BIONX IMPLANTS INC, S-1/A, 1997-04-10

BIONX IMPLANTS INC
S-1/A, 1997-04-10
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 10, 1997
REGISTRATION NO. 333-22359
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------

AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
BIONX IMPLANTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3841 22-3458598
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION INDUSTRIAL IDENTIFICATION NO.)
OF INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
279B GREAT VALLEY PARKWAY
MALVERN, PENNSYLVANIA 19355
(610) 296-0919
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------
DAVID W. ANDERSON
279B GREAT VALLEY PARKWAY
MALVERN, PENNSYLVANIA 19355
(610) 296-0919
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
WITH COPIES TO
PETER H. EHRENBERG, ESQ. ALEXANDER D. LYNCH, ESQ.
LOWENSTEIN, SANDLER, KOHL, FISHER & BROBECK, PHLEGER & HARRISON LLP
BOYLAN, P.A. 1633 BROADWAY, 47TH FLOOR
65 LIVINGSTON AVENUE NEW YORK, NEW YORK 10019
ROSELAND, NEW JERSEY 07068 (212) 581-1600
(201) 992-8700
------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As promptly
as practicable after this Registration Statement is declared effective.
------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM MAXIMUM
SECURITIES TO BE TO BE OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
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<S> <C> <C> <C> <C>
Common Stock, par value
$.0019 per share...... 2,300,000 shs. $14.00 $32,200,000 $9,758(3)
</TABLE>
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(1) Includes 300,000 shares which may be purchased by the Underwriters to
cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(3) Previously paid.
------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

- -------------------------------------------------------------------------------
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<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

PROSPECTUS Subject To Completion, Dated April 10, 1997
2,000,000 SHARES

[LOGO] BIONX IMPLANTS INC.

COMMON STOCK
------------
All of the 2,000,000 shares of Common Stock offered hereby are being sold by
Bionx Implants, Inc. (the "Company"). Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price will be between $12.00 and $14.00 per
share. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. Application has been made for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"BINX."

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE""RISK
FACTORS" COMMENCING ON PAGE 6.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions[1] Company[2]
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<S> <C> <C> <C>
Per Share.................................. $ $ $
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Total[3]................................... $ $ $
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</TABLE>
1. For information regarding indemnification of the Underwriters, see
"Underwriting."
2. Before deducting expenses of the offering payable by the Company, estimated
at $985,000.
3. The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 300,000 additional shares of
Common Stock on the same terms as set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public will be $ , the Underwriting Discounts and Commissions will be
$ and the Proceeds to the Company will be $ . See "Underwriting."

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The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and to certain other
conditions. It is expected that delivery of such shares will be made through
the offices of UBS Securities LLC, 299 Park Avenue, New York, New York on or
about , 1997.

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

UBS SECURITIES

HAMBRECHT & QUIST

VOLPE BROWN WHELAN & COMPANY

, 1997
<PAGE>

BIONX IMPLANTS INC.
(LOGO)
TWO PAGE GATEFOLD

PAGE 1
Marketing a Broad Line of Proprietary, Self-Reinforced Resorbable Products
that Provide Solutions to Medical Needs in Orthopaedics and Other Specialties.

Photograph of businessman demonstrating approved indications for Bionx
Implants.

For fracture management, Bionx Implants markets four full lines of resorbable
pins and screws with over 100 specific product sizes applicable to a wide
variety of orthopaedic procedures involving fracture management.

Picture display of the Bionx Implant Product lines for Fracture Fixation
including PLLA SmartScrews, PLLA SmartPins, PGA Screws and Pins in a variety
of lengths and diameters.

In February 1996 the Company introduced its SmartTack product, its first
product dedicated to serving the clinical needs of the hand surgeon.

Photograph of skier demonstrating approved indication for SmartTack in the
thumb.

Picture display of SmartTack.

Skeletal diagram of hand showing the SmartTack in place.

PAGE 2
MENISCUS ARROW

In the second quarter of 1996, Bionx Implants introduced its patented Meniscus
Arrow to provide the arthroscopist with the first resorbable implant that
provided a rapid and effective means of repairing meniscal tears. Prior to the
introduction of the Meniscus Arrow, surgeons were required to either remove
the damaged section of the meniscus, a procedure that may be detrimental to
the long term outcome of the surgery, or perform a complex, technically
demanding and time consuming arthroscopic suture repair procedure.

Picture display of Meniscus Arrow.

Blow-up schematic of the knee showing the Meniscus Arrow in place repairing a
meniscus tear.

Bionx Implants: Working Today to Create the Next Generation of Proprietary
Self-Reinforced, Resorbable Implants for the Orthopaedic Surgeon.

Photographs of businessman, skier and woman demonstrating approved indications
for Bionx Implants.
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------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

2
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PROSPECTUS SUMMARY

This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this
Prospectus. The following summary is qualified in its entirety by the more
detailed information and the Consolidated Financial Statements and Notes
thereto appearing elsewhere in this Prospectus, including the information under
"Risk Factors."

THE COMPANY

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

The Company uses several proprietary manufacturing and processing
technologies to modify well characterized resorbable polymers (e.g., poly-l-
lactic acid ("PLLA") and polyglycolic acid ("PGA")) into appropriately
designed, Self-Reinforced (reinforced with material of the same chemical
composition as the bulk of the polymer), resorbable implants which can be used
safely and reliably in surgical applications. In addition to providing the
strength necessary for these applications, the Company's Self-Reinforcing
technology also imparts to the resorbable polymer a number of characteristics
which enhance the manufacturability of the implants and broaden their potential
clinical applications. For example, the Self-Reinforced polymers can be
machined (e.g., lathed, heat-treated and forged) into clinically appropriate
sizes and modified using custom metal forming techniques to incorporate
features, such as ridges and barbs, for improved fixation. See "Business--
Manufacturing." The Company's implants are resorbed by the body (i.e., broken
down into sizes that enable the body to dispose of them naturally) over a
controlled period of time, based on the indicated use of the particular
product.

The human skeletal system is comprised of bone, connective tissue (ligaments
and tendons) and cartilage, all of which may be damaged as a result of trauma,
degenerative disease or surgical intervention. For more than four decades,
orthopaedic surgeons have used implantable metal devices, including screws,
pins and tacks, to repair skeletal tissue and to facilitate healing. While
metal implants have been recognized as the standard of care for fixation of
skeletal tissue due to their high strength and low complication rates, these
devices have several limitations, including reduction of healed bone strength
due to stress shielding (prevention of the transfer of weight-bearing load from
the implant to the bone) and the need to remove the implants. First generation
resorbable implants were developed in response to the limitations of metal
fixation devices. These implants do not require removal following surgery, but
are either brittle or overly flexible due to the processes, such as injection
molding, which are used in their manufacture. As a result of their low
strength, these implants had to be produced in large sizes which limited their
clinical utility. The Company developed its Self-Reinforced, resorbable polymer
implants -- including pins, screws and other profiled (nonsmooth-surfaced)
implants -- in clinically appropriate sizes to address the limitations of

3
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metal implants and first generation resorbable implants. See "Business--
Traditional Approaches to Fixation," "--Limitations of Traditional Approaches"
and "--Self-Reinforced, Resorbable Implants."

The Company has leveraged its Self-Reinforcing platform technology to develop
and introduce high quality, clinically proven, resorbable implants into major
segments of the medical device industry. The Company's Self-Reinforced,
resorbable implants include pins and screws for repair of fractures of the
ankle, hand, knee, elbow, wrist and foot, resorbable stents for use in
urological procedures, and the Meniscus Arrow, the first resorbable,
arthroscopically administered fixation device designed for use in the repair of
longitudinal, vertical tears of the medial and lateral meniscus of the knee.
Prior to the introduction of the Meniscus Arrow, damaged menisci could only be
treated through complex suturing techniques or removal of the torn section. The
Meniscus Arrow has demonstrated the ability to reduce operating room time by
approximately 50% and to decrease the risk of arterial and nervous system
complications which may occur with suturing techniques. See "Business--
Products."

The Company is also developing more than ten additional Self-Reinforced,
resorbable polymer implants for approximately 18 different applications.
Products under development include PLLA plates and anchors, intramedullary
nails, resorbable joint prostheses, and ultra-high strength resorbable
composites, all of which are planned for commercial introduction within the
next several years. See "Business--Product Development."

The Company's use of well known and well characterized polymers has, to date,
allowed for clearance of the Company's orthopaedic products by 510(k)
submissions. The FDA is familiar with the toxicological properties of these
polymers, and has not required extensive preclinical or clinical tests prior to
granting marketing clearance. In certain recent cases, clearances have been
obtained within 90 days after submission. The Company believes that many of its
products under development for orthopaedic and related applications will be
subject to clearance by 510(k) submissions, while certain of its other
products, including urology stents, may be subject to a more extensive
regulatory approval process. No assurances can be given as to whether or when
products to be submitted by the Company to the FDA will receive the necessary
clearances or approvals. See "Business--Government Regulation."

THE OFFERING

Common Stock Offered................ 2,000,000 shares

Common Stock Outstanding after this
Offering............................ 8,607,513 shares(1)

Use of Proceeds..................... To establish a manufacturing capability
in the U.S. and expand manufacturing
capacity in Finland, to fund increased
research and development, to expand sales
and marketing, to fund working capital
and for other general corporate purposes,
including repayment of certain long-term
debt.

Proposed Nasdaq National Market
Symbol.............................. BINX

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(1) Excludes 424,382 shares of Common Stock reserved for issuance pursuant to
stock options outstanding as of December 31, 1996. Also excludes an
aggregate of 425,618 shares of Common Stock reserved for future issuance
under the Company's Stock Option/Stock Issuance Plan as of December 31,
1996. See "Management -- Stock Option/Stock Issuance Plan" and "Description
of Capital Stock" and Note 11 of Notes to Consolidated Financial
Statements.

4
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SUMMARY CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1992(1) 1993(1) 1994 1995 1996
---------- ---------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.................. $1,522 $1,177 $ 1,280 $ 1,622 $ 5,379
Gross profit.............. 951 831 804 1,084 3,274
Operating expenses........ 1,668 1,135 883 2,439 4,905
Operating loss............ (717) (304) (79) (1,355) (1,631)
Net loss.................. (651) (219) (162) (1,478) (1,969)
Pro forma net loss per
share(2)................. (0.31)
Shares used in computing
pro forma net loss per
share(2)................. 6,370
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4)
------ ------------ -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................ $2,046 $2,046 $25,241
Total assets........................... 5,284 5,284 28,479
Long-term debt less current portion.... 590 590 590
Mandatorily redeemable convertible
preferred stock....................... 5,000 -- --
Accumulated deficit.................... (4,663) (4,663) (4,663)
Total stockholders' equity (deficit)... (3,063) 1,937 25,132
</TABLE>
- --------
(1) Consolidated Statement of Operations data for the years ended December 31,
1992 and 1993 have been derived from unaudited financial statements of the
Company.
(2) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
(3) Gives effect to the automatic conversion of all outstanding shares of
Preferred Stock of the Company into 1,052,638 shares of Common Stock and
the assumed cashless exercise of all outstanding warrants into 236,451
shares of Common Stock, calculated based on an assumed initial public
offering price of $13.00 per share.
(4) Adjusted to give effect to the receipt of the net proceeds from the sale of
the 2,000,000 shares of Common Stock offered hereby (at an assumed initial
public offering price of $13.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses
payable by the Company).

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

Unless otherwise indicated, all information in this Prospectus (i) assumes
the Underwriters' over-allotment option is not exercised, (ii) reflects a 1 for
1.9 reverse stock split of the Common Stock effected on February 24, 1997 (the
"Reverse Stock Split"), (iii) gives effect to the conversion of all outstanding
shares of Preferred Stock into 1,052,638 shares of Common Stock which will
occur upon the closing of this Offering (the "Preferred Stock Conversion") and
(iv) assumes the cashless exercise of all outstanding warrants into 236,451
shares of Common Stock upon the closing of this Offering, calculated based on
an assumed initial public offering price of $13.00 per share (the "Warrant
Exercise"). See "Description of Capital Stock," "Capitalization" and
"Underwriting."

The Company's logo is a trademark of the Company. This Prospectus also
includes trademarks and trade names of companies other than the Company.

5
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RISK FACTORS

Prospective investors in the shares offered hereby should carefully consider
the following risk factors, in addition to the other information contained in
this Prospectus. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors and elsewhere in this Prospectus.

History of Operating Losses; Accumulated Deficit; Uncertainty of Future
Profitability; Fluctuating Results of Operations. The Company has incurred
substantial operating losses since its inception, including an operating loss
of approximately $1.6 million in 1996, and, at December 31, 1996, had an
accumulated deficit of approximately $4.7 million. Such losses have resulted
principally from expenses associated with the development and patenting of the
Company's Self-Reinforcing technologies and resorbable implant designs,
preclinical and clinical studies, preparation of submissions to the U.S. Food
and Drug Administration (the "FDA") and foreign regulatory bodies, the
development of sales, marketing and distribution channels and the development
of manufacturing capabilities. Although the Company's revenues grew
significantly during 1996, no assurance can be given that this trend will
continue or that revenues will exceed expenses incurred in anticipation of
future revenue growth. Accordingly, the Company may incur significant
operating losses in the future as the Company continues its product
development efforts, expands its marketing, sales and distribution activities
and scales up its manufacturing capabilities. There can be no assurance that
the Company will be able to successfully commercialize its products or that
profitability will be achieved. The Company's results of operations have
fluctuated in the past on an annual and quarterly basis and may fluctuate
significantly from period to period in the future, depending upon a number of
factors, many of which are outside of the Company's control. Such factors
include the timing of government approvals, the medical community's acceptance
of the Company's products, the success of competitive products, the ability of
the Company to enter into strategic alliances with corporate partners,
expenses associated with patent matters, and the timing of expenses related to
product launches. Due to one or more of these factors, in one or more future
quarters the Company's results of operations may fall below the expectations
of securities analysts and investors. In that event, the market price of the
Company's Common Stock could be materially and adversely affected. See
"Selected Consolidated Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."

Uncertainty of Market Acceptance. The Company's success will depend in part
upon the acceptance of the Company's Self-Reinforced, resorbable implants by
the medical community, including health care providers, such as hospitals and
physicians, and third-party payors. Such acceptance may depend upon the extent
to which the medical community perceives the Company's products as a safe,
reliable and cost-effective alternative to non-resorbable products, which are
widely accepted, have a long history of use and are generally sold at prices
lower than the prices of the Company's products. Such acceptance may also
depend upon the extent to which the medical community believes that the
Company's Self-Reinforced, resorbable implants have overcome the strength and
composition difficulties experienced with first generation resorbable
implants. Ultimately, for the Company's products to gain wide market
acceptance, it will also be necessary for the Company to convince surgeons
that the benefits associated with the Company's products justify the
modification of standard surgical techniques in order to use the Company's
implants safely and effectively. There can be no assurance that the Company's
products will achieve significant market acceptance on a timely basis, or at
all. Failure of some or all of the Company's products to achieve significant
market acceptance could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business --
Competition."

Uncertainties Relating to Licenses, Trade Secrets, Patents and Proprietary
Rights. The Company's success will depend in part upon its ability to preserve
its trade secrets, obtain and maintain patent protection for its technologies,
products and processes, and operate without infringing the proprietary rights
of other parties. As a result of the substantial length of time and expense
associated with developing and commercializing new medical devices, the
medical device industry places considerable importance on obtaining and
maintaining trade secret and patent protection for new technologies, products
and processes.

6
<PAGE>

The Company owns or has licenses to patents issued in the United States and
various foreign countries and has patent applications pending at the U.S.
Patent and Trademark Office ("U.S. PTO") and in patent offices of various
foreign countries. Provided that all requisite maintenance fees are paid, the
Company's four principal U.S. patents (two of which are owned by the Company
and two of which are licensed to the Company on an exclusive basis) will
expire between 2004 and 2008. The two principal U.S. patents owned by the
Company relate to the Company's Self-Reinforced resorbable polymer products,
the Company's sintering process, and resorbable polymer products produced from
the Company's controlled drawing process. European counterparts to the two
principal U.S. patents that are owned by the Company and the Japanese
counterpart to one such patent are currently the subject of opposition
proceedings. One of these European patents has been revoked by the European
Patent Office for lack of novelty based on an earlier publication. The Company
has filed an appeal of the European Patent Office's revocation decision. The
other European patent and the Japanese patent application are being challenged
on lack of novelty and inventiveness grounds on the basis of disclosures made
in patent and other publications. The Company is vigorously defending its
European and Japanese patent positions in these proceedings. No assurance can
be given as to whether such appeal in Europe will be successful or as to the
outcome of the pending opposition proceedings. In order to clarify and confirm
its U.S. patent position, the Company intends in the second quarter of 1997 to
request reexamination by the U.S. PTO of the two principal U.S. patents owned
by the Company. No assurance can be given as to whether the issues raised in
the reexamination proceedings will be resolved in the Company's favor.
The reexamination process is expected to take up to twelve months or longer.
Such reexamination could result in some or all of the patent claims set forth
in these two U.S. patents being altered to provide narrower coverage or being
determined to be unpatentable. No assurance can be given as to the outcome of
the reexamination process. Narrowing of the coverage or a holding of
unpatentability in relation to one or both of these two principal U.S. patents
may significantly ease entry to the U.S. market for the products of the
Company's competitors and could have a material adverse effect on the
Company's business, financial condition and results of operations.

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

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

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

7
<PAGE>

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

Legal standards relating to the scope of claims and the validity of patents
in the medical device field are still evolving, and no assurance can be given
as to the degree of protection any patents issued to or licensed to the
Company would provide. The medical device industry has been characterized by
extensive litigation regarding patents and other intellectual property rights,
and companies in the medical device industry have employed intellectual
property litigation to gain competitive advantage. The Company has initiated
an opposition in the European Patent Office challenging the grant of a third
party's European patent relating to a drawing process for manufacturing
resorbable polymer products. Subsequently, another company has instituted its
own opposition against that patent. No assurance can be given that these
oppositions will result in either the revocation of that patent or the
narrowing of its claims. If neither opposition is successful, then no
assurance can be given that the third party will not assert that its European
patent is infringed by sales of one or more of the Company's products or by
the practice of one or more of the Company's processes in any of the eight
countries identified in the European patent. Moreover, there can be no
assurance that the Company will not be subject to claims that one or more of
its products or processes infringe other patents or violate the proprietary
rights of third parties. Defense and prosecution of patent claims can be
expensive and time consuming, regardless of whether the outcome is favorable
to the Company, and can result in the diversion of substantial financial,
management and other resources from the Company's other activities. An adverse
outcome could subject the Company to significant liability to third parties,
require the Company to obtain licenses from third parties, or require the
Company to cease any related product development activities or product sales.
In addition, the laws of certain countries may not protect the Company's
patent rights, trade secrets, inventions, products or processes to the same
extent as in the U.S. See "Business -- Licenses, Trade Secrets, Patents and
Proprietary Rights."

Uncertainties Relating to Product Development. Product development involves
a high degree of risk. There can be no assurance that the Company's products
under development will prove to be safe and effective, will receive the
necessary regulatory approvals or will ultimately be commercially successful.
These products will require substantial additional investment, laboratory
development, clinical testing and regulatory approvals prior to their
commercialization. There can be no assurance that the Company will not
experience difficulties that could delay or prevent the successful
development, introduction and marketing of new products. The Company's
inability to successfully develop and introduce products under development on
a timely basis or at all, or achieve market acceptance of such products, could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Product Development."

Estimates of Procedures Uncertain; Regulatory Submission Dates Subject to
Change. To assist investors in evaluating the Company, this Prospectus
contains certain estimates of procedures performed in the U.S. on an annual
basis. These estimates have been derived by the Company on the basis of its
analysis of market research reports compiled by independent third-party
sources which the Company believes to be reliable. However, all such estimates
are inherently subject to uncertainties, and the Company is unable to
determine with any degree of certainty the number of potential patients for
any indication or the number of patients who are suitable for treatment using
any of the Company's products.

This Prospectus also reflects the Company's estimates regarding future
regulatory submission dates. Regulatory submissions can be delayed, or plans
to submit proposed products can be canceled, for a number

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<PAGE>

of reasons, including the receipt of unanticipated preclinical or clinical
study reports, a determination by the FDA that PMA approval (as defined
herein) rather than 510(k) clearance is required with respect to a particular
submission, changes in regulations, adoption of new, or unanticipated
enforcement of existing, regulations, technological developments and
competitive developments. Accordingly, no assurances can be given that the
Company's anticipated submissions will be made on their target dates, or at
all. Delays in such submissions could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Government Regulation."

Dependence on Key Personnel and Relationship with the Technical University
at Tampere. The Company's ability to operate successfully depends in part upon
the continued service of certain key scientific, technical, managerial and
finance personnel, and its continuing ability to attract and retain additional
highly qualified scientific, technical, managerial and finance personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to retain existing personnel and attract or retain
additional highly qualified employees in the future. At present, the Company
does not maintain key man life insurance on any of its employees and only has
individual employment agreements with two of its employees. The loss of key
personnel and the inability to hire and retain qualified personnel in key
positions could have a material adverse effect on the Company's business,
financial condition and results of operations.

The Company's product development efforts are dependent upon Pertti Tormala,
Ph.D. and the Technical University in Tampere, Finland. Dr. Tormala, a
founder, director and executive officer of the Company, is currently an
Academy Professor at the Technical University and has been permitted by the
University to devote his efforts to developing new products for the Company.
Dr. Tormala utilizes a group of senior researchers, graduate students and
faculty at the Technical University to perform research and development
projects involving resorbable polymers and other topics relating to the
Company's technologies and manufacturing processes. This arrangement,
permitted in Finland as a means of encouraging the commercialization of
technological development, has resulted in substantial cost savings to the
Company while greatly expanding its product development efforts. There can be
no assurance that the University will allow Dr. Tormala to continue to devote
his efforts and University resources to the Company's product development
efforts. Any failure by the Company to obtain the continued services of Dr.
Tormala, or any requirement that the Company fund research at the Technical
University at a substantially increased level, could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview," "Management" and "Certain
Transactions."

Government Regulation. The Company's products are subject to extensive
regulation by the FDA and certain foreign regulatory agencies. Pursuant to the
Federal Food, Drug, and Cosmetic Act, as amended, and the regulations
promulgated thereunder (the "FDC Act"), the FDA regulates the preclinical and
clinical testing, manufacture, labeling, distribution and promotion of medical
devices. Noncompliance with applicable requirements can result in, among other
things, warning letters, fines, injunctions, civil penalties, recalls or
seizures of products, total or partial suspension of production, failure of
the government to grant premarket clearance or premarket approval for devices,
withdrawal of marketing clearances or approvals and criminal prosecution. The
FDA also has the authority to request repair, replacement or refund of the
cost of any device manufactured or distributed by the Company.

The Company is prohibited from marketing new devices in the U.S. until it
obtains clearance from the FDA under the premarket notification provisions of
Section 510(k) of the FDC Act ("510(k)") or approval of a Premarket Approval
Application ("PMA") from the FDA. A 510(k) submission generally requires
supporting data, which may include clinical data. The process of obtaining PMA
approval is much more costly, lengthy and uncertain. A PMA application
requires extensive clinical data and other supporting information. When
clinical data is required for either a 510(k) submission or a PMA application,
the process of compiling the data can be expensive and time-consuming, and
there can be no assurance that any clinical study proposed by the Company will
be permitted by the FDA, will be completed, or, if completed, will provide
data and information that will support clearance or approval. The Company
believes that it usually takes from four to

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<PAGE>

twelve months from submission to obtain 510(k) clearance, although it can take
longer, and that the FDA's review of a PMA application after it is accepted
for filing can last from one to three years, or even longer. In all cases,
there can be no assurance that 510(k) clearance or PMA approval will ever be
obtained. Moreover, regulatory clearances or approvals, if granted, may
include significant limitations on the indicated uses for which a product may
be marketed.

To date, all of the Company's products sold in the U.S. have received 510(k)
clearance. There can be no assurance that the FDA will not determine that the
Company's urology stents, certain products currently in development by the
Company or future products must undergo the more costly, lengthy and uncertain
PMA approval process. It is likely that the FDA will require the Company to
seek PMA approval for its urological stents.

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

Any products manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA. Changes in existing requirements or adoption of new requirements
could adversely affect the ability of the Company to be in regulatory
compliance. Failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will not be
required to incur significant costs to comply with laws and regulations in the
future or that laws or regulations will not have a material adverse effect
upon the Company's business, financial condition and results of operations.

The FDC Act requires devices to be manufactured in accordance with good
manufacturing practices ("GMPs") which impose certain procedural and
documentation requirements upon the Company with respect to manufacturing,
quality assurance and other matters. Enforcement of GMP regulations has
increased significantly in the last several years, and the FDA has publicly
stated that compliance will be more strictly scrutinized. The FDA has recently
finalized changes to the GMP regulations, including design controls, which
will likely increase the cost of compliance with GMP requirements.

In October 1994, the Company's facility in Finland was inspected by the FDA.
The inspector made several observations related to GMPs, which resulted in a
Warning Letter being issued to the Company on February 23, 1995. The Company
then began an exchange of correspondence with the FDA, which concluded with an
October 10, 1995 letter from the FDA stating, among other things, that the
Company's responses to the Warning Letter were "adequate" and that during the
next inspection, the FDA would "verify that the corrections have been
implemented." Such an inspection is expected to occur in the near future.

In addition, international regulatory bodies often establish regulations
governing product standards, packaging requirements, labeling requirements,
import restrictions, tariff regulations, duties and tax requirements. As a
result of the Company's sales in Europe, the Company is required to receive a
"CE" marking certification, an international symbol of quality and compliance
with the applicable European medical device directive. In January 1997, the
Company received an EC Design Examination and an EC Quality System Certificate
from a European Notified Body, which entitles the Company to affix a CE
marking on all of its currently marketed orthopaedic, dental and maxillo-
facial products. Submission of the required design dossier for the Company's
stent products is scheduled for late 1997. Failure to obtain CE marking for
the Company's stent products by June 14, 1998 would prohibit the Company from
selling such

10
<PAGE>

products in the European Economic Area unless and until compliance is
achieved. There can be no assurance that the Company will be able to achieve
and/or maintain compliance required for CE marking for any or all of its
products or that it will be able to produce its products in a timely and
profitable manner while complying with applicable requirements.

The Company is also subject to numerous environmental and safety laws and
regulations, including those governing use of hazardous materials. Any
violation of, and the cost of compliance with, these regulations could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Government Regulation."

Competition. The medical device industry is subject to intense competition
both in the U.S. and abroad. The Company's products compete against metal
implants and other resorbable products for orthopaedic surgery, urology,
dentistry, and maxillo-facial surgery applications. Potential competitors may
be able to develop technologies that are as effective as, or more effective or
easier to use than, those offered by the Company, which could render the
Company's products noncompetitive or obsolete. Moreover, many of the Company's
existing and potential competitors have substantially greater financial,
marketing, sales, distribution and technological resources than the Company.
Such existing and potential competitors may be
in the process of seeking FDA approval for their respective products or may
possess substantial advantages over the Company in terms of research and
development expertise, experience in conducting clinical trials, experience in
regulatory matters, manufacturing efficiency, name recognition, sales and
marketing expertise or distribution channels. There can be no assurance that
the Company will be able to compete successfully against current or future
competitors or that competition will not have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Competition."

Dependence Upon Independent Sales Agents, Distributors and Dealers. The
Company markets and sells its products through managed networks of independent
sales agents in the U.S. and independent distributors and dealers in foreign
countries. As a result, a substantial portion of the Company's revenues are
dependent upon the sales efforts of such sales agents, distributors and
dealers. The Company may also rely on its distributors to assist it in
obtaining reimbursement and regulatory approvals in certain international
markets. There can be no assurance that the Company's sales agents,
distributors and dealers, certain of which operate relatively small
businesses, have the financial stability to assure their continuing presence
in their markets. The inability of a sales agent, distributor or dealer to
perform its obligations, or the cessation of business by a sales agent,
distributor or dealer, could materially and adversely affect the Company's
business, financial condition and results of operations. There can be no
assurance that the Company will be able to engage or retain qualified sales
agents, distributors or dealers in each territory targeted by the Company. The
failure to engage such entities in such territories would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Sales, Marketing and Distribution."

Risks Relating to International Operations. Approximately 32% of the
Company's product sales during 1996 were generated in international markets. A
number of risks are inherent in international operations. International sales
and operations may be limited or disrupted by the imposition of government
controls, export license requirements, political instability, trade
restrictions, changes in tariffs, difficulties in managing international
operations, import restrictions and fluctuations in foreign currency exchange
rates. The international nature of the Company's business subjects it and its
representatives, agents and distributors to the laws and regulations of the
foreign jurisdictions in which they operate, and in which the Company's
products are sold. The regulation of medical devices in a number of such
jurisdictions, particularly in the European Union, continues to develop and
there can be no assurance that new laws or regulations will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Business -- Government Regulation" and
Note 14 of Notes to Consolidated Financial Statements.

Product Liability Risks; Limited Insurance Coverage. The Company's business
is subject to product liability risks in the testing, manufacturing and
marketing of its products. There can be no assurance that product

11
<PAGE>

liability claims will not be asserted against the Company, its strategic
partners or its licensees. While the Company maintains product liability
insurance, there can be no assurance that this coverage will be adequate to
protect the Company against future product liability claims. In addition,
product liability insurance is expensive and there can be no assurance that,
in the future, product liability insurance will be available to the Company on
terms satisfactory to the Company, if at all. A successful product liability
claim or series of claims brought against the Company in excess of its
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Product
Liability and Insurance."

No Assurance of Ability to Manage Growth. The Company experienced
substantial growth in product sales during the second half of 1996. Although
there can be no assurance that such growth can be sustained, products in
development may potentially lead to further growth. There can be no assurance
that the Company will be able to (i) develop the necessary manufacturing
capabilities, (ii) manage an expanded sales and marketing network, (iii)
attract, retain and integrate the required key personnel, or (iv) implement
the financial, accounting and management systems to meet growing demand for
its products should it occur. Failure of the Company to successfully manage
its growth could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business --
Manufacturing," "-- Sales, Marketing and Distribution," "-- Facilities" and
"Management."

Uncertainties Regarding Manufacturing. The Company currently manufactures
its implant products solely in Finland. The Company intends to develop a
manufacturing capability in the U.S. in order to increase its manufacturing
capacity for its existing and new implant products. The Company anticipates
that it will establish this capability either by (i) equipping and operating a
leased facility in the eastern U.S. or (ii) contracting with a third party to
provide a manufacturing capability to the Company. The Company presently is
exploring both of these alternatives. If the Company pursues contract
manufacturing, it will solicit bids from reliable medical device
manufacturers, including a subsidiary of Vital Signs, Inc. ("Vital Signs").
Certain of the directors and principal stockholders of the Company are
directors, officers and stockholders of Vital Signs. If the Company uses a
contract manufacturer, the Company would equip the manufacturer's facility,
with the objective of ultimately transitioning to a neighboring Company-owned
or Company-leased facility. There can be no assurance that the Company will be
able to enter into a contract manufacturing agreement or otherwise secure the
use of suitable facilities in the U.S. on commercially reasonable terms, or at
all. Furthermore, regardless of the alternative selected, the integration of
the Company's existing operations with the U.S. facility may result in
inefficiencies and delays, especially as a result of the technical
requirements necessary to produce products in accordance with the Company's
specifications. There can be no assurance that the Company will not encounter
difficulties in scaling up production, including problems involving production
yield, quality control and assurance, and shortages of qualified personnel. In
addition, the U.S. facility will be subject to GMP regulations, international
quality control standards and other regulatory requirements. Difficulties
encountered by the Company in manufacturing scale-up, or the failure by the
Company to establish and maintain the U.S. facility in accordance with such
regulations, standards or other regulatory requirements, could have a material
adverse effect on the Company's business, financial condition and results of
operations. During 1995 and 1996, the Company experienced occasional periods
of delay in filling product orders due to increases in demand beyond
forecasted levels. The Company is currently upgrading its production machinery
and processes to address this increased demand. No assurance can be given that
the integration of these machines into the production process will occur
within the scheduled time frame or will not result in difficulties in scale-up
that could lead to further delays in filling orders in the future.
Difficulties experienced in integrating such machinery on a timely basis could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Manufacturing" and "-- Facilities"
and "Certain Transactions."

Limited Sources of Supply; Lack of Contractual Arrangements. The raw
materials for the Company's PLLA products are currently available to the
Company from three qualified sources, while the Company's PGA raw materials
are available from two qualified sources. The Company's raw materials have
been utilized in

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<PAGE>

products cleared by the FDA and the Company's suppliers maintain Device Master
Files at the FDA that contain basic toxicology and manufacturing information.
The Company does not have long-term supply contracts with any of its
suppliers, although it is currently negotiating a supply agreement with its
principal PLLA supplier. In the event that the Company is unable to obtain
sufficient quantities of raw materials on commercially reasonable terms, or in
a timely manner, the Company would not be able to manufacture its products on
a timely and cost-competitive basis which, in turn, would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, if any of the raw materials for the Company's PGA and
PLLA products are no longer available in the marketplace, the Company would be
forced to further modify its Self-Reinforcing processes to incorporate
alternate raw materials. The incorporation of new raw materials into the
Company's existing products would likely require the Company to seek clearance
or approval from the FDA. There can be no assurance that such development
would be successful or that, if developed by the Company or licensed from
third parties, products containing such alternative materials would receive
regulatory approvals on a timely basis, or at all. See "Business --
Manufacturing" and "-- Government Regulation."

Ability to Maintain Third-Party Reimbursement. In the U.S. and other
markets, health care providers such as hospitals and physicians, that purchase
medical devices, such as the Company's products, generally rely on third-party
payors including Medicare, Medicaid and private health insurance plans, to
reimburse all or part of the cost of the procedures in which the medical
devices are being used. The Company believes that, to date, U.S. health care
providers have been reimbursed in full for the cost of procedures which
utilize the Company's products. However, there can be no assurance that third-
party reimbursement for such procedures will be consistently available for the
Company's products or that such third-party reimbursement will be adequate.
There is significant uncertainty concerning third-party reimbursement for
procedures which utilize any medical device incorporating new technology.
Reimbursement by a third-party payor may depend on a number of factors,
including the payor's determination that the use of the Company's products is
clinically useful and cost-effective, medically necessary and not experimental
or investigational. Since reimbursement approval is required from each payor
individually, seeking such approvals can be a time consuming and costly
process which, in the future, could require the Company to provide supporting
scientific, clinical and cost-effectiveness data for the use of the Company's
products to each payor separately. Federal and state government agencies are
increasingly considering limiting health care expenditures. For example, the
U.S. Congress is currently considering various proposals to significantly
reduce Medicaid and Medicare expenditures. Such proposals, if enacted, could
have a material adverse effect on the Company's business, financial condition
and results of operations. Outside the U.S., the Company relies on
distributors to establish reimbursement from third-party payors in their
respective territories. Health care reimbursement systems vary from country to
country and, accordingly, there can be no assurance that third-party
reimbursement available under any one system will be available for procedures
utilizing the Company's products under any other reimbursement system. Lack of
or inadequate reimbursement by government and other third-party payors for
procedures utilizing the Company's products would have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business -- Third-Party Reimbursement."

Possible Future Capital Needs; Uncertainty of Additional Financing. The
Company has experienced negative operating cash flows since its inception. The
Company has expended, and expects to continue to expend in the future,
substantial funds to pursue product development efforts, expand its sales and
marketing activities and expand its manufacturing capabilities. The Company
expects that its existing capital resources, together with the net proceeds of
this Offering, the interest earned thereon and the cash flow from operations,
will be adequate to fund the Company's operations through 1998. However, the
Company's future capital requirements and the adequacy of available funds will
depend on numerous factors, including market acceptance of its existing and
future products, the successful commercialization of products in development,
progress in its product development efforts, the magnitude and scope of such
efforts, progress with preclinical studies, clinical trials and product
clearances by the FDA and other agencies, the cost and timing of its efforts
to expand its manufacturing capabilities, the cost of filing, prosecuting,
defending and enforcing patent claims

13
<PAGE>

and other intellectual property rights, competing technological and market
developments, and the development of strategic alliances for the marketing of
certain of its products. To the extent that funds generated from the Company's
operations, together with its existing capital resources, the proceeds of this
Offering and the interest earned thereon, are insufficient to meet current or
planned operating requirements, the Company will be required to obtain
additional funds through equity or debt financings, strategic alliances with
corporate partners and others, or through other sources. The terms of any
equity financings may be dilutive to stockholders and the terms of any debt
financings may contain restrictive covenants which limit the Company's ability
to pursue certain courses of action. Principal stockholders of the Company who
previously provided funding to the Company and provided guarantees to sources
of credit have indicated that they do not intend to continue furnishing such
assistance. The Company does not have any committed sources of additional
financing, and there can be no assurance that additional funding, if
necessary, will be available on acceptable terms, if at all. If adequate funds
are not available, the Company may be required to delay, scale-back or
eliminate certain aspects of its operations or attempt to obtain funds through
arrangements with strategic partners or others that may require the Company to
relinquish rights to certain of its technologies, product candidates, products
or potential markets, which could have a material adverse effect on the
Company's business, financial condition and results of operations. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

Uncertainties Relating to Strategic Partners. The Company anticipates that
it may be necessary to enter into arrangements with corporate partners,
licensees or others, in order to efficiently market, sell and distribute
certain of its products. Such strategic partners may also be called upon to
assist in the support of such products, including support of certain product
development functions. As a result, the success of such products may be
dependent in part upon the efforts of such third parties. The Company has
negotiated one such agreement with Ethicon GmbH, a subsidiary of Johnson &
Johnson, pursuant to which Ethicon GmbH has the right to market and sell in
Europe certain products, based upon the Company's membrane patent, in
dentistry and two other unrelated fields of use. There can be no assurance
that the Company will be able to negotiate additional acceptable arrangements
with strategic partners or that the Company will realize any meaningful
revenues pursuant to such arrangements.

Control by Directors, Executive Officers and Affiliated Entities. The
Company's directors, executive officers and entities affiliated with them
will, in the aggregate, beneficially own approximately 63% of the Company's
outstanding shares of Common Stock following the completion of this Offering
(or approximately 61% if the Underwriters exercise their over-allotment
options in full), assuming that all Warrants are exercised by payment of the
full exercise price. These stockholders, if acting together, would be able to
significantly influence all matters requiring approval by the stockholders of
the Company, including the election of directors and the approval of mergers
or other business combination transactions. See "Certain Transactions" and
"Principal Stockholders."

Potential Anti-Takeover Effects of Delaware Law and the Company's
Certificate of Incorporation and Bylaws. The Company's Board of Directors has
the authority, without further action by the stockholders, to issue from time
to time, up to 8,000,000 shares of Preferred Stock in one or more classes or
series, and to fix the rights and preferences of such Preferred Stock. The
Company's Certificate of Incorporation provides for staggered terms for
members of the Board of Directors and does not permit stockholders to act
without a meeting. The Company is also subject to provisions of Delaware
corporate law which, subject to certain exceptions, will prohibit the Company
from engaging in any "business combination" with a person who, together with
affiliates and associates, owns 15% or more of the Company's Common Stock (an
"Interested Stockholder") for a period of three years following the date that
such person became an Interested Stockholder, unless the business combination
is approved in a prescribed manner. Additionally, the bylaws of the Company
establish an advance notice procedure for stockholder proposals and for
nominating candidates for election as directors. These provisions of Delaware
law and of the Company's Certificate of Incorporation and bylaws may have the
effect of delaying, deterring or preventing a change in control of the

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<PAGE>

Company, may discourage bids for the Common Stock at a premium over the
prevailing market price, and may adversely affect the market price, and the
voting and other rights of the holders, of the Common Stock. See "Description
of Capital Stock."

Shares Eligible for Future Sale. Sales of substantial amounts of Common
Stock (including shares issued upon the exercise of outstanding options and
warrants) in the public market after this Offering or the prospect of such
sales could materially and adversely affect the market price of the Common
Stock and may have a material adverse effect on the Company's ability to raise
any necessary capital to fund its future operations. Upon completion of this
Offering, the Company will have 8,607,513 shares of Common Stock outstanding.
The 2,000,000 shares offered hereby will be freely tradeable without
restrictions or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), except that any shares held by "affiliates" of
the Company within the meaning of the Securities Act will be subject to the
resale limitations of Rule 144 promulgated under the Securities Act ("Rule
144"). The remaining 6,607,513 outstanding shares are "restricted" securities
that may be sold only if registered under the Securities Act, or sold in
accordance with an applicable exemption from registration, such as Rule 144.
Rule 144 imposes a holding period with respect to securities purchased
directly from an issuer. The Securities and Exchange Commission has amended
Rule 144, effective April 29, 1997, to reduce the holding period for sales
subject to certain resale restrictions from two years to one year and to
reduce the holding period applicable to non-affiliates for non-restricted
sales from three years to two years.

The officers and directors of the Company and other holders of Common Stock
who together hold 6,607,513 shares of Common Stock and options to purchase an
additional 395,431 shares of Common Stock (of which, options to purchase
98,894 shares are currently exercisable), have agreed not to sell, directly or
indirectly, any Common Stock without the prior written consent of UBS
Securities LLC for a period of 180 days from the date of this Prospectus (the
"Lock-up Agreements"). UBS Securities LLC has advised the Nasdaq Stock Market
that it will not grant any such consent prior to September 4, 1997.
Approximately 90 days after the completion of this Offering, the Company
intends to file a registration statement on Form S-8 under the Securities Act
to register the future issuance of all shares of Common Stock reserved for
issuance under the Company's Stock Option/Stock Issuance Plan. As of December
31, 1996, 424,382 shares of Common Stock were reserved for issuance pursuant
to outstanding options and 425,618 shares of Common Stock were reserved for
future issuance under the Company's Stock Option/Stock Issuance Plan. Such
registration statement will automatically become effective upon filing.
Accordingly, shares registered thereunder will, subject to Rule 144
limitations applicable to affiliates, be available for sale in the public
market, except to the extent that such shares are subject to vesting
restrictions with the Company or certain contractual restrictions on sale or
transfer (including options covering 395,431 shares which are subject to Lock-
up Agreements). After this Offering, the holders of approximately 1,290,000
shares of Common Stock will be entitled to certain demand and piggyback rights
with respect to the registration of such shares under the Securities Act. If
such holders, by exercising their demand registration rights, cause a large
number of securities to be registered and sold in the public market, such
sales could have an adverse effect on the market price of the Company's Common
Stock. If the Company, either on its own behalf or on behalf of certain
stockholders, were to initiate a registration and include shares held by such
holders pursuant to the exercise of their piggyback registration rights, such
sales could have a material adverse effect on the Company's ability to raise
needed capital. See "Certain Transactions," "Shares Eligible for Future Sale,"
"Description of Capital Stock--Registration Rights of Certain Holders" and
"Underwriting."

No Prior Public Market For Common Stock; Possible Volatility of Stock
Price. Prior to this Offering, there has been no public market for the
Company's Common Stock and there can be no assurance that an active public
market for the Common Stock will develop or be sustained after this Offering
or that the market price of the Common Stock will not decline below the
initial public offering price. The initial public offering price has been
determined by negotiations between the Company and the Underwriters and is not
necessarily indicative of the market price at which the Common Stock of the
Company will trade after this Offering. Among the factors considered in such
negotiations were prevailing market conditions, certain financial

15
<PAGE>

information of the Company, market valuations of other companies that the
Company and the representatives of the Underwriters believe to be comparable
to the Company, estimates of the business potential of the Company, the
present state of the Company's development and other factors deemed relevant.
The stock markets have experienced price and volume fluctuations that have
particularly affected medical technology companies, resulting in changes in
the market prices of the stocks of many companies that may not have been
directly related to the operating performance of those companies. Such broad
market fluctuations may materially and adversely affect the market price of
the Common Stock following this Offering. Factors such as variations in the
Company's results of operations, comments by securities analysts,
underperformance against analysts' estimates, announcements of technological
innovations or new products by the Company or its competitors, changing
government regulations and developments with respect to FDA or foreign
regulatory submissions, the results of regulatory inspections, patents,
proprietary rights or litigation may have a material adverse effect on the
market price of the Common Stock.

Dilution; No Dividends. Purchasers of the Common Stock offered hereby will
suffer immediate and substantial dilution in the net tangible book value per
share from the initial public offering price. The Company has not paid cash
dividends since its inception and does not intend to pay any dividends on its
Common Stock in the foreseeable future. See "Dilution" and "Dividend Policy."

16
<PAGE>

THE COMPANY

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

The Company's principal executive offices are located at 279B Great Valley
Parkway, Malvern, Pennsylvania 19355. Its telephone number at that address is
(610) 296-0919.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$23,195,000 ($26,822,000 if the Underwriters' over-allotment option is
exercised in full), assuming an initial public offering price of $13.00 per
share, after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company.

The Company estimates that approximately $4-5 million of the net proceeds
will be used to purchase equipment for, and to otherwise establish, a
manufacturing capability in the U.S. and to expand manufacturing capacity in
Finland, approximately $3-4 million will be used to develop maxillo-facial
products and to establish a sales and marketing infrastructure for such
products, approximately $6-8 million will be used for the development of new
resorbable polymers, the development of additional product applications in the
fields of urology and spinal fixation, and related clinical and regulatory
support, and the balance of $6-10 million (or approximately $10-14 million if
the Underwriters' overallotment option is exercised in full) will be used for
working capital and other general corporate purposes, including the repayment
of certain long-term debt. The foregoing represents estimates only; the actual
amounts expended by the Company for these purposes and the timing of such
expenditures will depend on numerous factors, including the status of the
Company's development efforts, actions relating to patent and regulatory
matters, the extent to which the Company's products gain market acceptance and
competition. The long-term debt to be repaid consists of approximately
$440,000 in loans from Finnish financial institutions maturing from 1997 to
2000 at interest rates ranging from 6% to 13% per annum. The Company may use a
portion of the net proceeds to acquire complementary businesses, products or
technologies, although the Company currently has no agreements and is not
involved in any negotiations with respect to any such transactions. Pending
use of the net proceeds of this Offering, the Company plans to invest the net
proceeds in interest-bearing, investment grade securities. The Company intends
to invest in liquid assets in a manner that will not subject it to regulation
under the Investment Company Act of 1940. Although the Company believes that
the net proceeds from this Offering, together with cash flows from operations
and existing cash and cash equivalents, will be sufficient to maintain its
current and planned operations through 1998, there can be no assurance that
the Company will not require additional financing within two years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

DIVIDEND POLICY

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

17
<PAGE>

CAPITALIZATION

The following table sets forth, at December 31, 1996, (i) the actual
capitalization of the Company, assuming completion of the Reverse Stock Split,
(ii) the pro forma capitalization of the Company, giving effect to the
Preferred Stock Conversion and the Warrant Exercise upon the closing of this
Offering, and (iii) the pro forma capitalization of the Company as adjusted to
reflect the receipt of the estimated net proceeds from the sale of 2,000,000
shares of Common Stock in this Offering at an assumed initial public offering
price of $13.00 per share, after deducting the estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company. This table should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(2)
------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt less current portion....... $ 590 $ 590 $ 590
Mandatorily redeemable convertible
preferred stock.......................... 5,000 -- --
Stockholders' equity:
Preferred Stock: $.001 par value;
8,000,000 shares authorized, no shares
issued and outstanding on an actual,
pro forma or pro forma as adjusted
basis.................................. -- -- --
Common Stock: $.0019 par value;
31,600,000 shares authorized; 5,318,424
shares issued and outstanding on an
actual basis;
6,607,513 shares issued and outstanding
on a pro forma basis;
8,607,513 shares issued and outstanding
on a pro forma as
adjusted basis(1)...................... 10 13 16
Additional paid-in capital................ 1,859 6,856 30,048
Accumulated deficit....................... (4,663) (4,663) (4,663)
Foreign currency translation adjustment... (269) (269) (269)
------- ------- -------
Total common stockholders' equity
(deficit)............................. (3,063) 1,937 25,132
------- ------- -------
Total capitalization................... $ 2,527 $ 2,527 $25,722
======= ======= =======
</TABLE>
- --------
(1) Excludes 424,382 shares of Common Stock reserved for issuance pursuant to
stock options outstanding as of December 31, 1996 at a weighted average
exercise price of $3.23 per share. Also excludes an additional 425,618
shares of Common Stock reserved for future grant under the Company's Stock
Option/Stock Issuance Plan as of December 31, 1996. See "Management --
Stock Option/Stock Issuance Plan," "Description of Capital Stock" and
Note 11 of Notes to Consolidated Financial Statements.
(2) Prior to this Offering, the Company had outstanding 2,000,000 shares of
Preferred Stock and warrants entitling the holders to purchase a total of
421,065 shares of Common Stock at an exercise price of $5.70 per share
(the "Warrants"). Concurrently with the closing of this Offering, all of
the outstanding shares of Preferred Stock will be converted into 1,052,638
shares of Common Stock after giving effect to the Reverse Stock Split. The
Company has the right, and intends, to call the Warrants upon the closing
of this Offering. See "Description of Capital Stock -- Warrants."

18
<PAGE>

DILUTION

The net tangible book value of the Company's Common Stock as of December 31,
1996 was $1,936,708, or $0.29 per share. The net tangible book value per share
of Common Stock represents the amount of the Company's tangible assets less
total liabilities, divided by the 6,607,513 shares of Common Stock outstanding
(after giving effect to the Preferred Stock Conversion and the Warrant
Exercise). Net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in this Offering and the pro forma net tangible book value per share of
Common Stock immediately after completion of this Offering. After giving
effect to the Preferred Stock Conversion, the Warrant Exercise and the sale by
the Company of the 2,000,000 shares of Common Stock offered hereby at an
assumed initial public offering price of $13.00 per share (after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses payable by the Company), the pro forma net tangible book value of the
Company as of December 31, 1996 would have been $25,131,708, or $2.92 per
share. This represents an immediate increase in net tangible book value of
$2.63 per share to existing stockholders and an immediate dilution in net
tangible book value of $10.08 per share to new investors of Common Stock in
this Offering.

The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
------
Net tangible book value per share before the Offering......... $0.29
Increase per share attributable to new investors.............. 2.63
-----
Pro forma net tangible book value per share after the Offer-
ing.......................................................... 2.92
------
Dilution per share to new investors........................... $10.08
======
</TABLE>

The following table sets forth, on a pro forma basis as of December 31,
1996, the difference between the number of shares of Common Stock purchased
from the Company, the total consideration paid and the average price per share
paid by the existing holders of Common Stock and by the new investors, after
giving effect to the Warrant Exercise and Preferred Stock Conversion and
before deducting the estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company, at an assumed initial
public offering price of $13.00 per share.

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders........ 6,607,513 76.8 $ 7,064,080 21.4 $ 1.07
New investors................ 2,000,000 23.2 26,000,000 78.6 13.00
--------- ----- ----------- -----
Total...................... 8,607,513 100.0% $33,064,080 100.0%
========= ===== =========== =====
</TABLE>

The foregoing tables (i) assume the conversion of all Preferred Stock into
Common Stock and the cashless exercise of all 421,065 Warrants upon the
closing of this Offering, (ii) assume no exercise of the Underwriters' over-
allotment option, (iii) exclude 424,382 shares of Common Stock reserved for
issuance pursuant to stock options outstanding as of December 31, 1996, and
(iv) exclude an additional 425,618 shares of Common Stock reserved for future
grant under the Company's Stock Option/Stock Issuance Plan as of December 31,
1996. See "Management -- Stock Option/Stock Issuance Plan," "Description of
Capital Stock" and Note 11 of Notes to Consolidated Financial Statements.

19
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following consolidated selected financial data is qualified in its
entirety by, and should be read in conjunction with, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and the related Notes thereto included
elsewhere in this Prospectus. The Consolidated Statement of Operations data
for the years ended December 31, 1994, 1995 and 1996 and the Company's
Consolidated Balance Sheet data at December 31, 1995 and 1996 are derived from
audited Consolidated Financial Statements of the Company included elsewhere in
this Prospectus. The Consolidated Statement of Operations data with respect to
the years ended December 31, 1992 and 1993 and the Consolidated Balance Sheet
data at December 31, 1992, 1993 and 1994 are derived from unaudited
consolidated financial statements not included in this Prospectus. Such
unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of the Company's financial position and the results of its
operations for those years.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues.................... $ 1,522 $ 1,177 $ 1,280 $ 1,622 $ 5,379
Gross profit................ 951 831 804 1,084 3,274
Operating expenses.......... 1,668 1,135 883 2,439 4,905
Operating loss.............. (717) (304) (79) (1,355) (1,631)
Other income and expense,
net........................ 66 85 (83) (123) (130)
Net loss.................... (651) (219) (162) (1,478) (1,969)
Pro forma net loss per
share(1)................... (0.31)
Shares used in computing pro
forma net loss per
share(1)................... 6,370
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- ---------------------
ACTUAL PRO FORMA(2)
------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital
(deficit).............. $ (364) $ (224) $ (164) $ (576) $ 2,046 $ 2,046
Total assets............ 2,855 2,551 2,029 1,794 5,284 5,284
Long-term debt less
current portion........ 763 890 301 896 590 590
Mandatorily redeemable
convertible preferred
stock.................. -- -- -- -- 5,000 --
Accumulated deficit..... (819) (956) (1,215) (2,693) (4,663) (4,663)
Total stockholders'
equity (deficit)....... 606 333 1,159 (1,036) (3,063) 1,937
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
(2) Gives effect to the Preferred Stock Conversion and the Warrant Exercise.

20
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto presented elsewhere herein.
The discussion in this Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially from those discussed in the forward-looking statements. Factors
that could cause or contribute to such differences include, without
limitation, those discussed in the sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as those discussed elsewhere in this
Prospectus.

OVERVIEW

The Company was founded in 1984 to develop certain resorbable polymers for
orthopaedic uses. The Company has incurred substantial operating losses since
its inception and, at December 31, 1996, had an accumulated deficit of
approximately $4.7 million. Such losses have resulted principally from
expenses associated with the development and patenting of the Company's Self-
Reinforcing technologies and resorbable implant designs, preclinical and
clinical studies, preparation of submissions to the FDA and foreign regulatory
agencies, the development of sales, marketing and distribution channels and
the development of its manufacturing capabilities. Although the Company's
revenues grew significantly in 1996, no assurance can be given that this trend
will continue or that revenues of any magnitude will exceed expenses incurred
in anticipation of future growth. Accordingly, the Company may incur
significant operating losses in the future as it continues its product
development efforts, expands its marketing, sales and distribution activities
and scales up its manufacturing capabilities. There can be no assurance that
the Company will be able to successfully commercialize its products or that
profitability will be achieved.

The Company first introduced its PGA pins in 1984 and its PGA screws in
1986. In 1987, the Company introduced its first PLLA products, PLLA pins. PLLA
screws were introduced in 1989. Since the introduction of these products, the
Company has expanded its PGA and PLLA pin and screw product lines to address
additional clinical indications. The Company's PGA membrane product was
introduced in 1992, and, in 1995, the Company launched its Meniscus Arrow,
PLLA tacks, and PGA and PLLA urology stents. Prior to 1996, the Company
derived substantially all of its revenue from sales of its PLLA and PGA screws
and pins. A substantial portion of the Company's revenues and revenue growth
in the second half of 1996 resulted from sales of the Meniscus Arrow, which
received FDA clearance in March 1996. To date, all products sold by the
Company have been launched first in international markets. During 1994, 1995
and 1996, international product sales represented 65%, 65% and 32%,
respectively, of the Company's total product sales.

The Company typically sells implant grade, stainless steel surgical
instruments for use with each of its Self-Reinforced, resorbable products. The
margins for these instruments are typically lower than the margins applicable
to the Company's implant products. However, since orthopaedic companies
operating in the U.S. have traditionally loaned rather than sold instruments
to their customers, the Company anticipates that in the future, it will be
necessary for the Company to provide an increasing proportion of its
instrumentation in the U.S. on a loan basis. Similar practices are not common
in international markets. For financial statement purposes, revenues from the
sale of instrumentation systems are included within product sales and costs
associated with the Company's procurement of such systems are included within
cost of goods sold. The Company's instrumentation systems are reusable.
Accordingly, sales and loans of such systems are likely to be most pronounced
in periods shortly after product launches and likely to be less prevalent as
penetration of the market increases over the long term. Thus, the negative
impact on the Company's gross profit margins associated with sales and loans
of a particular instrument system is expected to decrease after a substantial
market penetration has been achieved. Similarly, such impact is likely to
lessen to the extent that sales and loans of instrument systems decrease as a
percentage of total product sales. However, no assurance can be given as to
the extent to which instrumentation sales will depress the Company's gross
profit margins in the future.

21
<PAGE>

The Company sells its products through managed networks of independent sales
agents, distributors and dealers. In the U.S., the Company handles all
shipping and invoicing functions directly and pays commissions to its sales
agents. Outside the U.S., the Company sells its products directly to
distributors and dealers at discounts that vary by product and by market.
Accordingly, the Company's U.S. sales result in higher gross margins than
international sales. The Company anticipates that during the next few years,
the relative percentage of its U.S. product sales to total product sales is
likely to continue to increase. Since the Company pays commissions on sales
made through its U.S. network, an increased percentage of U.S. sales in the
future will likely result in an increase in the percentage of selling, general
and administrative expenses to total sales. This increase will be partially
offset by the higher gross margins received on products sold in the U.S.

Outside of the orthopaedic market, the Company may seek to establish
licensing or distribution agreements with strategic partners to develop
certain products and to market and distribute products that the Company elects
not to distribute through its managed networks of independent sales agents,
distributors and dealers. The Company has licensed its membrane patent for use
in dental and two other applications in Europe to Ethicon GmbH, a subsidiary
of Johnson & Johnson. During 1995 and 1996, Ethicon GmbH paid the Company
approximately $200,000 and $201,000, respectively, in licensing fees. Ethicon
GmbH has agreed to pay royalties to the Company upon the initiation of
commercial sales of its membrane products, which are targeted for commercial
release commencing in the second quarter of 1997. Revenues from the Company's
sales of such products have not been material. Accordingly, no assurance can
be given that royalty payments from Ethicon GmbH, when and if they commence,
will be material. Furthermore, no assurance can be given that the Company will
be able to enter into other license arrangements regarding other products on
satisfactory terms.

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

The Company has benefited from the research and development activities of
Dr. Pertti Tormala, the founder of the Company, at the Technical University in
Tampere, Finland. Dr. Tormala is currently an Academy Professor at the
Technical University and is permitted by the University to devote his efforts
to developing products for the Company. Dr. Tormala utilizes a group of senior
researchers, graduate students and faculty at the Technical University to
perform research and development projects involving resorbable polymers and
other topics relating to the Company's technology and manufacturing processes.
This arrangement, permitted in Finland as a means of encouraging the
commercialization of technological development, has resulted in substantial
cost savings to the Company while greatly expanding its product development
efforts. Any failure by the Company to obtain the continued services of Dr.
Tormala, or any requirement that the Company fund research at a substantially
increased level, could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company has hired
certain senior researchers from the University program and anticipates that,
in the future, more of its product development work will be performed and
funded directly by the Company, thereby increasing the Company's research and
development expenses.

The Company currently manufactures its implant products solely at its
Tampere, Finland plant. The Company intends to use a portion of the proceeds
of this Offering to establish a manufacturing capability in the U.S. The
Company plans to establish this capability either by equipping and operating a
leased facility or contracting with a third party to provide a manufacturing
capability to the Company. The Company believes that on an interim basis,
contract manufacturing may enable the Company to save certain staffing costs
and enable senior management to focus on other aspects of its business.
However, if the Company arranges for a third party to provide contract
manufacturing in the U.S., fees payable to such manufacturer may exceed any
savings in staffing costs and result in higher costs of goods sold and lower
gross profit. Ultimately, in

22
<PAGE>

operating a U.S. facility, the Company will incur certain duplicative
manufacturing costs which could result in higher costs of goods sold and lower
gross profit margins. For information regarding the operations of the Company
by geographic area, see Note 14 of the Notes to the Company's Consolidated
Financial Statements.

While the Company's operating losses have resulted in net operating loss
carryforwards of approximately $2.1 million for income tax reporting purposes,
the extent to which such carryforwards are available to offset future U.S. and
Finnish taxable income is significantly limited as a result of various
ownership changes that have occurred in recent years. Additionally, because
U.S. tax laws limit the time during which these carryforwards may be applied
against future taxes, the Company may not be able to take full advantage of
the U.S. portion of these carryforwards for federal income tax purposes.
Furthermore, income earned by a foreign subsidiary may not be offset against
operating losses of Bionx Implants, Inc. or its U.S. subsidiaries. As a
result, the Company may incur tax obligations (as it has incurred during 1996)
during periods when it reflects a consolidated net operating loss. The
statutory tax rates applicable to the Company and its foreign subsidiaries
vary substantially, presently ranging from approximately 40% in the U.S. to
28% in Finland. Tax rates have fluctuated in the past and may do so in the
future. See Note 12 of Notes to Consolidated Financial Statements.

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

RESULTS OF OPERATIONS

Product sales. The Company's product sales increased by 7.1% from $1.3
million in 1994 to $1.4 million in 1995 and by 271.6% to $5.0 million in 1996.
The increase in 1995 reflected the commencement of sales (aggregating
approximately $228,000) of Meniscus Arrow products to Europe and the
commencement of sales through the Company's managed network of independent
sales agents in the U.S. The substantial increase in product sales during 1996
primarily resulted from the U.S. introduction of the Company's Meniscus Arrow
products in the second quarter of 1996; revenues from the sale of Meniscus
Arrow products were approximately $2.4 million in 1996, as compared with $0.2
million in 1995. In addition, the 1996 sales increase reflects increased
utilization of the Company's managed network of independent sales agents in
the U.S., increased sales of the Company's existing products in international
markets and increased instrumentation system sales. Revenues generated from
the sale of instrumentation systems and related loaner fees represented 8%,
15% and 20% of total sales in 1994, 1995 and 1996, respectively, increasing
from approximately $100,000 in 1994 and $200,000 in 1995 to approximately $1.0
million in 1996. The 1996 increase is attributable primarily to the U.S.
introduction of the Meniscus Arrow during the second quarter of 1996; 1996
instrumentation revenues relating to the Meniscus Arrow were approximately
$453,000.

License and Grant revenues. License and grant revenues were negligible in
1994, increased to $267,000 in 1995 and increased by 29.3% to $345,000 in
1996. Royalty payments by Ethicon GmbH based upon actual sales are expected to
commence in the second quarter of 1997, although no assurances can be given
with respect to the timing or amount of such payments. Upon the commencement
of such sales by Ethicon GmbH, the Company will be required to cease its
dental membrane sales in Europe.

Gross profit; gross profit margins. The Company's gross profit increased by
34.8% from $804,000 in 1994 to $1,084,000 in 1995 and by 202.1% to $3.3
million in 1996. The increase in gross profit from 1994 to 1995 was primarily
attributable to a $251,000 increase in license and grant revenues. The
substantial increase in the Company's gross profit during 1996 primarily
reflected the increased sales of Meniscus Arrow products after their
introduction in the U.S. in the second quarter of 1996. Overall, the Company's
gross profit margin increased from 62.8% in 1994 to 66.8% in 1995 and declined
to 60.9% in 1996. The improvement in 1995

23
<PAGE>

reflects the increased license and grant revenues. Substantially all of the
decline in 1996 is attributable to the inclusion within products sales and
cost of goods sold of revenues and expenses associated with the purchasing and
sale of instrumentation systems. The Company's gross profit margin applicable
to implant sales, representing implant revenues less related raw materials,
direct labor and overhead and associated variable expenses, increased from
65.1% in 1994 to 66.1% in 1995 and to 66.7% in 1996. The improvement in this
portion of the Company's gross profit margin in 1995 was attributable in large
part to a change in the Company's product mix from primarily PGA products to
primarily PLLA products. In general, the costs associated with manufacturing
PLLA products are substantially less than comparable costs for PGA products.
The improvement in this portion of the Company's gross profit margin in 1996
resulted primarily from increased sales of higher margin Meniscus Arrow
products, increased sales of higher margin PLLA products and the leveraging of
certain fixed manufacturing costs over the Company's expanded revenue base.

Selling, general and administrative expenses. Selling, general and
administrative expenses increased by 212.2% from $693,000 in 1994 to $2.2
million in 1995 and by 105.4% to $4.4 million in 1996. Such expenses were
54.8% of product sales in 1994, 159.8% of product sales in 1995 and 88.3% of
product sales in 1996. Selling, general and administrative expenses consist
primarily of commissions paid on product sales in the U.S., patent and license
related expenses, costs incurred in connection with the regulatory process and
expenses associated with supporting the Company's managed networks of
independent sales agents, distributors and dealers. The increases in the
dollar amount of selling, general and administrative expenses during these
periods were primarily attributable to increased commission payment
obligations reflecting the Company's increased product sales in the U.S. and
increased expenses associated with establishing and supporting a managed
network of independent sales agents in the U.S. The substantial increase in
the percentage relationship of such expenses to product sales in 1995 reflects
the investment made by the Company in 1995 in establishing and supporting its
U.S. managed network of independent sales agents. Such expenses were incurred
in anticipation of the product sales growth which the Company experienced in
1996.

Research and development. Research and development expenses increased by
44.7% from $190,000 in 1994 to $274,000 in 1995 and by 67.6% to $460,000 in
1996. These increases reflected an increased volume of product development
work being performed by the Company and increased staffing levels.

Other income and expense. Other income and expense consists of interest
expense and other miscellaneous expense and income items. Interest expense has
remained relatively constant over the past three years.

Income taxes. Due to operating losses in Finland and in the U.S., the
Company did not incur any tax obligations during 1994 or 1995. In 1996, one of
the Company's Finnish subsidiaries recorded a profit, which resulted in a
Finnish tax liability of $208,000.

24
<PAGE>

QUARTERLY PRODUCT SALES

The following table presents unaudited product sales information for the
last eight quarters through December 31, 1996. In the opinion of management,
this information has been prepared on the same basis as the product sales data
included in the Consolidated Financial Statements appearing elsewhere in this
Prospectus. Product sales for any period are not necessarily indicative of
product sales to be expected for any future period.

<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1995:
Quarter ended March 31........... $ 225
Quarter ended June 30............ 378
Quarter ended September 30....... 335
Quarter ended December 31........ 417
1996:
Quarter ended March 31........... 716
Quarter ended June 30............ 750
Quarter ended September 30....... 1,160
Quarter ended December 31........ 2,408
</TABLE>

The quarterly increases in product sales principally reflect the continuing
development of the Company's managed network of independent sales agents in
the U.S., the introduction in the U.S. of the Company's PLLA screw products
during the fourth quarter of 1995 and the U.S. introduction of the Meniscus
Arrow products during the second quarter of 1996. The increase in product
sales from the first quarter of 1995 to the second quarter of 1995 also
reflects the commencement of sales in the U.S. through the Company's managed
network of independent sales agents during the second quarter. Minimal sales
of the Company's products were made in the U.S. during the first quarter of
1995 while the Company was establishing its U.S. managed network of
independent sales agents. The Company anticipates that in future periods,
third quarter revenues may be adversely impacted due to relatively lower
European sales activity during the summer months.

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

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has relied upon bank loans (guaranteed in certain
instances by the Company's principal stockholders), capital contributions by
its principal stockholders and government grants to fund its operations. In
September 1996, the Company completed a private placement of preferred stock
and warrants in which it received net proceeds of approximately $4.9 million.
These net proceeds were used to repay bank debt, to pay down trade debt, to
fund manufacturing and product development efforts and for other working
capital purposes.

The Company's cash and cash equivalents increased by $1.5 million from
December 31, 1995 to December 31, 1996 as a result of the Company's September
1996 private placement. The infusion of cash from that transaction was offset
in part by the Company's net loss for the year, a $1.3 million increase in
accounts receivable and a $299,000 increase in inventory.

As of December 31, 1996, the Company had working capital of $2.0 million. At
that date, the Company had outstanding approximately $800,000 of long-term
debt (including the current portion of such indebtedness); the Company expects
to repay a portion of such long-term debt out of the proceeds of this
Offering.

25
<PAGE>

The Company believes that existing capital resources from its September 1996
private placement, cash flow from operations (if, and to the extent,
generated) and the anticipated net proceeds from this Offering will be
sufficient to fund its operations through 1998. However, the Company's future
capital requirements and the adequacy of available funds will depend on
numerous factors, including market acceptance of its existing and future
products, the successful commercialization of products in development,
progress in its product development efforts, the magnitude and scope of such
efforts, progress with preclinical studies, clinical trials and product
clearances by the FDA and other agencies, the cost and timing of its efforts
to expand its manufacturing capabilities, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, and the development of
strategic alliances for the marketing of certain of its products. The
Company's operations have not produced positive cash flows during any of the
past three fiscal years. To the extent that funds generated from the Company's
operations, together with its existing capital resources, the proceeds of this
Offering and the interest earned thereon, are insufficient to meet current or
planned operating requirements, the Company will be required to obtain
additional funds through equity or debt financings, strategic alliances with
corporate partners and others, or through other sources. The terms of any
equity financings may be dilutive to stockholders and the terms of any debt
financings may contain restrictive covenants which limit the Company's ability
to pursue certain courses of action. Principal stockholders of the Company who
previously provided funding to the Company and provided guarantees to sources
of credit have indicated that they do not intend to continue furnishing such
assistance. The Company does not have any committed sources of additional
financing, and there can be no assurance that additional funding, if
necessary, will be available on acceptable terms, if at all. If adequate funds
are not available, the Company may be required to delay, scale-back or
eliminate certain aspects of its operations or attempt to obtain funds through
arrangements with strategic partners or others that may require the Company to
relinquish rights to certain of its technologies, product candidates, products
or potential markets. If adequate funds are not available, the Company's
business, financial condition and results of operations could be materially
and adversely affected.

26
<PAGE>

BUSINESS

OVERVIEW

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

BACKGROUND

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

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

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

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

TRADITIONAL APPROACHES TO FIXATION

To achieve proper skeletal tissue healing, orthopaedic surgeons either (i)
use implantable devices, including screws, pins, tacks, plates and nails, to
perform various internal fixation and repair techniques and/or (ii) apply
external fixators and immobilization systems, such as casts. These techniques
are designed

27
<PAGE>

to ensure appropriate reduction (close approximation of the separated tissues)
and compression (pressure applied to the reduced tissues to assure maintenance
of the reduction) during the healing process.

Rigid Internal Fixation

Rigid internal fixation (fracture fixation) procedures are performed to
repair bone fractures. These procedures, performed either through an open
incision or through percutaneous, minimally invasive techniques, are designed
to produce correct realignment of bones, to create appropriate reduction and
to fix bones in the anatomically correct position to maximize the potential
for healing. Since the 1950's, rigid internal fixation techniques involving
the internal placement of metal implants have been the standard of care for
fracture management and have resulted in improved healing of fractures. Rigid
internal fixation is intended as a temporary measure to allow for the
initiation of the healing process by creating appropriate reduction. In
practice, most metal implants utilized in rigid internal fixation are not
removed and become a substitute for the strength and functionality of bone.
Such strength and functionality would return to the bone if the fixation
device were removed. Annually, approximately 735,000 rigid internal fixation
procedures are performed in the U.S.

Connective Tissue Fixation

Connective tissue fixation may involve the reattachment of ligaments or
tendons that have been torn at the point of attachment. Alternatively,
ligaments or tendons may tear at a point other than the point of attachment,
requiring reconnection to return functionality. Connective tissue fixation
techniques are performed either through open incisions or through minimally
invasive techniques, and involve the use of tacks, screws, nails or sutures to
effect the anatomical reattachment as close to the original point of
attachment as possible. The same repair options are available to the surgeon
when ligaments are torn in areas other than at their point of attachment. In
both fracture fixation and connective tissue repair, the affected joint or
limb is immobilized for a period of time to promote healing. While connective
tissue fixation techniques have resulted in adequate repairs, metal fixation
devices or suture systems can cause long-term problems and complications,
including local pain and limited joint functionality, since the attachment
site will not heal completely while the device remains in place. Annually,
approximately 360,000 soft tissue fixation procedures are performed in the
U.S.

Cartilage and Cartilaginous Tissue Repair

Repairs to cartilagenous tissue typically involve removal of the torn tissue
or difficult and demanding surgical techniques. Removal of tissue can have
long-term consequences for the patient and may lead to subsequent surgeries.
Since cartilage has minimal vascularity, or is avascular, the healing of
injuries to these tissues must be surgically assisted through complex
arthroscopic or open surgical techniques. For example, suturing torn menisci
is one of the most technically demanding skills in arthroscopic surgery and
may result in surgical complications, including damage to the vascular and
neural system. Annually, approximately 940,000 cartilage repairs and
replacements are performed in the U.S.

LIMITATIONS OF TRADITIONAL APPROACHES

Metal Implants

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

Despite the nearly universal acceptance of metal fixation devices, the
medical community has recognized several important limitations associated with
these products. Most importantly, bone repaired with and supported by metal
devices relies upon the implant to perform the load-bearing functions
previously

28
<PAGE>

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

First Generation Resorbable Implants

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

SELF-REINFORCED, RESORBABLE IMPLANTS

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

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

The resorption of PLLA and PGA occurs in a predictable three step process.
The first two steps are initiated by hydrolysis, which breaks down the polymer
molecules into smaller chains, resulting in an initial reduction in molecular
weight and a slight swelling of the implant, causing it to lock in place. The
third step involves degradation. Unlike first generation unreinforced
resorbable polymers which degraded rapidly into large particles (greater than
1mm) in an uncontrolled process, the Company's Self-Reinforced, resorbable
polymers degrade in a slow controlled fashion into small particles. Only when
the Self-Reinforced, resorbable implant has degraded into small particles will
they be released into the surrounding tissue for final

29
<PAGE>

degradation through cellular absorption. The slow and controlled degradation
of Self-Reinforced, resorbable polymer implants causes the gradual transfer
(ranging from three weeks to six months depending upon the medical indication)
of the weight-bearing load from the implant to the bone.

The Company believes that the principal advantages of its Self-Reinforced,
resorbable implants include:

. Improved Bone Healing. The controlled degradation of the Company's Self-
Reinforced, resorbable implants in bone results in a gradual transfer of
the weight-bearing load from the fixation device to the bone, eliminating
stress shielding. In a trial involving 39 patients with ankle fractures,
bone mineral density decreased on average by 6.4% in those patients in
which the Company's PLLA screws were used, as compared to an 18.6%
average decrease for those patients receiving metal screws. As a result,
the Company believes that its implants promote more effective bone
healing than metal implants.

. Improved Soft Tissue Healing. Fractures and soft tissue injuries that
involve the articulating surfaces of joints have been difficult to
address with metal implants due to the potential for erosion of these
delicate surfaces. In a clinical study of 34 patients who received the
Company's Meniscus Arrow, no such erosion occurred.

. Lower Implant Failure Rate. Competitors' first generation unreinforced,
resorbable implants have a reported failure rate of 7-10% on insertion.
The Company believes, based on clinical experience with its self-
reinforced, resorbable implants and feedback from the medical community,
that the Company's implants have a significantly lower rate of failure.

. Reduced Need for Repeat Surgery. The Company's implants are absorbed by
the body over a controlled period of time, which is based on their
indicated use. This controlled resorption allows the patient to avoid the
cost, trauma and inconvenience of follow-up surgery to remove the
implant. These advantages may be especially beneficial in the treatment
of ankle fractures, which typically involves the removal of the metal
implant. The potential for re-fracture of the site upon removal, which
exists whenever metal implants are removed, is also eliminated.

The Company's use of well known and well characterized polymers has, to
date, allowed for clearance of the Company's orthopaedic products through
510(k) submissions. The FDA is familiar with the toxicological properties of
these polymers, and has not required extensive preclinical or clinical tests
prior to granting marketing clearance. In certain recent cases, clearances
have been obtained within 90 days after submission.

BUSINESS STRATEGY

The Company's goal is to leverage its Self-Reinforcing technology as a
platform for the development and sale of resorbable polymer implants across a
wide range of medical/surgical applications. The key elements of the Company's
business strategy include:

. Develop Proprietary Products by Leveraging the Company's Platform
Technology. The Company intends to leverage its core technology as a
platform for developing new Self-Reinforced, resorbable implants which
allow surgeons to effectively treat specific medical needs where current
treatment modalities are not optimal. For example, the Company has
developed its Meniscus Arrow for use in the repair of tears of the medial
and lateral meniscus and has developed resorbable, self-expanding stents
for use in the urinary tract and for prostate related disease, two
indications in which current therapies have clinical limitations.

. Enhance Core Technology Platform. The Company is developing next
generation polymers and high strength resorbable composites, which are
designed to further enhance the Company's core technology and expand the
applications for its products. The technologies which the Company has
developed to produce Self-Reinforced polymers are applicable to any
resorbable polymer, and may be applied to the development of new, more
durable, stronger, profiled (nonsmooth-surfaced) implants. In addition,
the Company may work with universities and other polymer developers to
expand its proprietary polymer base.

30
<PAGE>

. Leverage Existing Customer Base. Over 1,000 orthopaedic surgeons
worldwide have used the Company's Self-Reinforced, resorbable implants.
Substantially all of these surgeons are repeat customers. The Company
believes that it has developed a reputation for producing high quality,
safe and reliable resorbable implants. The Company intends to leverage
its reputation with its customers to build new markets for its products,
to increase acceptance of its existing products and to accelerate
adoption of products currently under development.

. Maintain Focused Sales and Marketing Efforts. The Company intends to
continue to focus its sales and marketing efforts initially on the
estimated $595 million annual orthopaedic resorbable biomaterial and
meniscal preservation markets. Accordingly, outside the orthopaedic
market, the Company may seek to establish licensing or distribution
agreements with strategic partners to develop certain products and to
market and distribute products that the Company elects not to distribute
through its managed networks of independent sales agents, distributors
and dealers.

. Expand the Company's Manufacturing Capabilities. The Company manufactures
its implant products in Finland. Through the establishment of its managed
network of independent sales agents in the U.S., the Company has
substantially increased its presence in the U.S. With this increased
presence, the Company believes that it will be able to more effectively
support U.S. selling efforts by establishing a manufacturing capability
in the U.S. to supplement its Finnish manufacturing capacity. Management
may seek to arrange for a contract manufacturer to provide this
capability to the Company.

PRODUCTS

The Company currently markets nine product lines representing more than 100
distinct products. The Company also provides specially designed instruments
for use with each of its products. The Company's product lines are described
below:

<TABLE>
<CAPTION>
ANNUAL POTENTIAL
PRODUCT LINES TARGETED INDICATIONS(1) REGULATORY STATUS U.S. PROCEDURES(1)
------------- ------------------------ ---------------------------- ------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Fracture
Fixation:
SR-PLLA Fractures/Osteotomies Marketed Worldwide 100
Pins
SR-PLLA Fractures/Osteotomies Marketed Worldwide 125
Screws
SR-PGA Fractures/Osteotomies Marketed Worldwide 400
Pins
SR-PGA Fractures/Osteotomies Marketed Worldwide 125
Screws
Tissue
Repair:
Meniscus Meniscus Repair Marketed Worldwide 138
Arrows
SR-PLLA Ligament Attachment Marketed Worldwide 15
Tacks
SR-PGA Alveolar Ridge Marketed Outside of the U.S. NA
Membrane
Urology
Stents:
SR-PGA Post Benign Prostatic Marketed Outside of the U.S. NA
Stents Hyperplasia Swelling FDA Submission in 1997(2)
SR-PLLA Benign Prostatic Marketed Outside of the U.S. NA
Stents Hyperplasia Prophylaxis FDA Submission in 1998(2)
</TABLE>
--------
(1) As described herein, FDA clearances for certain of the Company's
products are limited to specific indications. The Company's estimates
for the number of potential annual procedures in the U.S. have been
derived by the Company on the basis of its analysis of market research
reports compiled by independent third-party sources which the Company
believes to be reliable. Such market research reports contain
approximate total procedure amounts from which the Company has
estimated the number of potential procedures eligible for the targeted
indication. "NA" denotes that data is not available. See "Risk
Factors - Estimates of Procedures Uncertain; Regulatory Submission
Data Subject to Change."
(2) FDA submission dates reflect the Company's current plans and are
subject to delay or cancellation depending upon contingencies that may
arise in the development process. These submission dates could be
delayed if the FDA requires PMA approval rather than 510(k) clearance
for the urology stents. See "Risk Factors -- Estimates of Procedures
Uncertain; Regulatory Submission Dates Subject to Change" and " --
Government Regulation."

31
<PAGE>

PLLA and PGA Pins

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

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

PLLA and PGA Screws

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

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

Meniscus Arrows

Tears of the cartilage pads in the knee, known as the menisci, are the most
common knee injuries treated by orthopaedic surgeons in the U.S. Prior to the
introduction of the Company's Meniscus Arrow, the treatment options available
to surgeons were limited to either the removal of the damaged section
(meniscectomy) or surgical repair using a variety of complex suturing
techniques. The efficacy of meniscectomy, historically the preferred approach
given the complex and lengthy nature of the suture repair procedure, has
recently been questioned in peer-reviewed and published studies. These studies
have shown that meniscus removal may be detrimental to the long-term outcome
of the surgery and may lead to complications requiring further, more invasive,
surgeries. The suturing alternative requires surgeons to tie knots
arthroscopically, which is one of the most technically demanding skills in
arthroscopic surgery. Surgical

32
<PAGE>

complications, including damage to the vascular and neural system, can arise
during this time-consuming suturing process, due in part to the necessity of
creating a small opening at the back of the knee to allow for the passing of
sutures and the tying of knots.

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

PLLA Tacks

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

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

PGA Membrane

Repair of defects in the gum or jaw to facilitate the use of dental implants
requires the use of membranes to support and contain materials that are
implanted at these sites to assist the body in growing new bone. Current
membranes, made from either non-resorbable materials or collagen sponges, may
limit the surgeon's capabilities to effect good repairs because they either
must be removed in a second surgery or may not provide support for a period
sufficient to complete the healing process. The Company's membrane is a
resorbable sheet of self-reinforced polymer that degrades over a clinically
appropriate period to allow for bone growth and does not require removal in a
second surgery.

The Company has licensed Johnson & Johnson's Ethicon GmbH subsidiary to sell
products based on the Company's membrane patent for use in dental and two
other applications in Europe. Ethicon GmbH has advised the Company that it
expects to commence commercial sales of such products during the second
quarter of 1997. In the U.S., the Company is assessing whether the orthopaedic
market for the membrane product is sufficient for the Company to incur the
expense of pursuing FDA clearance on its own. For the dental surgery market in
the U.S., the Company presently intends to pursue a strategic alliance with a
corporate partner, although no assurance can be given that an arrangement
satisfactory to the Company will

33
<PAGE>

be negotiated. The Company's membrane products cannot be marketed or sold in
the U.S. until clearance or approval is obtained from the FDA. See "Risk
Factors -- Government Regulation."

PGA Urology Stents

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

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

In studies conducted by the Company, the Company's PGA stent enabled a
substantial percentage of patients to void on the first or second day after
implantation following laser treatment of BPH. In contrast, the study data
indicated that indwelling catheters do not enable patients to void on their
own for an average of six days after such surgery is performed. The Company
believes that its stent provides the patient with immediate relief of post-
operative edema, avoids the necessity for return to the clinic for catheter
removal, avoids the potential inconvenience associated with the use of an
indwelling system and reduces the potential for infection associated with use
of a catheter in a sensitive area of the body. The Company's stents cannot be
marketed or sold in the U.S. until clearance or approval is obtained from the
FDA. See "Risk Factors --Government Regulation."

Instrumentation

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

PRODUCT DEVELOPMENT

The Company's product development efforts focus upon expanding the use of
the Company's platform technology to address the limitations of traditional
surgical techniques and existing implants. The Company currently has ten
products for 18 different indications in various stages of development. To
date, all of the Company's implants sold in the U.S. have been cleared through
the 510(k) pre-market notification process. However, lengthier and more costly
PMA submissions may be required in order to obtain approval to sell urological
stents and other new products in the U.S.

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<PAGE>

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

<TABLE>
<CAPTION>
CLINICAL ESTIMATED ANNUAL POTENTIAL
PRODUCT INDICATION PATIENTS DURATION CLINICAL/REGULATORY STATUS(1) U.S. PROCEDURES(2)
------- ---------------------------------- -------- ----------- ----------------------------- ------------------
(IN MONTHS) (IN THOUSANDS)
<C> <S> <C> <C> <C> <C>
ORTHOPAEDICS
PLLA Screw Colles fracture (wrist) 28 12-18 Enrollment complete 16
Endo-brow lifts (face) 50 6-12 Enrollment complete 15
Acetabular cup fixation (hip) 25 18-30 First patients enrolled 7/96 180
Femoral neck fixation (leg) 40 24-36 FDA submission in 1997 165
PGA Screw Salter osteotomies (pediatric hip) 25 36-48 To commence in 1997 NA
PLLA Nail Osteochondritis dessicans (knee) 25 6-12 Enrollment commenced 10/96 9
PLLA Tack Bankhart tears (shoulder) 20 24-36 FDA submission in 1997 87
PLLA Wedge High tibial osteotomy (leg) 25 12-24 To commence in 1997 NA
ACL fixation (knee) 20 18-30 To commence in 1997 149
PLLA Screw/Washer Rotator cuff repair (shoulder) 25 12-30 To commence in 1997 87
UROLOGY
PGA Stent Lumen support post BPH treatment 96 36-48 FDA submission in 1997 300
PLLA Stent Urethral stricture 60 24-36 Enrollment commenced pre-1996 100
PLLA Stent Use with finasteride 60 TBD Enrollment commenced 9/96 NA
GENERAL SURGERY
PLLA Stent Bile duct blockage 10 18-30 Enrollment commenced 1/96 NA
Pancreatic duct blockage 10 18-30 Enrollment commenced pre-1996 NA
MAXILLO-FACIAL SURGERY
PLLA Screw Sagittal split osteotomy (jaw) 47 24-30 FDA submission in 1997 25
PDLA Screw
and Plate Mid-face corrections 50 12-24 First patients enrolled 11/96 110
PLLA Plate Cranial-facial fractures 26 12-24 Enrollment commenced 15
</TABLE>
-------
(1) Regulatory submission dates reflect the Company's plans and are subject
to delay or cancellation depending upon contingencies that may arise in
the development process. The submission data for the PGA urology stent
could be delayed if the FDA requires PMA approval rather than 510(k)
approval. See "Risk Factors -- Estimates of Procedures Uncertain;
Regulatory Submission Dates Subject to Change" and "-- Government
Regulation."

(2) The Company's estimates for the number of potential annual procedures
in the U.S. have been derived by the Company on the basis of its
analysis of market research reports compiled by independent third-party
sources which the Company believes to be reliable. Such market research
reports contain approximate total procedure amounts from which the
Company has estimated the number of potential procedures eligible for
the targeted indication. "NA" denotes that data is not available. See
"Risk Factors - Estimates of Procedures Uncertain; Regulatory
Submission Dates Subject to Change."

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<PAGE>

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

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

The Company has designed a resorbable anchor to address the principal
shortcomings of existing metal anchors. The design of the Company's anchor
enables it to be inserted without the use of a bone tap, to be easily removed
if misplaced or if the suture breaks, and to accommodate any type of suture.
Since there have been at least five predecessor devices and because the
product design is a modification of the Company's PLLA screw, the Company
believes that the FDA will not require clinical verification of the anchor's
efficacy, although no assurance can be given in this regard. Biomechanical
tests have demonstrated the pull-out (the force necessary to remove the anchor
from the bone) of the Company's anchor to be equal to or greater than that of
certain currently approved products. The Company plans to seek 510(k)
clearance for this product in 1997. See "-- Government Regulation."

Intramedullary Nails. To treat fractures of the forearm and humerus in
children, pediatric surgeons currently use flexible stainless steel wire as a
substitute for nails in order to avoid damaging the growth plates in either
bone of the forearm. While these wires are less invasive and do not stress-
shield growing bones as do metal plates and screws, they may be difficult for
the pediatric surgeon to manipulate in the small bones of a child and may
require removal in the future. To respond to the needs of pediatric surgeons
for a fast, easy to use and safe procedure to manage forearm and humeral
fractures in children while avoiding the need to remove metal implants, the
Company has developed and tested in preclinical studies a resorbable
intramedullary nail made of poly-dl-lactic acid ("PDLA"). The Company believes
that PDLA implants have greater initial strength, higher flexibility and
faster absorption rates than PLLA implants. These performance characteristics,
particularly rapid, safe absorption, are important in children because of
their rapid growth and the traumatic impact on children of surgically removing
permanent implants. Based on the elimination of the need for removal surgery,
the Company believes that its intramedullary nails are a superior alternative
to current techniques for the fixation of displaced fractures in the pediatric
forearm. Preclinical studies have demonstrated that the use of the Company's
resorbable implants in the intramedullary canal do not create local
inflammation or interfere with the normal healing process. The Company plans
to commence a multi-center clinical trial of its intramedullary nails in
children in 1997.

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

36
<PAGE>

with a pin, the joint is designed to be functional and load-bearing at an
earlier stage than has been demonstrated with silicone implants and to create
a pseudo-joint after resorption.

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

SALES, MARKETING AND DISTRIBUTION

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

The Company has licensed Johnson & Johnson's Ethicon GmbH subsidiary to sell
in Europe certain products, based on the Company's membrane patent, in
dentistry and two other unrelated fields of use. Under that arrangement, the
Company received license fees in 1995 and 1996 and will be entitled to receive
royalty payments once the licensee commences sales.

MANUFACTURING

The Company currently manufactures all of its products in its Tampere,
Finland facility. All finished goods production, packaging and testing are
conducted in a validated 1,000 square foot clean room with physically separate
areas of varying types of air quality designed specifically for the production
of resorbable polymeric materials and products. Substantially all aspects of
the manufacturing process are subject to, and are designed to comply with, the
FDA's GMP regulations. The facility is subject to inspection by the FDA and
European regulatory agencies. The Company has received an EC Design
Examination and an EC quality system Certificate and is entitled to affix a CE
marking on all of its currently marketed orthopaedic, dental and maxillo-
facial products. See "-- Government Regulation."

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

37
<PAGE>

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

The Company intends to establish manufacturing capabilities in the U.S. in
order to increase its manufacturing capacity for its existing and new
products. The Company anticipates that it will either (i) equip and operate a
leased facility in the eastern U.S. or (ii) contract with a third party to
provide a manufacturing capability to the Company. The Company presently is
exploring both of these alternatives. If the Company chooses to use a contract
manufacturer, the Company would likely equip the manufacturer's facility, with
the objective of ultimately transitioning to a neighboring Company-owned or
Company-leased facility. The Company believes that on an interim basis,
contract manufacturing may enable the Company to save certain staffing costs
and enable senior management to focus on other aspects of its business;
however, savings in staffing costs may be outweighed by fees payable to the
contract manufacturer. Regardless of the approach to be utilized, the Company
currently plans to commence packaging and sterilization functions in the U.S.
by late 1997 and to commence the balance of the manufacturing process in the
U.S. by 1999. While the Company's plans may change, the Company anticipates
that once full manufacturing commences in the U.S. facility, the Company will
seek to manufacture the Company's entire product line both domestically and
abroad. There can be no assurance that the Company will not encounter
difficulties in scaling up production in the U.S., including problems
involving production yield, quality control and assurance, and shortage of
qualified personnel. In addition, the U.S. facility will be subject to GMP
regulations, international quality control standards and other regulatory
requirements. Difficulties encountered by the Company in manufacturing scale-
up or the failure by the Company to establish and maintain the U.S. facility
in accordance with such regulations, standards or other regulatory
requirements could entail a delay or termination of production, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. During 1995 and 1996, the Company experienced
occasional periods of delay in filling product orders due to increases in
demand beyond forecasted levels. The Company is currently upgrading its
production machinery and processes to address this increased demand. No
assurance can be given that the integration of these machines into the
production process will occur within the scheduled time frame or will not
result in difficulties in scale-up that could lead to further delays in
filling orders in the future. See "Certain Transactions."

LICENSES, TRADE SECRETS, PATENTS AND PROPRIETARY RIGHTS

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

38
<PAGE>

The Company's patent strategy has been to seek patent protection for the
technologies that produce the Company's Self-Reinforced resorbable polymer
products and, in certain instances, for the products themselves. The Company
owns or has licenses to patents issued in the United States and in various
foreign countries and has patent applications pending at the U.S. PTO and in
the patent offices of various foreign countries. Provided that all requisite
maintenance fees are paid, the Company's four principal U.S. patents (two of
which are owned by the Company and two of which are licensed to the Company on
an exclusive basis) will expire between 2004 and 2008. The two principal U.S.
patents owned by the Company relate to the Company's Self-Reinforced
resorbable polymer products, the Company's sintering process, and resorbable
polymer products produced from the Company's controlled drawing process. The
Company also has pending two principal U.S. patent applications that relate to
the Company's resorbable stent technology. The Company's other patents and
patent applications relate to various uses for Self-Reinforced resorbable
polymers, either alone or in combination with other resorbable polymers or
biocompatible materials, and generally involve specific applications or
improvements of the technologies disclosed in the Company's principal patents
and patent applications. European counterparts to the two principal U.S.
patents that are owned by the Company and the Japanese counterpart to one such
patent are currently the subject of opposition proceedings. One of these
European patents has been revoked by the European Patent Office for lack of
novelty based on an earlier publication. The Company has filed an appeal of
the European Patent Office's revocation decision. The other European patent
and the Japanese patent application are being challenged on lack of novelty
and inventiveness grounds on the basis of disclosures made in patent and other
publications. The Company is vigorously defending its European and Japanese
patent positions in these proceedings. No assurance can be given as to whether
such appeal in Europe will be successful or as to the outcome of the pending
opposition proceedings. In order to clarify and confirm its U.S. patent
position, the Company intends in the second quarter of 1997 to request
reexamination by the U.S. PTO of the two principal U.S. patents owned by the
Company. No assurance can be given as to whether the issues raised in the
reexamination proceedings will be resolved in the Company's favor. The
reexamination process is expected to take up to twelve months or longer. Such
reexamination could result in some or all of the patent claims set forth in
these two U.S. patents being altered to provide narrower coverage or
determined to be unpatentable. No assurance can be given as to the outcome of
the reexamination process. Narrowing of the coverage or a holding of
unpatentability in relation to one or both of these two principal U.S. patents
may significantly ease entry to the U.S. market for the products of the
Company's competitors and could have a material adverse effect on the
Company's business, financial condition and results of operations.

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

39
<PAGE>

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

Legal standards relating to the scope of claims and the validity of patents
in the medical device field are still evolving, and no assurance can be given
as to the degree of protection any patents issued to or licensed to the
Company would provide. The medical device industry has been characterized by
extensive litigation regarding patents and other intellectual property rights,
and companies in the medical device industry have employed intellectual
property litigation to gain competitive advantage. The Company has initiated
an opposition in the European Patent Office challenging the grant of a third
party's European patent relating to a drawing process for manufacturing
resorbable polymer products. Subsequently, another company has instituted its
own opposition against that patent. No assurance can be given that these
oppositions will result in either the revocation of that patent or the
narrowing of its claims. If neither opposition is successful, then no
assurance can be given that the third party will not assert that its European
patent is intringed by sales of one or more of the Company's products or by
the practice of one or more of the Company's processes in any of the eight
countries identified in the European patent. Moreover, there can be no
assurance that the Company will not be subject to claims that one or more of
its products or processes infringe other patents or violate the proprietary
rights of third parties. Defense and prosecution of patent claims can be
expensive and time consuming, regardless of whether the outcome is favorable
to the Company, and can result in the diversion of substantial financial,
management and other resources from the Company's other activities. An adverse
outcome could subject the Company to significant liability to third parties,
require the Company to obtain licenses from third parties, or require the
Company to cease any related product development activities or product sales.
In addition, the laws of certain countries may not protect the Company's
patent rights, trade secrets, inventions, products or processes to the same
extent as in the U.S.

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

40
<PAGE>

COMPETITION

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

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

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

Overall, the Company believes that the primary competitive factors in the
markets for its products are safety and efficacy, ease of implantation,
quality and reliability, pricing and the cost effectiveness of resorbable
products as compared with non-resorbable products. In addition, the length of
time required for products to be developed and to receive regulatory approval
is an important competitive factor. The Company believes that it competes
favorably with respect to these factors, although there can be no assurance
that it will continue to do so.

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

GOVERNMENT REGULATION

United States. Products manufactured or marketed by the Company in the U.S.
are subject to extensive regulation by the FDA. Pursuant to the Federal Food,
Drug and Cosmetic Act, as amended, and the

41
<PAGE>

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

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

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

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

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

42
<PAGE>

will obtain 510(k) premarket clearance within satisfactory time frames, if at
all, for any of the devices for which it may file a 510(k).

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

If a manufacturer or distributor of medical devices cannot establish that a
proposed device is substantially equivalent to a legally marketed device, the
manufacturer or distributor must seek premarket approval of the proposed
device through submission of a PMA. A PMA must be supported by extensive data,
including laboratory, preclinical and clinical trial data to prove the safety
and effectiveness of the device and extensive manufacturing information.
Following receipt of a PMA, if the FDA determines that the application is
sufficiently complete to permit a substantive review, the FDA will "file" the
application. The PMA approval process can be lengthy, expensive and uncertain.
If granted, the approval of the PMA may include significant limitations on the
indicated uses for which a product may be marketed.

To date, all of the Company's products sold in the U.S. have received 510(k)
clearance. There can be no assurance that the FDA will not determine that the
Company's urology stents, certain products currently in development or future
products must undergo the more costly, lengthy and uncertain PMA approval
process. It is likely that the FDA will require the Company to seek PMA
approval for its urological stents.

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

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

The Company's facilities and manufacturing processes, as well as those of
any suppliers, are subject to periodic inspection by the FDA and other
agencies. In October 1994, the Company's facility in Finland was inspected by
the FDA. The inspector made several observations related to GMPs, which
resulted in a Warning

43
<PAGE>

Letter being issued to the Company on February 23, 1995. The Company then
began an exchange of correspondence with the FDA, which concluded with an
October 10, 1995 letter from the FDA stating, among other things, that the
Company's responses to the Warning Letter were "adequate" and that during the
next inspection, the FDA would "verify that the corrections have been
implemented." Such an inspection is expected to occur in the near future.

The FDA has recently finalized changes to the GMP regulations, including
design controls, which will likely increase the cost of compliance with GMP
requirements. Changes in existing requirements or adoption of new requirements
could have a material adverse effect on the Company's business, financial
condition and results of operations. There can be no assurance that the
Company will not incur significant costs to comply with such laws and
regulations in the future or that such laws and regulations will not have a
material adverse effect upon the Company's business, financial condition and
results of operations.

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

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

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

In order to continue selling its products within the European Economic Area
following June 14, 1998, the Company is required to achieve compliance with
the requirements of the Medical Devices Directive (the "MDD") and affix CE
marking on its products to attest such compliance. To achieve this, the
Company's products must meet the Essential Requirements as defined under the
MDD relating to safety and performance of its products and the Company must
successfully undergo verification of its regulatory compliance ("conformity
assessment") by a Notified Body selected by the Company. The nature of such
assessment will depend on the regulatory class of the Company's products.
Under European law, the Company's products are likely to be in class III. In
the case of class III products, the Company must (as a result of the
regulatory structure which the Company has elected to follow) establish and
maintain a complete quality system for design and manufacture as described in
Annex II of the MDD (this corresponds to a quality system for design described
in ISO 9001 and EN 46001 standards). The Notified Body must audit this quality
system and determine if it meets the requirements of the MDD. In addition, the
Notified Body must approve the specific design of each device in class III.
The Company received an EC Design Examination and an EC quality system
Certificate from a Notified Body on January 23, 1997. As part of the design
approval process, the Notified Body must also verify that the products comply
with the Essential Requirements of the MDD. In order to comply with these
requirements, the Company must, among other things, complete a risk analysis
and present sufficient clinical data. The clinical data presented by the
Company must provide evidence that the products meet the performance
specifications claimed by the Company, provide sufficient evidence of

44
<PAGE>

adequate assessment of unwanted side-effects and demonstrate that the benefits
to the patient outweigh the risks associated with the device. The Company will
be subject to continued supervision by the Notified Body and will be required
to report any serious adverse incidents to the appropriate authorities. The
Company also will be required to comply with additional national requirements
that are beyond the scope of the MDD. The Company is entitled to affix a CE
marking on all of its currently marketed orthopaedic, dental and maxillo-
facial products. Submission of the required design dossier for the Company's
stent products is scheduled for late 1997. Failure to obtain a CE marking for
the Company's stent products by June 14, 1998 would mean that the Company
would be unable to sell such products in the European Economic Area unless and
until compliance was achieved. There can be no assurance that the Company will
be able to achieve and/or maintain compliance required for CE marking for any
or all of its products or that it will be able to produce its products in a
timely and profitable manner while complying with the requirements of the MDD
and other regulatory requirements.

THIRD-PARTY REIMBURSEMENT

In the U.S. and other markets, health care providers such as hospitals and
physicians, that purchase medical devices, such as the Company's products,
generally rely on third-party payors, including Medicare, Medicaid and other
health insurance plans, to reimburse all or part of the cost of the procedure
in which the medical device is being used. The Company believes that, to date,
domestic health care providers have been reimbursed in full for the cost of
procedures which utilize the Company's products. However, there can be no
assurance that third-party reimbursement for such procedures will be
consistently available or that such third-party reimbursement will be
adequate. There is significant uncertainty concerning third-party
reimbursement for the procedures which utilize any medical device
incorporating new technology. Reimbursement by a third-party payor may depend
on a number of factors, including the payor's determination that the use of
the Company's products are clinically useful and cost-effective, medically
necessary and not experimental or investigational. Since reimbursement
approval is required from each payor individually, seeking such approvals can
be a time consuming and costly process which, in the future, could require the
Company to provide supporting scientific, clinical and cost-effectiveness data
for the use of the Company's products to each payor separately. Congress and
certain state legislatures have considered reforms in the health care industry
that may affect current reimbursement practices, including controls on health
care spending through limitations on the growth of Medicare and Medicaid
spending. The development of managed care programs in which the providers
contract to provide comprehensive health care to a patient population at a
fixed cost per person has also given rise to substantial pressure on health
care providers to lower costs.

Outside the U.S., the success of the Company's products is also dependent in
part upon the availability of reimbursement and health care payment systems.
These reimbursement and health care payment systems vary significantly by
country, and include both government sponsored health care and private
insurance plans. Accordingly, there can be no assurance that third-party
reimbursement available under any one system will be available for procedures
utilizing the Company's products under any other reimbursement system. Several
governments have recently attempted to dramatically reshape reimbursement
policies affecting medical devices. Typically, the Company's international
independent distributors have obtained any necessary reimbursement approvals.

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

PRODUCT LIABILITY AND INSURANCE

The Company's business is subject to product liability risks inherent in the
testing, manufacturing and marketing of the Company's products. There can be
no assurance that product liability claims will not be

45
<PAGE>

asserted against the Company or its licensees. While the Company maintains
product liability insurance, there can be no assurance that this coverage will
be adequate to protect the Company against future product liability claims. In
addition, product liability insurance is expensive and there can be no
assurance that product liability insurance will be available to the Company in
the future, on terms satisfactory to the Company, if at all. A successful
product liability claim or series of such claims brought against the Company
in excess of its coverage could have a material adverse effect on the
Company's business, financial condition and results of operations.

EMPLOYEES

As of December 31, 1996, the Company employed 14 full-time employees in the
U.S. and 33 full-time employees in Finland. Of its full-time employees, at
that date 14 were engaged in sales and marketing, six were engaged in
research, development, regulatory and quality assurance matters, 24 were
engaged in manufacturing and three were engaged in financial and
administrative services. The Company also contracts with independent
consultants from time to time. The Company's Finnish production and office
employees are members of a union and the terms of their employment are
governed in part by a collective bargaining agreement. The Company believes
that it maintains satisfactory relations with its employees.

FACILITIES

The Company currently operates two facilities, a central manufacturing
facility in Tampere, Finland that is part owned and part leased by the Company
and office space in Malvern, Pennsylvania that is leased by the Company on a
month-to-month basis. The Finnish facility, comprising approximately 10,000
square feet, is located in an industrial science park adjacent to the
Technical University at Tampere. Currently, that facility houses the Company's
manufacturing, quality control and product development functions and serves as
the Company's European customer service and central shipping location. The
Company operates its corporate headquarters, its executive offices and its
worldwide marketing and sales operations from its 2,500 square foot office
space in Pennsylvania.

The Company intends to relocate from its existing facility in Malvern,
Pennsylvania in 1997. The Company anticipates that it will either (i) equip
and operate a leased facility in the eastern U.S. or (ii) relocate its
headquarters and contract with a third party to provide a manufacturing
capability to the Company. No specific site has been selected. See "--
Manufacturing" and "Certain Transactions."

46
<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES

The following table sets forth certain information with respect to the
executive officers and directors of the Company:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
President, Chief Executive Officer and
David W. Anderson................ 44 Director
Executive Vice President, Research and
Pertti Tormala................... 51 Director
Michael J. O'Brien............... 36 Vice President, Finance and Administration
and Chief Financial Officer
Pertti Viitanen.................. 46 Managing Director of the Company's Finnish
subsidiaries
Stephen A. Lubischer............. 34 Vice President, U.S. Sales
Terry D. Wall(1)................. 55 Chairman of the Board
David J. Bershad(1).............. 57 Director
Anthony J. Dimun(2).............. 53 Director

David H. MacCallum(2)............ 59 Director
</TABLE>
- --------
(1) Member of Compensation Committee
(2) Member of Audit Committee

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

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

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

47
<PAGE>

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

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

TERRY D. WALL has been a director of Bionx Implants, Inc. since its
inception and a director of the Company's operating subsidiaries since 1992.
He has served as the President and Chief Executive of Vital Signs, Inc.
("Vital Signs"), a manufacturer of disposable anesthesia and respiratory
devices, since he founded that company in 1972. Prior to establishing Vital
Signs, he held various sales and marketing positions with The Foregger Co.,
the medical division of Westinghouse Corp., and the medical division of
American Optical Corp. Mr. Wall is also a director of EchoCath, Inc.
("EchoCath") and Exogen, Inc.

DAVID J. BERSHAD has been a director of Bionx Implants, Inc. since its
inception and a director of the Company's operating subsidiaries since 1992.
Mr. Bershad is, and has been for more than the past five years, a senior
partner with the New York law firm of Milberg Weiss Bershad Hynes & Lerach,
LLP. Mr. Bershad is also a director of Vital Signs.

ANTHONY J. DIMUN has been a director of Bionx Implants, Inc. since its
inception and a director of the Company's operating subsidiaries since 1992.
For more than the past five years, he has served as Executive Vice President
and Chief Financial Officer of Vital Signs. Prior to joining Vital Signs on a
permanent basis in 1991, he served as a Senior Vice President of First
Atlantic Capital Ltd., a U.S. affiliate of an international merchant banking
group, from 1989 to 1991, a financial consultant during 1988, a partner in the
accounting firm of Goldstein Golub and Kessler (from 1978 to 1987) and a
senior audit manager in the accounting firm of Ernst & Young LLP. He is also a
director of Vital Signs and EchoCath.

DAVID H. MACCALLUM has been a director of Bionx Implants, Inc. since its
inception and a director of the Company's operating subsidiaries since 1992.
Since May 1994, Mr. MacCallum has been the Managing Director for Life Sciences
Investment Banking at UBS Securities LLC. Prior to commencing his association
with UBS Securities LLC, Mr. MacCallum served from 1983 to May 1994 as the Co-
Head, Investment Banking for Hambrecht & Quist LLC. Mr. MacCallum is also a
director of MiniMed, Inc.

BOARD OF DIRECTORS AND OFFICERS

In accordance with the terms of the Company's Certificate of Incorporation
to be effective upon the completion of this Offering, the Board of Directors
of the Company (the "Board") will be divided into three classes, denominated
Class I, Class II and Class III, with members of each class holding office for
staggered three-year terms. Messrs. Anderson and Wall will be Class I
directors whose terms will expire at the 1998 annual meeting of stockholders,
Messrs. Bershad and Tormala will be Class II directors whose terms will expire
at the 1999 annual meeting of stockholders and Messrs. Dimun and MacCallum
will be Class III directors whose terms will expire at the 2000 annual meeting
of stockholders (in all cases subject to the election and qualification of
their successors or to their earlier death, resignation or removal). At each
annual stockholder meeting commencing with the 1998 annual meeting, the
successors to the directors whose terms expire will be elected to serve from
the time of their election and qualification until the third annual meeting of
stockholders following their election or until a successor has been duly
elected and qualified. Officers serve at the discretion of the Board.

48
<PAGE>

The Audit Committee of the Board was established in February 1997 to review,
act on and report to the Board with respect to various auditing and accounting
matters, including the selection of the Company's auditors, the scope of the
annual audits, the fees to be paid to the auditors, the performance of the
Company's independent auditors and the accounting practices of the Company.

The Compensation Committee of the Board was established in February 1997 to
determine the salaries and incentive compensation of the employee-officers of
the Company and to provide recommendations for the salaries and incentive
compensation of the other employees and the consultants of the Company. The
Compensation Committee will also administer the Company's benefit plans.

EXECUTIVE COMPENSATION

During 1996, the only executive officer of the Company who received in
excess of $100,000 in compensation from the Company was David W. Anderson, the
Company's Chief Executive Officer. The following table sets forth the
compensation paid by the Company during 1996 to the Chief Executive Officer
and to the Company's four other most highly compensated executive officers
(the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------- ---------------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) UNDERLYING OPTIONS(#) COMPENSATION
--------------------------- -------- ------- --------------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
David W. Anderson....... $151,600 $40,000 -- -- $7,708(2)
President and Chief
Executive Officer
Stephen A.
Lubischer(3)........... 74,622 -- -- 52,632(4) 7,462(2)
Vice President, U.S.
Sales
Michael J. O'Brien(5)... 9,167 -- -- 65,790(6) 917(2)
Vice President, Finance
and Administration,
and
Chief Financial Officer
Pertti Tormala.......... 84,680 -- -- -- 26,400(7)
Executive Vice
President, Research
Pertti Viitanen......... 80,725 -- -- -- --
Managing Director of
the Company's Finnish
subsidiaries
</TABLE>
- --------
(1) Perquisites and other personal benefits do not exceed ten percent of
salary plus bonus for any of the Named Executive Officers.
(2) Represents amounts paid on behalf of the Named Executive Officer for
various employee benefits selected by such individual pursuant to a
cafeteria plan.
(3) Mr. Lubischer joined the Company as its Vice President, U.S. Sales in
April 1996. He is currently paid an annual salary of $100,000.
(4) In September 1996, Mr. Lubischer was granted options covering 39,474
shares of Common Stock, of which options covering 15,790 shares are vested
and options covering 23,684 shares will vest in three equal annual
installments on December 31, 1997, 1998 and 1999. In November 1996, Mr.
Lubischer was granted options covering an additional 13,158 shares vesting
ratably over a five year period.
(5) Mr. O'Brien joined the Company as its Vice President, Finance and
Administration, and Chief Financial Officer in November 1996. He is
currently paid an annual salary of $110,000.
(6) Mr. O'Brien was granted his options upon commencement of employment. Of
the shares covered by his options, 15,790 shares vest on each of November
24, 1997 and 1998, 13,158 shares vest on November 24, 1999 and 10,526
shares vest on each of November 24, 2000 and 2001.
(7) Represents royalty payments due to Professor Tormala under a now
superceded employment agreement with respect to 1996 product sales.

49
<PAGE>

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement, with David W.
Anderson, its President and Chief Executive Officer. The term of the agreement
will expire on December 31, 1998. Pursuant to the agreement, Mr. Anderson
receives minimum annual compensation of $160,000 and is entitled to receive a
performance based bonus. Mr. Anderson is also entitled to receive all health
insurance benefits generally made available to the Company's employees as well
as a monthly car allowance of $500. The agreement further provides that if Mr.
Anderson's employment is terminated without cause by the Company prior to the
expiration of the initial term, or if Mr. Anderson terminates the agreement
for good reason prior to the expiration of the initial term, Mr. Anderson will
be entitled to base salary and health insurance benefits continuation for a
period of one year after the date of termination.

The Company has also entered into a new employment agreement with Pertti
Tormala effective December 1996. The agreement provides for a term expiring in
2002. Pursuant to the agreement, Professor Tormala will receive a base salary
of 540,000 FIM (approximately $120,000) and is eligible to receive cash
bonuses granted by the Company's Board of Directors. Professor Tormala is also
entitled to a car, certain pension benefits and reimbursement of all
reasonable travel and entertainment expenses. Under the agreement, all
patents, patent applications and other industrial property rights developed by
Professor Tormala relating to the Company's research and development
activities are the sole property of the Company. The agreement permits
Professor Tormala to spend up to 16 hours per month working on a business to
be spun-off from the Company prior to the consummation of this Offering. See
"Certain Transactions."

STOCK OPTION INFORMATION

The following table sets forth certain information concerning stock options
granted during the year ended December 31, 1996 to the Named Executive
Officers who received stock options during that year. In accordance with the
rules of the Securities and Exchange Commission (the "Commission"), the
following table also sets forth the potential realizable value over the term
of the options (the period from the grant date to the expiration date) based
on assumed rates of stock price appreciation of 5% and 10% compounded
annually. These amounts do not represent the Company's estimate of future
stock price performance. Actual realizable values, if any, of stock options
will depend on the future performance of the Common Stock. No stock
appreciation rights were granted during the fiscal year ended December 31,
1996.

OPTION GRANTS IN THE FISCAL YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(3)
OPTIONS EMPLOYEES IN EXERCISE PRICE PER EXPIRATION -----------------------
NAME GRANTED (#)(1) 1996 SHARE ($/SHARE)(2) DATE 5% 10%
---- -------------- ------------- ------------------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Lubischer.... 39,474 26.8% $4.75 9/2/06 $ 118,126 298,128
13,158 8.9 9.50 11/23/06 78,751 198,752
Michael J. O'Brien...... 65,790 44.6 9.50 11/23/06 393,754 993,758
</TABLE>
- --------
(1) These options were granted under the Company's Stock Option/Stock Issuance
Plan. For information regarding the vesting of these options, see the
notes to the Summary Compensation Table.
(2) The exercise price per share of the options was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board.
(3) The potential realizable value is calculated based on the term of the
option at the date of grant (10 years). It is calculated assuming that the
fair market value of the Company's Common Stock on the date of grant
appreciates at the indicated annual rate compounded annually for the
entire term of the options and that the options are exercised and sold on
the last day of their term for the appreciated stock price.

50
<PAGE>

No stock options or stock appreciation rights were exercised by the Named
Executive Officers during 1996 and no stock appreciation rights were
outstanding as of December 31, 1996. The following table sets forth certain
information with respect to the value of stock options held by the Named
Executive Officers as of December 31, 1996.

FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1996(#) DECEMBER 31, 1996(1)($)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
David W. Anderson........... 83,104 193,905 $1,005,351 $2,345,766
Stephen A. Lubischer........ 15,790 36,842 130,268 241,446
Michael J. O'Brien.......... -- 65,790 -- 230,265
</TABLE>
- --------
(1) Based on a value equal to an assumed initial public offering price of
$13.00 per share, minus the per share exercise price, multiplied by the
number of shares underlying the options.

STOCK OPTION/STOCK ISSUANCE PLAN

The Company's Stock Option/Stock Issuance Plan (the "Plan") was adopted by
the Company's Board of Directors and stockholders in September 1996. A total
of 850,000 shares of Common Stock have been authorized for issuance under the
Plan. In no event may any one person participating in the Plan receive
options, separately exercisable stock appreciation rights and direct stock
issuances for more than 278,947 shares in any calendar year.

The Plan is divided into four separate components: (i) the Discretionary
Option Grant Program under which employees, consultants and other independent
advisors who provide services to the Company may, at the discretion of the
plan administrator, be granted options to purchase shares of Common Stock;
(ii) the Stock Issuance Program under which such persons may, in the plan
administrator's discretion, be issued shares of Common Stock directly, either
through the immediate purchase of such shares at a price not less than the
fair market value of the Common Stock on the date of issuance or as a bonus
for services rendered to the Company; (iii) the Salary Investment Option Grant
Program under which employees designated by the plan administrator may elect
to have a portion of their base salary invested each year in options to
purchase shares of Common Stock at an exercise price equal to thirty-three and
one-third percent (33 1/3%) of the fair market value of the Common Stock on
the grant date; and (iv) the Automatic Option Grant Program under which
eligible non-employee directors shall automatically, at periodic intervals,
receive option grants to purchase shares of Common Stock at an exercise price
equal to one hundred percent (100%) of the fair market value of the Common
Stock on the grant date.

The Discretionary Option Grant, the Salary Investment Option Grant and the
Stock Issuance Programs will be administered by the Compensation Committee of
the Company's Board of Directors. The Compensation Committee, as plan
administrator, has full authority to determine which eligible persons are to
receive option grants or stock issuances, the time or times when such option
grants or stock issuances are to be made, the number of shares subject to each
such grant or issuance, the status of any granted option as either an
incentive option or a non-statutory option under the Federal tax laws, the
vesting schedule (if any) applicable to the option grant or stock issuance and
the maximum term for which any granted option is to remain outstanding. The
Automatic Option Grant Program is self-executing, with all grants thereunder
being made in strict compliance with the express terms of that program, and no
administrative discretion will be exercised by the Board of Directors or any
committees with respect to those grants.

51
<PAGE>

Prior to the adoption of the Plan, the Company committed itself to grant
options to certain employees at specified option exercise prices which, at the
time such commitments were made, were intended to represent the fair market
value of the Common Stock. Options granted under these commitments will be
governed by the Discretionary Option Grant Program, subject to the commitments
made with respect to the exercise price and the term of such options.

Should the Company's stockholders approve a merger or consolidation of the
Company with or into another corporation, or the sale of all or substantially
all of the assets of the Company, in which the stockholders of the Company
before the transaction own less than 50% of the voting securities of the
surviving or successor corporation following the transaction (a "Corporate
Transaction"), each outstanding option under the Discretionary Option Grant
Program will automatically vest in full, unless such option will be assumed or
replaced with an equivalent incentive program by the successor corporation.
Any options so assumed or replaced, and in the event of a change in control of
the ownership of the Company each outstanding option under this program, will
automatically vest in full if the optionee's service with the Company is
involuntary terminated within 18 months following the effective date of the
Corporate Transaction or the change in control.

In the event of any Corporate Transaction or change in control while the
optionee remains in service to the Company, each outstanding option under the
Salary Investment Option Grant Program will automatically vest in full and
will remain exercisable until the earlier of the expiration of the option term
or the expiration of the two year period from the optionee's cessation of
service with the Company.

Upon any Corporate Transaction, all the shares of Common Stock subject to
repurchase rights under the Stock Issuance Program will immediately vest in
full, unless those repurchase rights are assigned to the successor
corporation. Any shares under repurchase rights so assigned, and in the event
of a change in control all shares subject to repurchase rights under the Stock
Issuance Program, will immediately vest in full if the optionee's service with
the Company is involuntary terminated within 18 months following the effective
date of the Corporate Transaction or the change in control.

Tandem stock appreciation rights may be issued under the Plan which will
allow optionees to surrender their outstanding options in exchange for an
appreciation distribution from the Company equal to the excess of (i) the fair
market value of the vested shares of Common Stock subject to the surrendered
option over (ii) the aggregate exercise price payable for such shares. Such
appreciation distribution may be made in cash or in shares of Common Stock.
Furthermore, limited stock appreciation rights may be issued to officers and
directors of the Company under the Plan which, upon the occurrence of a
hostile take-over, permit such individuals holding options with such limited
stock appreciation rights in effect for at least six months the unconditional
right to surrender such options in return for a cash distribution from the
Company in an amount equal to the excess of (i) the take-over price of the
vested shares surrendered under the option over (ii) the aggregate exercise
price payable for such shares.

The plan administrator has the authority to effect, with the consent of the
affected option holders, the cancellation of outstanding options under the
Discretionary Option Grant Program in return for new options covering the same
or a different number of shares with an exercise price based on the fair
market value of the Common Stock on the new grant date.

Under the Automatic Option Grant Program, each non-employee director first
elected or appointed to the Board of Directors after the date of this
Offering, will automatically be granted a non-statutory option for shares of
Common Stock equal to the greater of (i) 3,000 or (ii) the number equal to
$30,000 divided by the price at which the Common Stock is offered in this
Offering, provided such individual has not been in the prior employ of the
Company. In addition, at each annual stockholders meeting after this Offering,
each individual with at least six months service on the Board of Directors as
a non-employee director and who will continue to serve as a non-employee
director following the meeting will automatically be granted a non-statutory
option for 3,000 shares of Common Stock, provided such individual has
continued his or her service

52
<PAGE>

as a non-employee director for a period of at least one year after he or she
ceases serving as an employee of the Company.

Each automatic grant will have a term of ten years, subject to earlier
termination following the optionee's cessation of service on the Board of
Directors as provided in the Plan. Fifty percent of the shares subject to an
automatic grant will vest on the date of grant, 25% one year after the date of
grant, and the remaining 25% two years after the date of grant.

In the event of a Corporate Transaction or change in control, the shares of
Common Stock under the Automatic Option Grant Program will automatically vest
in full. Upon the occurrence of a hostile take-over, the optionee will have a
30 day period in which to surrender to the Company each automatic option held
by him or her in exchange for a cash distribution from the Company equal to
the excess of the take-over price of the shares subject to the surrendered
option over the aggregate exercise price payable for such shares.

The Plan will terminate on September 3, 2006, unless sooner terminated
pursuant to its terms.

LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION

The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except liability for (i)
any breach of their duty of loyalty to the corporation or its stockholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) unlawful payments of dividends
or unlawful stock repurchases or redemptions, or (iv) any transaction from
which the director derived an improper personal benefit. Such limitation of
liability does not apply to liabilities arising under the federal and state
securities and environmental laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission.

The Company's by-laws also provide that the Company shall indemnify, to the
fullest extent permitted by law, all present and former directors and
officers, and any such person serving or agreeing to serve as an officer or
director with any other enterprise at the Company's request, in connection
with any proceeding threatened, pending or instituted against such party by
reason of their serving or agreeing to serve in such capacity.

Section 145 of the Delaware General Corporation Law generally allows the
Company to indemnify the parties described in the preceding paragraph for all
expenses (including attorneys' fees), judgments, fines, and amounts in
settlement actually paid and reasonably incurred in connection with any
proceedings so long as such party acted in good faith and in a manner
reasonably believed to be in or not opposed to the Company's best interests
and, with respect to any criminal proceedings, if such party had no reasonable
cause to believe his or her conduct to be unlawful. Indemnification may be
provided by the Company only if the applicable standard of conduct set forth
in Section 145 has been met by the indemnified party upon a determination made
(i) by a majority vote of directors who are not parties to such proceedings,
even though less than a quorum, or (ii) if there are no such directors, or if
the directors so direct, by independent legal counsel in a written opinion, or
(iii) by the stockholders.

At present, there is no pending litigation or proceeding involving a
director or officer of the Company in which indemnification is required or
permitted.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During 1996, the Board of Directors performed all of the responsibilities of
the Compensation Committee. Mr. Wall, who is the Chairman of the Board of the
Company, Mr. Anderson, who is the President and Chief Executive Officer of the
Company, and Professor Tormala, who is an Executive Vice President of the
Company, participated in all discussions and decisions regarding salaries and
incentive compensation for all employees of the Company, except that Mr.
Anderson and Professor Tormala were excluded from discussions regarding their
own salary and incentive compensation. Mr. Wall has not received any salary or
incentive compensation from the Company.

53
<PAGE>

CERTAIN TRANSACTIONS

In September 1996, the Company consummated its Reorganization. Pursuant to
the Reorganization, (i) the U.S. and Finnish stockholders of the Company's
four operating subsidiaries contributed the capital stock of those entities to
Bionix, B.V. (the "Dutch Company") and Bionx Implants, Inc. (the "Parent
Company"), (ii) the Dutch Company contributed to the Parent Company the
capital stock of the operating companies that it received from such
stockholders, (iii) the Parent Company issued 2,684,211 shares of Common Stock
to the Dutch Company, (iv) the Company's four operating entities became
wholly-owned subsidiaries of the Parent Company, (v) each of the Company's
Finnish stockholders received capital stock of the Dutch Company and (vi) each
of the Company's U.S. investors received capital stock of both the Dutch
Company and the Parent Company. The shares issued to the Company's directors
and executive officers or their affiliated entities pursuant to the
Reorganization were as follows: (i) David Anderson: 131,222 shares of the
Company's Common Stock and shares representing 1.3% of the equity and 3.3% of
the voting power of the Dutch Company's capital stock; (ii) David J. Bershad:
254,732 shares of the Company's Common Stock and shares representing 1.9% of
the equity and 4.9% of the voting power of the Dutch Company's capital stock;
(iii) Anthony J. Dimun: 129,416 shares of the Company's Common Stock and
shares representing 1.3% of the equity and 3.3% of the voting power of the
Dutch Company's capital stock; (iv) David H. MacCallum: 97,179 shares of the
Company's Common Stock and shares representing 1.0% of the equity and 2.6% of
the voting power of the Dutch Company's capital stock; (v) Pertti Tormala:
shares representing 41.9% of the equity and 21.6% of the voting power of the
Dutch Company's capital stock; (vi) Pertti Viitanen: shares representing 5.4%
of the equity and 2.8% of the voting power of the Dutch Company's capital
stock; and (vii) Terry D. Wall: 1,966,400 shares of the Company's Common Stock
and shares representing 18.0% of the equity and 46.5% of the voting power of
the Dutch Company's capital stock.

No shares of the Company's capital stock were issued prior to the
Reorganization. Immediately prior to the Reorganization, the relative
ownership of the capital stock of the Company's four operating subsidiaries
(excluding shares of any of the four operating companies owned by any of the
other four operating subsidiaries) was as follows:

<TABLE>
<CAPTION>
U.S. FINNISH
STOCKHOLDERS STOCKHOLDERS
------------ ------------
<S> <C> <C>
Bioscience....................................... 61.2% 38.8%
Biocon Class A Shares............................ 57.7 42.3
Biocon Class B Shares............................ 58.2 41.8
Biostent......................................... 100.0 --
Orthosorb........................................ 100.0 --
</TABLE>

Upon consummation of the Reorganization, the Dutch Company owned 51% of the
outstanding Common Stock (2,684,211 shares) and the U.S. stockholders owned
49% of the outstanding Common Stock (2,578,949 shares). At that time, the U.S.
stockholders owned 27.5% of the equity and 60% of the voting power of the
Dutch Company's capital stock and the balance of such equity and voting power
was owned by the Finnish stockholders. Because the four operating subsidiaries
were controlled by a group of common stockholders, the Reorganization was
accounted for as a recapitalization. As a result of that accounting treatment,
the assets of the four operating subsidiaries were recorded on the Company's
consolidated financial statements at the historical bases of such assets prior
to the Reorganization. See Note 1 of the Notes to the Company's Consolidated
Financial Statements.

Promptly after the Reorganization was consummated, the Company issued a
total of 2,000,000 shares of its Preferred Stock (convertible into a total of
1,052,638 shares of Common Stock) and Warrants covering 421,065 shares of
Common Stock to several U.S. investors in exchange for an aggregate capital
contribution of $5,000,000. In this round of financing, T. Rowe Price
Threshold Fund III, L.P. ("Threshold") acquired 1,200,000 shares of Preferred
Stock and Warrants covering 252,632 shares for an aggregate purchase price of
$3,000,000, David J. Bershad acquired 120,000 shares of Preferred Stock and
Warrants covering 25,264 shares for an aggregate purchase price of $300,000,
Anthony J. Dimun (through an affiliated entity) acquired 40,000 shares of
Preferred Stock and Warrants covering 8,422 shares for an aggregate purchase
price of

54
<PAGE>

$100,000, David H. MacCallum (through an affiliated entity) acquired 20,000
shares of Preferred Stock and Warrants covering 4,211 shares for an aggregate
purchase price of $50,000 and Terry D. Wall (through an affiliated entity)
acquired 160,000 shares of Preferred Stock and Warrants covering 33,685 shares
for an aggregate purchase price of $400,000. Each share of Preferred Stock
will convert into approximately 0.526 of a share of Common Stock upon
consummation of this Offering. Messrs. Bershad, Dimun, MacCallum and Wall were
directors of the Company at the time of this financing. Upon completion of the
issuance of Series A Preferred Stock and Warrants and after giving effect to
the Preferred Stock Conversion and the issuance of 55,264 shares of Common
Stock to a former employee occurring simultaneously with the Series A
Preferred Stock and Warrant transaction but without giving effect to any
exercise of outstanding options or Warrants, (i) the Dutch Company owned 42.1%
of the outstanding Common Stock, (ii) the initial U.S. stockholders owned
directly an additional 43.3% of the outstanding Common Stock (excluding shares
indirectly owned by virtue of their ownership of capital stock of the Dutch
Company) and (iii) all other stockholders of the Company owned 14.6% of the
outstanding Common Stock.

As stated elsewhere herein, the Company's Preferred Stock will be
automatically converted into Common Stock, and the Warrants will be called,
upon closing of this Offering. Holders of the Preferred Stock and Warrants
(including Threshold and Messrs. Bershad, Dimun, MacCallum and Wall or their
affiliated entities) have rights to demand registration under the Securities
Act of shares of Common Stock issuable pursuant to the conversion of the
Preferred Stock and pursuant to the exercise of the Warrants on two occasions
beginning six months after the closing of this Offering. Such investors also
have the right to cause the Company to register such shares under the
Securities Act pursuant to a "shelf" registration statement commencing one
year after this Offering. In addition, in the event that the Company proposes
to register any of its securities or the securities of any other shareholder
under the Securities Act, the current holders of the Preferred Stock and
Warrants will have rights, subject to certain exceptions and limitations, to
have shares of Common Stock issuable upon conversion of the Preferred Stock or
upon exercise of the Warrants included in such registration statement. See
"Description of Capital Stock --Registration Rights of Certain Holders."

From October 1994 through April 1995, the Company was a party to a
distribution agreement with a subsidiary of Vital Signs which entitled that
subsidiary to distribute the Company's products in the U.S. on a non-exclusive
basis. During the term of that agreement, the Vital Signs subsidiary paid the
Company approximately $105,000 for products purchased for distribution by such
subsidiary. Pursuant to that relationship, the Company borrowed $100,000 from
Vital Signs at an interest rate of nine percent per annum. In addition, upon
termination of the distribution agreement, the Company agreed to pay the Vital
Signs subsidiary $87,000 upon return of certain inventory. That amount, as
well as all principal and interest due on such borrowing, was paid by the
Company in 1996. Terry D. Wall, the Chairman of the Board of the Company, is
the principal stockholder and Chief Executive Officer of Vital Signs and he,
Anthony J. Dimun and David J. Bershad are directors of Vital Signs. The
Company believes that the terms of these transactions were no less favorable
to the Company than terms that would be available from similarly situated
unrelated parties.

During the three years ended December 31, 1996, Professor Tormala (an
officer, director and principal beneficial stockholder of the Company) earned
royalty payments totaling approximately $182,000 from the Company pursuant to
the terms of an employment agreement that was terminated as of December, 1996
and license agreements covering certain of the Company's products. In lieu of
continuing royalty payments under the employment agreement, Professor
Tormala's new employment agreement provides for an increase in his base
salary. See Note 5 of the Notes to the Company's Consolidated Financial
Statements.

Pentti Rokkanen, M.D., who beneficially owns 7.0% of the Company's
outstanding Common Stock, provides consulting services to the Company. During
the three years ended December 31, 1996, a total of approximately $95,000 of
consulting fees were accrued and ultimately paid to Professor Rokkanen.

As described elsewhere herein, the Company presently is considering the
possibility of contracting with a third party to provide a manufacturing
operation to the Company in the eastern U.S. If the Company

55
<PAGE>

pursues such an arrangement, it will solicit bids from reliable medical device
manufacturers, including Thomas Medical Products, Inc. ("Thomas"), a wholly-
owned subsidiary of Vital Signs. Messrs. Wall, Dimun and Bershad, each of whom
are directors of Vital Signs, will not participate in any such determination
pertaining to Thomas.

Terry Wall, Pertti Tormala and the Company are each one-third equity owners
in a business organized to engage in developing, manufacturing and selling
polymer-based advanced drug delivery systems (the "Business"). The Company
acquired its interest in the Business from an unrelated individual in 1996 in
exchange for a payment of $85,000 and has not incurred any expenses relating
to the Business since that time. The Business has no tangible assets and is
expected to be in the development stage for a period of at least four years.
The Board of Directors has concluded that in light of the substantial
expenditures that would be required in order to bring any of the Business'
products to market, it is in the best interests of the Company and its
stockholders for the Company to forego its development of the Business and to
spin-off the Business. The Company intends to distribute its interest in the
Business to stockholders of record of the Company as of a date prior to the
closing of this Offering. Accordingly, investors in this Offering will not
have an ownership interest in the Business. Professor Tormala's employment
agreement with the Company enables him to dedicate certain of his services to
the Business, but provides that he may not work more than 16 hours per month
during business hours on matters pertaining to the Business. See "Management -
Employment Agreements."

During 1994 and 1995, Messrs. Wall, Anderson, Bershad, Dimun and MacCallum
contributed $494,000, $150,000, $61,000, $33,333 and $11,667, respectively, to
subsidiaries of the Company in exchange for shares of capital stock of such
subsidiaries. Such shares were exchanged for shares of Common Stock and shares
of the Dutch company's capital stock pursuant to the Reorganization.

Through December 31, 1996, the Company granted executive officers and
directors options to purchase a total of 395,431 shares of Common Stock with
exercise prices ranging from $0.9025 to $9.50 per share. Specifically, (i)
David W. Anderson, a director and the Company's Chief Executive Officer and
President, was granted options to purchase 277,009 shares of Common Stock at
an exercise price of $0.9025 per share; (ii) Michael J. O'Brien, the Company's
Vice President, Finance and Administration and Chief Financial Officer, was
granted options to purchase 65,790 shares of Common Stock at an exercise price
of $9.50 per share; and (iii) Stephen A. Lubischer, the Company's Vice
President, U.S. Sales, was granted options to purchase 39,474 shares of Common
Stock at an exercise price of $4.75 per share and options to purchase 13,158
shares of Common Stock at an exercise price of $9.50 per share. The options
granted to Messrs. Anderson, O'Brien and Lubisher have ten year terms and were
granted pursuant to the Company's Stock Option/Stock Issuance Plan. See
"Management--Stock Option/Stock Issuance Plan". Of the options granted to Mr.
Anderson, 60% are presently fully vested, 20% will vest on March 31, 1998 and
the remainder will vest on March 31, 1999. For information regarding the
vesting of Mr. O'Brien's options and Mr. Lubisher's options, see "Management--
Executive Compensation". For information regarding employment agreements with
executive officers, see "Management - Employment Agreements."

56
<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth information known to the Company with respect
to the beneficial ownership of its Common Stock as of December 31, 1996, and
as adjusted to reflect the sale of Common Stock offered by the Company hereby,
for (i) each person who is known by the Company to own beneficially more than
5% of the Company's Common Stock, (ii) each of the Company's directors, (iii)
each Named Executive Officer and (iv) all directors and Named Executive
Officers as a group.

<TABLE>
<CAPTION>
PERCENT OF TOTAL(1)
--------------------
SHARES PERCENT PERCENT
BENEFICIALLY BEFORE AFTER
NAMES OF BENEFICIAL OWNER(2) OWNED(1) OFFERING OFFERING(3)
- ---------------------------- ------------ -------- -----------
<S> <C> <C> <C>
Bionix, B.V.(4).............................. 2,684,211 42.1 30.1
Terry D. Wall(5)............................. 2,568,715 40.1 29.2
T. Rowe Price Threshold Fund III, L.P.(6) ... 884,211 13.3 10.1
David W. Anderson(7)......................... 249,167 3.9 2.8
David J. Bershad(8).......................... 393,886 6.2 4.5
Anthony J. Dimun(9).......................... 193,571 3.0 2.2
Stephen A. Lubischer(10)..................... 15,790 * *
Michael J. O'Brien........................... -- -- --
David H. MacCallum(11)....................... 138,813 2.2 1.6
Pentti Rokkanen(12).......................... 443,217 7.0 5.0
Pertti Tormala(13)........................... 1,124,818 17.7 12.8
Pertti Viitanen(14).......................... 144,840 2.3 1.6
All directors and Named Executive Officers
as a group (nine persons)(15)............... 4,829,600 73.8 54.3
</TABLE>
- --------
(*) Less than 1%.
(1) Applicable percentage ownership is based on 6,371,062 shares of Common
Stock outstanding as of December 31, 1996 (giving pro forma effect to the
Preferred Stock Conversion) together with applicable stock options and
Warrants for such stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission, based
on factors including voting and investment power with respect to shares.
Shares of Common Stock subject to the Warrants and shares of Common Stock
subject to stock options currently exercisable, or exercisable within 60
days after December 31, 1996, are deemed outstanding for computing the
percentage ownership of the person holding such stock options or Warrants,
but are not deemed outstanding for computing the percentage ownership of
any other person. In light of the Commission's rules regarding the
calculation of beneficial ownership with respect to exercisable Warrants,
each holder of Warrants is deemed to be the beneficial owner of all shares
covered by such holder's Warrants. Each owner of an equity interest in the
Dutch Company is deemed to beneficially own a percentage of the shares of
the Common Stock owned by the Dutch Company equal to such owner's
proportionate equity interest in the Dutch Company.
(2) Except as otherwise indicated in the footnotes to this table and pursuant
to applicable community property laws, persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock. Unless otherwise indicated, the address of all 5% shareholders is
c/o the Company, 279B Great Valley Parkway, Malvern, Pennsylvania 19355.
The address of T. Rowe Price Threshold Fund III, L.P. is 100 E. Pratt
Street, Baltimore, Maryland 21202.
(3) In calculating the percentage ownership after this Offering, this table
assumes that no holders of Warrants utilize a cashless exercise approach
and that, as a result, a total of 421,065 shares of Common Stock are
issued upon the closing of this Offering pursuant to the exercise of
Warrants.
(4) The capital stock of the Dutch Company is owned by the former stockholders
of the Company's operating subsidiaries. The Board of Directors of the
Dutch Company consists of David W. Anderson (who is also the chief
executive officer of the Dutch Company), David J. Bershad, Anthony J.
Dimun, David H. MacCallum, Pertti Tormala, Pertti Viitanen, Terry D. Wall
and Pentti Rokkanen, all but the last of whom are directors or executive
officers of the Company. Messrs. Anderson, Bershad, Dimun, MacCallum and
Wall beneficially own capital stock of the Dutch Company representing, in
the aggregate, approximately 23.5% of the equity and 60.6% of the voting
power of the Dutch Company's capital stock. Messrs. Tormala, Viitanen and
Rokkanen own capital stock of the Dutch Company representing, in the
aggregate, approximately 63.8% of the equity and 32.9% of the voting power
of the Dutch Company's capital stock. The remaining equity and voting
power of the Dutch Company's capital stock is allocated among several
other Finnish investors.
(5) Mr. Wall's shares include 33,685 shares of Common Stock issuable upon the
exercise of Warrants and 484,419 shares of Common Stock owned by the Dutch
Company, representing Mr. Wall's proportionate equity interest in the
2,684,211 shares of Common Stock owned by the Dutch Company. Mr. Wall has
the right to cause the Dutch Company to transfer such 484,419 shares to
him

57
<PAGE>

pursuant to an agreement with the Dutch Company. All of Mr. Wall's shares of
Common Stock and of the Dutch Company's capital stock are held in an
investment partnership which he controls.
(6) Such Fund's shares include 252,632 shares of Common Stock issuable upon
the exercise of Warrants.

(7) Mr. Anderson's shares include 83,104 shares of Common Stock issuable upon
the exercise of vested stock options and 34,841 shares of Common Stock
owned by the Dutch Company, representing Mr. Anderson's proportionate
equity interest in the 2,684,211 shares of Common Stock owned by the
Dutch Company. Mr. Anderson has the right to cause the Dutch Company to
transfer such 34,841 shares to him pursuant to an agreement with the
Dutch Company. Pursuant to the Company's Stock Option/Stock Issuance
Plan, Mr. Anderson has transferred to a trust established for his son
vested stock options covering 61,947 of the afore-mentioned 83,104
shares.
(8) Mr. Bershad's shares include 25,264 shares of Common Stock issuable upon
the exercise of Warrants and 50,732 shares of Common Stock owned by the
Dutch Company, representing Mr. Bershad's proportionate equity interest
in the 2,684,211 shares of Common Stock owned by the Dutch Company. Mr.
Bershad has the right to cause the Dutch Company to transfer such shares
to him pursuant to an agreement with the Dutch Company. A total of
254,732 of Mr. Bershad's shares of Common Stock and all of Mr. Bershad's
shares of the Dutch Company's capital stock are held in an investment
partnership which he controls.
(9) Mr. Dimun's shares include 8,422 shares of Common Stock issuable upon the
exercise of Warrants and 34,680 shares of Common Stock owned by the Dutch
Company, representing Mr. Dimun's proportionate equity interest in the
2,684,211 shares of Common Stock owned by the Dutch Company. Mr. Dimun
has the right to cause the Dutch Company to transfer such 34,680 shares
to him pursuant to an agreement with the Dutch Company. All of
Mr. Dimun's shares of Common Stock and of the Dutch Company's capital
stock and all of his Warrants are held in entities which he controls.
(10) Mr. Lubischer's shares represent shares of Common Stock issuable upon the
exercise of vested options.
(11) Mr. MacCallum's shares include 4,211 shares of Common Stock issuable upon
the exercise of Warrants and 26,896 shares of Common Stock owned by the
Dutch Company, representing Mr. MacCallum's proportionate equity interest
in the 2,684,211 shares of Common Stock owned by the Dutch Company. Mr.
MacCallum has the right to cause the Dutch Company to transfer such
shares to him pursuant to an agreement with the Dutch Company. A total of
10,527 of Mr. MacCallum's shares of Common Stock and all of his Warrants
are held in an entity which he controls.
(12) Represents Professor Rokkanen's proportionate equity interest in the
2,684,211 shares of Common Stock owned by the Dutch Company. Professor
Rokkanen has the right to cause the Dutch Company to transfer such
443,217 shares to him pursuant to an agreement with the Dutch Company.
(13) Represents Professor Tormala's proportionate equity interest in the
2,684,211 shares of Common Stock owned by the Dutch Company. Professor
Tormala has the right to cause the Dutch Company to transfer such
1,124,818 shares to him pursuant to an agreement with the Dutch Company.
That agreement enables Professor Tormala to direct the voting by the
Dutch Company of a specified number of shares of the Company's Common
Stock held by the Dutch Company. As of December 31, 1996, that specified
number equals 2,052,643, representing Professor Tormala's proportionate
equity interest in the 2,684,211 shares of Common Stock owned by the
Dutch Company (1,124,818 shares) and the proportionate equity interest of
all other Finnish investors in such 2,684,211 shares (927,825 shares).
The table above excludes from Professor Tormala's beneficial ownership
the 927,825 shares attributable to the equity interests of such other
Finnish investors.
(14) Represents Mr. Viitanen's proportionate equity interest in the 2,684,211
shares of Common Stock owned by the Dutch Company. Mr. Viitanen has the
right to cause the Dutch Company to transfer such 144,840 shares to him
pursuant to an agreement with the Dutch Company.
(15) Includes 71,582 shares of Common Stock issuable upon the exercise of
Warrants, 98,894 shares of Common Stock issuable upon the exercise of
vested stock options, and 1,901,226 shares of Common Stock owned by the
Dutch Company, representing the directors' and Named Executive Officers'
proportionate equity interest in the 2,684,211 shares of Common Stock
owned by the Dutch Company. The directors and Named Executive Officers as
a group beneficially own approximately 70.8% of the equity and
approximately 85.0% of the voting power associated with the capital stock
of the Dutch Company. The directors and Named Executive Officers of the
Company as a group have a right to vote all of the 2,684,211 shares of
Common Stock owned by the Dutch Company. If all such 2,684,211 shares
were deemed to be beneficially owned by the Company's directors and Named
Executive Officers, such persons as a group would be deemed to be the
beneficial owners of 5,612,585 shares of Common Stock, representing 85.8%
of the shares outstanding before this Offering and 63.1% of the shares
outstanding after this Offering.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 31,600,000 shares of
Common Stock and 8,000,000 shares of Preferred Stock (after giving effect to a
reduction in the authorized shares of Preferred Stock which will result from
the mandatory conversion of the outstanding shares of Preferred Stock upon the
closing of this Offering). The following summaries of certain provisions of
the Common Stock and Preferred Stock do not purport to be complete and are
subject to, and qualified in their entirety by, the provisions of the
Company's Certificate of Incorporation, which is included as an exhibit to the
Registration Statement of which this Prospectus forms a part, and by
applicable law.

COMMON STOCK

As of January 31, 1997, there were 6,607,513 shares of Common Stock
outstanding, as adjusted to reflect the conversion of all outstanding shares
of Preferred Stock and the assumed cashless exercise of all outstanding
Warrants upon the closing of this Offering. Such shares were held of record by
21 stockholders.

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the Board of Directors out of funds legally available for
that purpose. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of Preferred Stock, if any,
then outstanding. The Common Stock has no preemptive or conversion rights or
other subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are
fully paid and nonassessable, and the shares of Common Stock to be issued upon
the closing of this Offering will be fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors has the authority, without action by the
stockholders, to designate and issue Preferred Stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the Common Stock. It is not
possible to state the actual effect of the issuance of any shares of Preferred
Stock upon the rights of holders of the Common Stock until the Board of
Directors determines the specific rights of the holders of such Preferred
Stock. However, the effects might include, among other things, restricting
dividends on the Common Stock, diluting the voting power of the Common Stock,
impairing the liquidation rights of the Common Stock and delaying or
preventing a change in control of the Company without further action by the
stockholders. The Company has no present plans to issue any shares of
Preferred Stock.

REGISTRATION RIGHTS OF CERTAIN HOLDERS

The holders of 1,289,089 shares of Common Stock (the "Registrable
Securities"), after giving effect to the mandatory conversion of the
outstanding shares of Preferred Stock and the assumed cashless exercise of the
Warrants upon the closing of this Offering, or their transferees are entitled
to certain rights with respect to the registration of such shares under the
Securities Act. These rights are provided under the terms of an agreement
between the Company and the holders of Registrable Securities. Subject to
certain limitations in that agreement, the holders of a majority of the
Registrable Securities may require, on two occasions beginning six months
following the date of this Prospectus, that the Company register the
Registrable Securities for public resale. If the Company registers any of its
Common Stock either for its own account or for the account of other security
holders, the holders of Registrable Securities are entitled to include their
shares of Common Stock in the registration statement, subject to the ability
of the underwriters to limit the number of shares included in the offering
(but to not less than 30% of the offering). The holders of Registrable
Securities may also require the Company to register all or a portion of their
Registrable Securities

59
<PAGE>

on Form S-3 when use of such form becomes available to the Company, provided,
among other things limitations, that the proposed aggregate selling price (net
of any underwriters' discounts or commissions) is at least $1 million. All
registration expenses must be borne by the Company and all selling expenses
relating to Registrable Securities must be borne by the holders of the
securities being registered.

WARRANTS

Prior to this Offering, the Company had outstanding Warrants entitling the
holders to purchase a total of 421,065 shares of Common Stock at an exercise
price of $5.70 per share. The Company, will call the Warrants upon the closing
of this Offering. To avoid forfeiture of the Warrants upon such call, the
holders of the Warrants must then either pay the exercise price in cash or
arrange for a cashless exercise in which the Company will issue to each holder
a number of shares of Common Stock having a fair market value equal to (x) the
amount by which the fair market value of one share of Common Stock exceeds
$5.70 multiplied by (y) the number of Warrants exercised. Except as otherwise
indicated herein, this Prospectus assumes that each Warrant holder will
exercise such holder's Warrants by means of a cashless exercise and that,
based upon an assumed initial public offering price of $13.00 per share, a
total of 236,451 shares of Common Stock will be issued upon the exercise of
the Warrants.

CERTAIN CHANGE OF CONTROL PROVISIONS

Bionx Implants, Inc. is a Delaware corporation and is subject to Section 203
of the Delaware General Corporation Law, an anti-takeover law. In general,
Section 203 prohibits a publicly held Delaware corporation from engaging in a
"business combination" with an "interested stockholder" for a period of three
years following the date the person became an interested stockholder, unless
(with certain exceptions) the "business combination" or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock.

The authorization of undesignated Preferred Stock makes it possible for the
Board of Directors to issue Preferred Stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
the Company. Upon consummation of this Offering, the Company's Certificate of
Incorporation will provide for staggered terms for members of the Board of
Directors and will eliminate the right of stockholders to act without a
meeting. The amendment of the staggered term and stockholder meeting
provisions would require approval of at least two-thirds of the outstanding
Common Stock. Additionally, the Bylaws of the Company will, upon consummation
of this Offering, establish an advance notice procedure for stockholder
proposals and for nominating candidates for election as directors.

The above-mentioned provisions of Delaware law and of the Company's
Certificate of Incorporation and Bylaws may have the effect of delaying,
deterring or preventing a change in control of the Company, may discourage
bids for the Common Stock at a premium over the prevailing market price, and
may adversely affect the market price, and the voting and other rights of the
holders, of the Common Stock.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is Stocktrans, Inc.

60
<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market could materially and adversely affect the market prices of the Common
Stock prevailing from time to time. Sales of substantial amounts of Common
Stock of the Company in the public market after the restrictions described
below lapse could also materially and adversely affect the prevailing market
price of the Common Stock and the ability of the Company to raise equity
capital in the future.

Upon completion of this Offering, the Company will have 8,607,513 shares of
Common Stock outstanding, assuming no exercise of options after December 31,
1996 and after giving effect to the Preferred Stock Conversion and the Warrant
Exercise. Of these shares, the 2,000,000 shares sold in this Offering will be
freely tradable without restriction under the Securities Act, unless held by
"affiliates" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 6,607,513 shares of Common Stock held by
existing stockholders were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act. These
shares may be sold in the public market only if registered, or pursuant to an
exemption from registration such as Rule 144 or Rule 144(k) under the
Securities Act. The Company's directors, executive officers and certain other
stockholders of the Company that beneficially own or have dispositive power
over substantially all of the shares of Common Stock outstanding prior to this
Offering, including Common Stock to be issued upon the closing of this
Offering pursuant to the conversion of the Company's Preferred Stock and
pursuant to the exercise of all outstanding Warrants, have entered into lock-
up agreements under which they have agreed not to sell, offer, make any short
sale or otherwise dispose of or enter into any contract, arrangement or
commitment to sell or otherwise dispose of any shares of Common Stock or
securities convertible or exchangeable or exercisable for any rights to
purchase or acquire Common Stock owned by them for a period of 180 days after
the date of this Prospectus, without the prior written consent of UBS
Securities LLC. UBS Securities LLC has advised the Nasdaq Stock Market that it
will not grant any such consent prior to September 4, 1997. The Company has
entered into a similar agreement, except that the Company may grant options
and issue stock under its current stock option and stock purchase plans, and
pursuant to other currently outstanding options.

Approximately 90 days after the completion of this Offering, the Company
intends to file a registration statement on Form S-8 under the Securities Act
to register the future issuance of all shares of Common Stock reserved for
issuance under the Company's Stock Option/Stock Issuance Plan. As of December
31, 1996, an aggregate of 424,382 shares of Common Stock were reserved for
issuance pursuant to outstanding options and 425,618 shares of Common Stock
have been reserved for future grant under the Company's Stock Option/Stock
Issuance Plan. Such registration statement will automatically become effective
upon filing. Accordingly, shares registered thereunder will, subject to Rule
144 limitations applicable to affiliates, be available for sale in the public
market, except to the extent that such shares are subject to vesting
restrictions with the Company or certain contractual restrictions on sale or
transfer (including options covering 395,431 shares which are subject to Lock-
up Agreements).

No shares of Common Stock, other than the 2,000,000 shares offered hereby
and 3,846 shares subject to options which will be vested on or after the
effective date of such Registration Statement on Form S-8 and which are held
by persons who have not executed lock-up agreements, will be available for
immediate sale prior to the expiration of the lock-up agreements. The
6,607,513 shares held by existing stockholders will become eligible for public
resale upon expiration of the lock-up agreements, subject in some cases to
volume limitations imposed by Rule 144, subject to an exclusion of those
shares of Common Stock acquired upon payment of the cash exercise price of
Warrants and subject to the Company's ability or obligation to register any of
these shares for resale at any time after the lock-up agreements expire.

After this Offering, the holders of 1,289,089 shares of Common Stock (after
giving effect to the Preferred Stock Conversion and the Warrant Exercise) will
be entitled to certain demand and piggyback rights with respect to the
registration of such shares under the Securities Act. If such holders, by
exercising their demand

61
<PAGE>

registration rights, cause a large number of securities to be registered and
sold in the public market, such sales could have an adverse effect on the
market price of the Company's Common Stock. If the Company, either on its own
behalf or on behalf of certain shareholders, were to initiate a registration
and include shares held
by such holders pursuant to the exercise of their piggyback registration
rights, such sales could have an adverse effect on the Company's ability to
raise needed capital. See "Certain Transactions" and "Description of Capital
Stock - Registration Rights of Certain Holders."

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for a minimum
holding period (which the Securities and Exchange Commission has reduced from
two years to one year, effective in April 1997), including the holding period
of any prior owner, except an affiliate, is entitled to sell in "broker's
transactions" or to market makers, within any three month period commencing
90 days after the date of this Prospectus, a number of shares that does not
exceed the greater of (i) one percent of the number of shares of Common Stock
then outstanding (approximately 86,000 shares immediately after this Offering)
or (ii) the average weekly trading volume of the Common Stock during the four
calendar weeks preceding the required filing of a Form 144 with respect to
such sale. Sales under Rule 144 are generally subject to certain manner of
sale provisions and notice requirements and to the availability of current
public information about the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company at any time during the 90 days
preceding a sale, and who has beneficially owned the shares proposed to be
sold for a minimum holding period (reduced from three years to two years,
effective April 29, 1997), is entitled to sell such shares without being
required to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701 under the
Securities Act, persons who purchase shares upon exercise of options granted
prior to the effective date of this Offering are entitled to sell such shares
90 days after the effective date of this Offering in reliance on Rule 144,
without having to comply with the holding period requirements of Rule 144 and,
in the case of non-affiliates, without having to comply with the public
information, volume limitation or notice provisions of Rule 144.

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<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC,
Hambrecht & Quist LLC and Volpe Brown Whelan & Company, LLC are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective number of shares of Common Stock:

<TABLE>
<CAPTION>
UNDERWRITERS SHARES
------------ ---------
<S> <C>
UBS Securities LLC.................................................
Hambrecht & Quist LLC..............................................
Volpe Brown Whelan & Company, LLC..................................
---------
Total.......................................................... 2,000,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased. The Underwriting Agreement contains certain provisions whereby if
any Underwriter defaults in its obligations to purchase shares, and the
aggregate obligations of the Underwriters so defaulting do not exceed ten
percent of the shares offered hereby, the remaining Underwriters, or some of
them, must assume such obligations.

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering
price set forth on the cover of this Prospectus, and to certain dealers at
such price less a concession not in excess of $ per share. The Underwriters
may allow and such dealers may reallow a concession not in excess of $ per
share to certain other dealers. After the public offering of the shares of
Common Stock, the Offering price and other selling terms may be changed by the
Underwriters.

The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock to cover over allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares
of Common Stock to be purchased by it shown in the above table bears to the
total number of shares of Common Stock offered hereby. The Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters.

In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock.
Specifically, the Underwriters may overallot the Offering, creating a
syndicate short position. In addition, the Underwriters may bid for and
purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. Finally, the
underwriting syndicate may reclaim selling concessions from syndicate members
in the Offering if the syndicate repurchases previously distributed Common
Stock in syndicate covering transactions, in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain the market price
of the Common Stock above independent market levels. The Underwriters are not
required to engage in these activities, and may end any of these activities at
any time.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.

63
<PAGE>

The executive officers, directors, employees and certain other stockholders
of the Company who beneficially own or have dispositive power over
substantially all of the shares of Common Stock outstanding prior to this
Offering, including Common Stock to be issued upon the closing of this
Offering pursuant to the conversion of the Company's Preferred Stock and
pursuant to the exercise of Warrants, have agreed that they will not, without
the prior written consent of UBS Securities LLC, offer, sell or otherwise
dispose of any shares of securities exchangeable for or convertible into
shares of Common Stock owned by them for a period of 180 days after the date
of this Prospectus. UBS Securities LLC has advised the Nasdaq Stock Market
that it will not grant any such consent prior to September 4, 1997. The
Company has agreed that it will not, without the prior written consent of UBS
Securities LLC, offer, sell or otherwise dispose of any shares of Common Stock
for a period of 180 days after the date of this Prospectus, except that the
Company may grant options and issue shares under its current Stock
Option/Stock Issuance Plan and may issue shares pursuant to other currently
outstanding options.

The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority in excess of five percent of the number of shares of Common Stock
offered hereby.

An entity affiliated with Hambrecht & Quist LLC beneficially owns 147,370
shares (assuming exercise in full of the Warrants owned by such entity) of the
Company's Common Stock. Certain individuals affiliated with UBS Securities LLC
beneficially own, in the aggregate, 153,554 shares (assuming exercise in full
of the Warrants owned by such individuals) of the Company's Common Stock.

Prior to this Offering, there has been no public market for the Common Stock
of the Company. The initial public offering price was determined through
negotiations among the Company and the Representatives. Among the factors
considered in such negotiations were prevailing market conditions, certain
financial information of the Company, market valuations of other companies
that the Company and the representatives of the Underwriters believe to be
comparable to the Company, estimates of the business potential of the Company,
the present state of the Company's development and other factors deemed
relevant. The initial public offering price set forth on the cover page of
this Prospectus should not, however, be considered an indication of the actual
value of the Common Stock. Such price is subject to change as a result of
market conditions and other factors. There can be no assurance that an active
trading market will develop for the Common Stock or that the Common Stock will
trade in the public market subsequent to this Offering at or above the initial
offering price.

LEGAL MATTERS

The validity of the Common Stock offered hereby will be passed upon for the
Company by Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A., Roseland, New
Jersey. Certain legal matters will be passed upon for the Underwriters by
Brobeck, Phleger & Harrison LLP, New York, New York.

EXPERTS

The consolidated financial statements of Bionx Implants, Inc. as of December
31, 1995 and 1996, and for each of the years in the three-year period ended
December 31, 1996, have been included herein and in the Registration Statement
in reliance upon the report of KPMG Peat Marwick LLP, independent Certified
Public Accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.

The statements in this Prospectus under the captions "Risk Factors --
Uncertainties Relating to Licenses, Trade Secrets, Patents and Proprietary
Rights" and "Business -- Licenses, Trade Secrets, Patents and Proprietary
Rights" on matters of U.S. intellectual property law have been reviewed and
approved by Kenyon & Kenyon, New York, New York, U.S. intellectual property
counsel for the Company, as experts in U.S. intellectual property law, and are
included herein in reliance upon such review and approval.

64
<PAGE>

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 29549, a Registration Statement on Form S-1
under the Securities Act with respect to the shares of Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in
the Registration Statement and the exhibits and schedules thereto. To the
extent that statements contained in this Prospectus as to the contents of any
contract or any other document relate to a contract or document that is filed
as an exhibit to the Registration Statement, reference is made to the copy of
such contract or document. For further information with respect to the Company
and such Common Stock, reference is made to the Registration Statement and to
the exhibits and schedules filed therewith. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. A copy of the Registration Statement may be inspected by
anyone without charge at the Commission's principal office in Washington, D.C.
and copies of all or any part of the Registration Statement may be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, upon payment of certain fees prescribed by the
Commission. The Commission also maintains a site on the World Wide Web that
will contain reports, proxy and information statements and other information
regarding the Company. The address for such site is http://www.sec.gov.

65
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Financial Statements:
Consolidated Balance Sheets at December 31, 1995 and 1996................ F-3
Consolidated Statements of Operations for the Years ended December 31,
1994, 1995, and 1996 ................................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the Years
ended December 31, 1994, 1995, and 1996................................. F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
1994, 1995, and 1996.................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Bionx
Implants, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit),
and cash flows for each of the years in the three-year period ended December
31, 1996. These consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Bionx
Implants, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.

KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
January 24, 1997, except
for the first paragraph of
Note 15 which is as of February 24, 1997

F-2
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1995 AND 1996

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
PRO FORMA
DECEMBER 31, 1996
1995 1996 (NOTE 2)
----------- ---------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 50,662 1,593,131 1,593,131
Inventory, net (note 3).......... 731,644 1,030,809 1,030,809
Trade accounts receivable, net of
allowance of $97,325 as of
December 31, 1996............... 398,168 1,708,432 1,708,432
Grants receivable................ 7,730 122,711 122,711
Deferred offering costs (note
15)............................. -- 194,981 194,981
Prepaid expenses and other
current assets.................. 170,065 153,005 153,005
----------- ---------- ----------
Total current assets............... 1,358,269 4,803,069 4,803,069
Investments........................ 104,161 100,334 100,334
Deposits........................... -- 43,964 43,964
Plant and equipment, net (note 4).. 331,808 336,286 336,286
----------- ---------- ----------
Total assets....................... $ 1,794,238 5,283,653 5,283,653
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQ-
UITY (DEFICIT)
Current liabilities:
Trade accounts payable........... $ 908,695 848,127 848,127
Long-term debt, current portion
(note 7)........................ 363,293 223,037 223,037
Related party (note 5)........... 198,096 163,184 163,184
Current income tax liability..... -- 205,065 205,065
Accrued and other current liabil-
ities (note 6).................. 464,225 1,317,196 1,317,196
----------- ---------- ----------
Total current liabilities.......... 1,934,309 2,756,609 2,756,609
----------- ---------- ----------
Long-term debt (note 7)............ 896,204 590,336 590,336
----------- ---------- ----------
Series A mandatorily redeemable
convertible preferred stock, par
value $0.001 per share;
2,000,000 shares authorized,
none issued and outstanding at
December 31, 1995 and 2,000,000
shares issued and outstanding as
of December 31, 1996 (converts
into 1,052,638 pro forma common
shares as of December 31, 1996
upon consummation of the
offering contemplated herein)
(note 8)........................ -- 5,000,000 --
----------- ---------- ----------
Stockholders' equity (deficit)
(notes 8,9,15):
Preferred stock, par value $0.001
per share, 8,000,000 shares
authorized and none issued and
outstanding................... -- -- --
Common stock, par value $0.0019
per share, 31,600,000 shares
authorized and 5,318,424 shares
issued and outstanding as of
December 31, 1996 (6,607,513 pro
forma common shares as of
December 31, 1996 upon
conversion of the Series A
preferred stock in conjunction
with the Offering contemplated
herein)......................... 1,343,316 10,105 12,554
Additional paid-in capital....... 580,998 1,858,870 6,856,421
Accumulated deficit.............. (2,693,442) (4,662,690) (4,662,690)
Foreign currency translation
adjustment...................... (267,147) (269,577) (269,577)
----------- ---------- ----------
Total stockholders' equity (defi-
cit).............................. (1,036,275) (3,063,292) 1,936,708
----------- ---------- ----------
Commitments and contingencies
(note 10)
Total liabilities and stockholders'
equity (deficit).................. $ 1,794,238 5,283,653 5,283,653
=========== ========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-3
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
Revenues:
Product sales.......................... $1,264,733 1,354,719 5,033,952
License and grant revenues (note 13)... 15,682 266,887 345,203
---------- ---------- -----------
Total revenues....................... 1,280,415 1,621,606 5,379,155
---------- ---------- -----------
Cost of goods sold....................... 476,447 538,013 2,105,128
---------- ---------- -----------
Gross profit............................. 803,968 1,083,593 3,274,027
---------- ---------- -----------
Selling, general and administrative...... 693,159 2,164,340 4,445,362
Research and development................. 189,530 274,213 459,666
---------- ---------- -----------
Total operating expenses................. 882,689 2,438,553 4,905,028
---------- ---------- -----------
Operating loss........................... (78,721) (1,354,960) (1,631,001)
---------- ---------- -----------
Other income and expenses:
Interest expense....................... (93,250) (98,021) (86,906)
Other, net............................. 10,208 (25,035) (42,951)
---------- ---------- -----------
Total other income (expense), net.... (83,042) (123,056) (129,857)
---------- ---------- -----------
Loss before provision for income taxes... (161,763) (1,478,016) (1,760,858)
Provision for income taxes (note 12)..... -- -- (208,390)
---------- ---------- -----------
Net loss................................. $ (161,763) (1,478,016) (1,969,248)
========== ========== ===========
Pro forma net loss per share (note 2).... $ (0.31)
===========
Shares used in computing pro forma net
loss per share (note 2)................. 6,369,655
===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<TABLE>
<CAPTION>
COMMON
STOCK FOREIGN TOTAL
PAR VALUE ADDITIONAL CURRENCY STOCKHOLDERS'
PREFERRED OR STATED PAID-IN ACCUMULATED TRANSLATION EQUITY
STOCK VALUE CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
--------- ----------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994
(unaudited)............ $-- 494,406 299,998 (1,053,663) (188,529) (447,788)
Proceeds from the
issuance of common
stock................ -- 269,577 95,000 -- -- 364,577
Foreign currency
translation
adjustment........... -- -- -- -- (35,210) (35,210)
Net loss.............. -- -- -- (161,763) -- (161,763)
---- ----------- --------- ---------- -------- ----------
Balance, December 31,
1994................... -- 763,983 394,998 (1,215,426) (223,739) (280,184)
Proceeds from the
issuance of common
stock................ -- 579,333 186,000 -- -- 765,333
Foreign currency
translation
adjustment........... -- -- -- -- (43,408) (43,408)
Net loss.............. -- -- -- (1,478,016) (1,478,016)
---- ----------- --------- ---------- -------- ----------
Balance, December 31,
1995................... -- 1,343,316 580,998 (2,693,442) (267,147) (1,036,275)
Effect of
reorganization
(note 1)............. -- (1,333,266) 1,333,266 -- -- --
Proceeds from the
issuance of common
stock................ -- 55 49,820 -- -- 49,875
Issuance costs--Series
A mandatorily
redeemable
convertible preferred
stock................ -- -- (105,214) -- -- (105,214)
Foreign currency
translation
adjustment........... -- -- -- -- (2,430) (2,430)
Net loss.............. -- -- -- (1,969,248) -- (1,969,248)
---- ----------- --------- ---------- -------- ----------
Balance, December 31,
1996................... $-- 10,105 1,858,870 (4,662,690) (269,577) (3,063,292)
==== =========== ========= ========== ======== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------------------
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(161,763) (1,478,016) (1,969,248)
--------- ---------- ----------
Adjustments to reconcile net loss to
net cash
used in operating activities:
Depreciation......................... 61,432 71,194 76,042
Change in assets and liabilities:
(Increase) decrease in accounts re-
ceivable........................... 12,785 19,772 (1,310,264)
Increase in inventory............... (82,196) (150,547) (299,165)
Increase in grants receivable....... -- -- (114,981)
Increase in deferred insuance
costs.............................. -- -- (194,981)
(Increase) decrease in prepaid ex-
pense and other assets............. (3,000) (54,589) 17,060
Increase in deposits................ -- -- (43,964)
Increase (decrease) in accounts pay-
able............................... 10,721 79,047 (60,568)
Increase (decrease) in related par-
ty................................. -- 198,096 (34,912)
Increase in current tax liability... -- -- 205,065
Increase (decrease) in accrued and
other liabilities.................. 133,682 (240,309) 852,971
--------- ---------- ----------
133,424 (77,336) (907,697)
--------- ---------- ----------
Net cash used in operating activities... (28,339) (1,555,352) (2,876,945)
--------- ---------- ----------
Cash flows from investing activities:
Purchases of plant and equipment...... (3,008) (37,316) (80,520)
Purchases of investments.............. -- (2,056) --
Proceeds from sale of investments..... -- -- 3,827
--------- ---------- ----------
Net cash used in investing activities... (3,008) (39,372) (76,693)
--------- ---------- ----------
Cash flow from financing activities:
Proceeds from long-term debt.......... -- 484,139 --
Repayment of long-term debt........... (196,445) -- (446,124)
Net proceeds from the issuance of pre-
ferred stock......................... -- -- 4,894,786
Proceeds from the issuance of common
stock................................ 364,577 765,333 49,875
--------- ---------- ----------
Net cash provided by financing activi-
ties................................... 168,132 1,249,472 4,498,537
--------- ---------- ----------
Net effects of foreign exchange rate
differences............................ (35,210) (43,408) (2,430)
--------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................ 101,575 (388,660) 1,542,469
Cash and cash equivalents at beginning
of period.............................. 337,747 439,322 50,662
--------- ---------- ----------
Cash and cash equivalents at end of pe-
riod................................... $ 439,322 50,662 1,593,131
========= ========== ==========
Supplemental disclosure of cash flow in-
formation:
Cash paid for interest................. $ -- 54,213 195,035
Cash paid for taxes.................... -- -- 3,325
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996

(1) ORGANIZATION

Basis of Presentation

Bionx Implants, Inc. (the Company) was incorporated in October, 1995 as a
Delaware corporation. In 1996, the Company entered into a reorganization,
described more fully below, whereby four corporate entities that separately
controlled the business activities of the Company were reorganized into Bionx
Implants, Inc. The shareholders of the four separate corporations who were
shareholders having a common interest in the combined activities of the
business exchanged their shares pro-rata, directly or indirectly, for the
shares of Bionx Implants, Inc. All stockholders of the four entities
substantially retained their respective pro-rata equity stake ownership
subsequent to the reorganization of the Company.

Given the ownership relationship of the four predecessor corporations and
the subsequent reorganization into the Company described below, the
accompanying consolidated financial statements include the four predecessor
corporations' financial statements as of December 31, 1995 and 1996 and for
each of the years ended December 31, 1994, 1995 and 1996. All financial
information contained herein is presented in U.S. dollars.

Reorganization

In September 1996, the Company consummated its reorganization. Pursuant to
the reorganization, (i) the Company's four operating entities became wholly-
owned subsidiaries of the Company, (ii) each of the Company's Finnish
shareholders received capital stock of a Dutch company, and (iii) each of the
Company's United States investors received capital stock of both a Dutch
company and the Company. Upon consummation of the reorganization, the sole
assets of such Dutch company were 2,684,211 shares of the Company's common
stock.

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

Accordingly, at present the Company has four wholly-owned subsidiaries--
OrthoSorb, Inc., Biostent, Inc., Bioscience, Ltd., and Biocon, Ltd.--each of
which are wholly-owned by the Company. Because the four operating subsidiaries
were controlled by a group of common stockholders prior to the reorganization,
the reorganization was accounted for as a recapitalization. As a result of
that accounting treatment, the assets of the Company's four operating entities
were recorded on the Company's consolidated financial statements at the
historical bases of such assets prior to the reorganization.

Business Purpose

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

Since inception, the Company has sustained operating losses and has not
generated positive cash flow from operations. The Company plans to continue to
finance its future operations with proceeds from the

F-7
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

sale of capital stock, such as the proposed initial public offering
contemplated by the prospectus ("Offering"), and revenues from future product
sales, royalty payments and license and government grant payments, if any. The
Company's future operations are dependent upon the successful execution of
planned financings, such as the Offering, and ultimately, upon achieving
profitable operations, if ever. If the Offering contemplated herein is not
consummated, it will be necessary for the Company to seek other sources of
capital or adjust its proposed future operating plans.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

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

Use of Estimates

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

Cash and Cash Equivalents

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

Inventory

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

Investments

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

A decline in the market value below cost that is deemed to be other than
temporary results in a reduction in carrying amount to fair value. The
impairment is charged to earnings and a new cost basis for the security is
established. Dividend and interest income are recognized when earned. The
amortized cost approximates market value as of December 31, 1995 and 1996.

F-8
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Plant and Equipment

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

Certain Risks and Concentrations

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

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

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

Fair Value of Financial Instruments

Financial Accounting Standards Board Statement No. 107, Disclosures About
Fair Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. Cash, trade accounts receivable,
prepaid expenses and other current assets, trade accounts payable and accrued
expenses reported in the combined balance sheets equal or approximate fair
value due to their short maturities. Based on the borrowing rates currently
available to the Company, the fair value of all of the Company's loans is
approximately $700,000.

Stock Option Plan

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

Revenue Recognition

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

F-9
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Research and Development

All research and development costs are expensed as incurred.

Foreign Currency Translation

The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards (SFAS) No. 52, Foreign Currency Translation.
Substantially all assets and liabilities of the foreign subsidiaries are
translated at year-end exchange rates and income and expense items are
translated at an average exchange rate for the year. Exchange adjustments
resulting from foreign currency transactions are generally recognized in
operations, while adjustments resulting from the translation of financial
statements are reflected as a separate component of stockholders' equity
(deficit). The Company does not hedge its currency translation exposure.

Accounting for Income Taxes

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

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

Pro Forma Net Loss Per Share (Unaudited)

Pro forma net loss per share is computed using the weighted average number
of common shares outstanding giving effect to certain adjustments described
below. Common equivalent shares from stock options are excluded from the
computation of pro forma net loss per share as their effect is anti-dilutive,
except that, pursuant to Securities and Exchange Commission (SEC) Staff
Accounting Bulletins and SEC staff policy, common stock and common stock
equivalent shares issued at prices below the anticipated initial public
offering price during the preceding twelve months of the offering have been
included in the computation as if they were outstanding for all periods
presented (using the treasury stock method and the anticipated offering
price).

Pursuant to SEC staff policy, the calculation of shares used in computing
pro forma net loss per share also includes the weighted average number of
common equivalent shares of Series A preferred stock and warrants that will
automatically convert into shares of common stock upon completion of the
Offering (using the if-converted method) from their respective original dates
of issuance.

The following table sets forth the calculation of the total number of shares
used in the computation of pro forma net loss per common share:
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Weighted average common shares outstanding....................... 5,281,020
Weighted average of incremental shares assumed to be outstanding
related to common stock options and warrants granted and
convertible preferred stock based on the treasury stock method.. 748,335
Weighted average convertible preferred stock (if converted
method)......................................................... 340,300
---------
Weighted average common and common equivalent shares used in
computation of pro forma net loss per common share.............. 6,369,655
=========
</TABLE>

F-10
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Pro Forma Balance Sheet (Unaudited)

The unaudited pro forma balance sheet as of December 31, 1996 reflects the
conversion of the existing 2,000,000 shares of Series A mandatorily redeemable
convertible preferred stock into 1,052,638 shares of common stock (adjusted
for the common stock reverse split), which conversion is contingent upon the
closing of the Offering. In addition, the unaudited pro forma balance sheet as
of December 31, 1996 reflects the assumed cashless exercise of the warrants
covering 421,065 shares of common stock into 236,451 shares of common stock
(adjusted for the common stock reverse split).

(3) INVENTORY

Inventory consists of the following components as of December 31, 1995 and
1996:

<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Raw materials............................................. $ 80,108 101,122
Finished goods............................................ 812,557 1,210,033
--------- ---------
892,665 1,311,155
Less reserves............................................. (161,021) (280,346)
--------- ---------
$ 731,644 1,030,809
========= =========
</TABLE>

(4) PLANT AND EQUIPMENT

Plant and equipment consist of the following components as of December 31,
1995 and 1996:

<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Machinery and production equipment......................... $ 658,711 731,015
Computer equipment......................................... 13,829 14,613
--------- --------
672,540 745,628
Less accumulated depreciation.............................. (340,732) (409,342)
--------- --------
$ 331,808 336,286
========= ========
</TABLE>

(5) RELATED PARTY TRANSACTIONS

Under an employment agreement dated August 21, 1992, the Company was
obligated to pay an executive officer (Dr. Pertti Tormala) a 2 percent royalty
on sales of certain products for which the Company received a patent after
August 1992. This agreement also required that the Company pay a minimum
royalty of approximately $2,200 per month. Dr. Tormala and another employee
are parties to an additional agreement that provides royalties on sales of a
specific product patented prior to 1992, again subject to certain annual
minimums. The aggregate amount of all royalties due to employees related to
these agreements was $98,096 and $163,184 as of December 31, 1995 and 1996,
respectively.

The December 31, 1995 related party balance also included a $100,000
interest-bearing loan from Vital Signs, Inc., a company for which the Chairman
of the Board and another director of the Company are executives. This loan was
repaid in 1996.

The Company's product development efforts are dependent upon one employee
who is a founder, director, and executive officer of the Company and is
currently an Academy Professor at the Technical University in Tampere, Finland
and as such is permitted by the University to devote his efforts to

F-11
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

developing new products for the Company. This executive utilizes a group of
senior researchers, graduate students, and faculty at the Technical University
to perform research and development projects involving resorbable polymers and
other topics impacting the Company's technology and processes. This
arrangement, partially funded by the Company and permitted in Finland as a
means of encouraging the commercialization of technological development, has
resulted in substantial cost savings to the Company while substantially
expanding its product development effort. The Company's funding obligation,
which amounted to $0, $0 and approximately $167,000 during the years ended
December 31, 1994, 1995 and 1996, respectively, consists of providing the
University with reasonable compensation for University resources (including
graduate students) utilized by the Company.

(6) ACCRUED AND OTHER CURRENT LIABILITIES

Accrued and other current liabilities consist of the following components as
of December 31, 1995 and 1996:

<TABLE>
<CAPTION>
1995 1996
-------- ---------
<S> <C> <C>
Commissions and royalties.................................... $ 21,948 359,687
Wages........................................................ 133,495 184,920
Withholding tax and social security.......................... 177,940 157,325
Interest..................................................... 130,842 77,252
Inventory purchases.......................................... -- 23,002
Professional fees............................................ -- 305,492
Value-added and other taxes.................................. -- 78,981
Other........................................................ -- 130,537
-------- ---------
$464,225 1,317,196
======== =========
</TABLE>

(7) LONG-TERM DEBT

Long-term debt consists of the following components as of December 31, 1995
and 1996:

<TABLE>
<CAPTION>
1995 1996
---------- --------
<S> <C> <C>
Loans from financial institutions......................... $ 595,134 546,930
Loans from Finnish government............................. 352,911 226,483
Bank note payable......................................... 300,000 --
Other debt................................................ 11,452 39,960
---------- --------
1,259,497 813,373
Less current portion...................................... (363,293) (223,037)
---------- --------
$ 896,204 590,336
========== ========
</TABLE>

The loans from the financial institutions are payable in semi-annual and
annual installments with interest rates ranging from 3.7 to 13.0 percent. The
loans from the Finnish government are made in order to support technology
development and are payable in annual installments with an interest rate of 1
percent. The bank note payable was a demand bank note which accrued interest
at the prime rate. The bank note was repaid with the proceeds of the Series A
mandatorily convertible preferred stock offering.

The loans are secured by all of the assets of the Finnish subsidiaries.

The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1996 are as follows: 1997, $223,037; 1998,
$238,153; 1999, $242,830; 2000, $60,856 and 2001, $48,497.

F-12
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(8) MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK

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

The holders of Series A Preferred are not entitled to dividends, unless
declared by the Company. Dividends, if any, are non-cumulative. As of December
31, 1996, no such dividends have been declared on the Series A.

The holders of Series A Preferred are entitled to a liquidation preference
over all other types of capital stock. The preference equals $2.50 per share
together with all accrued and unpaid dividends plus an amount equal to the
Series A Preferred pro rata share of all remaining Company assets available
for distribution. In addition, each share of Series A Preferred is convertible
into common stock at a conversion ratio of 1 for 1.9. Further, such conversion
becomes automatic immediately prior to the closing of an initial public
offering for the sale of the Company's common stock at an aggregate gross
sales proceeds of not less than $10,000,000 at a price of $9.50 per share or
more.

In connection with the Series A Preferred offering, the Company issued
warrants covering 421,065 shares. The warrants entitle the holders to purchase
from the Company a total of 421,065 shares of common stock at an exercise
price of $5.70 per share, subject to adjustment as defined. Until such time as
the warrants are exercised in full or expire, the purchase price and the
number of shares of common stock (or other securities) issuable upon exercise
of the warrants are subject to adjustment for dilution, as defined. The
warrants expire on September 5, 2001. The Company may require the exercise of
the warrants upon the occurrence and satisfaction of certain conditions
applicable to the closing of the Company's proposed Offering.

The Company is obligated to redeem the Series A Preferred at its redemption
value, at any time after August 2001, upon the written request of a majority
of the Series A Preferred stockholders.

(9) COMMON STOCKHOLDERS' EQUITY

Common stockholders' equity consists of the following as of December 31,
1995 and 1996:

<TABLE>
<CAPTION>
1995 1996
---------------------------- ----------------------------
ADDITIONAL ADDITIONAL
COMMON PAID-IN COMMON PAID-IN
SHARES STOCK CAPITAL SHARES STOCK CAPITAL
------ ---------- ---------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Biocon, Ltd.:
Class A, at stated
value................ 10,647 $ 240,101 $ -- -- $ -- $ --
Class B, at stated
value................ 3,587 80,033 -- -- -- --
Bioscience, Ltd., at
stated value........... 4,050 1,023,180 -- -- -- --
Biostent, Inc., at
stated value........... 1,031 1 9,999 -- -- --
OrthoSorb, Inc., at
stated value........... 1,031 1 570,999 -- -- --
Bionx Implants, Inc. ... -- -- -- 5,318,424 10,105 1,858,870
---------- -------- --------- ------- ----------
$1,343,316 $580,998 5,318,424 $10,105 $1,858,870
========== ======== ========= ======= ==========
</TABLE>

F-13
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

In September 1996, 55,264 shares of common stock were issued to a former
employee, in accordance with the terms of his employment, at a price of $.9025
per share, the estimated fair market value of such stock on the date that such
commitment was made, as determined by the Board of Directors. See note 1 for a
discussion of the reorganization in September 1996.

(10) COMMITMENTS AND CONTINGENCIES

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

<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1997 ........................................................ $137,739
1998 ........................................................ 111,902
1999 ........................................................ 109,890
2000 ........................................................ 99,231
2001......................................................... 99,231
</TABLE>

Rental expense for the years ended December 31, 1994, 1995 and 1996
aggregated $105,041, $90,815 and $98,755, respectively.

(11) STOCK OPTION PLANS

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

At December 31, 1996, there were 425,618 additional shares available for
grant under the 1996 Option Plan. The per share weighted-average fair value of
stock options granted during 1995 and 1996 was $0.46 and $5.86 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1995--expected dividend yield 0%, risk-free
interest rate of 7.06%, and an expected life of 10 years; 1996--expected
dividend yield 0%, risk-free interest rate of 6.50%, and an expected life of
10 years.

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

<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Net loss:
As reported......................................... $(1,478,016) $(1,969,248)
Pro forma (unaudited) .............................. (1,530,121) (2,051,242)
</TABLE>

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

F-14
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

A summary of activity under the 1996 Option Plan from January 1, 1994 to
December 31, 1996 is as follows:

<TABLE>
<CAPTION>
RANGE OF EXERCISE
SHARES PRICES PER SHARE
------- -----------------
<S> <C> <C>
Balance, January 1, 1994.............................. -- $ --
Granted............................................. -- --
------- ------------
Balance, December 31, 1994............................ -- --
Granted............................................. 277,009 0.9025
------- ------------
Balance, December 31, 1995............................ 277,009 0.9025
Granted............................................. 147,373 4.75-9.50
------- ------------
Balance, December 31, 1996............................ 424,382 $0.9025-9.50
======= ============
Shares exercisable at December 31, 1996............... 102,740 $0.9025-4.75
======= ============
</TABLE>

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

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

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

(12) INCOME TAXES

At December 31, 1996, the Company and its subsidiaries had available U.S.
and Finnish net operating loss carryforwards ("NOL") of approximately $2.1
million for income tax reporting purposes, which are available to offset
future taxable income, if any, through 2011.

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

F-15
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Income tax expense attributable to the loss before provision for taxes was
$208,390 for the year ended December 31, 1996 and differed from the amounts
computed by applying the U.S. federal income tax rate of 35 percent to pretax
loss as a result of the following:

<TABLE>
<CAPTION>
1996
---------
<S> <C>
Computed "expected" tax benefit..................................... $(616,300)
Increase (reduction) in income taxes resulting from:
Difference in the foreign tax rates............................... (47,430)
Change in the valuation allowance for Federal deferred tax
assets........................................................... 896,930
Other, net........................................................ (24,810)
---------
Income tax expense.................................................. $ 208,390
=========
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the Federal, foreign and state deferred tax assets at December 31,
1995 and 1996 are presented below:

<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 350,893 787,485
Research and development costs........................ 177,537 184,125
Depreciation adjustments.............................. 55,661 60,937
Inventory-related items............................... 93,761 615,638
Recognition of accrued expenses or reserves for
financial statement reporting purposes but not for
income tax reporting purposes........................ 64,408 128,844
--------- ----------
Total gross deferred tax assets....................... 742,260 1,777,029
Less valuation allowance.............................. (742,260) (1,777,029)
--------- ----------
Net deferred tax assets................................. $ -- --
========= ==========
</TABLE>

The net change in the total valuation allowance for the years ended December
31, 1994, 1995, and 1996 were increases of approximately $79,195, $155,140 and
$1,034,769, respectively.

(13) LICENSE AND GRANT REVENUE

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

In addition, the Company has applied for grants from the Finnish government
to conduct research on resorbable polymers. The revenue from such grants was
$15,682, $66,983 and $143,916 for the years ended December 31, 1994, 1995 and
1996, respectively. In connection with such grants, the Company typically
commits to perform research projects and to report on the status of, and the
conclusions drawn from, its projects.

F-16
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(14) GEOGRAPHIC INFORMATION

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

<TABLE>
<CAPTION>
UNITED
STATES EUROPE ELIMINATIONS CONSOLIDATED
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Year ended
December 31, 1994
Product sales:
Customers................. $ 440,348 $ 824,385 $ -- $ 1,264,733
Intercompany.............. -- -- -- --
----------- ---------- ----------- -----------
Total product sales......... 440,348 824,385 -- 1,264,733
Net loss.................... (15,200) (146,563) -- (161,763)
Identifiable assets......... 340,191 1,931,892 (242,725) 2,029,358
Year ended
December 31, 1995
Product sales:
Customers................. $ 477,952 $ 876,767 $ -- $ 1,354,719
Intercompany.............. -- 985,354 (985,354) --
----------- ---------- ----------- -----------
Total product sales......... 477,952 1,862,121 (985,354) 1,354,719
Net loss.................... (1,323,214) 79,601 (234,403) (1,478,016)
Identifiable assets......... 745,329 2,310,037 (1,261,128) 1,794,238
Year ended
December 31, 1996
Product sales:
Customers................. $ 3,412,204 $1,621,748 $ -- $ 5,033,952
Intercompany.............. -- 3,506,864 (3,506,864) --
----------- ---------- ----------- -----------
Total product sales......... 3,412,204 5,128,612 (3,506,864) 5,033,952
Net loss.................... (2,269,215) 1,546,511 (1,246,544) (1,969,248)
Identifiable assets......... 5,061,627 4,382,219 (4,160,193) 5,283,653
</TABLE>

(15) SUBSEQUENT EVENTS

Reverse Stock Split

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

F-17
<PAGE>

BIONX IMPLANTS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Initial Public Offering (Unaudited)

On February 14, 1997, the Board of Directors authorized the filing of a
registration statement for the Offering with the Securities and Exchange
Commission for the sale of 2,000,000 shares of common stock. If the Offering
is consummated under the terms presently anticipated, all 2,000,000 shares of
the Series A Preferred outstanding as of the closing date of the Offering will
be automatically converted into 1,052,638 shares of common stock on a 1 for
1.9 basis and the Company will have the right to require the exercise of
warrants to purchase 421,065 shares of common stock. No dividends will be
payable with respect to such preferred stock. The deferred offering costs
associated with the Offering, which represent legal and printing costs, will
be recorded as a reduction of stockholders' equity (deficit) if the Offering
is consummated. If the Offering is not consummated, the deferred offering
costs will be charged to operations.

Spin-Off (Unaudited)

Two of the Company's shareholders and the Company are each one third equity
owners in a business organized to engage in developing, manufacturing and
selling polymer-based advanced drug delivery systems (the "Business"). On
February 14, 1997, the Board of Directors concluded that in light of the
substantial expenditures that would be required in order to bring any of the
Business' products to market, it is in the best interests of the Company and
its shareholders for the Company to forego its development of the Business and
to spin-off the Business. The Company intends to distribute its interest in
the Business to shareholders of record of the Company as of a date prior to
the effective date of the Offering.

F-18
<PAGE>

No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained herein and, if
given or made, such information or representation must not be relied upon as
having been authorized by the Company or the Underwriters. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
security other than the Common Stock offered hereby, nor does it constitute an
offer to sell or a solicitation of an offer to buy any of the securities
offered hereby to any person in any jurisdiction in which it is unlawful to
make such an offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall under any circumstances create any implication
that there has been no change in the affairs of the Company since the date
hereof or that the information contained herein is correct as of any date
subsequent to the date hereof.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 17
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 21
Business................................................................. 27
Management............................................................... 47
Certain Transactions..................................................... 54
Principal Stockholders................................................... 57
Description of Capital Stock............................................. 59
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 63
Legal Matters............................................................ 64
Experts.................................................................. 64
Additional Information................................................... 65
Financial Statements..................................................... F-1
</TABLE>

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

Until , 1997 (25 days after the date of this Prospectus), all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.

2,000,000 Shares

[LOGO] BIONX
IMPLANTS INC.

Common Stock

-----------------
PROSPECTUS
, 1997
-----------------

UBS Securities

Hambrecht & Quist

Volpe Brown Whelan & Company

<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee, the NASD filing fee and the Nasdaq National
Market application and listing fee.

<TABLE>
<S> <C>
SEC registration fee............................................... $ 9,758
NASD filing fee.................................................... 3,720
Nasdaq National Market application and listing fee................. 40,019
Printing and engraving costs....................................... 100,000
Legal fees and expenses............................................ 500,000
Accounting fees and expenses....................................... 160,000
Blue Sky fees and expenses......................................... 20,000
Directors' and officers' liability insurance....................... 135,000
Transfer Agent..................................................... 5,000
Miscellaneous expenses............................................. 11,503
--------
Total.......................................................... $985,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation
and its directions and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.

The Company's Certificate of Incorporation provides that the Company shall
indemnify to the fullest extent permitted by Section 145 of the Delaware
General Corporation Law, and the Company's by-laws provide that the Company
shall indemnify to the fullest extent permitted by law, all present and former
directors and officers, and any such person serving or agreeing to serve as an
officer or director (or, in the case of the Certificate of Incorporation in
any other capacity), with any other enterprise at the Company's request, in
connection with any proceeding threatened, pending or instituted against such
party by reason of their serving or agreeing to serve in such capacity. The
Company's Certificate of Incorporation also permits indemnification of the
Company's agents extending to the limits created by Delaware law. The
Company's By-Laws describe certain procedures applicable to indemnification
rights.

The Underwriting Agreement to be filed as Exhibit 1.1 to this Registration
Statement will provide for indemnification by the Underwriters of the
Registrant and its officers and directors for certain liabilities arising
under the Securities Act of 1933, as amended (the "Securities Act"), or
otherwise.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since the Registrant's incorporation in October 1995, the Registrant has
issued and sold the following unregistered securities.

1. In September 1996, the Registrant issued and sold 5,263,160 shares of
Common Stock pursuant to the Reorganization upon the transfer to the
Registrant of all of the capital stock of four operating subsidiaries.

2. In September 1996, the Registrant issued and sold 2,000,000 shares of
Preferred Stock and warrants to purchase 421,065 shares of Common Stock (at an
exercise price of $5.70 per share) to investors at an aggregate price of
$5,000,000.

II-1
<PAGE>

3. In September 1996, the Registrant issued and sold 55,264 shares of its
Common Stock to a former employee at an aggregate price of approximately
$50,000. Such sale was made to honor a pre-existing commitment to the former
employee.

The Registrant from time to time has granted stock options to purchase
shares of Common Stock to certain officers and employees. The following table
sets forth certain information regarding such grants:

<TABLE>
<CAPTION>
RANGE OF
NO. OF SHARES EXERCISE PRICES
------------- ---------------
<S> <C> <C>
1995........................................... 277,009 $ .9025
1996........................................... 147,373 $4.75-$9.50
</TABLE>

The above securities were offered and sold by the Registrant in reliance
upon an exemption from registration under either (i) Section 4(2) of the
Securities Act as transactions not involving any public offering or (ii) Rule
701 under the Securities Act. No underwriters were involved in connection with
the sales of securities referred to in this Item 15.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(a) Exhibits

<TABLE>
<C> <S>
1.1** Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant as currently
in effect.
3.2* Form of Restated Certificate of Incorporation to be filed after the
closing of the Offering made under this Registration Statement.
3.3* Bylaws of the Registrant, as currently in effect.
4.1 Specimen Common Stock Certificate.
5.1** Opinion of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A.
10.1* Reorganization Agreement dated as of September 5, 1996.
10.2 Form of Registrant's 1996 Stock Option/Stock Issuance Plan.
10.3* Form of Amended and Restated Employment Agreement between the
Registrant and David W. Anderson.
10.4* Form of Employment Agreement between the Registrant's Subsidiary and
Pertti Tormala.
10.5* Form of Proprietary Information and Inventions Agreement.
10.6* Investors' Rights Agreement, dated as of September 6, 1996, between
the Registrant and certain holders of the Registrant's securities.
10.7* Stock Purchase Agreement between the Registrant and Purchasers of the
Company's Preferred Stock and Warrants.
10.8+* License Agreements between the Registrant's Subsidiary and Saul N.
Schreiber.
10.9+* License Agreement among the Registrant's Subsidiary, Pertti Tormala,
Markku Tamminmaki and Menifix I/S.
10.10+* Licensing, Manufacturing and Distribution Agreement among the
Registrant's Subsidiary, Pertti Tormala and various Danish and Finnish
inventors.
10.11* Shareholders' Agreement among Bionix, B.V. and certain shareholders of
the Company.
21.1* List of Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP (including a report regarding the
financial statement schedule).
23.2 Consent of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A. (to be
included in Exhibit 5.1).
23.3 Consent of Kenyon & Kenyon.
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- --------
*Previously filed.
**To be filed by amendment.
+Confidential treatment requested.

II-2
<PAGE>

(b) Financial Statement Schedules

This Registration Statement includes the following financial statement
schedule:

(a) Schedule II -- Valuation and Qualifying Accounts

All other schedules have been omitted because the information required to be
set forth therein is not applicable or is shown in the financial statements or
notes thereto.

ITEM 17. UNDERTAKINGS

The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.

Insofar as indemnification by the Registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the provisions referenced in Item 14 of
this Registration Statement, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

The undersigned Registrant hereby further undertakes that:

(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 2 TO ITS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE TOWN OF MALVERN, STATE OF PENNSYLVANIA, ON THE 10TH DAY OF APRIL, 1997.

BIONX IMPLANTS, INC.

/s/ Michael J. O'Brien
By: _________________________________

Michael J. O'Brien

(Vice President and Chief
Financial Officer)

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 2 TO THE REGISTRANT'S REGISTRATION STATEMENT HAS BEEN SIGNED BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:

SIGNATURE TITLE DATE

President, Chief
/s/ David W. Anderson* Executive Officer April 10, 1997
- ------------------------------------- and Director
DAVID W. ANDERSON (Principal
Executive Officer)

/s/ David J. Bershad* Director
- ------------------------------------- April 10, 1997
DAVID J. BERSHAD

/s/ Anthony J. Dimun* Director
- ------------------------------------- April 10, 1997
ANTHONY J. DIMUN

II-4
<PAGE>

SIGNATURE TITLE DATE

Director
- -------------------------------------
DAVID H. MACCALLUM

/s/ Pertti Tormala* Director
- ------------------------------------- April 10, 1997
PERTTI TORMALA

/s/ Terry D. Wall* Director
- ------------------------------------- April 10, 1997
TERRY D. WALL

Vice President,
/s/ Michael J. O'Brien Finance and April 10, 1997
- ------------------------------------- Administration,
MICHAEL J. O'BRIEN Chief Financial
Officer, Treasurer
and Secretary
(Principal
Financial and
Accounting Officer)

/s/ Michael J. O'Brien
*By__________________________________

Michael J. O'Brien
Attorney-in-Fact

II-5
<PAGE>

SCHEDULE II

BIONX IMPLANTS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

FOR THE THREE YEARS ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
CHARGED CHARGED CHARGED
BALANCE TO BALANCE TO BALANCE TO BALANCE
AT COSTS AND AT COSTS AND AT COSTS AND AT
CLASSIFICATION 12/31/93 EXPENSES DEDUCTIONS 12/31/94 EXPENSES DEDUCTIONS 12/31/95 EXPENSES DEDUCTIONS 12/31/96
- -------------- -------- --------- ---------- -------- --------- ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Inventory Reserves.. $-- -- -- -- 161,021 -- 161,021 119,325 -- 280,346
==== === === === ======= === ======= ======= === =======
Accounts Receivable
Reserves........... $-- -- -- -- -- -- -- 97,325 -- 97,325
==== === === === ======= === ======= ======= === =======
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S> <C>
1.1** Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Registrant as
currently in effect.
3.2* Form of Restated Certificate of Incorporation to be filed after
the closing of the Offering made under this Registration
Statement.
3.3* Bylaws of the Registrant, as currently in effect.
4.1 Specimen Common Stock Certificate.
5.1** Opinion of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A.
10.1* Reorganization Agreement dated as of September 5, 1996.
10.2 Form of Registrant's 1996 Stock Option/Stock Issuance Plan.
10.3* Form of Amended and Restated Employment Agreement between the
Registrant and David W. Anderson.
10.4* Form of Employment Agreement between the Registrant's Subsidiary
and Pertti Tormala.
10.5* Form of Proprietary Information and Inventions Agreement.
10.6* Investors' Rights Agreement, dated as of September 6, 1996,
between the Registrant and certain holders of the Registrant's
securities.
10.7* Stock Purchase Agreement between the Registrant and Purchasers
of the Company's Preferred Stock and Warrants.
10.8+* License Agreements between the Registrant's Subsidiary and Saul
N. Schreiber.
10.9+* License Agreement among the Registrant's Subsidiary, Pertti
Tormala, Markku Tamminmaki and Menifix I/S.
10.10+* Licensing, Manufacturing and Distribution Agreement among the
Registrant's Subsidiary, Pertti Tormala and various Danish and
Finnish inventors.
10.11* Shareholders' Agreement among Bionix, B.V. and certain
shareholders of the Company.
21.1* List of Subsidiaries.
23.1 Consent of KPMG Peat Marwick LLP (including a report regarding
the financial schedule).
23.2 Consent of Lowenstein, Sandler, Kohl, Fisher & Boylan, P.A. (to
be included in Exhibit 5.1).
23.3 Consent of Kenyon & Kenyon.
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- --------
*Previously filed.
**To be filed by amendment.
+Confidential treatment requested.

<PAGE>

EXHIBIT 3.1

AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BIONX IMPLANTS, INC.

Bionx Implants, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:

1. The name of the corporation is Bionx Implants, Inc. Bionx
Implants, Inc. was originally incorporated under the name Bionix, Inc. The
original Certificate of Incorporation of the corporation was filed with the
Secretary of State of the State of Delaware on October 11, 1995.

2. Pursuant to Sections 242 and 245 of the General Corporation Law
of the State of Delaware, this Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the Certificate of
Incorporation of this corporation.

3. The text of the Amended and Restated Certificate of Incorporation
as heretofore amended or supplemented is hereby restated and further amended to
read in its entirety as follows:

ARTICLE I

The name of the corporation is Bionx Implants, Inc. (the
"corporation").

ARTICLE II

The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.

ARTICLE III

The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.

ARTICLE IV

The aggregate number of shares which the corporation shall have
authority to issue is forty one million six hundred thousand (41,600,000),
divided into thirty one million six hundred thousand (31,600,000) shares of
common stock with par value of $.0019 per share and ten million (10,000,000)
shares of preferred stock with par value of $.001 per share, of which two
million
<PAGE>

(2,000,000) shares shall be designated as Series A Convertible Participating
Preferred Stock. The designation and amount of the Series A Convertible
Participating Preferred Stock and the voting powers, preferences and relative,
participating, optional and other special rights of the shares of such series,
and the qualifications, limitations or restrictions thereof are as follows:

1. Number of Shares. The series of Preferred Stock, par value $.001
----------------
per share, authorized and designated as "Series A Convertible Participating
Preferred Stock" shall consist of 2,000,000 shares (the "Series A Preferred
Stock").

2. Dividends. The holders of Series A Preferred Stock shall be
---------
entitled to receive dividends, separate and apart from any other class or
series of capital stock of the corporation, at such time and in such
amounts per share of Series A Preferred Stock as the Board of Directors may
declare from time to time, whether in cash, in kind or in shares of capital
stock of the corporation, payable out of any assets legally available
therefor (the "Preferred Dividend"). In addition to any Preferred
Dividends, the holders of the Series A Preferred Stock shall be entitled to
receive, out of any assets legally available therefor, dividends at the
same rate as any dividends (other than dividends paid in additional shares
of Common Stock, provided that the adjustments called for in Section 6F
below are effected) are paid with respect to the Common Stock, treating
each share of Series A Preferred Stock as being equal to the number of
shares of Common Stock (including fractions of a share and rounded up to
the nearest whole number) into which each share of Series A Preferred Stock
is then convertible. No dividend shall be declared or payable in cash or
other property of the corporation with respect to the Common Stock other
than in the form of shares of Common Stock. The Preferred Dividend
described in this Section 2 shall not be cumulative.

3. Liquidation; Stated Preference. Upon any liquidation, dissolution
------------------------------
or winding up of the corporation, whether voluntary or involuntary, the
holders of the shares of Series A Preferred Stock shall be entitled to be
paid and receive the full amount of their Stated Preference per share of
Series A Preferred Stock, before any distribution or payment is made upon
any stock ranking on liquidation junior to the Series A Preferred Stock.
For purposes hereof, the Common Stock shall rank on liquidation junior to
the Series A Preferred Stock.

3A. For purposes hereof the "Stated Preference" for each share
of Series A Preferred Stock shall be an amount equal to (i) $2.50 per share
together with all dividends declared but unpaid thereon and any outstanding
Redemption Interest amounts (referred to in Section 7D below), computed to
the date payment is made available, plus (ii) an amount equal to the Series
A Preferred Stock pro rata share of all remaining assets available for
distribution to stockholders of the corporation, being deemed for such
purpose to be determined by the number of shares of Common Stock (including
fractions of a share rounded up to the nearest whole number) into which the
shares of Series A Preferred Stock are then convertible relative to the
total number of shares of Common Stock then outstanding; provided, however,
-------- -------
that in the event of any "Qualifying Liquidation Event" (as defined below)
the holders of Series A Preferred Stock shall be

-2-
<PAGE>

entitled to receive a Stated Preference in an amount equal to the Series A
Preferred Stock pro rata share in all of the corporation's assets available
for distribution to stockholders, being deemed for such purpose to be
determined by the number of shares of Common Stock (including fractions of
a share rounded up to the next whole share) into which the shares of Series
A Preferred Stock are then convertible relative to the total number of
shares of Common Stock then outstanding. For purposes of this Section 3,
"Qualifying Liquidation Event" means any liquidation (or event deemed to
constitute a liquidation under this Section 3) as to which the total value
of net assets, proceeds or consideration available and payable currently
(without contingency or escrow and subject to no other offset or
liabilities) to all stockholders of the corporation, assuming the
conversion to Common Stock of the Series A Preferred Stock and of all
outstanding securities, options, warrants and other rights issued or
issuable by the corporation, is equal to at least $3.00 per share.

3B. After the corporation has distributed the full amount of the
Stated Preference to the holders of Series A Preferred Stock, the remainder
of the corporation's assets legally available to the Stockholders shall be
distributed to the holders of capital stock ranking junior to the Series A
Preferred Stock in accordance with their respective terms. If upon such
liquidation, dissolution or winding up of the corporation, whether
voluntary or involuntary, the assets to be distributed among the holders of
Series A Preferred Stock shall be insufficient to permit payment in full to
the holders of Series A Preferred Stock of the Stated Preference amounts,
then the entire assets of the corporation available to be so distributed
shall be distributed ratably among the holders of Series A Preferred Stock.

3C. The following events shall be deemed to be a liquidation,
dissolution or winding up of the corporation within the meaning of the
provisions of this Section 3: (i) any consolidation or merger of the
corporation into or with any other entity or entities which results in the
exchange of 40% or more of the outstanding shares of the corporation's
voting securities (in a single transaction or a series of related
transactions) for securities or other consideration issued or paid or
caused to be issued or paid by any such entity or affiliate thereof (other
than a merger to reincorporate the corporation in a different jurisdiction)
upon consummation of which the holders of the corporation's outstanding
voting securities immediately prior to such transaction hold less than 55%
of the voting securities of the resulting or surviving corporation; and
(ii) the sale, lease, abandonment, transfer or other disposition by the
corporation of 40% or more of its assets (in a single transaction or a
series of related transactions).

3D. In the event of such liquidation event, if the consideration
received by the corporation is other than cash, its value will be deemed
its fair market value. For this purpose, any securities shall be valued as
follows:

(i) Securities not subject to investment letter or other similar
restrictions on free marketability covered by (ii) below:

-3-
<PAGE>

(a) If traded on a securities exchange or through the Nasdaq
National Market, the value shall be deemed to be the average of the
closing prices of the securities on such exchange over the thirty (30)
day period ending three (3) days prior to the closing;

(b) If actively traded over-the-counter, the value shall be
deemed to be the average of the closing bid or sale prices (whichever
is applicable) over the thirty (30) day period ending three (3) days
prior to the closing; and

(c) If there is no active public market, the value shall be
the fair market value thereof, as mutually determined by the
corporation and the holders of at least a majority of the voting power
of all then outstanding shares of Series A Preferred Stock.

(ii) The method of valuation of securities subject to investment
letter or other restrictions on free marketability (other than restrictions
arising solely by virtue of a stockholder's status as an affiliate or
former affiliate) shall be to make an appropriate discount from the market
value determined as above under Section 3D(i) to reflect the approximate
fair market value thereof, as mutually determined by the corporation and
the holders of at least a majority of the voting power of all then
outstanding shares of such Series A Preferred Stock.

In the event the requirements of this Section 3 are not complied with, the
corporation shall forthwith either: cause such closing to be postponed
until such time as the requirements of this Section 3 have been complied
with; or cancel such transaction, in which event the rights, preferences
and privileges of the holders of the Series A Preferred Stock shall revert
to and be the same as such rights, preferences and privileges existing
immediately prior to the date of the first notice referred to in Section 3F
hereof.

3E. Each holder of Series A Preferred Stock shall have the right
at any time to convert all or any amount of Series A Preferred Stock into
shares of Common Stock in accordance with the terms hereof, or in the case
of any such liquidation which constitutes a reorganization or
reclassification, any holder of Series A Preferred Stock may elect to
receive the benefits of the provisions of Section 6G below.

3F. The corporation shall give to each holder of record of
Series A Preferred Stock written notice of such liquidation, dissolution or
winding up, stating a payment date, the amount of the Stated Preference and
the place where said stated payments shall be payable, with such notice to
be delivered in person, mailed by certified or registered mail, return
receipt requested, or sent by telecopier or telex, not less than twenty
(20) days prior to the payment date stated therein, to the holders of
record of Series A Preferred Stock, such notice to be addressed to each
such holder at its address as shown by the records of the corporation.

-4-
<PAGE>

4. Voting. The holder of each share of Series A Preferred Stock
------
shall have the right to one vote for each share of Common Stock into which
such Preferred Stock could then be converted and with respect to such vote,
such holder shall have full voting rights and powers equal to the voting
rights and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders'
meeting in accordance with the bylaws of this corporation, and shall be
entitled to vote, together with holders of Common Stock, with respect to
any question upon which holders of Common Stock have the right to vote.
Fractional votes shall not, however, be permitted and any fractional voting
rights available on an as converted basis (after aggregating all shares
into which shares of Series A Preferred Stock held by each holder could be
converted) shall be rounded up to the nearest whole number.

4A. General. Except as may be provided otherwise in these terms
-------
of the Series A Preferred Stock or required by law, the Series A Preferred
Stock shall vote together with all other voting classes and series of stock
of the corporation as a single class on all actions to be taken by the
stockholders of the corporation. Each share of Series A Preferred Stock
shall entitle the holder thereof to such number of votes per share as shall
equal the number of shares of Common Stock (including fractions of a share
rounded up to the nearest whole share) into which the shares of Series A
Preferred Stock are then convertible by its terms (after aggregating all
shares into which shares of Series A Preferred Stock held by each holder
could be converted).

4B. Board Size. The corporation shall not increase the maximum
----------
number of directors constituting the Board of Directors to a number in
excess of seven (7) without the written consent or affirmative vote of the
holders of at least a majority of the then outstanding shares of Series A
Preferred Stock, given in writing or by vote at a meeting, consenting or
voting (as the case may be) separately as a series.

4C. Board Seats. The holders of the Series A Preferred Stock,
-----------
voting as a separate series, shall be entitled to elect (1) one director of
the corporation. The holders of the Series A Preferred Stock and the
Common Stock, voting together as a single class, shall be entitled to elect
all other directors of the corporation. At any meeting (or in a written
consent in lieu thereof) held for the purpose of electing directors, the
presence in person or by proxy (or the written consent) of the holders of a
majority of the shares of Series A Preferred Stock then outstanding shall
constitute a quorum of the Series A Preferred Stock for the election of the
director to be elected solely by the holders of the Series A Preferred
Stock. A vacancy in any directorship elected by the holders of the Series
A Preferred Stock shall be filled only by vote or written consent of the
holders of the Series A Preferred Stock, and a vacancy in the directorships
elected jointly by the holders of the Series A Preferred Stock and the
Common Stock shall be filled only by vote or written consent of the Series
A Preferred Stock and the Common Stock, as provided above.

5. Restrictions. At any time when shares of Series A Preferred Stock
------------
in an amount equal to at least 10% of the number of shares of Series A
Preferred Stock

-5-
<PAGE>

originally issued are outstanding, except where the vote or written consent
of the holders of a greater number or percentage of shares of the
corporation is required by law or by the Certificate of Incorporation and
in addition to any other vote required by law or the Certificate of
Incorporation, without the approval of the holders of at least a majority
of the then outstanding shares of Series A Preferred Stock, given in
writing or by vote at a meeting, consenting or voting (as the case may be)
separately as a series, the corporation will not undertake or do any of the
following:

5A. Create or authorize the creation of any additional class or
series of shares of stock unless the same ranks junior to the Series A
Preferred Stock as to the distribution of assets on the liquidation,
dissolution or winding up of the corporation, or increase the authorized
amount of the Series A Preferred Stock or increase the authorized amount of
any additional class or series of shares of stock unless the same ranks
junior to the Series A Preferred Stock as to the distribution of assets on
the liquidation, dissolution or winding up of the corporation, or create or
authorize any obligation or security convertible into shares of Series A
Preferred Stock or into shares of any other class or series of stock unless
the same ranks junior to the Series A Preferred Stock as to the
distribution of assets on the liquidation, dissolution or winding up of the
corporation, whether any such creation, authorization or increase shall be
by means of amendment to the Certificate of Incorporation, as amended, or
by merger, consolidation or otherwise;

5B. Consent to (i) consolidation or merger of the corporation
into or with any other entity or entities which results in the exchange of
40% or more of the outstanding shares of the corporation's voting
securities (in a single transaction or a series of related transactions)
for securities or other consideration issued or paid or caused to be issued
or paid by any such entity or affiliate thereof (other than a merger to
reincorporate the corporation in a different jurisdiction) after which the
holders of the corporation's outstanding voting securities hold less than
55% of the voting securities of the resulting or surviving corporation, or
(ii) the sale, lease, abandonment, transfer or other disposition by the
corporation of 40% or more of its assets (in a single transaction or a
series of related transactions); unless upon such event the holders of
Series A Preferred Stock and Common Stock held as a result of the exercise
of a certain Common Stock Purchase Warrant dated ____________, 1996 (the
"Warrant") receive net proceeds at least equal to the "Qualified Return
Price" (as defined below);

5C. Amend, alter or seek a waiver of any term of the Series A
Preferred Stock or otherwise amend, alter or repeal its Certificate of
Incorporation or By-laws in a way materially adverse to or inconsistent
with the terms of the Series A Preferred Stock;

5D. Purchase or set aside any sums for the purchase of, or pay
any dividend or make any distribution on, any shares of stock other than
the Series A Preferred Stock, except for dividends or other distributions
payable on the Common Stock solely in the form of additional shares of
Common Stock or dividends or distributions of property made to holders of
the Common Stock and Series A Preferred Stock (treating each share of
Series A Preferred Stock on the same basis as if it had been converted into

-6-
<PAGE>

Common Stock immediately prior to the record date for such dividend or
distribution) if such dividends or distributions are approved by holders of
a majority of the shares of Series A Preferred Stock outstanding, and
except for the purchase of shares of Common Stock from former employees of
the corporation who acquired such shares directly from the corporation, if
each such purchase is made pursuant to contractual rights held by the
corporation relating to the termination of employment of such former
employee and the purchase price does not exceed the original issue price
paid by such former employee to the corporation for such shares; or

5E. Redeem or otherwise acquire any shares of Series A Preferred
Stock except as expressly authorized in Section 7 hereof or pursuant to a
purchase offer made pro rata to all holders of the shares of Series A
Preferred Stock on the basis of the aggregate number of outstanding shares
of Series A Preferred Stock then held by each such holder.

5F. For purposes of Section 5B, "Qualified Return Price" shall
mean an amount equal to (i) $2.50 per share (and with respect to the
exercised Warrant, the initial exercise price), increased by (ii) thirty-
five percent (35%) each year, compounded on an annual basis measured from
the date of issuance (or exercise, in the case of the Warrant) to the date
of calculation, pro-rated for any partial years, reduced by (iii) the per
share amount of any dividends or other distributions on account of the
Series A Preferred Stock or Common Stock (issued upon exercise of the
Warrant) actually made and paid prior to the date of calculation, which
amount, in the case of stock consideration shall be calculated such that
the proposed purchase price of shares to be received by holders of Series A
Preferred Stock and Common Stock (issued upon exercise of the Warrant) is
discounted by 25% unless such shares are freely tradeable.

6. Conversions. The holders of shares of Series A Preferred Stock
-----------
shall have the following conversion rights:

6A. Right to Convert. Subject to the terms and conditions of
----------------
this Section 6, the holder of any share or shares of Series A Preferred
Stock shall have the right, at its option at any time, to convert any such
shares of Series A Preferred Stock (except that upon any liquidation of the
corporation the right of conversion shall terminate at the close of
business on the business day fixed for payment of the amount distributable
on the Series A Preferred Stock) into such number of fully paid and
nonassessable shares of Common Stock as is obtained by (i) multiplying the
number of shares of Series A Preferred Stock so to be converted by $2.50
and (ii) dividing the result by the conversion price of $2.50 per share or,
in case an adjustment of such price has taken place pursuant to the further
provisions of this Section 6, then by the conversion price as last adjusted
and in effect at the date any share or shares of Series A Preferred Stock
are surrendered for conversion (such price, or such price as last adjusted,
being referred to as the "Conversion Price"). Such rights of conversion
shall be exercised by the holder thereof by giving written notice that the
holder elects to convert a stated number of shares of Series A Preferred
Stock into Common Stock and by surrender of a certificate or certificates
for

-7-
<PAGE>

the shares so to be converted to the corporation at its principal office
(or such other office or agency of the corporation as the corporation may
designate by notice in writing to the holders of the Series A Preferred
Stock) at any time during its usual business hours on the date set forth in
such notice, together with a statement of the name or names (with address)
in which the certificate or certificates for shares of Common Stock shall
be issued.

6B. Issuance of Certificates; Time Conversion Effected.
--------------------------------------------------
Promptly after the receipt of the written notice referred to in Section 6A
above and surrender of the certificate or certificates for the share or
shares of Series A Preferred Stock to be converted, the corporation shall
issue and deliver, or cause to be issued and delivered, to the holder,
registered in such name or names as such holder may direct, a certificate
or certificates for the number of whole shares of Common Stock issuable
upon the conversion of such share or shares of Series A Preferred Stock.
To the extent permitted by law, such conversion shall be deemed to have
been effected and the Conversion Price shall be determined as of the close
of business on the date on which such written notice shall have been
received by the corporation and the certificate or certificates for such
share or shares shall have been surrendered as aforesaid, and at such time
the rights of the holder of such share or shares of Series A Preferred
Stock shall cease, and the person or persons in whose name or names any
certificate or certificates for shares of Common Stock shall be issuable
upon such conversion shall be deemed to have become the holder or holders
of record of the shares represented thereby.

6C. Fractional Shares; Dividends; Partial Conversion. No
------------------------------------------------
fractional shares shall be issued upon conversion of Series A Preferred
Stock into Common Stock and no adjustment shall be made upon any conversion
on account of any cash dividends on the Common Stock issued upon such
conversion. At the time of each conversion, the corporation shall pay in
cash an amount equal to all dividends, accrued and unpaid on the shares of
Series A Preferred Stock surrendered for conversion to the date upon which
such conversion is deemed to take place as provided in Section 6B. In case
the number of shares of Series A Preferred Stock represented by the
certificate or certificates surrendered exceeds the number of shares
converted, the corporation shall, upon such conversion, execute and deliver
to the holder, at the expense of the corporation, a new certificate or
certificates for the number of shares of Series A Preferred Stock
represented by the certificate or certificates surrendered which are not to
be converted. If any fractional share of Common Stock would, except for
the provisions of the first sentence of this Section 6C, be delivered upon
such conversion, the corporation, in lieu of delivering such fractional
share, shall pay to the holder surrendering the Series A Preferred Stock
for conversion an amount in cash equal to the current market price of such
fractional share, as determined in good faith by the Board of Directors of
the corporation.

6D. Adjustment of Price Upon Issuance of Common Stock. Except
-------------------------------------------------
as provided in Section 6E, if and whenever the corporation shall issue or
sell, or is, in accordance with Sections 6D(1) through 6D(6), deemed to
have issued or sold, any shares of Common Stock for a consideration per
share less than the Conversion Price in effect

-8-
<PAGE>

immediately prior to the time of such issue or sale, then, forthwith upon
such issue or sale, the Conversion Price shall be reduced to the price
determined by multiplying the applicable Conversion Price by a fraction:

(1) the numerator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such
additional shares of Common Stock, plus (b) the number of shares of
Common Stock which the net aggregate consideration, if any, received
by the corporation for the total number of such additional shares of
Common Stock so issued would purchase at the applicable Conversion
Price for the Series A Preferred Stock in effect immediately prior to
such issuance, and

(2) the denominator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such
additional shares of Common Stock plus (b) the number of such
additional shares of Common Stock so issued.

For purposes of this Section 6D, the following Sections 6D(1) to 6D(6)
shall also be applicable:

6D(1) Issuance of Rights or Options. In case at any time
-----------------------------
the corporation shall in any manner grant (whether directly or by
assumption in a merger or otherwise) any warrants or other rights to
subscribe for or to purchase, or any options for the purchase of,
Common Stock or any stock or security convertible into or exchangeable
for Common Stock (such warrants, rights or options being called
"Options" and such convertible or exchangeable stock or securities
being called "Convertible Securities") whether or not such Options or
the right to convert or exchange any such Convertible Securities are
immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the
corporation as consideration for the granting of such Options, plus
the minimum aggregate amount of additional consideration payable to
the corporation upon the exercise of all such Options, plus, in the
case of such Options which relate to Convertible Securities, the
minimum aggregate amount of additional consideration, if any, payable
upon the issue or sale of such Convertible Securities and upon the
conversion or exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities
issuable upon the exercise of such Options) shall be less than the
Conversion Price in effect immediately prior to the time of the
granting of such Options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed
to have been issued for such price per share as of the date of
granting of such

-9-
<PAGE>

Options or the issuance of such Convertible Securities and thereafter
shall be deemed to be outstanding. Except as otherwise provided in
Section 6D(3), no adjustment of the Conversion Price shall be made
upon the actual issue of such Common Stock or of such Convertible
Securities upon exercise of such Options or upon the actual issue of
such Common Stock upon conversion or exchange of such Convertible
Securities.

6D(2) Issuance of Convertible Securities. In case the
----------------------------------
corporation shall in any manner issue (whether directly or by
assumption in a merger or otherwise) or sell any Convertible
Securities, whether or not the rights to exchange or convert any such
Convertible Securities are immediately exercisable, and the price per
share for which Common Stock is issuable upon such conversion or
exchange (determined by dividing (i) the total amount received or
receivable by the corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the corporation upon the
conversion or exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities) shall be less than the Conversion Price
in effect immediately prior to the time of such issue or sale, then
the total maximum number of shares of Common Stock issuable upon
conversion or exchange of all such Convertible Securities shall be
deemed to have been issued for such price per share as of the date of
the issue or sale of such Convertible Securities and thereafter shall
be deemed to be outstanding, provided that (a) except as otherwise
provided in Section 6D(3), no adjustment of the Conversion Price shall
be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities and (b) if any such issue or
sale of such Convertible Securities is made upon exercise of any
Options to purchase any such Convertible Securities for which
adjustments of the Conversion Price have been or are to be made
pursuant to other provisions of this Section 6D, no further adjustment
of the Conversion Price shall be made by reason of such issue or sale.

6D(3) Change in Option Price or Conversion Rate. Upon the
-----------------------------------------
happening of any of the following events, namely, if the purchase
price provided for in any Option referred to in Section 6D(1), the
additional consideration, if any, payable upon the conversion or
exchange of any Convertible Securities referred to in Section 6D(1) or
6D(2), or the rate at which Convertible Securities referred to in
Section 6D(1) or 6D(2) are convertible into or exchangeable for Common
Stock shall change at any time (including, but not limited to, changes
under or by reason of provisions designed to protect against
dilution), the Conversion Price in effect at the time of such event
shall forthwith be readjusted to the Conversion Price which would have
been in effect at such time had such Options or Convertible Securities
still outstanding provided for such changed purchase price, additional
consideration or conversion rate, as the case may be, at the time
initially granted, issued or sold, and any adjustments for dilutive
issuances or deemed dilutive issuances of Common Stock subsequent to
such time shall be determined based on

-10-
<PAGE>

such readjusted Conversion Price; and on the termination of any such
Option or any such right to convert or exchange such Convertible
Securities, the Conversion Price then in effect hereunder shall
forthwith be increased to the Conversion Price which would have been
in effect at the time of such termination had such Option or
Convertible Securities, to the extent outstanding immediately prior to
such termination, never been issued.

6D(4) Consideration for Stock. In case any shares of
-----------------------
Common Stock, Options or Convertible Securities shall be issued or
sold for cash, the consideration received therefor shall be deemed to
be the amount received by the corporation therefor, without deduction
therefrom of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the corporation in connection
therewith. In case any shares of Common Stock, Options or Convertible
Securities shall be issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
corporation shall be deemed to be the fair value of such consideration
as determined in good faith by the Board of Directors of the
corporation, without deduction of any expenses incurred or any
underwriting commissions or concessions paid or allowed by the
corporation in connection therewith. In case any Options shall be
issued in connection with the issue and sale of other securities of
the corporation, together comprising one integral transaction in which
no specific consideration is allocated to such Options by the parties
thereto, such Options shall be deemed to have been issued for such
consideration as determined in good faith by the Board of Directors of
the corporation.

6D(5) Record Date. In case the corporation shall take a
-----------
record of the holders of its Common Stock for the purpose of entitling
them (i) to receive a dividend or other distribution payable in Common
Stock, Options or Convertible Securities or (ii) to subscribe for or
purchase Common Stock, Options or Convertible Securities, then such
record date shall be deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution
or the date of the granting of such right of subscription or purchase,
as the case may be.

6D(6) Treasury Shares. The number of shares of Common
---------------
Stock outstanding at any given time shall not include shares owned or
held by or for the account of the corporation, and the disposition of
any such shares shall be considered an issue or sale of Common Stock
for the purpose of this Section 6D.

6E. Certain Issues of Common Stock Excepted. Anything herein to
---------------------------------------
the contrary notwithstanding, the corporation shall not be required to make
any adjustment of the Conversion Price in the case of the issuance from and
after the date of filing of these terms of the Series A Preferred Stock of
any Reserved Shares, as defined in this Section 6E. For purposes hereof
the term "Reserved Shares" shall mean and include: (i) up to an

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<PAGE>

aggregate of 1,052,632 shares (appropriately adjusted to reflect the
occurrence of any event described in Section 6F of Common Stock to
directors, officers, employees or consultants of the corporation in
connection with their service as directors of the corporation, their
employment by the corporation or their retention as consultants by the
corporation, plus such number of shares of Common Stock which are
repurchased by the corporation from such persons after such date pursuant
to contractual rights held by the corporation and at repurchase prices not
exceeding the respective original purchase prices paid by such persons to
the corporation therefor (collectively, the "Employee Shares"); and (ii)
such number of shares of Common Stock or other securities convertible or
exchangeable therefor, as the corporation may issue for purposes of
corporate business transactions, including joint venture, product
development, acquisition of a division or product line by the corporation,
with any such transaction and each issuance of capital stock to be subject
to the prior approval of at least a majority of directors who are not
regularly employed by the corporation or any wholly-owned subsidiary
thereof and, if requested by the Director representative of the holders of
Series A Preferred Stock, based upon projected growth and earnings analysis
validated by a third party mutually acceptable to both the corporation and
the Director representative of the holders of Series A Preferred Stock that
(i) the issuance of such shares by the corporation shall be accretive to
earnings by at least 10% over the ensuing twelve (12) months; and (ii) the
sales revenue growth rate of the corporation over the ensuing twelve (12)
months shall be at least equal to the corporation's historical sales growth
rate during the prior year (the "Transaction Shares").

6F. Subdivision or Combination of Common Stock. In case the
------------------------------------------
corporation shall at any time subdivide (by any stock split, stock dividend
or otherwise) its outstanding shares of Common Stock into a greater number
of shares, the Conversion Price in effect immediately prior to such
subdivision shall be proportionately reduced, and, conversely, in case the
outstanding shares of Common Stock shall be combined into a smaller number
of shares, the Conversion Price in effect immediately prior to such
combination shall be proportionately increased.

6G. Reorganization or Reclassification. If any capital
----------------------------------
reorganization or reclassification of the capital stock of the corporation
shall be effected in such a way that holders of Common Stock shall be
entitled to receive stock, securities or assets with respect to or in
exchange for Common Stock, then, as a condition of such reorganization or
reclassification, lawful and adequate provisions shall be made whereby each
holder of a share or shares of Series A Preferred Stock shall thereupon
have the right to receive, upon the basis and upon the terms and conditions
specified herein and in lieu of the shares of Common Stock immediately
theretofore receivable upon the conversion of such share or shares of
Series A Preferred Stock, such shares of stock, securities or assets as may
be issued or payable with respect to or in exchange for a number of
outstanding shares of such Common Stock equal to the number of shares of
such Common Stock immediately theretofore receivable upon such conversion
had such reorganization or reclassification not taken place, and in any
such case appropriate provisions shall be made with respect to the rights
and interests of such holder to the end that the provisions hereof
(including

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<PAGE>

without limitation provisions for adjustments of the Conversion Price)
shall thereafter be applicable, as nearly as may be, in relation to any
shares of stock, securities or assets thereafter deliverable upon the
exercise of such conversion rights.

6H. Notice of Adjustment. Upon any adjustment of the Conversion
--------------------
Price, then and in each such case the corporation shall give written notice
thereof, by delivery in person, certified or registered mail, return
receipt requested, telecopier or telex, addressed to each holder of shares
of Series A Preferred Stock at the address of such holder as shown on the
books of the corporation, which notice shall state the Conversion Price
resulting from such adjustment, setting forth in reasonable detail the
method upon which such calculation is based.

6I. Other Notices. In case at any time:
-------------

(i) the corporation shall declare any dividend upon its Common
Stock payable in cash or stock or make any other distribution to the
holders of its Common Stock;

(ii) the corporation shall offer for subscription pro rata to the
--- ----
holders of its Common Stock any additional shares of stock of any class or
other rights;

(iii) there shall be any capital reorganization or
reclassification of the capital stock of the corporation, or a
consolidation or merger of the corporation with or into another entity or
entities, or a sale, lease, abandonment, transfer or other disposition of
all or substantially all its assets; or

(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the corporation;

then, in any one or more of said cases, the corporation shall give, by
delivery in person, certified or registered mail, return receipt requested,
telecopier or telex, addressed to each holder of any shares of Series A
Preferred Stock at the address of such holder as shown on the books of the
corporation, (x) at least twenty (20) days' prior written notice of the
date on which the books of the corporation shall close or a record shall be
taken for such dividend, distribution or subscription rights or for
determining rights to vote in respect of any such reorganization,
reclassification, consolidation, merger, disposition, dissolution,
liquidation or winding up, and (y) in the case of any such reorganization,
reclassification, consolidation, merger, disposition, dissolution,
liquidation or winding up, at least twenty (20) days' prior written notice
of the date when the same shall take place. Such notice in accordance with
the foregoing clause (x) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto and such notice in
accordance with the foregoing clause (y) shall also specify the date on
which the holders of Common Stock shall be entitled to exchange their
Common Stock for securities or other property deliverable upon such

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<PAGE>

reorganization, reclassification, consolidation, merger, disposition,
dissolution, liquidation or winding up, as the case may be.

6J. Stock to be Reserved. The corporation will at all times
--------------------
reserve and keep available out of its authorized Common Stock, solely for
the purpose of issuance upon the conversion of Series A Preferred Stock as
herein provided, such number of shares of Common Stock as shall then be
issuable upon the conversion of all outstanding shares of Series A
Preferred Stock. The corporation covenants that all shares of Common Stock
which shall be so issued shall be duly and validly issued and fully paid
and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof, and, without limiting the generality of the
foregoing, the corporation covenants that it will from time to time take
all such action as may be requisite to assure that the par value per share
of the Common Stock is at all times equal to or less than the Conversion
Price in effect at the time. The corporation will take all such action as
may be necessary to assure that all such shares of Common Stock may be so
issued without violation of any applicable law or regulation, or of any
requirement of any national securities exchange upon which the Common Stock
may be listed. The corporation will not take any action which results in
any adjustment of the Conversion Price if the total number of shares of
Common Stock issued and issuable after such action upon conversion of the
Series A Preferred Stock would exceed the total number of shares of Common
Stock then authorized by the Certificate of Incorporation, as amended.

6K. No Reissuance of Series A Preferred Stock. Shares of Series
-----------------------------------------
A Preferred Stock which are converted into shares of Common Stock as
provided herein shall not be reissued.

6L. Issue Tax. The issuance of certificates for shares of
---------
Common Stock upon conversion of Series A Preferred Stock shall be made
without charge to the holders thereof for any issuance tax in respect
thereof, provided that the corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance
and delivery of any certificate in a name other than that of the holder of
the Series A Preferred Stock which is being converted.

6M. Closing of Books. The corporation will at no time close its
----------------
transfer books against the transfer of any Series A Preferred Stock or of
any shares of Common Stock issued or issuable upon the conversion of any
shares of Series A Preferred Stock in any manner which interferes with the
timely conversion of such Series A Preferred Stock, except as may otherwise
be required to comply with applicable securities laws.

6N. Definition of Common Stock. As used in this Section 6, the
--------------------------
term "Common Stock" shall mean and include the corporation's authorized
Common Stock, par value $.001 per share, as constituted on the date of
filing of these terms of the Series A Preferred Stock, and shall also
include any capital stock of any class of the corporation thereafter
authorized which shall not be limited to a fixed sum or percentage in
respect of the rights of the holders thereof to participate in dividends or
in the distribution of assets

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<PAGE>

upon the voluntary or involuntary liquidation, dissolution or winding up of
the corporation; provided that the shares of Common Stock receivable upon
conversion of shares of Series A Preferred Stock shall include only shares
designated as Common Stock of the corporation on the date of filing of this
instrument, or in case of any reorganization or reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
Section 6G.

6O. Mandatory Conversion. If at any time the corporation shall
--------------------
effect a firm commitment underwritten public offering of shares of Common
Stock in which (i) the gross proceeds received by the corporation from such
public offering shall be at least $10,000,000 and (ii) the price paid by
the public for such shares shall be at least $5.00 per share (appropriately
adjusted to reflect the occurrence of any event described in Section 6F,
then effective upon the closing of the sale of such shares by the
corporation pursuant to such public offering, all outstanding shares of
Series A Preferred Stock shall automatically convert to shares of Common
Stock on the basis set forth in this Section 6. In addition, upon the
approval of holders representing at least 66 2/3% of the outstanding Series
A Preferred Stock, or at such time as only 200,000 shares (subject to
equitable adjustments for stock splits, stock dividends and the like) of
Series A Preferred Stock remain outstanding, all outstanding shares of
Series A Preferred Stock shall automatically convert to shares of Common
Stock on the basis set forth in this Section 6. Holders of shares of
Series A Preferred Stock so converted may deliver to the corporation at its
principal office (or such other office or agency of the corporation as the
corporation may designate by notice in writing to such holders) during its
usual business hours, the certificate or certificates for the shares so
converted. As promptly as practicable thereafter, the corporation shall
issue and deliver to such holder a certificate or certificates for the
number of whole shares of Common Stock to which such holder is entitled,
together with any cash dividends and payment in lieu of fractional shares
to which such holder may be entitled pursuant to Section 6C. Until such
time as a holder of shares of Series A Preferred Stock shall surrender his
or its certificates therefor as provided above, such certificates shall be
deemed to represent the shares of Common Stock to which such holder shall
be entitled upon the surrender thereof.

7. Redemption. The shares of Series A Preferred Stock shall be
----------
redeemed as follows:

7A. Mandatory Redemption. At any time after August __, 2001
--------------------
upon the written request of holders of not less than a majority of the then
outstanding shares of Series A Preferred Stock, the corporation shall be
obligated to redeem from each holder of shares of Series A Preferred Stock,
all of the shares of Series A Preferred Stock held by such holder, with
such redemption to be completed within ninety (90) days of the date the
notice of redemption is delivered to the corporation (the "Redemption
Date").

7B. Redemption Price and Payment. The shares of Series A
----------------------------
Preferred Stock to be redeemed on the Redemption Date shall be redeemed by
paying for each such share in cash an amount equal to $2.50 per share plus,
in the case of each share, an

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<PAGE>

amount equal to all dividends declared but unpaid thereon, computed to the
Redemption Date (such amount being referred to as the "Redemption Amount").
Such payment shall be made in full on the Redemption Date to all the
holders entitled thereto, pro rata, based on the relative number of shares
being redeemed by each such holder.

7C. Redemption Mechanics. At least 20 but not more than 30 days
--------------------
prior to the Redemption Date, written notice (the "Redemption Notice")
shall be given by the corporation by delivery in person, certified or
registered mail, return receipt requested, telecopier or telex, to each
holder of record (at the close of business on the business day next
preceding the day on which the Redemption Notice is given) of shares of
Series A Preferred Stock notifying such holder of the redemption and
specifying the Redemption Amount, the Redemption Date and the place where
said Redemption Amount shall be payable. The Redemption Notice shall be
addressed to each holder at his address as shown by the records of the
corporation. From and after the close of business on the Redemption Date,
unless there shall have been a default in the payment of the Redemption
Amount, all rights of holders of shares of Series A Preferred Stock (except
the right to receive the Redemption Price) shall cease with respect to such
shares, and such shares shall not thereafter be transferred on the books of
the corporation or be deemed to be outstanding for any purpose whatsoever.
If the funds of the corporation legally available for redemption of shares
of Series A Preferred Stock on the Redemption Date are insufficient to
redeem the total number of outstanding shares of Series A Preferred Stock,
the holders of shares of Series A Preferred Stock shall share ratably in
any funds legally available for redemption of such shares according to the
respective amounts which would be payable with respect to the full number
of shares owned by them if all such outstanding shares were redeemed in
full. The shares of Series A Preferred Stock not redeemed shall remain
outstanding and entitled to all rights and preferences provided herein. At
any time thereafter when additional funds of the corporation are legally
available for the redemption of such shares of Series A Preferred Stock,
such funds will be used, at the end of the next succeeding fiscal quarter,
to redeem the balance of such shares, or such portion thereof for which
funds are then legally available, on the basis set forth above.

7D. Default. If the corporation fails to redeem the Series A
-------
Preferred Stock in full as called for, the corporation shall be obligated
to pay an additional interest amount to the holders of outstanding Series A
Preferred Stock based on the Redemption Amount outstanding ("Redemption
Interest") payable in cash quarterly in arrears at the initial rate of 8%
per annum calculated from the date of the redemption notice, increasing one
point each successive calendar quarter (or portion thereof) during which
the full outstanding Redemption Amount balance (plus Redemption Interest,
if any) is not paid in full. In the event that the corporation does not
pay such Redemption Interest in full within one hundred twenty (120) days
following the date of the redemption notice, then all accrued and unpaid
Redemption Interest shall be due and payable in kind in the form of
additional shares of Series A Preferred Stock, at an assumed value of $2.50
per share, in an amount equal to the Redemption Interest ("PIK Interest")
until such time as the corporation has sufficient legal capital available
to pay the Redemption Interest in cash. Any and all outstanding Redemption
Interest amounts shall be included as being due and

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<PAGE>

payable to the holders of Series A Preferred Stock for purposes of
determining the Stated Preference upon any liquidation under Section 3.

7E. Redeemed or Otherwise Acquired Shares to be Retired. Any
---------------------------------------------------
shares of Series A Preferred Stock redeemed pursuant to this Section 6 or
otherwise acquired by the corporation in any manner whatsoever shall be
canceled and shall not under any circumstances be reissued; and the
corporation may from time to time take such appropriate corporate action as
may be necessary to reduce accordingly the number of authorized shares of
Series A Preferred Stock.

8. Amendments. No provision of these terms of the Series A Preferred
----------
Stock may be amended, modified or waived without the written consent or
affirmative vote of the holders of at least a majority of the then
outstanding shares of Series A Preferred Stock, except for those provisions
which expressly call for a greater number or percentage of shares of Series
A Preferred Stock.

9. Relative Rights of Common Stock and Preferred Stock. All
---------------------------------------------------
preferences, voting powers, relative, participating, optional or other
specific rights and privileges, and qualifications, limitations, or
restrictions of the Common Stock are expressly made subject and subordinate
to those that may be fixed with respect to any shares of Preferred Stock.

10. Voting Rights. Except as otherwise required by law or this
-------------
Certificate of Incorporation, each holder of Common Stock shall have one
vote in respect of each share of stock held by him of record on the books
of the corporation for the election of directors and on all matters
submitted to a vote of stockholders of the corporation.

11. Dividends. Subject to the preferential rights of the Preferred
---------
Stock, the holders of shares of Common Stock shall be entitled to receive,
when and if declared by the Board of Directors, out of the assets of the
corporation which are by law available therefor, dividends payable either
in cash, in property or in shares of capital stock.

12. Dissolution, Liquidation or Winding Up. In the event of any
--------------------------------------
dissolution, liquidation or winding up of the affairs of the corporation,
after distribution in full of the preferential amounts, if any, to be
distributed to the holders of shares of the Preferred Stock, holders of
Common Stock shall be entitled, unless otherwise provided by law or this
Certificate of Incorporation, to receive all of the remaining assets of the
corporation or whatever kind available for distribution to stockholders
ratably in proportion to the number of shares of Common Stock held by them
respectively.

The preferred stock may be issued from time to time in one or more
series. The Board of Directors of the corporation is hereby expressly
authorized to provide, by resolution or resolutions duly adopted by it prior to
issuance, for the creation of each such series and to fix the designation and
the powers, preferences, rights, qualifications, limitations and restrictions
relating to the shares of each such series. The authority of the Board of
Directors with respect to each series of preferred stock shall include, but not
be limited to, determining the following:

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<PAGE>

(a) the designation of such series, the number of shares to
constitute such series and the stated value if different from the par value
thereof;

(b) whether the shares of such series shall have voting rights,
in addition to any voting rights provided by law, and, if so, the terms of
such voting rights, which may be general or limited;

(c) the dividends, if any, payable on such series, whether any
such dividends shall be cumulative, and, if so, from what dates, the
conditions and dates upon which such dividends shall be payable, and the
preference or relation which such dividends shall bear to the dividends
payable on any shares of stock of any other class or any other series of
preferred stock;

(d) whether the shares of such series shall be subject to
redemption either by the corporation or the holders thereof, and, if so,
the times, prices and other conditions of such redemption;

(e) the amount or amounts payable upon shares of such series
upon, and the rights of the holders of such series in, the voluntary or
involuntary liquidation, dissolution or winding up, or upon any
distribution of the assets, of the corporation;

(f) whether the shares of such series shall be subject to the
operation of a retirement or sinking fund and, if so, the extent to and the
manner in which any such retirement or sinking fund shall be applied to the
purchase or redemption of the shares of such series for retirement or other
corporate purposes and the terms and provisions relating to the operation
thereof;

(g) whether the shares of such series shall be convertible into,
or exchangeable for, shares of stock of any other class or any other series
of preferred stock or any other securities and, if so, the price or prices
or the rate or rates of conversion or exchange and the method, if any, of
adjusting the same, and any other terms and conditions of conversion or
exchange;

(h) the limitations and restrictions, if any, to be effective
while any shares of such series are outstanding upon the payment of
dividends or the making of other distributions on, and upon the purchase,
redemption or other acquisition by the corporation of, the common stock or
shares of stock of any other class or any other series of preferred stock;

(i) the conditions or restrictions, if any, upon the creation of
indebtedness of the corporation or upon the issue of any additional stock,
including additional shares of such series or of any other series of
preferred stock or of any other class; and

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<PAGE>

(j) any other powers, preferences and relative, participating,
optional and other specific rights, and any qualifications, limitations and
restrictions, thereof.

The powers, preferences and relative, participating, optional and
other special rights of each series of preferred stock, and the qualifications,
limitations or restrictions thereof, if any, may differ from those of any and
all other series at any time outstanding. All shares of any one series of
preferred stock shall be identical in all respects with all other shares of such
series, except that shares of any one series issued at different times may
differ as to the dates from which dividends thereof shall be cumulative.

ARTICLE V

The corporation is to have perpetual existence.

ARTICLE VI

In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized:

1. To make, alter or repeal the by-laws of the corporation.

2. To authorize and cause to be executed mortgages and liens upon
the real and personal property of the corporation.

3. To set apart out of any of the funds of the corporation available
for dividends a reserve or reserves for any proper purpose and to abolish any
such reserve in the manner in which it was created.

4. By a majority of the whole Board of Directors, to designate one
or more committees, each committee to consist of one or more of the directors of
the corporation. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. The by-laws may provide that in the
absence or disqualification of a member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, or in the by-laws of the corporation,
shall have and may exercise all the powers and authority of the board of
directors in the management of the business and affairs of the corporation, and
may authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have the power or authority in reference
to amending the Certificate of Incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, recommending
to the stockholders a dissolution of the corporation or a revocation of a
dissolution, or amending the by-laws of the corporation; and, unless the
resolution or by-laws expressly so provide, no such

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<PAGE>

committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.

5. When and as authorized by the stockholders in accordance with
law, to sell, lease or exchange all or substantially all of the property and
assets of the corporation, including its good will and its corporate franchises,
upon such terms and conditions and for such consideration, which may consist in
whole or in part of money or property including shares of stock in, and/or other
securities of, any other corporation or corporations, as its board of directors
shall deem expedient and for the best interests of the corporation.

ARTICLE VII

Elections of directors need not be by written ballot unless the by-
laws of the corporation shall so provide.

ARTICLE VIII

Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the by-laws of the corporation.

ARTICLE IX

The corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.

ARTICLE X

1. Limitation of Liability. To the fullest extent permitted by the
-----------------------
General Corporation Law of the State of Delaware as the same exists or as may
hereafter be amended, a director of the corporation shall not be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director.

2. Amendments. Neither any amendment nor repeal of this Article X,
----------
nor the adoption of any provision of the corporation's Certificate of
Incorporation inconsistent with this Article X, shall eliminate or reduce the
effect of this Article X, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article X, would accrue or
arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.

ARTICLE XI

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<PAGE>

1. Every person who is or was a director or officer of the
corporation shall be indemnified by the corporation to the fullest extent
allowed by Section 145 of the Delaware General Corporation Law against all
liabilities and expenses imposed upon or incurred by that person in connection
with any proceeding in which that person may be made, or threatened to be made,
a party, or in which that person may become involved by reason of that person
being or having been a director or officer or of serving or having served in any
capacity with any other enterprise at the request of the corporation, whether or
not that person is a director or officer or continues to serve the other
enterprise at the time the liabilities or expenses are imposed or incurred.

2. To the fullest extent permitted by applicable law, the
corporation is authorized to provide indemnification of (and advancement of
expenses to) agents of the corporation (and any other persons to which Delaware
law permits the corporation to provide indemnification) through bylaw
provisions, agreements with such agents or other persons, votes of stockholders
or disinterested directors or otherwise, in excess of the indemnification and
advancement otherwise permitted by Section 145 of the Delaware General
Corporation Law, subject only to limits created by applicable Delaware law
(statutory or non-statutory), with respect to actions for breach of duty to the
corporation, its stockholders and others.

ARTICLE XII

The following provisions shall be effective immediately after the
corporation consummates the closing of a sale of shares of Common Stock made
pursuant to a firm commitment underwritten public offering of Common Stock in
which (i) the gross proceeds received by the corporation from such public
offering are at least ten million dollars and (ii) the price paid by the public
for such shares is at least $9.50:

1. No action shall be taken by the shareholders of the corporation
except at an annual or special meeting of the stockholders called in accordance
with the By-laws of the corporation and no action shall be taken by the
stockholders by written consent.

2. Upon the later of the date on which this Restated Certificate of
Incorporation is filed with the Secretary of State of Delaware and the date on
which this Article XII becomes effective in accordance with its terms (such
later date being referred to herein as the "Effective Date"), the Board of
Directors of the corporation shall be divided into three classes, the respective
terms of office of which shall end in successive years . The number of directors
on the Board shall be determined in accordance with the by-laws of the
corporation. The number of directors in each class shall be as nearly equal as
possible, except that no director shall be moved from one class to another class
in order to attain equality or near equality in the size of the respective
classes. Such classes shall be designated as "Class I", "Class II" and "Class
III". Unless they are elected to fill vacancies or elected pursuant to the next
paragraph, the directors in each class shall hold office until the third
successive annual meeting of shareholders after their election and until their
successors shall have qualified, such that at each annual meeting of
shareholders only one class of directors shall be elected. In the event that a
director is elected to fill a vacancy, the term of such director shall expire at
the next annual meeting of shareholders.

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<PAGE>

At the meeting of shareholders at which this Restated Certificate of
Incorporation was adopted by the shareholders of the corporation, the
shareholders of the corporation elected directors and designated which of the
elected directors shall serve in each of the classes specified above as of the
Effective Date, the Class I directors to serve a one year term initially, the
Class II directors to serve a two year term initially and the Class III
directors to serve a three year term initially (with all Classes thereafter
being elected for three year terms). If, on the Effective Date, a person elected
as a director at such meeting remains on the Board, such person shall serve in
the Class so designated by the shareholders at such meeting. If any person so
elected ceases to serve on the Board prior to the Effective Date (such person, a
"Vacating Director") and the Board appoints another person (the "New Director")
to fill the vacancy of the Vacating Director, the term of the New Director shall
expire at the next annual meeting of shareholders.

Notwithstanding any provision herein to the contrary, the provisions
of this Article XII, including without limitation this paragraph, shall not be
amended unless any such amendment is approved by holders of at least two thirds
of the outstanding capital stock of each class of capital stock entitled to vote
thereon.

IN WITNESS WHEREOF, Bionx Implants, Inc. has caused this certificate
to be signed by David W. Anderson, its President, and Michael J. O'Brien, its
Secretary, this 24th day of February, 1997.

/s/ David W. Anderson
___________________________________
David W. Anderson, President

/s/ Michael J. O'Brien
___________________________________
Michael J. O'Brien, Secretary

-22-

<PAGE>

Exhibit 4.1

NUMBER [LOGO] BIONX SHARES
IMPLANTS inc.

INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE

CUSIP 09064Q 10 6
SEE REVERSE FOR CERTAIN DEFINITIONS

- --------------------------------------------------------------------------------
THIS CERTIFIES THAT

is the owner of
- --------------------------------------------------------------------------------

FULLY-PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.0019 PAR VALUE, OF

BIONX IMPLANTS, INC., transferable on the books of the Corporation by the holder
hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be held subject to all the provisions of the
Certificate of Incorporation, as amended, and the By-Laws of the Corporation, as
amended (copies of which are on file at the office of the Transfer Agent), to
all of which the holder of this Certificate by acceptance hereof assents. This
Certificate is not valid unless countersigned and registered by the Transfer
Agent and Registrar.

WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.

Dated:

/s/ Michael J. O'Brien /s/ David W. Anderson
- ---------------------- [SEAL OF BIONX IMPLANTS, INC.] ---------------------
Michael J. O'Brien David W. Anderson
Vice President President and
and Chief Financial Chief Executive
Officer Officer

Countersigned and Registered:
Stocktrans, Inc.
7 East Lancaster Avenue
Ardmore, PA 19003

Transfer Agent and Registrar

- --------------------
Authorized Signature
<PAGE>

BIONX IMPLANTS, INC.

The Corporation will furnish to any stockholder, upon request and
without charge, a full statement of the powers, designations, preferences and
relative, participating, optional, or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

TEN COM - as tenants in common UNIF GIFT MIN ACT- Custodian
------ -------
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right
of survivorship and not as under Uniform Gifts to
tenants in common Minors Act
------------
(State)

Additional abbreviations may also be used though not in the above list.

For value received, hereby sell, assign and transfer unto
----------------------

PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of assignee

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

- --------------------------------------------------------------------------------
Shares
- ----------------------------------------------------------------------
of the Common Stock represented by the within Certificate, and do hereby
irrevocable constitute and appoint
----------------------------------------------

- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named Corporation
with full power of substitution in the premises.

Dated
------------------------------

------------------------------------------------
SIGNATURE

Signature Guaranteed By:

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

- -----------------------------------------
Banker or Member Firm of
a Stock Exchange

Signature(s) Guaranteed:

- -------------------------------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEM-
BERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17AD-15.

NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.

<PAGE>

EXHIBIT 10.2

BIONX IMPLANTS, INC.
1996 STOCK OPTION/STOCK ISSUANCE PLAN
(AS AMENDED THROUGH _______, 1997)

ARTICLE ONE

GENERAL PROVISIONS
------------------

I. PURPOSE OF THE PLAN

This 1996 Stock Option/Stock Issuance Plan is intended to promote the
interests of Bionx Implants, Inc., a Delaware corporation, by providing eligible
persons with the opportunity to acquire a proprietary interest, or otherwise
increase their proprietary interest, in the Corporation as an incentive for them
to remain in the service of the Corporation.

Capitalized terms shall have the meanings assigned to such terms in
the attached Appendix.

II. STRUCTURE OF THE PLAN

A. The Plan shall be divided into four separate equity programs:

(i) the Discretionary Option Grant Program under which eligible
persons may, at the discretion of the Plan Administrator, be granted
options to purchase shares of Common Stock,

(ii) the Salary Investment Option Grant Program under which
eligible employees may elect to have a portion of their base salary
invested each year in options to purchase shares of Common Stock,

(iii) the Stock Issuance Program under which eligible persons
may, at the discretion of the Plan Administrator, be issued shares of
Common Stock directly, either through the immediate purchase of such shares
or as a bonus for services rendered the Corporation (or any Parent or
Subsidiary), and

(iv) the Automatic Option Grant Program under which Eligible
Directors shall automatically receive option grants at periodic intervals
to purchase shares of Common Stock.

B. The provisions of Articles One and Six shall apply to all equity
programs under the Plan and shall accordingly govern the interests of all
persons under the Plan.
<PAGE>

III. ADMINISTRATION OF THE PLAN

A. Each Plan Administrator shall, within the scope of its
administrative functions under the Plan, have full power and authority (subject
to the provisions of the Plan) to establish such rules and regulations as it may
deem appropriate for proper administration of the Discretionary Option Grant,
Salary Investment Option Grant and Stock Issuance Programs and to make such
determinations under, and issue such interpretations of, the provisions of such
programs and any outstanding options or stock issuances thereunder as it may
deem necessary or advisable. Decisions of the Plan Administrator within the
scope of its administrative functions under the Plan shall be final and binding
on all parties who have an interest in the Discretionary Option Grant, Salary
Investment Option Grant or Stock Issuance Program under its jurisdiction or any
option or stock issuance thereunder.

C. Administration of the Automatic Option Grant Program shall be
self-executing in accordance with the terms of that program, and no Plan
Administrator shall exercise any discretionary functions with respect to option
grants made thereunder.

IV. ELIGIBILITY

A. The persons eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs are as follows:

(i) Employees;

(ii) non-employee members of the Board or of the board of
directors of any Parent or Subsidiary;

(ii) consultants and other independent advisors who provide
services to the Corporation (or any Parent or Subsidiary).

B. Only Employees shall be eligible to participate in the Salary
Investment Option Grant Program.

C. Only non-employee members of the Board shall be eligible to
participate in the Automatic Option Grant Program.

D. Each Plan Administrator shall, within the scope of its
administrative jurisdiction under the Plan and subject to the terms and
conditions of the Plan, have full authority to determine, (i) with respect to
the option grants under the Discretionary Option Grant and Salary Investment
Option Grant Programs, which eligible persons are to receive option grants, the
time or times at which such option grants are to be made, the number of shares
to be covered by each such grant, the status of the granted option as either an
Incentive Option or a Non-Statutory Option, the time or times at which each
option is to become exercisable, the vesting schedule (if any) applicable to the
option shares and the maximum term for which the option is to

-2-
<PAGE>

remain outstanding and (ii) with respect to stock issuances under the Stock
issuance Program, which eligible persons are to receive stock issuances, the
time or times when such issuances are to be made, the number of shares to be
issued to each Participant, the vesting schedule (if any) applicable to the
issued shares and the consideration to be paid by the Participant for such
shares.

E. The Plan Administrator shall have the absolute discretion either
to grant options in accordance with the Discretionary Option Grant and/or Salary
Investment Option Grant Program or to effect stock issuances in accordance with
the Stock Issuance Program.

F. The individuals eligible to participate in the Automatic Option
Grant Program shall be those individuals who first become non-employee Board
members after the Effective Conversion/IPO Date, whether through appointment by
the Board or election by the Corporation's stockholders, and those individuals
who continue to serve as non-employee Board members after the Effective
Conversion/IPO Date. A non-employee Board member who has previously been in the
employ of the Corporation (or any Parent or Subsidiary) shall not be eligible to
receive an option grant under the Automatic Option Grant Program at the time he
or she first becomes a non-employee Board member; any such individual shall be
eligible to receive periodic option grants under the Automatic Option Grant
Program upon his or her continued service as a non-employee Board member for a
period of at least one year after or she ceases serving as an Employee, but in
no event prior to the Effective Conversion/IPO Date.

V. STOCK SUBJECT TO THE PLAN

A. The stock issuable under the Plan shall be shares of authorized
but unissued or reacquired Common Stock, including shares repurchased by the
Corporation on the open market. The maximum number of shares of Common Stock
which may be issued over the term of the Plan shall not exceed 850,000 shares
(as adjusted for the Corporation's 1 for 1.9 reverse stock split effected in
February 1997), except that prior to the Effective Conversion Date, the
Corporation shall not issue, or grant rights which may obligate the Corporation
to issue, more than 498,753 shares (as adjusted for the Corporation's 1 for 1.9
reverse stock split effected in February 1997) pursuant to the Plan.

B. No one person participating in the Plan may receive options,
separately exercisable stock appreciation rights and direct stock issuances for
more than 278,947 shares of Common Stock (as adjusted for the Corporation's 1
for 1.9 reverse stock split effected in February 1997) per calendar year.

C. Shares of Common Stock subject to outstanding options shall be
available for subsequent issuance under the Plan to the extent (i) the options
expire or terminate for any reason prior to exercise in full or (ii) the options
are canceled in accordance with the cancellation-regrant provisions of Article
Two. Unvested shares issued under the Plan and subsequently canceled or
repurchased by the Corporation at the original issue price paid per share shall
be added back to the number of shares of Common Stock available for subsequent
issuance under the Plan. However, should the exercise price of an option under
the Plan be paid with shares of Common Stock in accordance with the provisions
of the Plan or should shares of

-3-
<PAGE>

Common Stock otherwise issuable under the Plan be withheld by the Corporation in
satisfaction of the withholding taxes incurred in connection with the exercise
of an option or the vesting of a stock issuance under the Plan, then the number
of shares of Common Stock available for issuance under the Plan shall be reduced
by the gross number of shares for which the option is exercised or which vest
under the stock issuance, and not by the net number of shares of Common Stock
issued to the holder of such option or stock issuance.

D. Should any change be made to the Common Stock by reason of any
stock split, stock dividend, recapitalization, combination of shares, exchange
of shares or other change affecting the outstanding Common Stock as a class
without the Corporation's receipt of consideration, appropriate adjustments
shall be made to (i) the maximum number and/or class of securities issuable
under the Plan, (ii) the number and/or class of securities for which any one
person may be granted options, separately exercisable stock appreciation rights
and direct stock issuances per calendar year, (iii) the number and/or class of
securities for which automatic option grants are to be subsequently made per
Eligible Director under the Automatic Option Grant program and (iv) the number
and/or class of securities and the exercise price per share in effect under each
outstanding option in order to prevent the dilution or enlargement of benefits
thereunder. The adjustments determined by the Plan Administrator shall be
final, binding and conclusive.

-4-
<PAGE>

ARTICLE TWO

DISCRETIONARY OPTION GRANT PROGRAM
----------------------------------

I. OPTION TERMS

Each option shall be evidenced by one or more documents in the form
approved by the Plan Administrator; provided, however, that each such document
--------
shall comply with the terms specified below. Each document evidencing an
Incentive Option shall, in addition, be subject to the provisions of the Plan
applicable to such options.

A. EXERCISE PRICE.
---------------

1. The exercise price per share shall be fixed by the Plan
Administrator but, subject to Section I, A, 3 of this Article Two and except as
provided in Section I, A, 3 of this Article Two, shall not be less than the Fair
Market Value per share of Common Stock on the option grant date.

2. The exercise price shall become immediately due upon exercise of
the option and shall, subject to the provisions of Section I of Article Six and
the documents evidencing the option, be payable in one or more of the forms
specified below:

(i) cash or check made payable to the Corporation,

(ii) if permitted by the Plan Administrator at the time of
grant or the time of exercise, shares of Common Stock held for the
requisite period necessary to avoid a charge to the Corporation's earnings
for financial reporting purposes and valued at Fair Market Value on the
Exercise Date, or

(iii) after the Effective IPO Date and to the extent the option
is exercised for vested shares, through a special sale and remittance
procedure pursuant to which the Optionee shall concurrently provide
irrevocable written instructions to (a) a Corporation-designated brokerage
firm to effect the immediate sale of the purchased shares and remit to the
Corporation, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
purchased shares plus all applicable Federal, state and local income and
employment taxes required to be withheld by the Corporation by reason of
such exercise and (b) the Corporation to deliver the certificates for the
purchased shares directly to such brokerage firm in order to complete the
sale transaction.

Except to the extent such sale and remittance procedure is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.

-5-
<PAGE>

3. It is acknowledged that prior to the formal adoption of the Plan,
commitments were made to grant options to certain Employees at specified option
exercise prices which, at the time such commitments were made, were intended to
represent the fair market value of the Common Stock. Notwithstanding any
provision herein to the contrary, options covering the following number of
shares (prior to adjustment for the Corporation's 1 for 1.9 reverse stock split
effected in February 1997) may be granted to the following persons at the
following exercise prices (prior to adjustment for the Corporation's 1 for 1.9
reverse stock split effected in February 1997) pursuant to the Discretionary
Option Grant Program:

NAME NUMBER OF SHARES EXERCISE PRICE

David Anderson 526,316 $.475
Stephen Lubischer 75,000 $2.50
John Waters 25,000 $2.50
Lisa Heckman 4,000 $2.50
Liz Eckman 2,500 $2.50
Lou Baal 2,500 $2.50
Michael Martin 2,500 $2.50

B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at
----------------------------
such time or times, during such period and for such number of shares as shall be
determined by the Plan Administrator and set forth in the documents evidencing
the option. Notwithstanding the foregoing, (i) no option shall have a term in
excess of ten (10) years measured from the option grant date and (ii) while
there are any shares of Series A Preferred Stock outstanding, unless each of the
members of the Plan Administrator concurs, no option other than the above-
mentioned options granted to Messrs. Anderson and Lubischer shall vest at a rate
greater than 20% per year, subject to provisions in the Plan relating to
acceleration of options in connection with specific events.

C. EFFECT OF TERMINATION OF SERVICE.
--------------------------------

1. The following provisions shall govern the exercise of any options
held by the Optionee at the time of cessation of Service or death:

(i) Any option outstanding at the time of the Optionee's
cessation of Service for any reason shall remain exercisable for such
period of time thereafter as shall be determined by the Plan Administrator
and set forth in the documents evidencing the option (or, in the absence of
any provision in such documents, for a period of one year after termination
resulting from death or Permanent Disability, for no period of time should
the Optionee's Service be terminated for Misconduct or be terminated by the
Optionee in circumstances which do not constitute Involuntary Termination,
and for 90 days after any other type of termination), but no such option
shall be exercisable after the expiration of the option term.

-6-
<PAGE>

(ii) Any option exercisable in whole or in part by the Optionee
at the time of death may be subsequently exercised by the personal
representative of the Optionee's estate or by the person or persons to whom
the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution.

(iii) During the applicable post-Service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable on the date of the
Optionee's cessation of Service. Upon the expiration of the applicable
exercise period or (if earlier) upon the expiration of the option term, the
option shall terminate and cease to be outstanding for any vested shares
for which the option has not been exercised. However, the option shall,
immediately upon the Optionee's cessation of Service, terminate and cease
to be outstanding to the extent it is not otherwise at that time
exercisable for vested shares.

(iv) Should the Optionee's Service be terminated for Misconduct,
then all outstanding options held by the Optionee shall terminate
immediately and cease to be outstanding.

(v) In the event of an Involuntary Termination following a
Corporate Transaction, the provisions of Section III of this Article Two
shall govern the period for which the outstanding options are to remain
exercisable following the Optionee's cessation of Service and shall
supersede any provisions to the contrary in this Section I.

2. The Plan Administrator shall have the discretion, exercisable
either at the time an option is granted or at any time while the option remains
outstanding, to:

(i) extend the period of time for which the option is to remain
exercisable following the Optionee's cessation of Service from the period
otherwise in effect for that option to such greater period of time as the
Plan Administrator shall deem appropriate, but in no event beyond the
expiration of the option term, and/or

(ii) at any time after the Effective IPO Date, permit the option
to be exercised, during the applicable post-Service exercise period, not
only with respect to the number of vested shares of Common Stock for which
such option is exercisable at the time of the Optionee's cessation of
Service but also with respect to one or more additional installments in
which the Optionee would have vested under the option had the Optionee
continued in Service.

D. STOCKHOLDER RIGHTS. The holder of an option shall have no
------------------
stockholder rights with respect to the shares subject to the option until such
person shall have exercised the option, paid the exercise price and become a
holder of record of the purchased shares.

E. LIMITED TRANSFERABILITY OF OPTIONS. Except as provided in the
----------------------------------
balance of this paragraph, no Option granted under this Plan shall be
transferable otherwise than by will

-7-
<PAGE>

or the law of descent and distribution following the Optionee's death, and
during the lifetime of the Optionee, shall be exercisable only by him or for his
benefit by his attorney in fact or guardian. A Non-Statutory Option may, in
connection with the Optionee's estate plan and with the approval of the Plan
Administrator, be assigned in whole or in part during the Optionee's lifetime to
one or more members of the Optionee's immediate family or to a trust established
exclusively for one or more such family members. The assigned portion may only
be exercised by the person or persons who acquire a proprietary interest in the
option pursuant to the assignment. The terms applicable to the assigned portion
shall be the same as those in effect for the option immediately prior to such
assignment and shall be set forth in such documents issued to the assignee as
the Plan Administrator may deem appropriate.

II. INCENTIVE OPTIONS

The terms specified below shall be applicable to all Incentive
Options. Except as modified by the provisions of this Section II, all the
provisions of Articles One, Two and Six shall be applicable to Incentive
Options. Options which are specifically designated as Non-Statutory Options
when issued under the Plan shall not be subject to the terms of this Section II.
---

A. ELIGIBILITY. Incentive Options may only be granted to Employees.
-----------

B. DOLLAR LIMITATION. The aggregate Fair Market Value (determined as
-----------------
of the respective date or dates of grant) of the shares of Common Stock for
which one or more options granted to any Employee under the Plan (or any other
option plan of the Corporation or any Parent or Subsidiary) may for the first
time become exercisable as Incentive Options during any one (1) calendar year
shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the
extent the Employee holds two (2) or more such options which become exercisable
for the fiat time in the same calendar year, the foregoing limitation on the
exercisability of such options as Incentive Options shall be applied on the
basis of the order in which such options are granted.

C. 10% STOCKHOLDER. If any Employee to whom an Incentive Option is
---------------
granted is a 10% Stockholder, then the exercise price per share shall not be
less than one hundred ten percent (110%) of the Fair Market Value per share of
Common Stock on the option grant date, and the option term shall not exceed five
(5) years measured from the option grant date.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. In the event of any Corporate Transaction, each outstanding option
shall automatically accelerate so that each such option shall, immediately prior
to the effective date of the Corporate Transaction, become fully exercisable for
all of the shares of Common Stock at the time subject to such option and may be
exercised for any or all of those shares as fully-vested shares of Common Stock.
However, an outstanding option shall not so accelerate if and to the extent: (i)
such option is, in connection with the Corporate Transaction, either to be
assumed by the successor corporation (or parent thereof or to be replaced with a
comparable option to

-8-
<PAGE>

purchase shares of the capital stock of the successor corporation (or parent
thereof), (ii) such option is to be replaced with a cash incentive program of
the successor corporation which preserves the spread existing on the unvested
option shares at the time of the Corporate Transaction and provides for
subsequent payout in accordance with the same vesting schedule applicable to
such option or (iii) the acceleration of such option is subject to other
limitations imposed by the Plan Administrator at the time of the option grant.
The determination of option comparability under clause (i) above shall be made
by the Plan Administrator, and its determination shall be final, binding and
conclusive.

B. Immediately following the consummation of the Corporate
Transaction, all outstanding options shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

C. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee upon consummation of such Corporate Transaction
had the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to (i) the number and class of
securities available for issuance under the Plan on both an aggregate and per
individual basis following the consummation of such Corporate Transaction and
(ii) the exercise price payable per share under each outstanding option,
provided the aggregate exercise price payable for such securities shall remain
- --------
the same.

D. Any options which are assumed or replaced in the Corporate
Transaction and do not otherwise accelerate at that time shall automatically
accelerate in the event the Optionee's Service should subsequently terminate by
reason of an Involuntary Termination within eighteen (18) months following the
effective date of such Corporate Transaction. Any options so accelerated shall
remain exercisable until the earlier of (i) the expiration of the option term or
(ii) the expiration of the one (1) year period measured from the effective date
of the Involuntary Termination.

E. Each outstanding option shall automatically accelerate in the
event the Optionee's Service should terminate by reason of an Involuntary
Termination within eighteen (18) months following the effective date of a Change
in Control. Any options so accelerated shall remain exercisable until the
earlier of (i) the expiration of the option term or (ii) the expiration of the
one (1) year period measured from the effective date of the Involuntary
Termination.

F. The portion of any Incentive Option accelerated in connection with
a Corporate Transaction or Change in Control shall remain exercisable as an
Incentive Option only to the extent the applicable One Hundred Thousand Dollar
limitation is not exceeded. To the extent such dollar limitation is exceeded,
the accelerated portion of such option shall be exercisable as a Non-Statutory
Option under the Federal tax laws.

-9-
<PAGE>

G. The grant of options under the Discretionary Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.

IV. CANCELLATION AND REGRANT OF OPTIONS

The Plan Administrator shall have the authority to effect, at any time
and from time to time, with the consent of the affected option holders, the
cancellation of any or all outstanding options under the Discretionary Option
Grant Program and to grant in substitution new options covering the same or
different number of shares of Common Stock but with an exercise price per share
based on the Fair Market Value per share of Common Stock on the new option grant
date.

V. STOCK APPRECIATION RIGHTS

A. The Plan Administrator shall have full power and authority to
grant to selected Optionees tandem stock appreciation rights and/or limited
stock appreciation rights.

B. The following terms shall govern the grant and exercise of tandem
stock appreciation rights:

(i) One or more Optionees may be granted the right, exercisable
upon such terms as the Plan Administrator may establish, to elect between
the exercise of the underlying option for shares of Common Stock and the
surrender of that option in exchange for a distribution from the
Corporation in an amount equal to the excess of (a) the Fair Market Value
(on the option surrender date) of the number of shares in which the
Optionee is at the time vested under the surrendered option (or surrendered
portion thereof) over (b) the aggregate exercise price payable for such
shares.

(ii) No such option surrender shall be effective unless it is
approved by the Plan Administrator either at the time of the actual option
surrender or at an earlier time. If the surrender is so approved, then the
distribution to which the Optionee shall be entitled may be made in shares
of Common Stock valued at Fair Market Value on the option surrender date,
in cash, or partly in shares and partly in cash, as the Plan Administrator
shall in its sole discretion deem appropriate.

(iii) If the surrender of an option is rejected by the Plan
Administrator, then the Optionee shall retain whatever rights the Optionee
had under the surrendered option (or surrendered portion thereof) on the
option surrender date and may exercise such rights at any time prior to the
later of (a) five (5) business days after the receipt of the rejection
notice or (b) the last day on which the option is otherwise exercisable in
accordance with the terms of the documents evidencing such option, but in
no event may such rights be exercised more than ten (10) years after the
option grant date.

-10-
<PAGE>

C. The following terms shall govern the grant and exercise of limited
stock appreciation rights:

(i) One or more Section 16 Insiders may be granted limited
stock appreciation rights with respect to their outstanding options.

(ii) Upon the occurrence of a Hostile Take-Over, each such
individual holding one or more options with such a limited stock
appreciation right shall have the unconditional right (exercisable for a
thirty (30)-day period following such Hostile Take-Over) to surrender each
such option to the Corporation, to the extent the option is at the time
exercisable for vested shares of Common Stock. In return for the
surrendered option, the Optionee shall receive a cash distribution from the
Corporation in an amount equal to the excess of (a) the Take-Over Price of
the shares of Common Stock which are at the time vested under each
surrendered option (or surrendered portion thereof) over (b) the aggregate
exercise price payable for such shares. Such cash distribution shag be
paid within five (5) days following the option surrender date.

(iii) Neither the approval of the Plan Administrator nor the
consent of the Board shall be required in connection with such option
surrender and cash distribution.

(iv) The balance of the option (if any) shall continue in full
force and effect in accordance with the documents evidencing such option.

-11-
<PAGE>

ARTICLE THREE

SALARY INVESTMENT OPTION GRANT PROGRAM

I. OPTION GRANTS

The Plan Administration shall have the sole and exclusive authority to
determine the calendar year or years (if any) for which the Salary Investment
Option Program is to be in effect and to select the Employees eligible to
participate in the Salary Investment Option Grant Program for those calendar
year or years; provided, however, that the Salary Investment Program shall not
be in effect at any time prior to the Effective Conversion Date. Each selected
Employee who elects to participate in the Salary Investment Option Grant Program
must, prior to the start of each calendar year of participation, file with the
Plan Administrator (or its designate) an irrevocable authorization directing the
Corporation to reduce his or her base salary for that calendar year by a
designated multiple of one percent (1%). However, the amount of such salary
reduction must be not less than Five Thousand Dollars ($5,000.00) and must not
be more than the lesser of (i) twenty percent (20%) of his or her rate of base
------
salary for the calendar year or (ii) Twenty Thousand Dollars ($20,000.00). Each
individual who files a proper salary reduction authorization shall automatically
be granted an option under this Salary Investment Option Grant Program on the
first trading day in January of the calendar year for which that salary
reduction is to be in effect.

II. OPTION TERMS

Each option shall be a Non-Statutory Option evidenced by one or more
documents in the form approved by the Plan Administrator; provided, however,
that each such document shall comply with the terms specified below.

A. EXERCISE PRICE.
--------------

1. The exercise price per share shall be thirty-three and one-third
percent (33-1/3%) of the Fair Market Value per share of Common Stock on the
option grant date.

2. The exercise price shall become immediately due upon exercise of
the option and shall be payable in one or more of the alternative forms
authorized under the Discretionary Option Grant Program. Except to the extent
the sale and remittance procedure specified thereunder is utilized, payment of
the exercise price for the purchased shares must be made on the Exercise Date.

B. NUMBER OF OPTION SHARES. The number of shares of Common Stock
-----------------------
subject to the option shall be determined pursuant to the following formula
(rounded down to the nearest whole number):

X = A / (B x 66-2/3%), where

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<PAGE>

X is the number of option shares,

A is the dollar amount of the Optionee's base salary reduction
for the calendar year; and

B is the Fair Market Value per share of Common Stock on the
option grant date.

C. EXERCISE AND TERM OF OPTIONS. The option shall become exercisable
----------------------------
in a series of twelve (12) successive equal monthly installments upon the
Optionee's completion of each calendar month of Service in the calendar year for
which the salary reduction is in effect. Each option shall have a maximum term
of ten (10) years measured from the option grant date.

D. EFFECT OF TERMINATION OF SERVICE. Should the Optionee cease
--------------------------------
Service for any reason while holding one or more options under this Article
Three, then each such option shall remain exercisable, for any or all of the
shares for which the option is exercisable at the time of such cessation of
Service, until the earlier of (i) the expiration of the ten (10)-year option
term or (ii) the expiration of the two (2)-year period measured from the date of
such cessation of Service. Should the Optionee die while holding one or more
options under this Article Three, then each such option may be exercised, for
any or all of the shares for which the option is exercisable at the time of the
Optionee's cessation of Service (less any shares subsequently purchased by the
Optionee prior to death), by the personal representative of the Optionee's
estate or by the person or persons to whom the option is transferred pursuant to
the Optionee's will or in accordance with the laws of descent and distribution.
Such right of exercise shall lapse, and the option shall terminate, upon the
earlier of (i) the expiration of the ten (10)-year option term or (ii) the two
(2)-year period measured from the date of the Optionee's cessation of Service.
However, the option shall, immediately upon the Optionee's cessation of Service
for any reason, terminate and cease to remain outstanding with respect to any
and all shares of Common Stock for which the option is not otherwise at that
time exercisable.

III. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. In the event of any Corporate Transaction while the Optionee
remains in Service, each outstanding option held by such Optionee under this
Salary Investment Option Grant Program shall automatically accelerate so that
each such option shall, immediately prior to the effective date of the Corporate
Transaction, become fully exercisable for all of the shares of Common Stock at
the time subject to such option and may be exercised for any or all of those
shares as fully-vested shares of Common Stock. Each such outstanding option
shall be assumed by the successor corporation (or parent thereof) in the
Corporate Transaction and shall remain exercisable for the fully-vested shares
until the earlier of (i) the expiration of the option term or (ii) the
expiration of the two (2)-year period measured from the date of Optionee's
cessation of Service.

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<PAGE>

B. In the event of a Change in Control while the Optionee remains in
Service, each outstanding option held by such Optionee under this Salary
Investment Option Grant Program shall automatically accelerate so that each such
option shall immediately become fully exercisable for all of the shares of
Common Stock at the time subject to such option and may be exercised for any or
all of such shares as fully-vested shares of Common Stock. The option shall
remain so exercisable until the earlier of (i) the expiration of the option term
or (ii) the expiration of the two (2)-year period measured from the date of the
Optionee's cessation of Service.

C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each of
his or her outstanding option grants. The Optionee shall in return be entitled
to a cash distribution from the Corporation in an amount equal to the excess of
(i) the Take-Over Price of the shares of Common Stock at the time subject to
each surrendered option (whether or not the Optionee is otherwise at the time
vested in those shares) over (ii) the aggregate exercise price payable for such
shares. Such cash distribution shall be paid within five (5) days following
the surrender of the option to the Corporation. No approval or consent of the
Board or any Plan Administrator shall be required in connection with such option
surrender and cash distribution.

D. The grant of options under the Salary Investment Option Grant
Program shall in no way affect the right of the Corporation to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.

IV. REMAINING TERMS

The remaining terms of each option granted under the Salary Investment
Option Grant Program shall be the same as the terms in effect for option grants
made under the Discretionary Option Grant Program.

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<PAGE>

ARTICLE FOUR

STOCK ISSUANCE PROGRAM
----------------------

I. STOCK ISSUANCE TERMS

Shares of Common Stock may be issued under the Stock Issuance Program
at any time after the Effective Conversion Date through direct and immediate
issuances without any intervening option grants. Each such stock issuance shall
be evidenced by a Stock Issuance Agreement which complies with the terms
specified below.

A. PURCHASE PRICE.
--------------

1. The purchase price per share shall be fixed by the Plan
Administrator, but shall not be less than the Fair Market Value per share of
Common Stock on the stock issuance date.

2. Subject to the provisions of Section I of Article Six, shares of
Common Stock may be issued under the Stock Issuance Program for any of the
following items of consideration which the Plan Administrator may deem
appropriate in each individual instance:

(i) cash or check made payable to the Corporation, or

(ii) past services rendered to the Corporation (or any Parent or
Subsidiary).

B. VESTING PROVISIONS.
------------------

1. Shares of Common Stock issued under the Stock Issuance Program
may, in the discretion of the Plan Administrator, be fully and immediately
vested upon issuance or may vest in one or more installments over the
Participant's period of Service or upon attainment of specified performance
objectives. The elements of the vesting schedule applicable to any unvested
shares of Common Stock issued under the Stock Issuance Program, namely:

(i) the Service period to be completed by the Participant or the
performance objectives to be attained,

(ii) the number of installments in which the shares are to vest,

(iii) the interval or intervals (if any) which are to lapse between
installments, and

(iv) the effect which death, Permanent Disability or other event
designated by the Plan Administrator is to have upon the vesting schedule,

-15-
<PAGE>

shall be determined by the Plan Administrator and incorporated into the Stock
Issuance Agreement.

2. Any new, substituted or additional securities or other property
(including money paid other than as a regular cash dividend) which the
Participant may have the right to receive with respect to the Participant's
unvested shares of Common Stock by reason of any stock dividend, stock split,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Corporation's
receipt of consideration shall be issued subject to (i) the same vesting
requirements applicable to the Participant's unvested shares of Common Stock and
(ii) such escrow arrangements as the Plan Administrator shall deem appropriate.

3. The Participant shall have full stockholder rights with respect to
any shares of Common Stock issued to the Participant under the Stock Issuance
Program, whether or not the Participant's interest in those shares is vested.
Accordingly, the Participant shall have the right to vote such shares and to
receive any regular cash dividends paid on such shares.

4. Should the Participant cease to remain in Service while holding
one or more unvested shares of Common Stock issued under the Stock Issuance
Program or should the performance objectives not be attained with respect to one
or more such unvested shares of Common Stock, then those shares shall be
immediately surrendered to the Corporation for cancellation, and the Participant
shall have no further stockholder rights with respect to those shares. To the
extent the surrendered shares were previously issued to the Participant for
consideration paid in cash or cash equivalent (including the Participant's
purchase-money indebtedness), the Corporation shall repay to the Participant the
cash consideration paid for the surrendered shares and shall cancel the unpaid
principal balance of any outstanding purchase-money note of the Participant
attributable to such surrendered shares.

5. The Plan Administrator may in its discretion waive the surrender
and cancellation of one or more unvested shares of Common stock (or other assets
attributable thereto) which would otherwise occur upon the cessation of the
Participant's Service or the non-completion of the vesting schedule applicable
to such shares. Such waiver shall result in the immediate vesting of the
Participant's interest in the shares of Common Stock as to which the waiver
applies. Such waiver may be effected at any time, whether before or after the
Participant's cessation of Service or the attainment or nonattainment of the
applicable performance objectives.

II. CORPORATE TRANSACTION/CHANGE IN CONTROL

A. All of the outstanding repurchase rights under the Stock Issuance
Program shall terminate automatically, and all the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in the event
of any Corporate Transaction, except to the extent (i) those repurchase rights
are assigned to the successor corporation (or parent thereof) in connection with
such Corporate Transaction or (ii) such accelerated vesting is precluded by
other limitations imposed in the Stock Issuance Agreement.

-16-
<PAGE>

B. Any repurchase rights that are assigned in the Corporate
Transaction shall automatically terminate, and all the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in the event
the Participant's Service should subsequently terminate by reason of an
Involuntary Termination within eighteen (18) months following the effective date
of such Corporate Transaction.

C. All of the outstanding repurchase rights under the Stock Issuance
Program shall terminate automatically, and all the shares of Common Stock
subject to those terminated rights shall immediately vest in full, in the event
the Optionee's service should terminate by reason of an Involuntary Termination
within eighteen (18) months following the effective date of a Change in Control.

III. SHARE ESCROW/LEGENDS

Unvested shares may, in the Plan Administrator's discretion, be held
in escrow by the Corporation until the Participant's interest in such shares
vests or may be issued directly to the Participant with restrictive legends on
the certificates evidencing those unvested shares.

-17-
<PAGE>

ARTICLE FIVE

AUTOMATIC OPTION GRANT PROGRAM
------------------------------

I. OPTION TERMS

A. GRANT DATES. Option grants shall be made on the dates specified
-----------
below:

1. Each Eligible Director who is first elected or appointed as a non-
employee Board member after the Effective Conversion/IPO Date shall
automatically be granted, on the date of such initial election or appointment, a
Non-Statutory Option to purchase such number of shares of Common Stock as shall
equal the greater of (x) 3,000 or (y) the number equal to $30,000 divided by the
price at which the Common Stock is first offered to the public in the Company's
initial public offering.

2. On the date of each Annual Stockholders Meeting after the
Effective Conversion/IPO Date, each individual who is to continue to serve as an
Eligible Director shall automatically be granted a Non-Statutory Option to
purchase an additional 3,000 shares of Common Stock, provided such individual
has served as a non-employee Board member for at least six (6) months. There
shall be no limit on the number of such 3,000 share option grants any one
Eligible Director may receive over his or her period of Board service; provided,
however, that the Board may terminate the Automatic Option Grant Program at any
time (in which case no further option grants shall be made pursuant to such
Program).

B. EXERCISE PRICE.
--------------

1. The exercise price per share shall be equal to one hundred percent
(100%) of the Fair Market Value per share of Common Stock on the option grant
date.

2. The exercise price shall be payable in one or more of the
alternative forms authorized under the Discretionary Option Grant Program.
Except to the extent the sale and remittance procedure specified thereunder is
utilized, payment of the exercise price for the purchase shares must be made on
the Exercise Date.

C. OPTION TERM. Each option shall have a term of ten (10) years
-----------
measured from the option grant date.

D. EXERCISE OF OPTIONS. Each grant shall become exercisable for the
-------------------
option shares as follows: 50% on the date of grant, 25% one year after the date
of grant and 25% two years after the date of grant.

E. EFFECT OF TERMINATION OF BOARD SERVICE. The following provisions
--------------------------------------
shall govern the exercise of any options held by the Optionee at the time the
Optionee ceases to serve as a Board member:

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<PAGE>

(i) Should the Optionee cease to serve as a Board member for
any reason (other than death or Permanent Disability), then the Optionee
shall have a six (6)-month period following the date of such cessation of
Board service in which to exercise each such option.

(ii) Should the Optionee become Personally Disabled or die
while the option is outstanding, then the Optionee or the personal
representative of the Optionee's estate or the person or persons to whom
the option is transferred pursuant to the Optionee's will or in accordance
with the laws of descent and distribution shall have a twelve (12)-month
period following the date of the Optionee's cessation of Board service in
which to exercise each such option.

(iii) During the limited post-service exercise period, the
option may not be exercised in the aggregate for more than the number of
vested shares for which the option is exercisable at the time of the
Optionee's cessation of Board service.

(iv) Should the Optionee cease to serve as a Board member by
reason of death or Permanent Disability, then all shares at the time
subject to the option shall immediately vest so that such option may,
during the twelve (12)-month exercise period following the Optionee's death
or Permanent Disability, be exercised for all or any portion of such shares
as fully-vested shares of Common Stock.

(v) In no event shall the option remain exercisable after the
expiration of the option term. Upon the expiration of the limited post-
service exercise period or (if earlier) upon the expiration of the option
term, the option shall terminate and cease to be outstanding for any vested
shares for which the option has not been exercised. However, the option
shall, immediately upon the Optionee's cessation of Board service,
terminate and cease to be outstanding to the extent it is not otherwise at
that time exercisable for vested shares.

II CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER

A. In the event of any Corporate Transaction, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall, immediately
prior to the effective date of the Corporate Transaction, become fully
exercisable for all of the shares of Common Stock at the time subject to such
option and may be exercised for all or any portion of such shares as fully-
vested shares of Common Stock. Immediately following the consummation of the
Corporate Transaction, each automatic option grant shall terminate and cease to
be outstanding, except to the extent assumed by the successor corporation (or
parent thereof).

B. In connection with any Change in Control, the shares of Common
Stock at the time subject to each outstanding option but not otherwise vested
shall automatically vest in full so that each such option shall immediately
prior to the effective date of the Change in

-19-
<PAGE>

Control become fully exercisable for all of the shares of Common Stock at the
time subject to such option and may be exercised for all or any portion of such
shares as fully-vested shares of Common Stock. Each such option shall remain
exercisable for such fully-vested option shares until the expiration or sooner
termination of the option term or the surrender of the option in connection with
a Hostile Take-Over.

C. Upon the occurrence of a Hostile Take-Over, the Optionee shall
have a thirty (30)-day period in which to surrender to the Corporation each
automatic option held by him or her. The Optionee shall in return be entitled
to a cash distribution from the Corporation in an amount equal to the excess of
(i) the Take-Over Price of the shares of Common Stock at the time subject to the
surrendered option (whether or not the Optionee is otherwise at the time vested
in those shares) over (ii) the aggregate exercise price payable for such shares.
Such cash distribution shall be paid within five (5) days following the
surrender of the option to the Corporation. No approval or consent of the Board
or any Plan Administrator shall be required in connection with such option
surrender and cash distribution.

D. Each option which is assumed in connection with a Corporate
Transaction shall be appropriately adjusted, immediately after such Corporate
Transaction, to apply to the number and class of securities which would have
been issuable to the Optionee in consummation of such Corporate Transaction had
the option been exercised immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the exercise price payable per
share under each outstanding option, provided the aggregate exercise price
payable for such securities shall remain the same.

E. The grant of options under the Automatic Option Grant Program
shall in no way affect the right of the Corporation to adjust, reclassify,
reorganize or otherwise change its capital or business structure or to merge,
consolidate, dissolve, liquidate or send or transfer all or any part of its
business or assets.

III. REMAINING TERMS

The remaining terms of each option granted under the Automatic Option
Grant Program shall be the same as the terms in effect for option grants made
under the Discretionary Option Grant Program.

-20-
<PAGE>

ARTICLE SIX

MISCELLANEOUS
-------------

I. FINANCING

A. The Plan Administrator may permit any Optionee or Participant to
pay the option exercise price under the Discretionary Option Grant Program or
the purchase price for shares issued under the Stock Issuance Program by
delivering a promissory note payable in one or more installments. The terms of
any such promissory note (including the interest rate and the terms of
repayment) shall be established by the Plan Administrator in its sole
discretion. Promissory notes may be authorized with or without security or
collateral. In no event may the maximum credit available to the Optionee or
Participant exceed the sum of (i) the aggregate option exercise price or
purchase price payable for the purchased shares plus (ii) any Federal, state and
local income and employment tax liability incurred by the Optionee or the
Participant in connection with the option exercise or share purchase.

B. The Plan Administrator may, in its discretion, determine that one
or more such promissory notes shall be subject to forgiveness by the Corporation
in whole or in part upon such terms as the Plan Administrator may deem
appropriate.

II. TAX WITHHOLDING

A. The Corporation's obligation to deliver shares of Common Stock
upon the exercise of options or stock appreciation rights or upon the issuance
or vesting of such shares under the Plan shall be subject to the satisfaction of
all applicable Federal, state and local income and employment tax withholding
requirements.

B. The Plan Administrator may, in its discretion, provide any or all
holders of Non-Statutory Options or unvested shares of Common Stock under the
Plan (other than the options granted or the shares issued under the Automatic
Option Grant Program) with the right to use shares of Common Stock in
satisfaction of all or part of the Taxes incurred by such holders in connection
with the exercise of their options or the vesting of their shares. Such right
may be provided to any such holder in either or both of the following formats:

(i) Stock Withholding: The election to have the Corporation
-----------------
withhold, from the shares of Common Stock otherwise issuable upon the
exercise of such Non-Statutory Option or the vesting of such shares, a
portion of those shares with an aggregate Fair Market Value equal to the
percentage of the Taxes (not to exceed one hundred percent (100%))
designated by the holder.

(ii) Stock Delivery: The election to deliver to the Corporation,
--------------
at the time the Non-Statutory Option is exercised or the shares vest, one
or more shares of Common Stock previously acquired by such holder (other
than in connection with the option exercise or share vesting triggering the
Taxes) with an aggregate Fair Market

-21-
<PAGE>

Value equal to the percentage of the Taxes (not to exceed one hundred
percent (100%)) designated by the holder.

III. EFFECTIVE DATE AND TERM OF PLAN

A. The Plan shall become effective immediately on the Effective Date.

B. The Board may terminate the Plan at any time. The Plan shall
automatically terminate upon the earliest of (i) September 3, 2006 (ten years
from the date that the Board approved the Plan), (ii) the date on which all
shares available for issuance under the Plan shall have been issued pursuant to
the exercise of options or the issuance of shares (whether vested or unvested)
under the Plan or (iii) the termination of all outstanding options in connection
with a Corporate Transaction. Upon a clause (i) termination or a termination by
the Board, all options and unvested stock issuances outstanding on such date
shall thereafter continue to have full force and effect in accordance with the
provisions of the documents evidencing such options or issuances.

IV. AMENDMENT OF THE PLAN

The Board shall have complete and exclusive power and authority to
amend or modify the Plan in any or all respects. However, no such amendment or
modification shall adversely affect the rights and obligations with respect to
options, stock appreciation rights or unvested stock issuances at the time
outstanding under the Plan unless the Optionee or the Participant consents to
such amendment or modification. In addition, certain amendments may require
stockholder approval pursuant to applicable laws or regulations.

V. USE OF PROCEEDS

Any cash proceeds received by the Corporation from the sale of shares
of Common Stock under the Plan shall be used for general corporate purposes.

VI. REGULATORY APPROVALS

A. The implementation of the Plan, the granting of any option or
stock appreciation right under the Plan and the issuance of any shares of Common
Stock (i) upon the exercise of any option or stock appreciation right or (ii)
under the Stock Issuance Program shall be subject to the Corporation's
procurement of all approvals and permits required by regulatory authorities
having jurisdiction over the Plan, the options and stock appreciation rights
granted under it and the shares of Common Stock issued pursuant to it.

B. No shares of Common Stock or other assets shall be issued or
delivered under the Plan unless and until there shall have been compliance with
all applicable requirements of Federal and state securities laws, including
either (x) the delivery to the Corporation of all investment letters and other
documents required by the Corporation to qualify for an exemption from such
requirements and the filing of any documents required in connection with such

-22-
<PAGE>

exemption or (ii) the filing and effectiveness of a Form S-8 registration
statement for the shares of Common Stock issuable under the Plan and the
satisfaction of all applicable listing requirements of any stock exchange (or
the Nasdaq National Market, if applicable) on which the Common Stock is then
listed for trading.

VII. NO EMPLOYMENT/SERVICE RIGHTS

Nothing in the Plan shall confer upon the Optionee or the Participant
any right to continue in Service for any period of specific duration or
interfere with or otherwise restrict in any way the rights of the Corporation
(or any Parent or Subsidiary employing or retaining such person) or of the
Optionee or the Participant, which rights are hereby expressly reserved by each,
to terminate such person's Service at any time for any reason, with or without
cause.

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<PAGE>

APPENDIX
--------

The following definitions shall be in effect under the Plan:

A. AUTOMATIC OPTION GRANT PROGRAM shall mean the automatic option grant
------------------------------
program in effect under the Plan.

B. BOARD shall mean the Corporation's Board of Directors.
-----

C. CHANGE IN CONTROL shall mean a change in ownership or control of the
-----------------
Corporation effected through either of the following transactions:

(i) the acquisition, directly or indirectly, by any person or related
group of persons (other than the Corporation or a person that directly or
indirectly controls, is controlled by, or is under common control with the
Corporation), of beneficial ownership (within the meaning of Rule 13d-3 of
the 1934 Act) of securities possessing more than fifty percent (50%) of the
total combined voting power of the Corporation's outstanding securities
pursuant to a tender or exchange offer made directly to the Corporation's
stockholders which the Board does not recommend such stockholders to
accept, or

(ii) a change in the composition of the Board over a period of thirty-
six (36) consecutive months or less such that a majority of the Board
members ceases, by reason of one or more contested elections for Board
membership, to be comprised of individuals who either (A) have been Board
members continuously since the beginning of such period or (B) have been
elected or nominated for election as Board members during such period by at
least a majority of the Board members described in clause (A) who were
still in office at the time the Board approved such election or nomination.

D. CODE shall mean the Internal Revenue Code of 1986, as amended.
----

E. COMMON STOCK shall mean the Corporation's common stock, par value
------------
$.001 per share.

F. CORPORATE TRANSACTION shall mean either of the following stockholder
---------------------
approved transactions to which the Corporation is a party, it being understood
that the reorganization described in the Reorganization Agreement dated
September 5, 1996, among the Corporation, the U.S. residents, the Finnish
residents and the other corporations which are parties thereto shall not
constitute a "Corporate Transaction" for purposes of this Plan:

(i) a merger or consolidation in which securities possessing more than
fifty percent (50%) of the total combined voting power of the Corporation's
outstanding securities are transferred to a person or persons different
from the persons holding those securities immediately prior to such
transaction; or

-24-
<PAGE>

(ii) the sale, transfer or other disposition of all or substantially
all of the Corporation's assets in complete liquidation or dissolution of
the Corporation.

G. CORPORATION shall mean Bionx Implants, Inc., a Delaware corporation.
-----------

H. DISCRETIONARY OPTION GRANT PROGRAM shall mean the discretionary option
----------------------------------
grant program in effect under the Plan.

I. EFFECTIVE CONVERSION DATE shall mean the first date (after any shares
-------------------------
of the Series A Preferred Stock are issued) on which there shall be no shares of
Series A Preferred Stock outstanding.

J. EFFECTIVE CONVERSION/IPO DATE shall mean the later of the Effective
-----------------------------
Conversion Date and the Effective IPO Date.

K. EFFECTIVE DATE shall mean the date on which the Plan is approved by
--------------
the shareholders of the Corporation.

L. EFFECTIVE IPO DATE shall mean the date on which the Securities and
------------------
Exchange Commission declares effective a registration statement of the
Corporation relating to the Corporation's initial public offering.

M. ELIGIBLE DIRECTOR shall mean a non-employee Board member eligible to
-----------------
participate in the Automatic Option Grant Program in accordance with the
eligibility provisions of Article One.

N. EMPLOYEE shall mean an individual who is in the employ of the
--------
Corporation (or any Parent or Subsidiary) and is subject to the control and
direction of the employer entity as to both the work to be performed and the
manner and method of performance.

O. EXERCISE DATE shall mean the date on which the Corporation shall have
-------------
received written notice of an option exercise.

P. FAIR MARKET VALUE per share of Common Stock on any relevant date shall
-----------------
be determined in accordance with the following provisions:

(i) If the Common Stock is at the time traded on the Nasdaq National
Market, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question, as such price is reported by
the National Association of Securities Dealers on the Nasdaq National
Market or any successor system. If there is no closing selling price for
the Common Stock on the date in question, then the Fair Market Value shall
be the closing selling price on the last preceding date for which such
quotation exists.

-25-
<PAGE>

(ii) If the Common Stock is at the time listed on any Stock
Exchange, then the Fair Market Value shall be the closing selling price per
share of Common Stock on the date in question on the Stock Exchange
determined by the Plan Administrator to be the primary market for the
Common Stock, as such price is officially quoted in the composite tape of
transactions on such exchange. If there is no closing selling price for the
Common Stock on the date in question, then the Fair Market Value shall be
the closing selling price on the last preceding date for which such
quotation exists.

(iii) If the Common Stock is not traded on the Nasdaq National Market
or any Stock Exchange, Fair Market Value shall be determined by the Plan
Administrator and shall represent the fair market value of one share of
Common Stock.

Q. HOSTILE TAKE-OVER shall mean the acquisition, directly or indirectly,
-----------------
by any person or related group of persons (other than the Corporation or a
person that directly or indirectly controls, is controlled by, or is under
common control with, the Corporation) of beneficial ownership (within the
meaning of Rule 13d-3 of the 1934 Act) of securities possessing more than fifty
percent (50%) of the total combined voting power of the Corporation's
outstanding securities pursuant to a tender or exchange offer made directly to
the Corporation's stockholders which the Board does not recommend such
stockholders to accept.

R. INCENTIVE OPTION shall mean an option which satisfies the requirements
----------------
of Code Section 422.

S. INVOLUNTARY TERMINATION shall mean the termination of the Service of
-----------------------
any individual which occurs by reason of:

(i) such individual's involuntary dismissal or discharge by the
Corporation for reasons other than Misconduct, or

(ii) such individual's voluntary resignation following (A) a change in
his or her position with the corporation which materially reduces his or
her level of responsibility, (B) a reduction in his or her level of
compensation (including base salary, fringe benefits and participation in
corporate-performance based bonus or incentive programs) by more than
fifteen percent (15%) or (C) a relocation of such individual's place of
employment by more than fifty (50) miles, provided and only if such change,
reduction or relocation is effected by the Corporation without the
individual's consent.

T. MISCONDUCT shall mean the commission of any act of fraud, embezzlement
----------
or dishonesty by an Optionee or Participant, any unauthorized use or disclosure
by any such person of confidential information or trade secrets of the
Corporation (or any Parent or Subsidiary), or any other intentional misconduct
by any such person adversely affecting the business or affairs of the
Corporation (or any Parent or Subsidiary) in a material manner. The foregoing
definition shall not be deemed to be inclusive of all the acts or omissions
which the Corporation (or any Parent or Subsidiary) may consider as grounds for
the dismissal or discharge of any Optionee, Participant or other person in the
Service of the Corporation (or any Parent or Subsidiary).

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<PAGE>

U. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended.
--------

V. NON-STATUTORY OPTION shall mean an option not intended to satisfy the
--------------------
requirements of Code Section 422.

W. OPTIONEE shall mean any person to whom an option is granted under the
--------
Discretionary Option Grant, Automatic Option Grant or Salary Investment Option
Grant Program.

X. PARENT shall mean any corporation (other than the Corporation) in an
------
unbroken chain of corporations ending with the Corporation, provided each
corporation in the unbroken chain (other than the Corporation) owns, at the time
of the determination, stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.

Y. PARTICIPANT shall mean any person who is issued shares of Common Stock
-----------
under the Stock Issuance Program.

Z. PERMANENT DISABILITY OR PERMANENTLY DISABLED shall mean the inability
--------------------------------------------
of an Optionee or Participant to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment expected to
result in death or to be of continuous duration of twelve (12) months or more.
However, solely for the purposes of the Automatic Option Grant Program,
Permanent Disability or Permanently Disabled shall mean the inability of the
non-employee Board member to perform his or her usual duties as a Board member
by reason of any medically determinable physical or mental impairment expected
to result in death or to be of continuous duration of twelve (12) months or
more.

AA. PLAN shall mean the Corporation's 1996 Stock Option/Stock Issuance
----
Plan, as set forth in this document.

AB. PLAN ADMINISTRATOR shall mean the Board; provided, however, that (i)
------------------
at any time that any shares of Series A Preferred Stock are outstanding, the
term "Plan Administrator" shall mean a committee of three or more non-employee
members of the Board, one of which members shall be the Series A Preferred Stock
Director if there is a Series A Preferred Director on the Board, and (ii) at any
time on or after the Effective Conversion Date, the term "Plan Administrator"
shall mean any other committee of the Board to the extent that the Board
delegates to such committee any of the responsibilities of the Plan
Administrator hereunder.

AC. SALARY INVESTMENT OPTION GRANT PROGRAM shall mean the salary
--------------------------------------
investment option grant program in effect under the Plan.

AD. SECTION 16 INSIDER shall mean an officer or director of the
------------------
Corporation subject to the short-swing profit liabilities of Section 16 of the
1934 Act.

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<PAGE>

AE. SERIES A PREFERRED STOCK shall mean the first series of the
------------------------
Corporation's preferred stock (par value $.001 per share) established by the
Board.

AF. SERIES A PREFERRED STOCK DIRECTOR shall mean the member of the Board,
---------------------------------
if any, elected solely by the holders of the Series A Preferred Stock; provided,
however, that prior to the first election of such director, the "Series A
Preferred Stock Director" shall be Terral Jordan or such other person as shall
be designated by the holders of the Series A Preferred Stock.

AG. SERVICE shall mean the provision of services to the Corporation (or
-------
any Parent or Subsidiary) by a person in the capacity of an Employee, a non-
employee member of the board of directors or a consultant or independent
advisor, except to the extent otherwise specifically provided in the documents
evidencing the option grant or stock issuance.

AH. STOCK EXCHANGE shall mean either the American Stock Exchange or the
--------------
New York Stock Exchange.

AI. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the
------------------------
Corporation and the Participant at the time of issuance of shares of Common
Stock under the Stock Issuance Program.

AJ. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect
----------------------
under the Plan.

AK. SUBSIDIARY shall mean any corporation (other than the Corporation) in
----------
an unbroken chain of corporations beginning with the Corporation, provided each
corporation (other than the last corporation) in the unbroken chain owns, at the
time of the determination, stock possessing fifty percent (50%) or more of the
total combined voting power of all classes of stock in one of the other
corporations in such chain.

AL. TAKE-OVER PRICE shall mean the greater of (i) the Fair Market Value
--------------- -------
per share of Common Stock on the date the option is surrendered to the
Corporation in connection with a Hostile Take-Over or (ii) the highest reported
price per share of Common Stock paid by the tender offeror in effecting such
Hostile Take-Over. However, if the surrendered option is an Incentive Option,
the Take-Over Price shall not exceed the clause (i) price per share.

AM. TAXES shall mean the Federal, state and local income and employment
-----
tax liabilities incurred by the holder of Non-Statutory Options or unvested
shares of Common Stock in connection with the exercise of such holder's options
or the vesting of his or her shares.

AN. 10% STOCKHOLDER shall mean the owner of stock (as determined under
---------------
Code Section 424(d)) possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Corporation (or any Parent
or Subsidiary).

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<PAGE>

AR. TRANSFEREE shall mean the person or entity to whom an Optionee
----------
transfers all or a portion of his or her options in accordance with the
provisions of Article II, Section I, Subsection E of the Plan.

-29-

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors
Bionx Implants, Inc.:

The audits referred to in our report dated January 24, 1997, except for the
first paragraph of Note 15 which is as of February 24, 1997, included the
related financial statement schedule as of December 31, 1996, and for each of
the years in the three-year period ended December 31, 1996, included in the
registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statement schedule based on our audits. In our
opinion, the financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

We consent to the use of our reports included herein and to the reference of
our firm under the heading "Experts" in the prospectus.

KPMG PEAT MARWICK LLP

Philadelphia, Pennsylvania
April 10, 1997

<PAGE>

EXHIBIT 23.3

CONSENT

We hereby consent to the reference to our firm under the caption "Experts" in
the Registration Statement on Form S-1 to be filed by Bionx Implants, Inc. with
the Securities and Exchange Commission.

KENYON & KENYON

/s/ Richard Mayer
By: _________________________________

Dated: April 10, 1997