ORTHOPEDIC BIOSYSTEMS LTD INC, SB-2/A, 1998-08-12

ORTHOPEDIC BIOSYSTEMS LTD INC
SB-2/A, 1998-08-12
ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1998

REGISTRATION NO. 333-58313
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ORTHOPAEDIC BIOSYSTEMS LTD., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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ARIZONA 3842 86-0752231
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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15990 N. GREENWAY-HAYDEN LOOP, SUITE 100
SCOTTSDALE, ARIZONA 85260
(602) 596-4066
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

D. RONALD YAGODA
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
15990 N. GREENWAY-HAYDEN LOOP, SUITE 100
SCOTTSDALE, ARIZONA 85260
(602) 596-4066
FAX: (602) 596-2180
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
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COPIES TO:

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STEVEN D. PIDGEON, ESQ. FAYE H. RUSSELL, ESQ.
SAMUEL C. COWLEY, ESQ. MICHAEL S. KAGNOFF, ESQ.
MICHAEL B. MALEDON, ESQ. MICHAEL A. BARMETTLER, ESQ.
SNELL & WILMER L.L.P. BROBECK, PHLEGER & HARRISON LLP
ONE ARIZONA CENTER 550 WEST C STREET, SUITE 1300
PHOENIX, ARIZONA 85004-0001 SAN DIEGO, CA 92101
(602) 382-6000 (619) 234-1966
FAX: (602) 382-6070 FAX: (619) 234-3848
</TABLE>

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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
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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, 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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TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) FEE
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Common Stock, no par value..... 2,875,000 $7.00 $20,125,000 $ (3)
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(1) Includes 375,000 shares of Common Stock that the Underwriters have the
option to purchase to cover over-allotments, if any.

(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).
(3) $5,937 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 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.

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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 SUCH STATE.

SUBJECT TO COMPLETION DATED AUGUST 12, 1998

2,500,000 SHARES

[ORTHOPAEDIC BIOSYSTEMS LTD, INC. LOGO]

COMMON STOCK

All of the 2,500,000 shares of Common Stock offered hereby are being sold
by Orthopaedic Biosystems Ltd., Inc. ("OBL" or the "Company"). Prior to this
offering (the "Offering"), there has been no public market for the Common Stock
of the Company. Application has been made for listing of the Common Stock on the
American Stock Exchange under the symbol "OBL." It is currently estimated that
the initial public offering price will be between $6.00 and $7.00 per share. See
"Underwriting," for a discussion of the factors considered in determining the
initial public offering price.

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SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.

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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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PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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Per Share...........................
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Total(3)............................
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(1) Excludes additional compensation to the Underwriters in the form of warrants
(the "Representatives' Warrants") to purchase up to 250,000 shares of Common
Stock to be granted to the representatives for the several underwriters (the
"Representatives"). In addition, the Company has agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended, in connection with this Offering. See "Underwriting."

(2) Before deducting expenses of the Offering, payable by the Company estimated
at $1,050,000, including the Representative's non-accountable expense
allowance. See "Underwriting."

(3) The Company has granted the Underwriters a 45-day option to purchase up to
375,000 additional shares of Common Stock on the same terms and conditions
as the securities offered hereby solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be $ ,
$ , and $ , respectively. See "Underwriting."

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

The shares of Common Stock are being offered by the Underwriters named
herein, subject to prior sale, when, as, and if delivered to and accepted by the
Underwriters, and subject to the right of the Underwriters to reject any order
in whole or in part and certain other conditions. It is expected that delivery
of the shares will be made against payment therefor at the offices of Cruttenden
Roth Incorporated, or the facilities of the Depository Trust Company, on or
about , 1998.

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CRUTTENDEN ROTH JOSEPHTHAL & CO. INC.
I N C O R P O R A T E D

THE DATE OF THIS PROSPECTUS IS , 1998
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This page includes an enlarged drawing of one of the Company's suture
anchors; the following language is printed below: "The recently released
OBLRC5(TM) preloaded suture anchor, featuring the Company's proprietary
double-helix high/low thread pattern." This page also includes a drawing of an
inserted anchor with sutures attached; the following language is printed below:
"The Company's suture anchors are designed to provide enhanced pull-out
strength, thus allowing multiple sutures per anchor." This page also includes a
drawing of a rotator cuff with a suture anchor being passed through the tissue;
the following language is printed below: "The shoulder area: Depicts a rotator
cuff repair."

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE AMERICAN STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

OBL(TM), PEBA(R), RC5(TM), AND DRYKNOT(TM), AMONG OTHER MARKS, ARE TRADEMARKS OF
THE COMPANY. OTHER TRADEMARKS APPEARING HEREIN ARE TRADEMARKS OF THEIR
RESPECTIVE OWNERS.

EXCEPT WHERE OTHERWISE NOTED, ALL STATISTICS REGARDING THE ORTHOPAEDIC MARKET
ARE DERIVED FROM MEDICAL DATA INTERNATIONAL.
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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus assumes (i) a
two-for-three reverse split of outstanding shares of Common Stock which was
effected on August 10, 1998, (ii) conversion of all outstanding shares of Class
A Convertible Preferred Stock (the "Preferred Stock") of the Company into
581,541 shares of Common Stock and conversion of warrants to purchase shares of
Preferred Stock into warrants to purchase an aggregate of 301,170 shares of
Common Stock, which will occur simultaneously with the payment to the Company of
the purchase price of the Common Stock sold in this Offering, and (iii) no
exercise of the Underwriters' over-allotment option, the Representatives'
Warrants or currently outstanding options or warrants. Investors should
carefully consider the information set forth herein under the heading "Risk
Factors" and are urged to read this Prospectus in its entirety.

THE COMPANY

Orthopaedic Biosystems Ltd., Inc. designs, develops and markets innovative
medical devices that are primarily used in orthopaedic surgery, including sports
medicine and minimally invasive arthroscopic procedures. The Company's current
product offerings consist of a variety of suture anchors, an array of
arthroscopic instruments and a system of surgical screws, all of which are
designed for specific orthopaedic surgical applications. The Company believes
that its suture anchors, which have been primarily used for rotator cuff repair
of the shoulder and feature a patented high/low thread pattern, provide surgeons
with a variety of intra-operative options and lead to improved surgical
outcomes. By leveraging the competitive advantages of its shoulder products, the
Company will be positioned to further penetrate markets for orthopaedic
procedures involving the knee, hand and foot. In addition, the Company is
applying its technology to opportunities outside of orthopaedics through
strategic partnerships for applications in urology and dentistry, and is also
pursuing other strategic opportunities in plastic surgery, spinal surgery and
trauma.

The Company believes its suture anchors, which are used by surgeons to
reattach torn or loose soft tissue, such as ligaments and tendons, to bones,
deliver a unique combination of competitive advantages including (i) enhanced
pull-out strength, (ii) ease of insertion, (iii) multiple sutures per anchor,
and (iv) revisability. The Company's suture anchors use a proprietary high/low
thread pattern that provides superior pull-out strength and low insertion torque
in soft, cancellous bone. The enhanced pull-out strength allows the Company's
anchors to support multiple sutures, which distributes the load of the suture
over a greater area of tissue, providing the surgeon the option to use fewer
anchors per procedure. Also, unlike many competitive products, the Company's
anchors are fully revisable which is a significant advantage when a suture
breaks and needs to be replaced or when the anchor needs to be adjusted or
repositioned. Further, certain of the Company's suture anchors are pre-loaded in
an insertion instrument to facilitate ease of use and to reduce surgery time and
associated costs.

The Company believes that the brand awareness associated with its suture
anchor products will accelerate the introduction and acceptance of additional
products now under development. The Company is developing a variety of
innovative medical devices including (i) a knot substitute that could eliminate
the difficult and time-consuming task of remote surgical knot-tying, (ii)
bio-absorbable suture anchors which would gradually degrade and absorb into
surrounding tissue, (iii) a comprehensive line of knee products for use in
meniscal and anterior cruciate ligament ("ACL") repair procedures, and (iv)
"next-generation" fixation products that will be designed to facilitate the
re-attachment of soft tissue to other soft tissue.

active adult population. The United States Consumer Products Safety Commission
estimates that the age group between 45 and 54 is likely to increase by 73%
between 1990 and 2010. This growth, coupled with increased physical activity
among adults, has led to a 60% rise in emergency room visits resulting from
injuries related to athletic activity from 1986 to 1996.

The sports medicine/arthroscopy market segment focuses on tissue-to-bone
and tissue-to-tissue repair. Some of the most common injuries within this
segment include torn rotator cuffs of the shoulder and ACLs. When ligaments or
tendons are detached from the bone as a result of trauma, physical activity, or
degenerative disease, a tissue-to-bone repair may be necessary. When the injury
involves a tear or rupture of the ligament or tendon, repair can often be
achieved by suturing these tissues or completely replacing these tissue
structures with tissue grafts. Tissue fixation devices have been developed to
perform repairs to the shoulder, knee, elbow, wrist and ankle. As a result of
the size, density and number of bones in these joints, a wide variety of tissue
fixation devices are required.

The Company's objective is to achieve leading positions in selected markets
within the sports medicine/arthroscopy segment of the orthopaedic industry. The
Company intends to pursue this objective by increasing the number and types of
surgical procedures using the Company's products, such as procedures involving
the knee, hand and foot, and by increasing the number of the Company's products
used in each surgical procedure. To accomplish this, the Company intends to
pursue the following strategies: (i) expand its core suture anchor business by
increasing sales and marketing efforts directed to its core shoulder surgery
market segment, (ii) continue to develop brand awareness with leading surgeons
by developing or acquiring rights to additional complementary products, (iii)
apply the Company's technology to additional applications both within and
outside of the sports medicine/arthroscopy market segments, (iv) develop new
technologies and materials to address specific surgical needs in tissue
fixation, and (v) pursue strategic alliances and acquisitions to facilitate
product development and distribution.

The Company was originally formed in Arizona as a limited partnership in
July 1993 and was subsequently incorporated in Arizona in February 1994. The
Company's principal executive offices are located at 15990 N. Greenway-Hayden
Loop, Suite 100, Scottsdale, Arizona 85260, and its telephone number is (602)
596-4066.

THE OFFERING

Common Stock Outstanding before the
Offering............................ 3,523,365 shares(1)

Common Stock Offered................ 2,500,000 shares

Common Stock Outstanding after the
Offering............................ 6,023,365 shares(1)

Use of Proceeds..................... Research and development, increased
sales and marketing efforts, potential
future acquisitions, capital
expenditures, repayment of related
party indebtedness and working capital
and general corporate purposes. See
"Use of Proceeds."

Risk Factors........................ Investment in the Common Stock involves
a high degree of Risk. See "Risk
Factors."

Proposed American Stock Exchange
symbol.............................. OBL
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(1) Excludes 516,690 and 301,170 shares of Common Stock issuable upon exercise
of stock options and warrants, respectively, outstanding as of August 10,
1998, at a weighted average exercise price of $2.47 and $3.00, respectively,
per share, of which options and warrants to purchase 305,683 and 301,170
shares, respectively, were then exercisable. Includes 26,667 shares of
Common Stock issued upon exercise of options subsequent to June 30, 1998.
Gives effect to the conversion of all outstanding shares of Preferred Stock
into 581,541 shares of Common Stock. See "Capitalization,"
"Management -- Summary of Executive Compensation" and "Description of
Capital Stock -- Warrants and Stock Options."

4
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)

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<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
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1996 1997 1997 1998
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SELECTED STATEMENT OF OPERATIONS DATA:
Net revenues........................................... $ 783 $ 1,482 $ 695 $1,208
Cost of revenues....................................... 486 825 340 538
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Gross profit......................................... 297 657 355 670
Research and development expenses...................... 152 273 91 183
General and administrative expenses.................... 376 821 290 760
Sales and marketing expenses........................... 264 979 429 529
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Operating loss....................................... (495) (1,416) (455) (802)
Other income (expense), net............................ 277 30 (3) (73)
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Net loss............................................... $ (218) $(1,386) $ (458) $ (875)
====== ======= ====== ======
Basic and diluted net loss per share................... $(0.08) $ (0.49) $(0.16) $(0.30)
Weighted average shares outstanding.................... 2,728 2,803 2,776 2,910
</TABLE>

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<CAPTION>
JUNE 30, 1998
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DECEMBER 31, PRO FORMA
1997 ACTUAL AS ADJUSTED(1)
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SELECTED BALANCE SHEET DATA:
Cash.................................................... $ 741 $ 25 $12,825
Working capital (deficit)............................... 590 (392) 13,482
Total assets............................................ 2,284 2,193 14,993
Total liabilities....................................... 1,230 1,993 919
Shareholders' equity.................................... 1,053 201 14,074
</TABLE>

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(1) On a pro forma basis, giving effect to the conversion of all outstanding
shares of Preferred Stock into 581,541 shares of Common Stock and adjusted
to reflect the sale by the Company of 2,500,000 shares of Common Stock in
this Offering at an assumed initial offering price of $6.50 per share and
the application of the net proceeds therefrom, including the application of
$1,100,000 of the proceeds for repayment of related party indebtedness of
$1,073,750, net of discount, of the Company. See "Use of Proceeds,"
"Capitalization," and Notes to Financial Statements.

5
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RISK FACTORS

Investment in the Common Stock offered hereby involves certain risks. In
addition to the other information contained in this Prospectus, the following
risk factors should be carefully considered in evaluating the Company and its
business prospects before purchasing shares of the Common Stock offered hereby.

HISTORY OF LOSSES; ACCUMULATED DEFICIT; PROBABILITY OF SUBSTANTIAL ADDITIONAL
FUTURE LOSSES;
UNCERTAINTY OF FUTURE PROFITABILITY

The Company has been in existence less than five years and has incurred a
net loss in each year since inception. The Company incurred operating losses of
$356,000, $495,000, and $1,416,000 for the years 1995, 1996 and 1997,
respectively. In addition, the Company expects to incur a net loss in 1998. Such
losses are due in part to expenses associated with the Company's sales and
marketing, overhead, research and development, prosecution of patents, and
compliance with United States Food and Drug Administration ("FDA") and other
regulatory requirements. As a result, accumulated deficit has increased from
$706,000 at December 31, 1995 to $3,185,000 at June 30, 1998. The Company's
financial statements for the year ended December 31, 1997 were audited by the
Company's independent auditors, whose report includes an explanatory paragraph
which describes an uncertainty about the Company's ability to continue as a
going concern. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes to Financial Statements.

The Company's future net revenue is difficult to predict as a result of
several factors including rapidly changing technology, regulatory restrictions,
the Company's limited time in business, and fluctuations in the number of
surgical procedures performed. The Company's future revenue and profitability
will be critically dependent on its ability to expand applications for its
current product lines both within the sports medicine and arthroscopy segments
of the orthopaedic market and other related specialities and to develop new
products. There is no assurance the Company will successfully expand the
applications of its current product lines or develop new products. Expenses
associated with developing unsuccessful products are not recoverable. See
"-- Uncertainty of Market Acceptance" and "-- Limited Product Line; Customer
Concentration." The Company is likely to continue to incur significant operating
losses in the future as the Company continues its product development efforts
and expands its marketing, sales and distribution capabilities and there is no
assurance the Company will ever be profitable.

UNCERTAINTY OF MARKET ACCEPTANCE

The Company's future success depends significantly on increasing
penetration of existing markets, acceptance of the Company's products in new
markets, and the development of new products for its existing and future
markets. There can be no assurance that any of the Company's existing or future
products will achieve or maintain market acceptance among surgeons, patients or
healthcare payors, even if reimbursement and necessary regulatory clearances or
approvals are obtained. Failure of some or all of the Company's products to
achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. To date,
the Company's marketing efforts have been directed mainly to the sports
medicine/arthroscopy market for bone-to-bone and tissue-to-bone fixation
devices. The Company has limited experience in establishing marketing or
distribution channels in other clinical areas. With respect to its current
products, the Company was not the first to market devices for the attachment of
soft tissue to bone. To succeed, the Company must both take market share away
from its existing competitors and create new demand for its products. The size
of the market for the Company's products will depend in part on the Company's
ability to persuade surgeons that its products offer advantages over existing
means of attaching soft tissue to other tissue or bone and that its fixation
devices could be used for a wider variety of clinical applications. In addition,
the Company will need to demonstrate that its products are cost-effective and
convenient to use and that the techniques for their use are relatively
straightforward and simple. There can be no assurance the market for the
Company's products will grow or that the Company's products will be accepted for
orthopaedic procedures not currently using fixation devices and in markets
outside of the sports medicine/arthroscopy market. See "Business."
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COMPETITION

The medical device industry is highly competitive and characterized by
innovation and rapid technological change. Among the Company's principal
competitors are Mitek Surgical Products, Inc., a division of Johnson & Johnson,
Inc.; Zimmer, Inc., a division of Bristol-Myers Squibb Company; Dyonics, Inc., a
subsidiary of Smith & Nephew, Inc.; Innovasive Devices, Inc.; Arthrotek Inc., a
division of Biomet, Inc.; Arthrex, Inc.; Linvatec Corporation, a division of
Conmed Corporation; and Bionx Implants, Inc. Each of these competitors has
significantly greater financial, manufacturing, marketing, distribution, and
technical resources than the Company and a greater share of the tissue fixation
market. These companies are better capitalized for extended research and
development, and may be able to withstand price pressures and deep discounting
over extended periods of time better than the Company. In order for the Company
to meet its projected future sales, the Company will have to take market share
away from the market leaders. There can be no assurance that the Company will be
able to gain such market share. Moreover, there can be no assurance that the
Company's competitors will not succeed in developing technologies and products
that are more effective or less costly than those developed by the Company, or
that any such products would not render the Company's products obsolete or not
competitive.

The healthcare industry is undergoing rapid change and consolidation as
healthcare systems merge to effect cost savings and operating efficiencies. In
addition, a number of large, national buying consortiums have formed to engage
in group purchasing of medical supplies and services in an effort at cost
containment for member hospital systems and healthcare providers. These
consolidated systems and large purchasing organizations are likely to apply
pressure to manufacturers and distributors of medical devices to reduce the
purchase prices of their goods. As a result, the Company may be forced to lower
prices in response to those pressures in order for its products to be approved
for purchase by those organizations, which could have a material adverse effect
on the Company's business, financial condition, and results of operations. See
"Business -- Competition."

LIMITED PRODUCT LINE; CUSTOMER CONCENTRATION

A substantial portion of the Company's revenues to date have been derived
from the Company's core suture anchor products for use in open shoulder repair
applications. As of the date of this Prospectus, the uses of the PeBA and OBL
RC5 suture anchor line have been cleared by the FDA for certain applications
involving the shoulder, knee, ankle, wrist, elbow, and pelvis. To date, however,
the Company has had relatively little clinical experience with joints other than
the shoulder. In addition, while the Company's future prospects depend in part
on the use of its products in arthroscopic and less invasive procedures, most of
the clinical experience involving the Company's products has been in open
surgery procedures. For the fiscal year ended December 31, 1997, and the six
months ended June 30, 1998, the Company's suture anchors and related instruments
accounted for approximately 85.5% and 88.1%, respectively, of the Company's
revenues. In addition, for the fiscal year ended December 31, 1997, and the six
months ended June 30, 1998, approximately 20.9% and 12.5%, respectively, of the
Company's net revenues were derived from sales to Mentor. The Company expects
that most of its revenue in the foreseeable future will continue to be derived
from sales of its suture anchor products. Failure of the suture anchor products
to maintain and gain market acceptance or the loss of any material customer,
such as Mentor, would have a material adverse affect on the Company's business,
financial condition, and results of operations. See "-- Uncertainties Relating
to Strategic Partners," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business -- Products and Technology," and
"Business -- Strategic Relationships."

NO ASSURANCE OF SUCCESSFUL IMPLEMENTATION OF BUSINESS STRATEGY

The Company's business strategy is to (i) expand its core suture anchor
business by increasing sales and marketing efforts directed to its core shoulder
surgery market segment, (ii) continue to develop brand awareness with leading
surgeons by developing or acquiring rights to additional complementary products,
(iii) apply the Company's technology to additional applications both within and
outside of the sports medicine/arthroscopy market segments, (iv) develop new
technologies and materials to address specific surgical needs in tissue
fixation, and (v) pursue strategic alliances and acquisitions to facilitate
product
7
<PAGE> 9

development and distribution. Implementation of the Company's strategy will be
dependent upon various factors such as actual market growth, technological
advances, competitive pressures, and general economic conditions. There can be
no assurance that the Company will be successful in implementing its strategy.
The Company's inability to achieve any of these goals could have a material
adverse effect on the Company's business, financial condition, and results of
operations. See "Business -- Business Strategy."

LIMITED SALES, MARKETING AND DISTRIBUTION CAPABILITY; RELIANCE ON THIRD-PARTY
DISTRIBUTORS

In the United States, the Company relies solely on a third-party
distribution channel, consisting of independent sales agents and stocking
dealers, that collectively employ approximately 180 sales representatives.
Accordingly, the Company's ability to effectively market its products to
surgeons and hospitals is dependent in large part on the strength and financial
condition of its third-party distributors, the expertise and relationships of
its distributors with customers and the interest of its distributors in selling
the Company's products. The failure by the Company to attract and retain
qualified distributors or the failure of such distributors to generate
substantial sales for the Company would have a material adverse effect on the
Company's business, financial condition, and results of operations.

Additionally, the Company's strategy will focus in part on increasing its
international sales. Currently, the Company is represented outside the United
States by 14 distributors that collectively employ approximately 80 sales
representatives in 14 countries. The failure of the Company's foreign
distributors to generate substantial sales for the Company could have a material
adverse effect on the Company's business, financial condition, and results of
operations. The loss of such distributors or the inability of the Company to
develop and maintain an alternative foreign distribution network could have a
material adverse impact on the Company's international sales. The Company will
depend in part on its international distributors' ability to obtain and maintain
regulatory approval for the sale of the Company's products in overseas markets.
The Company, through its Japanese distributors, is in the process of seeking
regulatory approval for its products in Japan and expects to receive such
approval in the near future. However, there can be no assurance that such
approval will be obtained in a timely manner, if at all. The failure of its
international distributors to obtain or maintain the necessary regulatory
approvals could have a material adverse effect on the Company's business,
financial condition, and results of operations. See "Business -- Sales and
Marketing."

The Company's distribution agreements with its stocking dealers generally
allow for a limited right of return on sales. Stocking dealers may request
credit for returned inventory for up to six months subsequent to the sale less
restocking fees. To date, the Company has had limited returns on sales. There
can be no assurance, however, that returns on sales will not increase in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and Notes to Financial Statements.

RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT INNOVATION

The medical device market is subject to rapid technological change and new
product introductions and enhancements. The Company's ability to be competitive
in this market will depend in significant part on its ability to develop and
introduce new products and enhancements on a timely and cost effective basis.
The ability of the Company to develop new and enhanced tissue fixation devices
depends on a number of factors, including product selection, timely and
efficient completion of product design, development of new materials and
manufacturing processes, timely regulatory clearance or approval, and effective
sales and marketing activities. There can be no assurance that the Company will
be successful in identifying, developing and marketing such products or
enhancing its existing products. If the Company experiences quality or
reliability problems with new products, or reductions in demand, then higher
manufacturing costs may result. Because new product development commitments must
be made well in advance of sales, new product decisions must anticipate both
future demand and the availability of technology to satisfy that demand. The
Company's experience to date has been limited mainly to the sports
medicine/arthroscopy market. The Company anticipates that its future success
will be dependent in part on expanding applications for its suture anchor
product line within orthopaedics and in other clinical applications such as
dentistry, urology/obgyn, plastic surgery, spinal surgery, and trauma. There can
be no assurance that the Company will successfully develop and introduce new
products or that such products or enhancements will achieve market acceptance.
The
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<PAGE> 10

failure of the Company to successfully introduce new products into the market
could have a material adverse effect on the Company's business, financial
condition, and results of operations. See "Business -- Business Strategy" and
"Business -- Products Under Development."

DEPENDENCE ON THIRD-PARTY MANUFACTURING ARRANGEMENTS AND SUPPLIERS; NO
MANUFACTURING EXPERIENCE

The Company is dependent on third-party arrangements for the manufacture of
all of its products and components. The Company is substantially dependent on
the ability of its manufacturers, among other things, to satisfy design and
quality specifications, to comply with all governmental regulations, to dedicate
sufficient production capacity for components and devices within scheduled
delivery times and to produce components and devices on a basis which is
cost-effective to the Company. Failure by such manufacturers to continue to
supply the Company with satisfactory components or devices on commercially
reasonable terms, or at all, in the absence of readily available alternative
sources, would have a material adverse effect on the Company. There can be no
assurance that the Company's suppliers will be able to satisfy the Company's
existing or future component or device requirements or comply with the Company's
quality assurance requirements. The Company does not maintain supply contracts
with any of its manufacturers and purchases components and devices pursuant to
purchase orders placed from time to time in the ordinary course of business. The
Company is also dependent on the availability at reasonable prices of the
materials used in the manufacture of the component parts of its products. No
assurance can be given that interruptions in supplies of the materials used in
the manufacture of the component parts of the Company's products will not occur
in the future. The Company's inability to obtain sufficient products or
components or to develop alternative manufacturing sources could result in
delays in product introductions or shipments, which could have a material
adverse effect on the Company's business, financial condition, and results of
operations.

The Company contemplates that in the future it may engage in limited
manufacturing of the components of its products, consisting primarily of
prototyping capabilities and early stage manufacturing. The Company has no
manufacturing experience and there can be no assurance that the Company will be
successful in prototyping or early stage manufacturing of components on a
cost-effective basis or at all. See "Business -- Manufacturing and Quality
Control."

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

The Company may require additional financing to fund its operations,
including its ongoing research and development programs. The Company's future
capital requirements will depend on many factors, including the progress of the
Company's research and development efforts, the scope and results of preclinical
studies and clinical trials, the cost, timing and outcome of regulatory reviews,
the rate of technological advances, the market acceptance of the Company's
products, administrative and legal expenses, competitive products, and
manufacturing and marketing arrangements. There can be no assurance that
additional equity or debt financing will not be required prior to the time, if
ever, the Company achieves and sustains sufficient profitability to fund
operations and growth. Additional debt financing will have several important
effects on the Company's future operations, including, without limitation, (i) a
portion of the Company's cash flow from operations will need to be dedicated to
the payment of principal and interest on indebtedness, thereby reducing funds
available for operations and for capital expenditures, including acquisitions,
(ii) borrowing facilities will likely contain covenants which will require the
Company to meet certain financial tests which may affect the Company's
flexibility in planning for, or reacting to, changes in its business, including
possible acquisition activities, and (iii) increased leverage will substantially
increase the Company's vulnerability to adverse changes in general economic,
industry, and competitive conditions. Any additional equity financing will
result in dilution to the Company's stockholders. There can be no assurance that
funds will be available on favorable terms, if at all. If adequate funds are not
available, the Company may be required to cut back or discontinue one or more of
its product development programs, reduce operating expenses, or obtain funds
through strategic alliances that may require the Company to relinquish rights to
certain of its technologies or products. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

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<PAGE> 11

RELIANCE ON AND UNCERTAINTY RELATING TO PATENTS AND PROPRIETARY TECHNOLOGY; RISK
OF INFRINGEMENT

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 of April 30, 1998, the Company owned six issued United States
patents, four pending United States patent applications, and nine pending
foreign patent applications covering various aspects of its devices, one
federally registered trademark and three pending federal trademark applications.
The Company intends to file additional patent applications in the future. The
patent positions of medical device companies, including the Company, are
generally uncertain and involve complex legal and factual questions. There can
be no assurance that patents will issue from any patent applications owned by or
licensed to the Company, and, if patents do issue, that the claims allowed will
be sufficiently broad to protect the Company's technology, or that any patents
issued to the Company (including existing patents) will not be circumvented or
invalidated. Failure to obtain or maintain patent and trade secret protection,
for any reason, could have a material adverse effect on the Company's business,
financial condition and results of operations.

Numerous current and potential competitors have acquired patents or have filed
patent applications relating to medical devices and there can be no assurance
that such competitors and other third parties have not filed or in the future
will not file applications for, or have not received or in the future will not
receive, patents or obtain additional proprietary rights relating to products or
processes used or proposed to be used by the Company. There can also be no
assurance that third parties will not assert infringement claims against the
Company in the future or that any such assertions will not result in costly
litigation or require the Company to obtain a license to intellectual property
rights of such parties. In this regard, the medical device industry has been
characterized by extensive litigation regarding patents and other intellectual
property rights, and certain companies in the medical device industry have
employed intellectual property litigation to gain a competitive advantage. The
Company's competition consists of companies which are better capitalized and may
be able to withstand higher patent enforcement costs. Litigation, which would
result in substantial expense to the Company, may be necessary to enforce any
patents issued or licensed to the Company and/or to determine the scope and
validity of proprietary rights of third parties or whether the Company's
products, processes or procedures infringe any such third-party proprietary
rights. The Company may also have to participate in interference proceedings
declared by the United States Patent and Trademark Office, which could result in
substantial expense to the Company, to determine the priority of inventions
covered by the Company's issued United States patents or pending patent
applications. Furthermore, the Company may have to participate at substantial
cost in International Trade Commission proceedings to enjoin importation of
products which would compete unfairly with products of the Company. Any adverse
outcome of any patent litigation (including interference proceedings) could
subject the Company to significant liabilities to third parties, or require the
Company to cease using the technology in dispute or require disputed rights to
be licensed from or to third parties. There can be no assurance that any such
licenses would be available on terms acceptable to the Company, if at all.

Patent applications in the United States are maintained in secrecy until a
patent issues, and patent applications in foreign countries are maintained in
secrecy for a period of time after filing. After such period of time, and
usually before the grant of the patent, patent applications in foreign countries
are published. While publication of discoveries in the scientific or patent
literature tends to lag behind actual discoveries and the filing of related
patent applications, such publication may enable the Company's competitors to
ascertain what areas of research or development the Company is engaged in prior
to the Company's receipt of patent protection in the United States or foreign
countries relating to such research or development.

The Company also relies on unpatented trade secrets to protect its
proprietary technology, and no assurance can be given that others will not
independently develop or otherwise acquire the same or substantially equivalent
technologies or otherwise gain access to the Company's proprietary technology or
disclose such technology or that the Company can ultimately protect its rights
to such unpatented proprietary technology. No assurance can be given that third
parties will not obtain patent rights to such unpatented trade secrets, which
patent rights could be used to assert infringement claims against the Company.

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<PAGE> 12

The Company generally enters into confidentiality agreements with its
collaborators, employees, advisors, and consultants in an effort to protect its
proprietary technology. There can be no assurance that these agreements will not
be breached, that the Company would have adequate remedies for any breach, that
parties not subject to such agreements will not disclose confidential
information, or that the Company's trade secrets will not otherwise become known
or be independently developed by competitors. Certain agreements with employees
and consultants require disclosure to the Company of ideas, developments,
discoveries or inventions pertaining to the proprietary rights relating to the
technology and products of the Company which are conceived during employment or
consulting, as the case may be, and grant the Company ownership to such
proprietary rights. In addition, the Company has entered into agreements with
certain strategic partners governing their various rights to technologies
developed by the parties. There can be no assurance that, notwithstanding these
agreements with its employees, consultants, and strategic partners, disputes
will not arise as to ownership of these proprietary rights or that the Company
will not be required to defend and indemnify strategic partners for the alleged
infringement by the Company's products. See "-- Uncertainties Relating to
Strategic Partners." Further, the extent to which efforts by others will result
in patents and the effect on the Company of the issuance of such patents is
unknown. See "Business -- Patents and Proprietary Rights" and
"Business -- Competition."

Although the Company does not know of any facts or circumstances affecting
the validity or enforceability of any of its issued or pending patents, neither
the Company nor its patent counsel had made any independent evaluation of the
validity or enforceability of any of the Company's patents, patent counsel has
expressed no opinion as to whether any patent will issue from any pending
application, and patent counsel has not made any assessment of the
enforceability of information or processes the Company considers to be a trade
secret or otherwise proprietary.

RISKS THAT THE COMPANY WILL BE UNABLE TO MANAGE GROWTH

As the Company expands, it may from time to time experience constraints
that will adversely affect its ability to satisfy customer demand in a timely
fashion. There can be no assurance that the Company will anticipate all of the
changing demands that expansion may place on the Company's operational,
managerial and financial systems and controls or that the Company will be able
to continue to improve such systems and controls. Additionally, there can be no
assurance that the Company will not encounter difficulties in meeting increased
production needs, maintaining quality control, and recruiting and retaining
qualified personnel. If the Company's management is not able to manage growth
effectively, the Company's business, financial condition and results of
operations could be materially and adversely affected. The Company currently
contracts out all of its manufacturing to a variety of approved vendors.
However, there can be no assurance that the Company will continue to meet
production through the use of third-party manufacturing or that the Company will
be able to successfully implement in-house manufacturing. See "-- Dependence on
Third Party Manufacturing Arrangements and Suppliers; No Manufacturing
Experience."

RISKS OF POTENTIAL ACQUISITIONS

The Company may acquire or make substantial investments in complementary
businesses, technologies, or products in the future, although there are
currently no negotiations for such acquisitions. Each acquisition would involve
several risk factors, including the difficulty of assimilating technologies,
operations, and personnel of an acquired business, the potential disruption of
the Company's ongoing business, and the possibility the Company will not be able
to derive any operational or financial benefits from the acquisition. Future
acquisitions and investments by the Company also could result in substantial
cash expenditures, potentially dilutive issuances of equity securities, the
incurrence of additional debt and contingent liabilities, and amortization
expenses related to goodwill and other intangible assets, which could adversely
affect the Company's business, operating results and financial condition. There
is no assurance that the Company will complete any such acquisitions or, upon
such an acquisition, be able to successfully integrate new product lines and
entities into its present operations. See "Use of Proceeds" and
"Business -- Business Strategy."

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BROAD DISCRETION OF MANAGEMENT WITH REGARD TO USE OF PROCEEDS

The proceeds allocated to each category under "Use of Proceeds" are
estimates only and the Company's management will have broad discretion in the
application of such funds without any action or approval of the Company's
shareholders. The uses to which the Company will actually allocate the funds
from the Offering will depend on various factors such as the availability of
complementary businesses, products or technologies for sale, technological
advances in manufacturing, the availability of qualified employees, changes in
the markets in which the Company competes, and the economy in general. See "Use
of Proceeds."

REGULATORY RISKS

Clinical testing, manufacture, and sale of the Company's products are
subject to regulation by numerous governmental authorities, primarily the FDA
and corresponding state and foreign regulatory agencies. The FDA regulates
preclinical and clinical testing, manufacturing, labeling, distribution and
promotion of medical devices. Noncompliance with applicable requirements can
result in, among other things, 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 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.

Before a new device can be introduced in the market, the Company must
generally obtain FDA clearance or approval through either the 510(k) clearance
process or the costlier, lengthier and less certain Premarket Approval
Application ("PMA") approval process. Several of the Company's products have
been cleared through the 510(k) process. The Company has not submitted 510(k)
notices or PMAs for many of its proposed devices. There can be no assurance that
the FDA will not determine that these or other future products must be approved
through the 510(k) or PMA approval process. The FDA may also require the 510(k)
submissions or PMAs for any of the Company's devices to be supported by clinical
data, which would lengthen the clearance or approval process. In addition, the
Company believes that a number of devices that it currently markets or intends
to market are exempt from the FDA's premarket clearance and approval
requirements. However, there can be no assurance that the FDA would agree with
the Company's determinations, or that the FDA would not require that the devices
be cleared or approved by the FDA before they could be marketed or continue to
be marketed. There can be no assurance that the Company will be able to obtain
necessary regulatory approvals or clearances on a timely basis, if at all, for
any of its products and delays in receipt of or failure to receive such
approvals or clearances, the loss of previously received approvals or
clearances, limitations on intended use imposed as a condition of such approvals
or clearances, or 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 operation.

For any of the Company's devices that are 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. The Company has
made certain modifications to its principal 510(k) cleared and exempt devices
which the Company believes do not require the submission of new 510(k) notices.
There can be no assurance, however, that the FDA would agree with any of the
Company's determinations not to submit a new 510(k) notice for any changes made
to the devices. If the FDA requires the Company to submit a new 510(k) notice
for any device modification, the Company may be prohibited from marketing the
modified device until the 510(k) notice is cleared by the FDA. There can be no
assurance that any 510(k) notice regarding a modification will be cleared on a
timely basis, if at all.

Any devices manufactured or distributed by the Company pursuant to FDA
clearance or approvals are subject to extensive and continuing regulation by the
FDA and certain state agencies. Manufacturers of medical devices for marketing
in the United States are required to adhere to applicable regulations setting
forth detailed Quality System Regulation ("QSR") and Medical Device Reporting
("MDR") requirements. Labeling and promotion activities are subject to scrutiny
by the FDA and, in certain circumstances, by the

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<PAGE> 14

Federal Trade Commission. Current FDA enforcement policy prohibits the marketing
of approved or cleared medical devices for unapproved uses.

The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements, and other
applicable regulations. Certain of the Company's third party suppliers may also
be subject to inspection by the FDA for compliance with applicable regulations.
There can be no assurance that the Company or such third party suppliers will be
found by the FDA to be in compliance with applicable regulations. A finding of
non-compliance could adversely affect the Company's ability to obtain products
from such suppliers or to continue marketing products. Changes in existing
requirements or adoption of new requirements could have a material adverse
effect on the Company's business, financial condition, or results of operations.
There can be no assurance that the Company will not incur significant costs to
comply with laws and regulations in the future or that laws and regulations will
not have a material adverse effect upon the Company's business, financial
condition or results of operations. In addition, the Company is subject to
numerous federal, state and local laws relating to such matters as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. 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 on the Company's business,
financial condition or results of operations.

International regulatory bodies 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 and maintain a "CE" marking
certification, an international symbol of quality and compliance with the
applicable European medical device directive. The Company has successfully
obtained its CE mark certification. However, there can be no assurance that the
Company will be able to maintain the proper certification. To the extent that
the Company obtains regulatory approval to sell its products in foreign
countries, it relies on independent distributors to comply with certain of the
foreign regulatory requirements. The inability or failure of the Company's
independent distributors to comply with applicable regulatory requirements could
materially and adversely affect the Company's business, financial condition or
results of operations. See "Business -- Government Regulation."

UNCERTAINTIES RELATING TO STRATEGIC PARTNERS

The Company has entered and intends to enter into additional arrangements
with corporate partners, licensees or others, to market, sell and distribute
certain of its products. For instance, the Company's anchor products are
currently being sold outside of the orthopaedic market by Mentor Urology
Corporation ("Mentor") for female urinary stress incontinence and its
proprietary technology has been licensed to Imcor, Inc. ("Imcor") for the
development of dental implants. The success of such products will be dependent
in part upon the financial stability and marketing efforts of such third
parties. There can be no assurance that the Company will be able to maintain its
current arrangements or negotiate additional acceptable arrangements with
strategic partners or that the Company will realize any meaningful revenues
pursuant to such arrangements. See "Business -- Business Strategy."

On June 22, 1998, Mentor was sued for alleged patent infringement by Boston
Scientific Corporation ("Boston Scientific") arising out of the marketing and
distribution of Mentor's bladder neck suspension anchor system, which uses the
Company's suture anchors. The complaint alleges that Mentor's marketing
techniques include the teaching of a surgical procedure that is subject to a
patent owned by Boston Scientific, and that Mentor's product infringes a patent
that covers a suture anchor assembly. The complaint seeks to enjoin Mentor from
continuing to sell its bladder neck suspension system, as well as treble
damages. A hearing on a preliminary injunction motion has been tentatively
scheduled for August 1998. The Company is not a party to the lawsuit. Further,
Mentor has advised the Company that it intends to defend the suit, and to
continue to market the products subject to the lawsuit. There can be no
assurance, however, that the lawsuit will not adversely affect sales of Mentor's
products, that Mentor will be successful in the suit, that the Company will not
be added as a party at a later date, or that the Company will not be requested
to defend
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<PAGE> 15

and/or indemnify Mentor in respect of this action. Any of these events or other
matters that may arise out of the lawsuit could have a material adverse effect
on the Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Strategic Relationships."

PRODUCT LIABILITY RISK

The Company markets medical devices used in surgical procedures, and
therefore operates solely in the medical industry. The Company's products are
sold to hospitals and healthcare providers, and they are eventually used in
surgical procedures. The development, manufacture and sale of medical devices
entail significant risks of product liability claims. There can be no assurance
that the amount of the Company's insurance coverage will be adequate to protect
it from product liability claims, that the Company will be able to obtain
adequate coverage at competitive rates in the future, or that the Company's
product liability experience in the future will enable it to obtain insurance
coverage in the future. A successful product liability suit not covered by such
insurance would have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business -- Product Liability
and Insurance."

POSSIBLE LIMITATIONS ON THIRD-PARTY REIMBURSEMENT; HEALTHCARE REFORM

The Company's products are generally purchased directly or indirectly by
hospitals and other healthcare providers, which in turn bill third-party payors
such as Medicare, Medicaid and private insurance companies. Many of these payors
are attempting to control healthcare costs by authorizing fewer surgical
procedures and by limiting reimbursement for procedures to fixed amounts.
Failure by physicians, hospitals and other 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
third-party payors' policies toward reimbursement for such procedures, could
have a material adverse effect on the Company's business, financial condition
and results of operations.

Since the Company only markets devices used in medical procedures, all of
the Company's revenues and accounts receivable are concentrated in the
healthcare market. The Company expects that there will continue to be a number
of federal and state proposals to implement government controlled pricing and
profitability in the healthcare market. Any change or occurrence which adversely
effects the healthcare market could have a material impact on the Company's
revenue growth, and upon the collectibility of the Company's accounts
receivable, which could have a material adverse effect on the Company's
business, financial condition and results of operations.

RISK OF APPLICABILITY OF ANTI-KICKBACK AND SELF-REFERRAL LAWS

Federal anti-kickback laws and regulations and certain state regulations
prohibit payment of remuneration in return or as an inducement for (i) referrals
of an individual for a product for which payment may be made by Medicare,
Medicaid or another government-sponsored healthcare program or (ii) purchasing
or recommending the purchase of a product for which payment may be made by a
government-sponsored healthcare program. Subject to certain exceptions, these
laws prohibit Medicare or Medicaid payments for services or products furnished
by an entity pursuant to a referral by a physician who had a financial
relationship with the entity through ownership, investment or a compensation
arrangement and otherwise regulate related activities. Possible sanctions for
violation of these anti-kickback and self-referral laws include monetary fines,
civil and criminal penalties, exclusion from Medicare and Medicaid programs and
forfeiture of amounts collected in violation of such prohibitions. The scope and
enforcement of these laws is uncertain and subject to rapid change. Accordingly,
there can be no assurance that federal or state regulatory authorities will not
challenge the Company's current or future activities, including the activities
of the members of the Company's scientific advisory board, under these current
or future laws and any such challenge could have a material adverse effect on
the Company.

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DEPENDENCE ON KEY PERSONNEL

The Company is dependent upon a number of key management and technical
personnel. The Company's future success depends, in large part, on the efforts
and abilities of its management team, including D. Ronald Yagoda, the Chief
Executive Officer and Chairman of the Company, and James W. Hart, the President
and Chief Operating Officer of the Company. Although the Company maintains
key-man life insurance in the amount of $1 million on each of these individuals,
the loss of the services of one or more of such employees could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's success will also depend on its ability to attract and
retain additional highly qualified management and technical personnel. The
Company faces intense competition for qualified personnel, many of whom are
often subject to competing employment offers. There can be no assurance that the
Company will be able to attract and retain such personnel. See "Management."

The Company also has several key scientific advisors and consultants upon
which the Company relies for developing new products and improving existing
products. Accordingly, the Company is dependent, in part, on the Company's
ability to attract and retain highly qualified advisors and consultants. The
Company's advisors devote only a small portion of their time to the affairs of
the Company. There can be no assurance that such advisors will devote sufficient
time and attention to the development of the Company's products. Although the
Company has entered into consulting agreements, with terms ranging from twelve
months to three years, including confidentiality provisions with each of the
members of the Company's scientific advisory board, there can be no assurance
that the consulting and confidentiality agreements between the Company and each
member of the scientific advisory board will not be breached or terminated. In
addition, there can be no assurance that any of such agreements will be renewed
upon termination. See "Management -- Scientific Advisory Board."

RISKS ASSOCIATED WITH INTERNATIONAL SALES; CURRENCY FLUCTUATIONS

The Company's international sales efforts are subject to the customary
risks of doing business abroad, including regulatory requirements, political and
economic instability, barriers to trade, trade and tariff restrictions, foreign
taxes, restrictions on transfer of funds, difficulty in obtaining distribution
and support, and export licensing requirements, any of which could have a
material adverse effect on the Company's operations. To date, all foreign
transactions have been U.S. dollar denominated. As such, a weakening in the
value of foreign currencies relative to the U.S. dollar and fluctuations in
foreign currency exchange rates could have an adverse impact on the price of the
Company's products in its international markets. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Overview."

NO PRIOR PUBLIC MARKET FOR COMMON STOCK; POTENTIAL VOLATILITY OF STOCK PRICE

Prior to this Offering, there has been no public market for the Common
Stock, and there can be no assurance that a regular trading market will develop
and continue 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 through negotiations between the Company and
the representatives of the Underwriters and may not be indicative of the market
price of the Common Stock following this Offering. See "Underwriting."

In recent years, the stock market in general, and particularly the market
for healthcare device stocks in which the Company belongs, has experienced
extreme price fluctuations. The market price of the Common Stock may be
significantly affected by various factors such as quarterly variations in the
Company's operating results, changes in revenue growth rates for the Company,
earnings estimates or changes in estimates by market analysts, speculation in
the press or analyst community, the announcement of new products or product
enhancements by the Company or its competitors, and general market conditions or
market conditions specific to particular industries. There can be no assurance
that the market price of the Common Stock will not experience significant
fluctuations in the future.

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POTENTIAL ADVERSE EFFECTS OF ANTI-TAKEOVER PROVISIONS

Certain provisions of the Company's Amended and Restated Articles of
Incorporation and Amended and Restated Bylaws may have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of the Company. Such provisions could limit
the price that certain investors may be willing to pay in the future for shares
of the Common Stock. Certain of these provisions allow the Company to issue
Preferred Stock and to determine the price, rights, preferences, privileges, and
restrictions, including voting rights of those shares, without any vote or
further action by the stockholders. Certain provisions also provide for a
classified Board of Directors and regulate nominations for the Board of
Directors. These provisions may make it more difficult for shareholders to take
certain corporate actions and could have the effect of delaying or preventing a
change in control of the Company. In addition, certain provisions of Arizona law
applicable to the Company also could delay or make more difficult a merger,
tender offer, or proxy contest involving the Company. See "Description of
Capital Stock -- Certain Charter and Bylaw Provisions."

CONCENTRATION OF OWNERSHIP

Upon completion of this Offering, the Company's executive officers and
directors, and their affiliates, will beneficially own approximately 47.38% of
the Company's outstanding Common Stock (44.77% assuming the exercise of the
Underwriters' over-allotment option in full). This concentration of ownership
and voting control may have the effect of delaying or preventing a change in
control of the Company, or causing a change in control of the Company which may
not be favored by the Company's other shareholders. There can be no assurance
that these individuals' ability to prevent or cause a change in control of the
Company will not have a material adverse effect on the market price of the
Common Stock. See "Principal Stockholders" and "Underwriting."

LIMITED LIABILITY OF DIRECTORS

The Company's Amended and Restated Articles of Incorporation provide, with
certain exceptions, that the Company's directors will not be personally liable
for monetary damages for breach of the directors' fiduciary duty of care to the
Company or its shareholders. Accordingly, even if a director were found liable
for a breach, the Articles would preclude a monetary remedy arising from the
breach. This provision does not eliminate the duty of care, and, in appropriate
circumstances, equitable remedies such as an injunction or other forms of
nonmonetary relief would remain available under Arizona law. This provision also
does not affect a director's responsibilities under any other laws, such as the
federal securities laws or state or federal environmental laws. See "Description
of Capital Stock -- Limitation of Liability and Indemnification of Directors and
Officers."

LACK OF DIVIDENDS

The Company has never declared or paid cash dividends on its capital stock
and does not anticipate paying any cash dividends in the foreseeable future. In
addition, the Company's credit facility restricts the ability of the Company to
pay dividends. See "Dividend Policy" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

DILUTION

Purchasers of shares of Common Stock offered hereby will suffer an
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price and will incur
additional dilution upon the exercise of outstanding stock options and warrants.
See "Dilution."

YEAR 2000 COMPLIANCE

16
<PAGE> 18

issues for both internal and external information systems by the end of 1998.
This process will entail communicating with significant suppliers, financial
institutions, insurance companies and other parties that provide significant
services to the Company. There can be no assurance that the Company's primary
service providers will properly address and resolve such provider's Year 2000
issues. Although expenditures to make the Company Year 2000 compliant are not
expected to be material to the Company's consolidated financial position or
results of operations, there can be no assurance in that regard. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance."

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of the Common Stock in the public
market following this offering or the prospect of such sales could adversely
affect the market price of the Common Stock. Upon completion of this Offering,
the Company will have outstanding 6,023,365 shares of Common Stock (assuming no
exercise of the Underwriter's over-allotment option). Of these shares, the
2,500,000 shares of Common Stock offered hereby are immediately eligible for
sale in the public market without restriction, except for shares purchased at
any time by any "affiliate" of the Company, as such term is defined in Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). Directors,
officers and certain shareholders of the Company owning a total of 2,842,676
shares of Common Stock and outstanding options and warrants to purchase 519,342
shares of Common Stock have signed lock-up agreements under which such holders
will agree not to offer, sell, or otherwise dispose of any of their shares of
Common Stock that might otherwise be eligible for sale for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Representatives. Upon the expiration of the lock-up agreements, 2,812,675 of
these securities will become eligible for sale in the public market, subject to
the provisions of Rule 144. In addition, the Company intends to file
registration statements under the Securities Act, after the date of this
Prospectus, covering the sale of shares to be issued pursuant to certain
currently outstanding options. See "Shares Eligible for Future Sale."

In addition, upon the consummation of this Offering, the Company will sell
to the Representatives for nominal consideration the Representatives' Warrants
to purchase up to 250,000 shares of Common Stock. The Representatives' Warrants
will have a term of five years and will be exercisable commencing one year after
the effective date of this Offering, at an exercise price per share of 120% of
the price per share of the Common Stock sold in this Offering. For the term of
the Representatives' Warrants, the holders thereof will have, at nominal cost,
the opportunity to profit from a rise in the market price of the Common Stock
without assuming the risk of ownership, with a resulting dilution in the
interest of other shareholders. As long as the Representatives' Warrants remain
unexercised, the Company's ability to obtain additional capital might be
adversely affected. Moreover, the Representative may be expected to exercise the
Representatives' Warrants at a time when the Company would, in all likelihood,
be able to obtain any needed capital through a new offering of its securities on
terms more favorable than those provided by the Representatives' Warrants. See
"Underwriting."

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

This Prospectus may contain forward-looking statements including statements
regarding, among other items, the Company's business strategies, expected growth
in the Company's markets, and anticipated trends in the Company's business and
the industry in which it operates. The words "believe," "expect," "anticipate,"
"intends," "forecast," "project," and similar expressions identify
forward-looking statements. These forward-looking statements are based largely
on the Company's expectations and are subject to a number of risks and
uncertainties, certain of which are beyond the Company's control. Actual results
could differ materially from these forward-looking statements, as a result of
the factors described under "Risk Factors" and elsewhere herein, including
regulatory or economic influences. In light of these risks and uncertainties,
there can be no assurance that the forward-looking information contained in this
Prospectus will in fact transpire or prove to be accurate. All subsequent
written and oral forward-looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by this
section.

17
<PAGE> 19

USE OF PROCEEDS

The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby are estimated to be approximately $13.9 million
($16.1 million if the Underwriters' over-allotment option is exercised in full)
based upon an assumed initial public offering price of $6.50 per share and after
deducting estimated Offering expenses and underwriting discounts and commissions
payable by the Company.

The Company anticipates that such net proceeds will be used substantially
as follows:

<TABLE>
<CAPTION>
PERCENTAGE OF
APPLICATION OF NET PROCEEDS DOLLAR AMOUNT NET PROCEEDS
--------------------------- ------------- -------------
<S> <C> <C>
Increase research and development efforts................... $ 2,500,000 18%
Increase sales and marketing efforts........................ 2,000,000 14
Fund future acquisitions(1)................................. 2,000,000 14
Repay indebtedness to certain related parties(2)............ 1,200,000 9
Capital expenditures........................................ 1,000,000 7
Working capital and general corporate purposes.............. 5,200,000 38
----------- ---
Total............................................. $13,900,000 100%
=========== ===
</TABLE>

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

(1) There are no agreements or arrangements currently in place for any potential
or future acquisitions.

(2) The Company intends to use approximately $1.2 million of the estimated net
proceeds of the Offering to pay in full the outstanding balance of related
party indebtedness of $1,073,750 and $1,173,750 as of June 30, 1998 and July
17, 1998, respectively. In December 1997 and January 1998, the Company
borrowed $900,000 from certain officers, directors and shareholders of the
Company. The loans bear interest at the prime rate of interest plus two
percent and are due on December 31, 1998. In connection with the loans, the
Company issued warrants to purchase an aggregate amount of 300,003 shares of
the Common Stock. In May 1998, the Company borrowed an additional $200,000
from the Company's Chairman. This loan bears interest at the prime rate of
interest plus four percent and is due April 30, 1999. See "Certain
Relationships and Related Transactions." In July 1998, the Company borrowed
an additional $100,000 from a shareholder. This loan bears interest at the
prime rate of interest plus four percent as is due June 30, 1999.

The Company believes that the net proceeds from this Offering, plus the
Company's existing capital resources, together with interest income thereon,
will be sufficient to fund its operations through at least the next twelve
months. Until applied as set forth above, all proceeds will be invested in
short-term, interest bearing, investment grade or equivalent securities or bank
certificates of deposit. The foregoing represents the Company's present
intentions with respect to the allocation of proceeds of this Offering based
upon its current plans and existing business conditions. However, the occurrence
of certain unforeseen events or changed business conditions could result in the
application of the proceeds of this Offering in a manner other than as described
in this Prospectus.

DIVIDEND POLICY

The Company intends to retain any earnings to finance the operations and
expansion of the Company's business and does not anticipate paying cash
dividends in the foreseeable future. In addition, the Company's credit facility
restricts the ability to pay dividends. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

18
<PAGE> 20

CAPITALIZATION

The following table sets forth the capitalization of the Company as of June
30, 1998: (i) on an actual basis; (ii) on a pro forma basis giving effect to the
conversion of 872,300 shares of Preferred Stock into 581,541 shares of Common
Stock; and (iii) on a pro forma as adjusted basis to reflect the sale of the
2,500,000 shares of Common Stock offered hereby, after deducting the
underwriting discount and estimated offering expenses, at an assumed initial
public offering price of $6.50 per share, and the initial application of the
estimated net proceeds therefrom. See "Use of Proceeds." The table should be
read in conjunction with the Company's Financial Statements and the related
Notes included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Short-term debt to related parties, net of discount of
$26,250............................................... $ 1,074 $ 1,074 $ --
Long-term debt, including current portion................ 20 20 20
------- ------- -------
Total debt............................................... 1,094 1,094 20
Shareholders' equity:
Class A Convertible Preferred Stock, no par value;
5,000,000 shares authorized; 872,300 shares issued and
outstanding, actual; no shares issued and outstanding
pro forma and pro forma as adjusted(1)................ 1,713 -- --
Common Stock, no par value; 20,000,000 shares authorized;
2,915,157 shares issued and outstanding, actual;
3,496,698 shares issued and outstanding, pro forma;
and 5,996,698 shares issued and outstanding, pro forma
as adjusted(1)(2)..................................... 1,585 3,298 17,198
Additional paid-in capital................................. 97 97 97
Accumulated deficit...................................... (3,185) (3,185) (3,212)
Unearned compensation.................................... (9) (9) (9)
------- ------- -------
Total shareholders' equity............................... 201 201 14,074
------- ------- -------
Total short term debt and capitalization......... $ 1,295 $ 1,295 $14,094
======= ======= =======
</TABLE>

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

(1) On August 10, 1998, the Company filed an Amended and Restated Articles of
Incorporation increasing its authorized capital stock to 25,000,000 shares,
of which 20,000,000 shares will be Common Stock, no par value, and 5,000,000
shares will be Preferred Stock, no par value.

(2) Excludes up to 843,360 shares of Common Stock issuable upon exercise of
stock options and warrants outstanding at June 30, 1998. Excludes 26,667
shares of Common Stock issued upon exercise of options subsequent to June
30, 1998. See "Management" and "Description of Capital Stock."

19
<PAGE> 21

DILUTION

The pro forma net tangible book value of the Company as of June 30, 1998,
was approximately $3,065, or less than $0.01 per share of Common Stock. Pro
forma net tangible book value per common share represents the net book value of
the Company's tangible assets less total liabilities divided by the number of
shares of Common Stock outstanding, after giving effect to the conversion of all
outstanding shares of Preferred Stock into 581,541 shares of Common Stock upon
completion of this Offering, but without giving effect to the possible exercise
of outstanding stock options and warrants.

Without taking into account any changes in such pro forma net tangible book
value subsequent to June 30, 1998, other than to give effect to the sale by the
Company of 2,500,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $6.50 per share (after deducting the underwriting
discounts and commission and other estimated Offering expenses) and the
application of the estimated net proceeds thereof, the as adjusted pro forma net
tangible book value of the Company as of June 30, 1998 would have been $13.9
million, or $2.31 per share. This represents an immediate increase in pro forma
net tangible book value of $2.31 per share to existing stockholders and the
immediate dilution of $4.19 per share to new investors purchasing Common Stock
pursuant to this Offering. Dilution per share to new investors represents the
difference between the amount per share paid by purchasers of Common Stock of
the Company pursuant to this Offering and the as adjusted pro forma net tangible
book value per share of Common Stock immediately after completion of this
Offering. The following table illustrates the per share effect of this dilution
on an investor's purchase of shares:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per common share...... $6.50
Pro forma net tangible book value per common share as of
June 30, 1998.......................................... $ --
Increase in pro forma net tangible book value per common
share attributable to new investors.................... $2.31
-----
As adjusted pro forma net tangible book value per common
share after Offering...................................... $2.31
-----
Dilution per common share to new investors.................. $4.19
=====
</TABLE>

The following table summarizes, on a pro forma as adjusted basis as of June
30, 1998, the number of shares of Common Stock purchased from the Company, the
total price paid, and the average price per share paid by existing stockholders
and by new investors purchasing shares of Common Stock offered hereby:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION PAID AVERAGE
-------------------- ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 3,496,698 58.3% $ 3,394,686 17.3% $0.97
New investors.................. 2,500,000 41.7 16,250,000 82.7 $6.50
--------- ----- ----------- -----
Total................ 5,996,698 100.0% $19,644,686 100.0%
========= ===== =========== =====
</TABLE>

The foregoing tables exclude up to 375,000 shares of Common Stock that may
be sold by the Company upon the exercise of the Underwriters' over-allotment
option and give effect to the conversion of all outstanding shares of Preferred
Stock into 581,541 shares of Common Stock upon completion of this Offering. The
tables also exclude 843,360 shares of Common Stock issuable upon exercise of
options and warrants outstanding at June 30, 1998 and 26,667 shares of Common
Stock issued upon exercise of options subsequent to June 30, 1998. Further
dilution may result from the exercise of such options and warrants. See
"Description of Capital Stock," "Underwriting" and "Management."

20
<PAGE> 22

SELECTED FINANCIAL DATA

The following selected financial data for the year ended December 31, 1996
are derived from financial statements of the Company which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The selected financial data
for the year ended December 31, 1997 are derived from the financial statements
of the Company which have been audited by Ernst & Young LLP, independent
auditors. Ernst & Young LLP's report on the financial statements for the year
ended December 31, 1997, which appears elsewhere herein, includes an explanatory
paragraph which describes an uncertainty about the Company's ability to continue
as a going concern. The financial data for the six months periods ended June 30,
1997 and 1998 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the entire year ending December 31, 1998.
The following 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 Financial Statements of the Company and
related Notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------- ----------------
1996 1997 1997 1998
------ ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
SELECTED STATEMENT OF OPERATIONS DATA:
Net revenues......................................... $ 783 $ 1,482 $ 695 $1,208
Cost of revenues..................................... 486 825 340 538
------ ------- ------ ------
Gross profit...................................... 297 657 355 670
Research and development expenses.................... 152 273 91 183
General and administrative expenses.................. 376 821 290 760
Sales and marketing expenses......................... 264 979 429 529
------ ------- ------ ------
Operating loss.................................... (495) (1,416) (455) (802)
Other income (expense), net.......................... 277 30 (3) (73)
------ ------- ------ ------
Net loss............................................. $ (218) $(1,386) $ (458) $ (875)
====== ======= ====== ======
Basic and diluted net loss per share................. $(0.08) $ (0.49) $(0.16) $(0.30)
Shares used in computation........................... 2,728 2,803 2,776 2,910
</TABLE>

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

21
<PAGE> 23

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

The following discussion of the financial condition and results of
operations should be read in conjunction with the Company's Financial Statements
and Notes thereto, and the other financial information included elsewhere in
this Prospectus.

OVERVIEW

The Company was incorporated in 1994 to design, develop and market
innovative medical devices for use in orthopaedic surgery, including sports
medicine and minimally invasive arthroscopic procedures. The Company's current
product offerings consist of suture anchors and related insertion instruments,
manual arthroscopic instrumentation, and a complete system of surgical screws.
In previous periods, the Company's focus has been on the development and sale of
its proprietary PeBA suture anchors, and more recently, the OBL RC5, a
pre-loaded suture anchor with a disposable insertion device. For the year ended
December 31, 1997, and the six months ended June 30, 1998, sales of suture
anchors and related instruments accounted for approximately 85.5% and 88.1%,
respectively, of net revenues. The Company intends to expand its line of suture
anchors and related instruments and expects that these products will continue to
represent a significant portion of its future revenues.

The Company's products are typically sold through a network of third-party
distributors, consisting of domestic and international stocking dealers and U.S.
sales agents. Sales to stocking dealers, both within the U.S. and
internationally, are at retail prices net of sales discounts. Sales discounts
vary according to certain factors such as volume orders and competition within
certain geographic regions. Stocking dealers purchase inventory for their own
account and sell product directly to hospitals at retail prices. Revenues from
sales to stocking dealers are recorded upon shipment to the dealer. The
Company's U.S. sales agents maintain inventories of the Company's products on a
consignment basis. The Company records revenue at retail prices at the time of
sale to hospitals. Related sales commissions to the sales agents are recorded as
a cost of revenues. Stocking dealer agreements allow for a limited right of
return on sales which has been provided for as part of the Company's allowance
for bad debts and sales returns.

The Company intends to pursue an aggressive product development strategy to
continue expanding the breadth of its product offerings. Following the Offering,
the Company intends to significantly increase its development staff, pursue
internal product development efforts, and seek collaborative development
arrangements with other medical device companies. The Company does not expect
research and development expenses to increase materially as a percentage of net
revenues. However, it expects a significant increase in the gross dollar amount
of such expenditures as compared to prior periods.

As of June 30, 1998, the Company had operating loss carryovers of
approximately $2.7 million, the income tax benefit of which has been offset
fully by a valuation allowance. Ownership changes, as defined in the Internal
Revenue Code, including those resulting from the issuance of Common Stock in
connection with this Offering, may limit the amount of net operating loss and
tax credit carryforwards that can be utilized to offset future taxable income
and reduce its tax liability.

22
<PAGE> 24

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, the percentage
of net revenues represented by certain items included in the Company's financial
statements.

<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
--------------- ----------------
1996 1997 1997 1998
----- ----- ----- ------
<S> <C> <C> <C> <C>
Net revenues............................ 100.0% 100.0% 100.0% 100.0%
Gross profit............................ 37.9 44.3 51.1 55.4
Research and development expenses....... 19.4 18.4 13.1 15.1
General and administrative expenses..... 48.0 55.4 41.7 62.9
Sales and marketing expenses............ 33.7 66.1 61.7 43.8
----- ----- ----- ------
Operating loss.......................... (63.2) (95.6) (65.4) (66.4)
Other income/(expense), net............. 35.4 2.1 (0.4) (6.1)
----- ----- ----- ------
Net loss................................ (27.8)% (93.5)% (65.8)% (72.5)%
===== ===== ===== ======
</TABLE>

Six Months Ended June 30, 1998 and 1997

Net revenues increased $513,000, or 73.7%, to $1,208,000 for the six months
ended June 30, 1998 from $695,000 for the six months ended June 30, 1997. The
increase in revenues reflects increased sales of suture anchors and related
instruments resulting from the expansion of the Company's distribution network
as well as sales of manual arthroscopic instrumentation. The Company's revenues
for the first six months of 1998 include an initial sale to the Company's newly
established Japanese distributor totaling $188,000, or 16% of revenues, of which
$117,500 related to the stocking of instrumentation and demonstration kits,
which is expected to satisfy the distributor's needs for these kits over the
next several months. The kits are used in the sale of suture anchors. Future
sales to the Company's Japanese distributor are dependant upon the Company's
products receiving regulatory approval in Japan, the occurrence or timing of
which is uncertain.

Gross profit increased $314,000, or 88.3%, to $669,000 for the six months
ended June 30, 1998 from $355,000 for the six months ended June 30, 1997,
representing gross margins of 55.4% and 51.1%, respectively. The increases in
gross profit and gross margins were primarily attributable to improved vendor
pricing and an increase in the sale of suture anchors which carry higher margins
than the Company's other products.

Research and development expenses consist primarily of compensation and
consulting fees, prototype development and sample inventory, and lab testing.
Research and development expenses increased $92,000, or 100.8%, to $183,000 for
the six months ended June 30, 1998 from $91,000 for the six months ended June
30, 1997. Research and development expenses as a percentage of net revenue
increased to 15.1% from 13.1% during the respective periods. These increases
were primarily attributable to the development of products including the OBL RC5
pre-loaded suture anchor, the SB anchor, and the DRYKnot.

General and administrative expenses consist primarily of compensation,
regulatory certification costs, and general corporate overhead including rent,
insurance, and other operating expenses. General and administrative expenses
increased $470,000, or 162.3%, to $760,000 for the six months ended June 30,
1998 from $290,000 for the six months ended June 30, 1997. As a percentage of
net revenues, general and administrative expenses increased to 62.9% for the six
months ended June 30, 1998 from 41.7% for the six months ended June 30, 1997.
These increases were primarily attributable to an increase in salaries
associated with hiring key management personnel, consulting fees incurred
related to ISO 9001 certification, and increased operating expenses incurred as
result of the Company's growth.

Sales and marketing expenses consist primarily of compensation, sales
workshops and seminars, international consulting fees, and other related
expenses. Sales and marketing expenses increased $100,000, or 23.3%, to $529,000
for the six months ended June 30, 1998 from $429,000 for the six months ended
June 30, 1997. Sales and marketing expenses as a percentage of net revenues
decreased to 43.8% from 61.7% during

23
<PAGE> 25

these respective periods as a result of the increase in sales. These increases
in sales and marketing expenses resulted from workshops held by the Company for
key surgeons as well as members of its scientific advisory board, increased
participation in industry meetings, and the hiring of additional in-house sales
and marketing personnel.

Net other expense increased $70,000 to $73,000 for the six months ended
June 30, 1998 from $3,000 for the six months ended June 30, 1997. This increase
was primarily attributable to interest expense incurred on related party
borrowings incurred in the fourth quarter of 1997 to fund the Company's
operations.

Net loss increased $418,000 or 91.5% to $876,000 for the six months ended
June 30, 1998 from $457,000 for the six months ended June 30, 1997 as a result
of the factors discussed above.

Years Ended December 31, 1997 and 1996

Net revenues increased $699,000 or 89.4% to $1,482,000 for the year ended
December 31, 1997 from $783,000 for the year ended December 31, 1996. The
increase in revenues was primarily attributable to increased sales of the
Company's proprietary suture anchors, including sales to Mentor.

Gross profit increased $361,000, or 121.8%, to $658,000 for the year ended
December 31, 1997 from $297,000 for the year ended December 31, 1996. As a
percentage of net revenues, gross profit was 44.3% and 37.9% in 1997 and 1996,
respectively. The improvement in gross profit was primarily attributable to
increased sales of suture anchors which carry higher margins than the Company's
other products.

Research and development expenses increased $121,000, or 79.6%, to $273,000
for the year ended December 31, 1997 from $152,000 for the year ended December
31, 1996. Research and development expenses as a percentage of net revenues
decreased to 18.4% from 19.4% during the respective periods. These increases in
dollar amount were primarily attributable to the development of new products
including the SB suture anchor as well as initial development costs for an ACL
repair screw and bio-absorbable implant materials.

General and administrative expenses increased $445,000, or 118.4%, to
$821,000 for the year ended December 31, 1997 from $376,000 for the year ended
December 31, 1996. As a percentage of net revenues, general and administrative
expenses increased to 55.4% for the year ended December 31, 1997 from 48.0% for
the year ended December 31, 1996. These increases were primarily attributable to
increased administrative and managerial compensation and increased costs
incurred as result of the Company's growth.

Sales and marketing expenses increased $716,000, or 271.5%, to $980,000 for
the year ended December 31, 1997 from $264,000 for the year ended December 31,
1996. Sales and marketing expenses as a percentage of net revenues increased to
66.1% from 33.7% during the respective periods. These increases resulted from
costs associated with the hiring of additional regional sales managers, expenses
associated with the expansion of the Company's distribution network particularly
in international markets, and expenses related to increased participation in
industry trade shows and sales meetings.

Net other income decreased $247,000, or 89.0%, to $30,000 for the year
ended December 31, 1997 from $277,000 for the year ended December 31, 1996. In
1996, net other income included an initial one-time payment by Mentor of
$300,000 for the exclusive marketing and distribution rights from the Company of
the 4.0 mm PeBA(R)C suture anchor for urology applications in the United States
and in other defined foreign markets. The Company also records ongoing revenue
from sales of suture anchor products to Mentor under this arrangement.

Net loss increased $1,168,000 to $1,386,000 for the year ended December 31,
1997 from $218,000 for the year ended December 31, 1996 as a result of the
factors discussed above.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations primarily from the private sale of
equity securities, from which it has raised $3.3 million since inception. The
Company has also financed its operations through borrowings from related
parties, and, at June 30, 1998, had borrowings outstanding of approximately
$1,073,750, net of
24
<PAGE> 26

discount. As a result of the operating losses incurred by the Company since
inception, the accumulated deficit was approximately $3.2 million at June 30,
1998. The Company's financial statements for the year ended December 31, 1997,
include an explanatory paragraph which describes an uncertainty about the
Company's ability to continue as a going concern. Upon consummation of the
Offering, the Company expects that the uncertainty will be eliminated.

As of June 30, 1998, the Company had cash of $25,000 as compared to
$741,000 on December 31, 1997. Operating activities required approximately
$779,000 and $1,966,000, respectively, during the six months ended June 30, 1998
and the year ended December 31, 1997. The changes in cash used in operations
were due primarily to the impact of increased revenues offset by higher expenses
associated with the expanded sales and marketing organization as well as the
Company's investment in its preloaded suture anchor product line. Such amounts
were greater than the loss incurred during each of the respective periods
primarily due to increases in accounts receivable and inventory relating to the
Company's increased operating levels. Investment activities required
approximately $192,000 and $267,000, respectively, during the six months ended
June 30, 1998 and the year ended December 31, 1997. Investment activities
included computer and other equipment and instrumentation required by the
Company in its research and development and operations activities. The Company
does not expect a material increase in the rate of capital expenditures for the
balance of 1998. Financing activities contributed approximately $256,000 and
$2,576,000, respectively, during the six months ended June 30, 1998 and the year
ended December 31, 1997.

The Company anticipates that it may establish an equipment leasing facility
to finance a portion of its capital expenditures. The Company does not have any
commitments or understandings pertaining to any lease facilities at this time.
During July 1998, the Company entered into a bank credit facility. The bank
credit facility provides for a line of credit up to $300,000 collateralized by
substantially all of the Company's assets. The line bears interest at the prime
rate plus 2 1/2% and requires the Company to satisfy ongoing financial covenants
including specified working capital and debt-to-equity ratios and restricts the
Company's ability to pay dividends, to merge and consolidate with other
entities, and to repay subordinated indebtedness. The Company has not drawn on
the line of credit and will be unable to draw on the line of credit until
certain financial covenants are met. The Company issued to the bank that is
providing the credit facility a warrant to purchase shares of Preferred Stock
which, upon the consummation of the Offering, will be converted into a warrant
to purchase 1,167 shares of Common Stock at an exercise price of $3.00 per
share.

The Company's future liquidity and capital requirements will depend on,
among other factors, the extent to which the Company's products gain market
acceptance and the success of its research and development programs and timely
regulatory clearances of new products. The Company believes that the net
proceeds from this Offering, together with interest income thereon, plus the
Company's existing capital resources, will be sufficient to fund its operations
and growth strategy for at least 12 months. See "Use of Proceeds." However, the
Company cannot provide any assurances that it will not require additional
financing during this time frame. If additional financing is necessary, the
Company would seek to raise these funds through credit facilities or debt or
equity offerings. There can be no assurance that such funds would be available
on terms acceptable to the Company or at all.

BACKLOG

The Company fills orders for its products promptly. Accordingly, backlog is
not a significant factor in its business.

YEAR 2000 COMPLIANCE

The Company recognizes the need to ensure that its operations will not be
adversely impacted by Year 2000 hardware and software issues. The Company
intends to confirm its compliance regarding Year 2000 issues for both internal
and external information systems by the end of 1998. This process will entail
communicating with significant suppliers, financial institutions, insurance
companies and other parties that provide significant services to the Company.
There can be no assurance that the Company's primary service providers will
properly address and resolve such provider's Year 2000 issues. Expenditures to
make the

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<PAGE> 27

Company Year 2000 compliant will be expensed as incurred and are not expected to
be material to the Company's consolidated financial position or results of
operations.

CHANGE IN AUDITOR

The Board of Directors of the Company on December 2, 1997, terminated the
Company's relationship with PricewaterhouseCoopers, LLP and engaged Ernst &
Young LLP as its new independent auditors to audit the Company's financial
statements. The report of PricewaterhouseCoopers, LLP on the Company's financial
statements for the year ended December 31, 1996 did not contain an adverse
opinion or a disclaimer of opinion nor was it qualified or modified as to
uncertainty, audit scope or accounting principles. During this period and
thereafter there were no disagreements between the Company and
PricewaterhouseCoopers, LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of PricewaterhouseCoopers,
LLP, would have caused it to make reference to the subject matter of the
disagreements in connection with its report. The Company has authorized
PricewaterhouseCoopers, LLP to respond fully to inquiries from Ernst & Young LLP
concerning all matters relating to prior audits conducted by
PricewaterhouseCoopers, LLP.

The Company did not consult with Ernst & Young LLP on the application of
accounting principles to a specified transaction, either completed or proposed,
or the type of audit opinion that might be rendered on the Company's financial
statements before engaging Ernst & Young LLP to perform its audit.

The Company has supplied a copy of this disclosure to both
PricewaterhouseCoopers, LLP and Ernst & Young LLP and neither has indicated to
the Company that it objects or disagrees with this disclosure.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130), issued by
the FASB in June 1997, is effective for periods beginning after December 15,
1997. Under the new requirements for calculating income, this statement requires
that an enterprise (a) classify items of other comprehensive income by their
nature in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The impact
of SFAS No. 130 on the calculation of comprehensive income for these periods was
not material.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. The adoption of SFAS No. 131 will have no impact on the
Company's consolidated results of operations, financial position or cash flows.

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<PAGE> 28

BUSINESS

OVERVIEW

The Company designs, develops and markets innovative medical devices that
are primarily used in orthopaedic surgery, including sports medicine and
minimally invasive arthroscopic procedures. The Company's current product
offerings consist of a variety of suture anchors, an array of arthroscopic
instruments and a system of surgical screws, all of which are designed for
specific orthopaedic surgical applications. The Company believes that its suture
anchors, which have been primarily used for rotator cuff repair of the shoulder
and feature a patented high/low thread pattern, provide surgeons with a variety
of intra-operative options and lead to improved surgical outcomes. By leveraging
the competitive advantages of its shoulder products, the Company will be
positioned to further penetrate markets for orthopaedic procedures involving the
knee, hand and foot. In addition, the Company is applying its technology to
opportunities outside of orthopaedics through strategic partnerships for
applications in urology and dentistry, and is also pursuing other strategic
opportunities in plastic surgery, spinal surgery and trauma.

The Company intends to achieve leading positions within the sports
medicine/arthroscopy segment of the orthopaedic industry by increasing the
aggregate number of surgical procedures using the Company's products and
increasing the number of the Company's products used in each surgical procedure.
The Company believes that the brand awareness that it is developing with the
advantages of its suture anchor products will accelerate the introduction and
acceptance of additional products now under development. The Company is also
developing a variety of other innovative medical devices including (i) a knot
substitute that could eliminate the difficult and time-consuming task of remote
surgical knot-tying, (ii) bio-absorbable suture anchors which would gradually
degrade and absorb into surrounding tissue, (iii) a comprehensive line of knee
products for use in miniscal and ACL repair procedures, and (iv) the
"next-generation" of fixation products that will be designed to facilitate the
re-attachment of soft tissue to other soft tissue.

The Company's products generally are selected by surgeons and then
purchased by hospitals or surgical facilities for use by the surgeon.
Accordingly, the Company's primary focus in developing and marketing its
products is to establish relationships with orthopaedic surgeons who specialize
in arthroscopic procedures. The Company's scientific advisory board, made up of
leading surgeons, assists the Company in marketing its products to other
surgeons through educational seminars, workshops, clinical studies and published
articles, as well as in generating new product ideas and providing input in
clinical evaluations. The Company distributes its products domestically and
internationally through a network of sales agents and stocking dealers. Within
the United States, the Company utilizes approximately 34 third-party
distributors, consisting of independent sales agents and stocking dealers that
collectively employ approximately 180 sales representatives. Internationally,
the Company distributes its products through a network of 14 stocking dealers in
14 countries consisting of independent stocking dealers that collectively employ
approximately 80 sales representatives, including Japan where the Company
recently signed a distribution agreement with Mizuho Medical Co., Ltd., a
leading medical device company, and is awaiting final Japanese regulatory
approval.

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<PAGE> 29

INDUSTRY BACKGROUND AND MARKET DATA

The orthopaedic industry is estimated to generate sales in 1998 of $8.3
billion worldwide, with over $4.4 billion in the United States. Market segments
within this industry consist of trauma devices, reconstructive implants, bone
rehabilitation, and spinal implants as well as sports medicine and arthroscopy
devices. The sports medicine/arthroscopic surgery market segment, in which the
Company currently competes, is estimated to generate sales in 1998 of $1.3
billion worldwide, with $785 million in the United States. The Company believes
that growth in the sports medicine/arthroscopic segment will be driven primarily
by the introduction of new arthroscopic procedures and increased physical
activity by a growing and increasingly active adult population. The United
States Consumer Products Safety Commission estimates that the age group between
45 and 54 is likely to increase by 73% between 1990 and 2010. This growth,
coupled with increased physical activity among adults, has led to a 60% rise in
emergency room visits related to athletic activity from 1986 to 1996.

Common Tissue Injuries

Methods of Treatment

Severe tissue and joint injuries have historically been treated using open
surgery involving hospital admittance, large incisions, associated trauma and
lengthy rehabilitation. These procedures are complex, highly invasive,
time-consuming and technically challenging. A typical open procedure involves
the reattachment of soft tissue to bone using metal surgical screws or staples.
These devices are placed through the tissue to secure it directly to the bone.
Metal screws and staples generally require large incisions, are difficult to
implant and protrude above the surface of the bone, creating potential damage to
healthy tissue. If a revision or corrective surgery is required, it is difficult
to remove the previously attached devices without additional tissue damage. As a
result, the device is often left in place, which can lead to less than optimal
placement of the revision devices.

To address the limitations of the traditional methods of reattaching soft
tissue to bone, the suture anchor was introduced in 1989. A suture anchor is
deployed in the bone and becomes secured below the outer surface. A suture is
attached to the anchor and used to secure soft tissue structures to the bone. A
suture anchor is inserted arthroscopically allowing for a smaller incision than
traditional methods of reattachment. When using such arthroscopic techniques,
the surgeon makes a small incision through which he passes a fiber optic
illuminated imaging tube, called an arthroscope, to allow the surgeon to see the
injury. Through another small incision, the surgeon typically inserts another
tube, called a cannula. The surgeon passes certain surgical instruments and
sutures through the cannula to make the necessary repairs. Such arthroscopic
techniques minimize the trauma and complications associated with surgery for the
repair of orthopaedic joint injuries.

Many current products available in the suture anchor market have
significant limitations. The most popular suture anchor is held in place by
barbs and may require pre-drilling even for placement in soft bone. The
potential risks are a lack of pull-out strength and possible migration of the
anchor. Also, these anchors generally are not revisable in instances when the
suture breaks or the anchor needs to be replaced or repositioned. As a result,
in such instances, surgeons typically leave the non-functioning anchor in place
and insert an additional anchor or damage surrounding bone in order to retrieve
the anchors. Additional anchors often are also required to be inserted if more
than one suture is necessary or desirable in surgery.

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<PAGE> 30

THE OBL SOLUTION

The Company's suture anchors are designed to provide exceptional
performance, addressing certain limitations of competitive suture anchors. As a
result of its proprietary high/low thread pattern, the Company's anchors have
superior pull-out strength in soft, cancellous bone. This significantly greater
pull-out strength reduces possible migration of the anchor and allows for
multiple sutures to be used with a single anchor thus distributing the load of
the suture over a greater area of tissue. The thread pattern of the Company's
anchors allows for easy insertion and retrieval and may not require pre-drilling
in soft bone. Because pre-drilling may not be required for insertion of the
Company's suture anchors in soft bone, the Company's suture anchors produce
reduced insertion torque which results in less bone damage and promotes quicker
healing. The Company believes these features lead to improved surgical outcomes.
Further, certain of the Company's suture anchors are pre-loaded in an insertion
instrument to facilitate ease of use and to reduce surgery time and associated
costs.

BUSINESS STRATEGY

Expand Core Suture Anchor Business. The Company intends to increase its
market share for suture anchors by increasing sales and marketing efforts
directed to its core shoulder surgery market segment. The Company believes that
its recently introduced OBL RC5 pre-loaded anchor product (which combines an
anchor, multiple pre-loaded sutures, and a disposable insertion device)
addresses certain limitations of other anchors presently on the market. The
Company intends to continue to increase market acceptance of its core suture
anchor products by expanding its network of domestic and international
distributors. In addition, through the efforts of its scientific advisory board,
the Company will continue to focus on featuring its core suture anchor products
in educational training programs directed at leading surgeons within the sports
medicine/arthroscopy market.

Continue to Develop Brand Awareness. The Company believes that it is
beginning to develop brand awareness with leading surgeons through its suture
anchor products. The Company intends to leverage this brand awareness by
developing or acquiring rights to additional complementary products for sale
through the Company's expanding distribution network. Toward this end, the
Company is in the process of developing a comprehensive line of knee products
for use in meniscal and ACL repair procedures. The Company is also developing an
arthroscopic instrumention system that will include a variety of instruments
designed to facilitate knee and shoulder surgeries and be fully compatible with
and complementary to the Company's other suture anchor products. Through this
system, the Company expects to improve the effectiveness of the surgeon and to
increase the number of its products used in each surgical procedure.

Apply the Company's Technologies to Additional Applications. The Company
intends to continue to pursue additional opportunities to apply its proprietary
technologies both within and outside of the sports medicine/arthroscopy markets.
Within the sports medicine/arthroscopy market, the Company intends to focus on
expansion of sales and marketing activities to further penetrate markets, such
as the knee, hand, and foot. Within the broader orthopaedic market, the Company
is pursuing licensing opportunities for its technology for applications in the
areas of trauma and spine. The Company is also pursuing opportunities outside
the orthopaedics industry. For example, the Company's anchor technology is
currently being licensed to Imcor for the development of dental implants.

Develop New Technologies and Materials. The Company is continuing to
pursue the development of new technologies and products that address specific
surgical needs. In this regard, the Company is currently pursuing the
development of (i) a knot substitute that could eliminate the difficult and
time-consuming task of remote surgical knot-tying, (ii) bio-absorbable suture
anchors which would gradually degrade and absorb into surrounding tissue causing
the surrounding bone to be stronger than bones with more permanent anchors,
29
<PAGE> 31

(iii) a comprehensive line of knee products including a meniscal repair device
and an interference screw for ACL reconstruction which will utilize the
Company's proprietary high/low thread design, and (iv) the "next-generation" of
fixation products that would be designed to facilitate the re-attachment of soft
tissue to other soft tissue. The Company anticipates developing additional
technologies through its internal resources as well as through licensing
agreements.

Pursue Strategic Alliances and Acquisitions. The Company will continue to
pursue strategic alliances and acquisitions as a means of facilitating
additional product development and expanded distribution. In this regard, the
Company intends to identify key foreign distributors to promote the Company's
products in international markets. For instance, the Company recently signed a
distribution arrangement with Mizuho, a leading medical device company serving
the Japanese market. In addition, the Company plans to develop alliances that
will facilitate new product introductions such as the Company's distribution
arrangement with T.A.G. Medical Products. The Company also intends to
commercialize applications of its technology outside of sports
medicine/arthroscopy through arrangements such as with Mentor and Imcor. There
are no present agreements or arrangements for any potential or future
acquisitions.

PRODUCTS AND TECHNOLOGY

The Company's current product offerings are described below and consist of
a variety of suture anchors, an array of arthroscopic instruments and a system
of surgical screws, all of which are designed for specific orthopaedic surgical
applications. Each of the following products have received FDA 510(k) clearance,
are modifications to 510(k) cleared devices that the Company believes do not
require additional clearance, or are devices the Company believes have been
exempted by the FDA from the 510(k) clearance process. See
"Business -- Government Regulation."

30
<PAGE> 32

<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------- -----------
<S> <C>
PRE-LOADED SUTURE ANCHORS
OBL RC5 Pre-Loaded Suture Anchor Pre-loaded RC5 anchor in a disposable
inserter with two braided polyester sutures.
Reduces amount of handling time needed to
prepare the anchor for implantation. Used
for rotator cuff reattachment.
2.8 mm Pre-Loaded Suture Anchor Pre-loaded PeBA S anchor in a disposable
inserter with one braided polyester suture.
Reduces amount of handling time needed to
prepare the anchor for implantation. Used
for repairs of the shoulder and for ulnar
ligament reattachments.
INDIVIDUAL SUTURE ANCHORS
5.0 mm RC5 Anchor Used for rotator cuff reattachment.
2.8 mm PeBA S Anchor Small profile is ideal for small, dense
bones. Use includes repairs of the shoulder
and ulnar ligament reattachments.
4.0 mm PeBA C Anchor Primary fastener for soft bone. Use includes
repairs in the shoulder, elbow, knee and
foot. Also sold through an OEM arrangement
with Mentor for use in female urinary stress
incontinence.
6.5 mm PeBA C Anchor Use includes shoulder, elbow, knee and foot.

INSTRUMENTS
Manual Arthroscopic Instruments Manufactured by T.A.G. Medical Products and
distributed in the United States exclusively
by OBL. Used in various types of
arthroscopic procedures.
Instrumentation Systems A selection of arthroscopic instruments used
to facilitate implantation of the Company's
anchor products; offered in a variety of
configurations; components include
inserters, bone drills, drill guides, and
sterilization trays.
SURGICAL SCREWS
Facet Screw System Designed for reconstructive surgery of small
bones, primarily in foot and ankle. Includes
a range of screws from 1.8 mm to 6.8 mm in
diameter.
Forefoot Reconstructive Screw System A system of cannulated cortical and
cancellous screws ranging in size from 2.7
mm to 3.5 mm in diameter.
</TABLE>

- ---------------
Suture Anchors

The Company currently markets a selection of suture anchor products which
provide the surgeon with distinctly different soft tissue suture anchors
designed for specific applications.

Proprietary High/Low Thread Design. Each of the Company's suture anchors
is made from titanium alloy and utilizes the Company's patented high/low double
helix thread design. This unique thread pattern is designed to (i) increase bone
density between the threads resulting in superior pull-out strength, (ii)
minimize radial stress on the bone which limits bone damage, and (iii) produce
low insertion torque allowing for ease of insertion. Unlike many suture anchors
currently on the market which cannot be removed or revised by the surgeon, the
Company's anchors may be removed if necessary where, for instance, the suture
has broken or where the anchor needs to be repositioned. In addition, because of
the anchor's enhanced holding capability, each of the Company's suture anchors
can accept multiple sutures. Multiple sutures distribute the load of each suture
over a greater area of tissue, resulting in a stronger repair at the
reattachment site. Using multiple sutures per anchor also allows the surgeon to
reduce the number of anchors needed per procedure, which may reduce the time of
the procedure and overall surgical costs.

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<PAGE> 33

Pre-Loaded Suture Anchors. The Company recently introduced the OBL RC5
pre-loaded suture anchor. Developed as a result of surgeon demand for a complete
anchor deployment system, the OBL RC5 is a 5.0 mm titanium suture anchor which
comes pre-loaded in a disposable inserter and pre-threaded with two braided
polyester sutures. The sutures are colored differently for easy intra-operative
identification. The OBL RC5 comes sterile packed and is designed to
significantly reduce the amount of handling time needed to implant the anchor,
thereby likely reducing surgical costs. The OBL RC5 inserter can also be used as
an extraction tool for suture repair or anchor repositioning. The Company also
recently introduced a 2.8 mm suture anchor which comes pre-loaded and sterile
packed with a disposable inserter and one braided polyester suture.

Individual Suture Anchors. While many surgeons prefer the convenience of a
pre-loaded anchor deployment system, individual suture anchors are still widely
used in many surgical procedures where speed is less important to the surgeon or
where the surgeon desires a particular type or size of suture that does not come
in a pre-loaded system. The PeBA family of suture anchors is the Company's
original line of anchors. These suture anchors must be loaded by the surgeon
into a manually driven insertion driver. The PeBA anchors come in varying sizes
which offers the surgeon intra-operative flexibility to choose the type, size
and amount of suture used for each procedure. The Company also markets its RC5
as an individual anchor. Each of the Company's individual suture anchors
utilizes its unique proprietary high-low thread design.

Private Label Suture Anchors. The Company is also the exclusive provider
of anchor products for Mentor. These anchors are marketed by Mentor and are used
primarily in treatment for female urinary stress incontinence.

Instrumentation

The Company recently secured a marketing alliance with and became an
exclusive distributor within the U.S. for T.A.G. Medical Products, a
manufacturer of high quality manual arthroscopic instrumentation. These
instruments are used by the surgeon in various arthroscopic procedures,
including procedures which utilize the Company's suture anchors.

The Company offers a selection of arthroscopic instruments compatible with
and used to deploy the Company's anchor products and manage tissue and sutures
during repair in surgery. The instruments are offered in a variety of kits,
which include inserters, bone drills, drill guides, and sterilization trays.
Each instrument may also be customized as requested by an individual surgeon.

Screw Systems

The Facet Screw System is a system of self-drilling cannulated screws which
are offered in varying sizes, from 1.8 mm to 6.8 mm in diameter, and in various
lengths. The Forefoot Reconstructive Screw System is a system of cannulated and
non-cannulated cortical and cancellous screws which are offered in varying
sizes, from 1.8 mm to 3.5 mm. These screws are designed to be used for
reconstructive surgery of smaller bones. The intended surgical audience is foot
and ankle orthopaedists and podiatrists. The unique feature of these screw
systems is the proprietary facet head of the screw which is designed to allow
maximum bone contact with minimal soft tissue irritation.

PRODUCTS UNDER DEVELOPMENT

The Company's product development efforts focus upon expanding the use of
its platform technology to increase the applications of existing products, as
well as the development of new products and technologies that address specific
needs identified by the surgical community. The Company currently has a number
of new products in various stages of development. Except as noted below, the
Company has not received the necessary regulatory clearance to market its
products under development and there can be no assurance that the Company will
obtain such clearances. See "Risk Factors -- Regulatory Risks" and "Business --
Government Regulation."

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<PAGE> 34

SB Titanium Suture Anchor

The SB Anchor is a toggle type anchor that is for use in osteoporotic bone
where the bone density cannot support a traditional threaded anchor. Inserted
either in a pre-drilled hole or by direct impact, the SB Anchor works by
rotating in the cancellous bone or medullary void. The Company's scientific
advisory board is currently considering the use of the SB Anchor for knee, hip
and trauma applications. The Company has received FDA 510(k) clearance for its
SB Anchor.

SB Non-Metallic Suture Anchor

The Company also intends to introduce its SB Anchor in a high-density
plastic material as well as a bio-absorbable material which degrades and absorbs
into surrounding tissue. Non-clinical testing is currently being conducted by
the Company.

Interference Screw

As part of the Company's strategy to expand its surgical procedure base,
the Company intends to introduce an interference screw for ACL reconstruction.
The ACL interference screw will utilize the Company's proprietary high/low
thread design.

Complete Instrument System -- Shoulder and Knee

The Company, in consultation with its scientific advisory board, is
developing comprehensive instrument systems for both the knee and shoulder.
These instrument systems will include a full complement of instruments designed
to facilitate knee and shoulder surgeries and will be fully compatible with the
Company's other suture anchor products. Such instruments will focus on tissue
and suture management and repair.

DRYKnot

One of the most difficult and time-consuming processes of arthroscopic
fixation surgery is suture knot-tying which must been done remotely by the
surgeon through a straw-like device known as a cannula. Difficulties in
arthroscopic knot-tying limit the number of surgeons capable or willing to
perform arthroscopic surgery. The DRYKnot would enable the suture to fixate
tissue to the bone without the complexity of normal knot-tying. The DRYKnot
could be used wherever a remote suture knot needs to be intra-operatively tied.
The Company's first generation of the DRYKnot is expected to be introduced in a
high density plastic. The Company also intends to introduce the DRYKnot in a
bio-absorbable material.

SALES AND MARKETING

The Company's products are typically selected by surgeons and then
purchased by hospital and surgical facilities for use by the surgeon.
Accordingly, the Company's marketing efforts are primarily directed toward
orthopaedic surgeons who specialize in sports medicine/arthroscopic procedures.
The American Academy of Orthopaedic Surgeons currently estimates that there are
15,600 board certified orthopaedic surgeons in the United States, of which
approximately 37% consider arthroscopy to be a major practice area. To reach
these surgeons, the Company's sales efforts include a combination of direct
sales calls, clinical workshops and presentations at medical trade shows and
education conferences.

The Company's products are sold through a network of sales agents and
stocking dealers both domestically and internationally. Within the United
States, the Company currently utilizes approximately 34 third-party distributors
consisting of independent sales agents and stocking dealers that collectively
employ approximately 180 sales representatives. The Company typically provides
inventories of its products to its United States sales agents until sold or
returned by the agent, and the Company pays the agents a commission based on net
revenues. Stocking dealers typically purchase product inventory from the Company
for their use in marketing and filling customer orders.

Internationally, the Company is represented by approximately 14 dealers who
employ over 80 sales representatives. The Company currently has distribution
arrangements covering parts of Europe, Canada,

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<PAGE> 35

Israel, New Zealand, and Japan where the Company recently signed an agreement
with Mizuho, a leading medical device company, and is awaiting final Japanese
regulatory approval. The Company is also currently pursuing further global
distribution in Australia, India and certain Asian countries. Under the
Company's contractual arrangements with foreign distributors, the distributor is
granted the exclusive right to market the Company's products in the specified
territory, but must meet sales quotas to maintain its relationship with the
Company. Foreign distributors typically purchase product inventory from the
Company for their use in marketing and filling customer orders.

While the Company's independent sales representatives typically sell
orthopaedic devices for a number of other manufacturers, the Company seeks
representatives who are committed to making sales of the Company's products a
priority in the product niches they address. The Company is dedicated to
continually training and educating the sales force in order to enhance the
representatives' ability to effectively market the Company's products. For
instance, the Company sponsors an annual national sales meeting for its
principal dealers and agents which serves to educate the sales force on the
technical aspects of the OBL product line. The Company also provides these sales
representatives with a monthly newsletter from the Company which includes sales
success stories, surgical tips from surgeons, letters from various employees and
general product updates.

The Company's scientific advisory board is also instrumental in developing
relationships within the arthroscopic medical community. For instance, the
scientific advisors participate in presentations of the Company's products at
medical trade shows and educational conferences. The Company also sponsors
weekend workshops that are led by its scientific advisors for six to eight of
their peers. These workshops are held in the Company's headquarters in
Scottsdale, Arizona, and target new users for the Company's products.

The Company uses print advertising for its products in arthroscopic
journals to support its suture anchors and manual arthroscopic instruments. See
"Risk Factors -- Limited Sales, Marketing and Distribution Capability; Reliance
on Third-Party Distributors."

STRATEGIC RELATIONSHIPS

The Company has an exclusive marketing and distribution agreement with
Mentor which grants an exclusive license for use of the Company's suture anchors
for treatment of urological conditions and disorders. Under the agreement,
Mentor has paid a one time licensing fee of $300,000 and has minimum purchase
requirements. The term of the agreement is for seven years with additional
options to extend the term of the agreement. In addition, the agreement includes
certain representations and warranties as well as indemnification provisions
relating to infringement by the Company of intellectual property rights of
others (unless the infringement arises from the combination of the Company's
product with Mentor's products).

The Company also has an exclusive licensing agreement with Imcor for use of
its suture anchors in connection with dental implants. Imcor is obligated to pay
minimum royalties to the Company beginning in 1999. The term of the agreement is
for the duration of the relevant patent. In addition, the Company has a
marketing and distribution agreement with T.A.G. Medical Products whereby the
Company serves as the exclusive distributor in the U.S. for T.A.G. manual
arthroscopic instruments. The agreement expires December 31, 2002 and may be
extended for an additional five year term upon the mutual agreement of the
parties. The Company is required to meet certain mutually agreed upon purchase
targets. The agreement is subject to termination for failure to meet the minimum
purchase targets.

For certain risks relating to the Company's arrangements with its strategic
partners, see "Risk Factors -- Uncertainties Relating to Strategic Partners."

MANUFACTURING AND QUALITY CONTROL

The manufacture of the Company's devices and instruments consists of
design, inspection, testing and packaging of components that have been molded,
machined or manufactured to the Company's specifications by a variety of outside
contractors. Most purchased components are available from more than one vendor.
Manufactured products are received, inspected, and warehoused in the Company's
headquarters in Scottsdale, Arizona. There can be no assurance that the
Company's suppliers will be able to satisfy the Company's existing or future
component requirements.

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<PAGE> 36

In order to maintain compliance with the FDA's Quality Systems Regulation
("QSR"), ISO 9001 and the requirements of foreign regulatory agencies, the
Company has established a quality control system. Under this system, samples
from each lot of finished goods are inspected to ensure that they comply with
the Company's specifications.

Although the Company believes that its subcontractors and component
suppliers are in material compliance with applicable regulations, there can be
no assurance that the FDA, or a state, local or foreign regulatory authority,
will not take action against a subcontractor or a component supplier found to be
violating such regulations or that the Company will be able to continue to
secure products in a timely manner from its suppliers, or replace any supplier
in a timely manner as necessary. See "Risk Factors -- Limited Sales, Marketing
and Distribution Capability; Reliance on Third-Party Distributors."

RESEARCH AND DEVELOPMENT

The Company's research and development expenses for the years ended
December 31, 1996 and 1997 were $152,000 and $273,000, respectively. Research
and development is done through a combination of its in-house staff of two
full-time employees, supplemented by the Company's scientific advisory board, as
well as outside design firms. The Company intends to use a portion of the
proceeds of this Offering to add additional full-time employees committed to
research and development and to establish a facility dedicated to prototyping
products under development. See "Use of Proceeds."

The Company's research and development efforts focus on designing superior
products and developing advanced delivery systems alternative materials. The
Company believes that its core high/low thread technology is applicable to a
range of soft-tissue surgical applications and intends to continue to develop
products to meet those applications utilizing such technology. The Company is
also continually engaged in assessing new tissue repair device technologies and
techniques, including efforts to develop alternative materials. In the future,
the Company's research and development efforts may include the identification of
new technologies developed by others and the acquisition or in-licensing of new
technologies and product lines or extensions. See "Use of Proceeds." In addition
to the products it currently has under development, the Company has identified
potential strategic partners for polymer technology and tissue-to-tissue
fixation products. The Company intends to maintain a balance of internal
development for core competencies and partnerships with external experts in new
technologies.

PATENTS AND PROPRIETARY RIGHTS

As of April 30, 1998, the Company owned six issued United States patents,
four pending United States patent applications, and nine pending foreign patent
applications covering various aspects of its devices, one federally registered
trademark and three pending federal trademark applications. There can be no
assurance that the patents that have been issued to the Company, or any patents
which may be issued as a result of the Company's patent applications, will
provide any competitive advantages for the Company's products or that they will
not be successfully challenged, invalidated or circumvented in the future. In
addition, there can be no assurance that competitors, many of which have
substantial resources and have made substantial investments in competing
technologies, will not seek to apply for and obtain patents that will prevent,
limit or interfere with the Company's ability to make, use and sell its products
either in the United States or in international markets. See "Risk
Factors -- Reliance on and Uncertainty Relating to Patents and Proprietary
Technology; Risk of Infringement."

35
<PAGE> 37

agreements with its employees, consultants, and strategic partners, disputes
will not arise as to ownership of these proprietary rights or that the Company
will not be required to defend and indemnify strategic partners for the alleged
infringement of the Company's products. See "Risk Factors -- Uncertainties
Relating to Strategic Partners." Further, the extent to which efforts by others
will result in patents and the effect on the Company of the issuance of such
patents is unknown.

GOVERNMENT REGULATION

United States. Clinical testing, manufacture and sale of the Company's
products are subject to regulation by numerous governmental authorities,
principally the FDA and corresponding state and foreign regulatory agencies.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, 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,
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 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.

In the United States, medical devices are classified into one of three
classes (i.e., Class I, II, or III) on the basis of the controls deemed
necessary by the FDA to reasonably ensure their safety and effectiveness. Class
I devices are subject to general controls (e.g., labeling, premarket
notification (unless exempt) and adherence to QSR requirements) and Class II
devices are subject to general and special controls (e.g., performance
standards, post-market surveillance, patient registries and/or FDA guidelines).
Generally, Class III devices are those which must receive pre-market approval by
the FDA to ensure their safety and effectiveness (e.g., life-sustaining,
life-supporting and implantable devices, or new devices which have been found
not to be substantially equivalent to legally marketed devices).

Before a new device can be introduced in the market, the Company must
generally obtain clearance from the FDA under the premarket notification
provisions of Section 510(k) of the FDC Act ("510(k)") or approval of a PMA from
the FDA. A 510(k) clearance will be granted if the submitted information
establishes that the proposed device is "substantially equivalent" to a legally
marketed Class I or Class II medical device or a Class III medical device for
which the FDA has not called for PMAs. The FDA recently has been requiring more
rigorous demonstration of substantial equivalence than in the past, including in
some cases requiring submission of clinical trial data. The FDA may determine
that the proposed device is not substantially equivalent to a predicate device
or that additional information is needed before a substantial equivalence
determination can be made. It generally takes from four to 12 months from
submission to obtain 510(k) premarket clearance, but the process may take
longer. A "not substantially equivalent" determination or a request for
additional information could prevent or delay the market introduction of new
products that fall into this category and could have a material adverse effect
on the Company's business, financial condition or results of operations. For any
of the Company's devices that are 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.

A PMA application must be filed if a proposed device is not substantially
equivalent to a legally marketed Class I or Class II device, or if it is a
preamendments Class III device for which the FDA has called for PMAs. A PMA
application must be supported by valid scientific evidence which typically
includes extensive information (including relevant bench tests, laboratory and
animal studies and clinical trial data) to demonstrate the safety and
effectiveness of the device. The PMA application also must contain a complete
description of the device and its components; a detailed description of the
methods, facilities and controls used to manufacture the device; and the
proposed labeling, advertising literature and training materials (if any). The
PMA process can be expensive, uncertain and lengthy. The FDA review of a PMA
application generally takes one to three years from the date the PMA is accepted
for filing, but may take significantly longer. A number of devices for which FDA
approval has been sought by other companies have never been approved for
marketing. Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements or new PMAs.

36
<PAGE> 38

If human clinical trials of a device are required for a 510(k) or a PMA and
the device presents a "significant risk," the sponsor of the trial (usually the
manufacturer or the distributor of the device) will have to file an
Investigational Device Exemption (an "IDE") application prior to commencing
human clinical trials. The IDE application must be supported by data, typically
including the results of animal and laboratory testing. If the IDE application
is approved by the FDA and one or more appropriate Institutional Review Boards
("IRBs"), human clinical trials may begin at a specific number of
investigational sites with a specific number of patients, as approved by the
FDA. 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. Submission of an IDE
does not give assurance that FDA will approve the IDE and, if it is approved,
there can be no assurance that FDA will determine that the data derived from
these studies support the safety and efficacy of this device or warrant
continuation of clinical studies.

Sponsors of clinical trials are permitted to sell investigational devices
distributed in the course of the study provided that compensation does not
exceed recovery of the costs of manufacture, research, development and handling.
An IDE supplement must be submitted to and approved by the FDA before a sponsor
or investigator may make a change to the investigational plan that may affect
its scientific soundness or the rights, safety or welfare of human subjects.

The Company has not submitted 510(k)s or PMAs for many of its proposed
devices. There can be no assurance that FDA will not determine that these or
other future products must be approved through the 510(k) or PMA approval
process. FDA may also require the 510(k) submissions or PMAs for any of the
Company's devices to be supported by clinical data, which would lengthen the
clearance or approval process. Several of the Company's products have been
cleared through the 510(k) process. In addition, the Company believes that a
number of devices that it currently markets or intends to market are exempt from
FDA's premarket clearance and approval requirements. However, there can be no
assurance that the FDA would agree with the Company's determinations, or that
the FDA would not require that the devices be cleared or approved by the FDA
before they could be marketed or continue to be marketed.

There can be no assurance that the Company will be able to obtain necessary
regulatory approvals or clearances on a timely basis, if at all, and delays in
receipt of or failure to receive such approvals or clearances, the loss of
previously received approvals or clearances, limitations on intended use imposed
as a condition of such approvals or clearances, or 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 operation.

For any of the Company's devices that are 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). The Company has made
certain modifications to its principal 510(k) cleared and exempt devices which
the Company believes do not require the submission of new 510(k) notices. There
can be no assurance, however, that the FDA would agree with any of the Company's
determinations not to submit a new 510(k) notice for any of these changes made
to the devices. If the FDA requires the Company to submit a new 510(k) notice
for any device modification, the Company may be prohibited from marketing the
modified device until the 510(k) notice is cleared by the FDA. There can be no
assurance that any 510(k) notice regarding a modification will be cleared on a
timely basis, if at all.

Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Manufacturers of medical devices for
marketing in the United States are required to adhere to applicable regulations
setting forth detailed QSR requirements, which include testing, control and
documentation requirements. Manufacturers must also comply with Medical Devices
Reporting ("MDR") requirements that a firm 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. Labeling
and promotional activities are subject to scrutiny by the FDA and, in certain
circumstances, by the Federal Trade Commission. Current FDA enforcement policy
prohibits the marketing of approved or cleared medical devices for unapproved
uses.

37
<PAGE> 39

The Company is subject to routine inspection by the FDA and certain state
agencies for compliance with QSR requirements, MDR requirements, and other
applicable regulations. Certain of the Company's third party suppliers may also
be subject to inspection by the FDA for compliance with applicable regulations.
There can be no assurance that the Company or such third party suppliers will be
found by the FDA to be in compliance with applicable regulations. A finding of
noncompliance could adversely affect the Company's ability to obtain products
from such suppliers or to continue marketing products. The FDA Modernization
Act, which was enacted in November of 1997, will affect the IDE, 510(k) and PMA
processes, and also will affect device standards and data requirements,
procedures relating to humanitarian and breakthrough devices, tracking and
postmarket surveillance, accredited third party review, and the dissemination of
off-label information. The Company cannot predict how or when these changes will
be implemented or what effect the changes will have on the regulation of the
Company's products. Changes in existing requirements or adoption of new
requirements could have a material adverse effect on the Company's business,
financial condition or results of operation. There can be no assurance that the
Company will not incur significant costs to comply with laws and regulations in
the future or that laws and regulations will not have a material adverse effect
upon the Company's business, financial condition or result of operations.

The Company also is subject to numerous federal, state and local laws
relating to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control, and disposal of hazardous or
potentially hazardous substances. 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 or
results of operations.

International. The Company is also subject to regulation in each of the
foreign countries in which it sells its products in the areas of product
standards, packaging requirements, labeling requirements, import restrictions,
tariff regulations, duties and tax requirements. Many of the regulations
applicable to the Company's products in these countries are similar to those of
the FDA. The national health organization of some countries require the
Company's products to be qualified before they can be marketed in those
countries. The Company relies on its international distributors to comply with
these requirements. To date, the Company has not experienced significant
difficulty in complying with these regulations.

For European distribution, the Company has received ISO 9001 certification
and the CE mark. ISO 9001 certification standards for quality operations have
been developed to ensure that companies know, on a worldwide basis, the
standards of quality to which they will be held. The European Union has
promulgated rules which require that medical products receive the CE mark by
mid-1998. The CE mark is an international symbol of quality and compliance with
applicable European medical device directives. Failure to maintain the CE mark
will prohibit the Company from selling its products in Europe. ISO 9001
certification in conjunction with demonstrated performance to the medical device
directive is one of the CE mark certification requirements. There can be no
assurance that the Company will be successful in maintaining the certification
requirements. See "Risk Factors -- Regulatory Risks."

COMPETITION

more effective or less costly than those developed by the Company, or that any
such products would not render the Company's products obsolete or not
competitive.

The healthcare industry is undergoing rapid change and consolidation as
healthcare systems merge to affect cost savings and operating efficiencies. In
addition, a number of large, national buying consortiums have formed to engage
in group purchasing of medical supplies and services in an effort at cost
containment for member hospital systems and healthcare providers. These
consolidated systems and large purchasing organizations are likely to apply
pressure to manufacturers and distributors of medical devices to reduce the
purchase prices of their goods. As a result, the Company may be forced to lower
prices in response to those pressures in order for its products to be approved
for purchase by those organizations, which could have a material adverse effect
on the Company's business, financial condition, and results of operations.

Overall, the Company believes that the primary competitive factors in the
markets for its products are design, material, sizing options, pull-out
strength, revision options, quality and reliability, customer service, and
pricing. 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.

PRODUCT LIABILITY AND INSURANCE

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

EMPLOYEES

As of June 30, 1998, the Company had 19 employees of which two are engaged
in research and development activities, seven are engaged in sales and marketing
activities, one is engaged in regulatory affairs and quality assurance and nine
are engaged in administration and accounting. The Company considers its employee
relations to be good. None of the Company's employees are represented by unions.

The Company is dependent upon a number of key management and technical
personnel. The loss of the services of one or more key employees or consultants
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company's success will also depend on
its ability to attract and retain additional highly qualified management and
technical personnel. The Company faces intense competition for qualified
personnel, many of whom are often subject to competing employment offers. There
can be no assurance that the Company will be able to attract and retain such
personnel. See "Risk Factors -- Dependence on Key Personnel."

FACILITIES

The Company operates its corporate headquarters, its executive offices and
worldwide marketing and sales operations from an approximately 6,000 square foot
office space in Scottsdale, Arizona. The Company's lease for this facility
extends through 2002. The Company believes that its existing facilities will be
sufficient for its operational purposes through 1998 and that any additional
space needed thereafter will be available on commercially reasonable terms.

LEGAL PROCEEDINGS

There are no material legal proceedings to which the Company is a party.

39
<PAGE> 41

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
D. Ronald Yagoda.......................... 54 Chairman, Chief Executive Officer and
Treasurer
James W. Hart............................. 39 President and Chief Operating Officer
Gary R. Scheel............................ 50 Vice President, Sales & Marketing
Jeffry B. Skiba........................... 44 Vice President, Engineering &
Manufacturing
Jennifer L. Guelich....................... 26 Vice President and Chief Financial Officer
Steven P. Davis........................... 60 Secretary and Director
Michael D. Greenbaum...................... 55 Director
Robert F. Lusch, Ph.D..................... 49 Director
Leslie S. Matthews, M.D................... 46 Director
Gary A. Peterson.......................... 47 Director
Richard Previte........................... 63 Director
Kerry Zang, D.P.M......................... 55 Director
</TABLE>

- ---------------
Mr. Yagoda, a co-founder of the Company, has served as Chairman, Chief
Executive Officer, and Treasurer of the Company since its incorporation in 1994.
From 1988 to 1993, he served as President of Pinnacle Consultant Corp., an
independent investment banking consulting firm. From 1976 to 1988, Mr. Yagoda
was employed by Marcus Schloss & Company, a registered broker-dealer, in his
most recent capacity as Executive Vice-President and Director. Mr. Yagoda
received a B.A. in history and journalism from the University of Oklahoma.

Mr. Hart joined the Company as President and Chief Operating Officer in
January 1998. Prior to joining the Company, Mr. Hart served from 1986 to 1998 in
various management capacities, most recently as Vice President -- Strategic
Marketing, at Zimmer, Inc., a subsidiary of Bristol-Myers Squibb Company. Prior
to 1986, Mr. Hart served three years in numerous sales and management capacities
at Johnson & Johnson, Inc. Mr. Hart received a B.A. in economics from DePauw
University.

Mr. Scheel joined the Company in October 1996 as Vice President, Sales &
Marketing. Prior to joining the Company, Mr. Scheel was with Smith & Nephew
Richards from 1988 through 1996, most recently as Vice President of Sales. Mr.
Scheel received a B.A. in sociology from Lakeland College.

Mr. Skiba has served as Vice President, Engineering & Manufacturing of the
Company since its incorporation in 1994. From September 1991 to September 1993,
Mr. Skiba was employed as technical manager by International Polymer Engineering
Inc., a subsidiary of Impra, Inc., a medical device manufacturer. Mr. Skiba
received a B.S. in biomechanical engineering from Arizona State University and a
B.S. in business administration from the University of Phoenix.

Ms. Guelich joined the Company in October 1997 as Vice President and Chief
Financial Officer. Prior to joining the Company, Ms. Guelich was an Assistant
Controller for Eagle River Interactive, Inc., a public interactive media based
company, from May 1997 to October 1997. From 1993 to 1997, Ms. Guelich held
various positions at Ernst & Young LLP and at Price Waterhouse, LLP, both
independent auditors. Ms. Guelich received a B.S. in Accounting from the
University of Arizona and is a Certified Public Accountant.

Mr. Davis has served as Secretary and a Director since the inception of the
Company. He was a partner of the law firm Aronberg Goldgehn Davis & Garmisa,
Chicago, Illinois from 1969 to 1997, and has been Of Counsel to the law firm
since 1997. Mr. Davis received a J.D. from the University of Michigan and a
B.B.A. from the University of Michigan.

40
<PAGE> 42

Mr. Greenbaum has served as a Director of the Company since 1994. Since
1993, Mr. Greenbaum has served in various capacities with the Scottsdale
Healthcare Foundation and currently serves as Chairman and Treasurer. Mr.
Greenbaum has also served since 1994 in various capacities with the Phoenix Art
Museum where he currently serves as President of the Board of Trustees. In
addition, Mr. Greenbaum serves as a Director of Scottsdale Healthcare Systems,
Inc. Mr. Greenbaum received a B.S. in mathematics from Rensselaer Polytechnic
Institute.

Dr. Lusch has served as a Director of the Company since 1994. Since 1992,
Dr. Lusch has served as a Professor of Marketing and Accounting and the Helen
Robson Walton Chair in Marketing at the University of Oklahoma. From 1987 to
1992, Dr. Lusch served as Dean of the College of Business Administration at the
University of Oklahoma. Dr. Lusch also currently serves on the boards of
Heartland Capital, Security National Bank, and MediCenter, Inc. Dr. Lusch
received a B.S. in business and an M.B.A. from the University of Arizona, and a
Ph.D. from the University of Wisconsin.

Dr. Matthews has served as a Director of the Company since 1998 and is
Chairman of the Company's Scientific Advisory Board. Dr. Matthews is currently
the Chief of Orthopaedic Surgery at Union Memorial Hospital in Baltimore,
Maryland, and has served in that capacity since 1992. Dr. Matthews is the
President of the Arthroscopic Association of North America ("AANA"). Dr.
Matthews also currently serves as a managing partner of the Greater Chesapeake
Orthopaedic Association and is a member of the Board of Directors of the
Specialty Care Network. Dr. Matthews received a B.A. in natural sciences from
Johns Hopkins University and a M.D. from the Baylor College of Medicine.

Mr. Peterson has served as a Director of the Company since May 1997. Mr.
Peterson is the President and Chief Executive Officer of BATON Development Inc.,
a virtual incubator for medical products as well as the Managing Member of BATON
Ventures L.L.C. and the Venture Partner in Affinity Ventures II L.L.C., both
venture capital funds. Mr. Peterson has also been the President of
Peterson-Spencer-Fansler Company, a capital sourcing and operational consulting
company since 1991 and a General Partner of PSF Advisors, the General Partner of
PSF Health Care Fund L.P., a venture capital limited partnership. He was also
President of Peterson-Spencer-Fansler Investments, Inc., a registered broker
dealer and a registered investment advisor. From 1986 through 1994, Mr. Peterson
served as President of Genesis Venture Development, Inc., a venture capital fund
management company. Mr. Peterson was a founder of Angiomedics Incorporated and
served in the capacities of Chief Operating Officer and Executive Vice President
from its inception in 1983 to 1986 at which time Angiomedics was acquired by
Pfizer, Inc. Mr. Peterson received a B.A. in biology and psychology from
Gustavus Adolphus College and is a registered broker-dealer and a registered
investment advisor.

Mr. Previte has served as a Director of the Company since 1994. Since 1969,
Mr. Previte has served in various capacities at Advanced Micro Devices, a public
semiconductor manufacturer. He currently serves as its President and Chief
Operating Officer, and is a director. Mr. Previte received a B.S. in business
and finance and a M.B.A. from San Jose State University.

Dr. Zang, a co-founder of the Company, has served as a Director of the
Company since its inception. Dr. Zang is a Board Certified Podiatric Surgeon and
has been in private practice since 1973. Dr. Zang is currently a Director of
Education at Humana Hospital in Phoenix and a Clinical Professor of the
California College of Podiatric Medicine. Dr. Zang also serves as a Diplomate of
the American Board of Podiatric Surgery and a Fellow of the American College of
Foot and Ankle Surgeons. Dr. Zang received a B.S. from Fairleigh Dickinson
University and a D.P.M. from the New York College of Podiatric Medicine.

INVOLVEMENT OF MANAGEMENT IN CERTAIN LEGAL PROCEEDINGS

In 1988, Mr. D. Ronald Yagoda and Marcus Schloss & Co, a broker dealer of
which Mr. Yagoda was then a principal, executive officer and director, were
indicted on several charges related to insider trading. Mr. Yagoda was
subsequently acquitted on all counts raised against him; however, Marcus Schloss
& Co. was convicted on two of the charges. Subsequent to Mr. Yagoda's acquittal,
in order to settle a related civil and administrative action filed by the
Securities and Exchange Commission, Mr. Yagoda, without admitting or denying any
liability, consented to a one-year suspension from the securities industry.

41
<PAGE> 43

SCIENTIFIC ADVISORY BOARD

The Company has established a Scientific Advisory Board composed of
individuals with demonstrated expertise in the field of orthopaedic surgery. The
Scientific Advisory Board meets periodically to review the Company's research,
development and operations activities and to identify potential applications of
the Company's technology. In addition, members of the Scientific Advisory Board
are available on an individual basis to consult with the Company as needed. The
members of the Scientific Advisory Board are consultants rather than employees
and have substantial constraints on the amount of time they can devote to the
Company.

Each member of the Scientific Advisory Board has entered into a consulting
agreement with the Company that contains confidentiality and nondisclosure
provisions that prohibit the disclosure of confidential information to anyone
outside the Company. These agreements contain exclusivity provisions restricting
the clinical advisors from providing services to or investing in any competitor
of the Company without the Company's consent. The consulting agreements
typically have three year terms. Members of the Scientific Advisory Board are
typically granted options to purchase shares of Company Common Stock as
compensation for their services.

42
<PAGE> 44

The current members of the Scientific Advisory Board are as follows:

<TABLE>
<CAPTION>
ADVISOR INSTITUTION
- ------- -----------
<S> <C>
Champ L. Baker, Jr., M.D. .................. Chief of Surgery and President of the
Columbia HCA Hughston Sports Medicine
Hospital in Columbus, Georgia
Donald E. Baxter, M.D. ..................... Director of Foot and Ankle Fellowship,
Clinical Professor of Orthopedic Surgery at
University of Texas Medical School; Past
President of the American Orthopaedic Foot
and Ankle Society
Brian J. Cole, M.D. ........................ Assistant Professor at the Section of Sports
Medicine at the Rush Presbyterian St. Lukes
Medical Center
James C. Esch, M.D. ........................ Assistant Clinical Professor at the
Department of Orthopaedics at the University
of California, San Diego; Founder and Chair
of the San Diego Shoulder Arthroscopy
Meeting; Former President of AANA,
Oceanside, California
Larry Field, M.D. .......................... Co-Director Upper Extremity Service MSMC;
Clinical Instructor, Department of
Orthopaedic Surgery, University of
Mississippi School of Medicine
Gary M. Gartsman, M.D. ..................... Clinical Associate Professor of Orthopaedic
Surgery, Baylor College of Medicine,
Houston, Texas
Warren D. King, M.D. ....................... Director of Orthopaedic Surgery, Oakland
Raiders Professional Football Team, the San
Francisco Giants Professional Baseball Team,
and the San Jose Sharks Professional Hockey
Team, Palo Alto Medical Foundation for
Sports Medicine
Mark S. Myerson, M.D. ...................... Assistant Professor of Orthopaedics at Johns
Hopkins University; Board Member American
Orthopaedic Foot and Ankle Society
Patrick A. Ruwe, M.D. ...................... Assistant Professor, Department of
Orthopaedics and Rehabilitation at the Yale
Sports Medicine Center
James P. Tasto, M.D. ....................... Associate Clinical Professor of Orthopaedic
Surgery at the University of California, San
Diego; Director of the Alvarado Hospital
Knee Research Institute
Arthur Ting, M.D. .......................... Palo Alto Medical Foundation for Sports
Medicine
Leslie S. Matthews, M.D. ................... Chief of Orthopaedic Surgery specializing in
sports medicine and arthroscopic surgery and
Director of the Orthopaedic Residency
Training Program at Union Memorial Hospital;
Assistant Professor of Orthopaedic Surgery
at Johns Hopkins Hospital
</TABLE>

43
<PAGE> 45

SUMMARY OF EXECUTIVE COMPENSATION

The following table sets forth all compensation awarded to, earned by or
paid for services rendered to the Company in all capacities during the fiscal
year ended December 31, 1997 by (i) the Company's Chief Executive Officer and
(ii) the two most highly compensated other executive officers who received
annual compensation in excess of $100,000 (collectively, the "Named Executive
Officers"):

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
- --------------------------- -------- ------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
D. Ronald Yagoda............... $ 60,000 -- $6,000(2) -- --
Chief Executive Officer
Gary R. Scheel................. $120,000 $ 5,000 -- -- --
Vice President Sales &
Marketing
Jeffry B. Skiba................ $101,667 $10,000 -- -- --
Vice President Engineering &
Manufacturing
</TABLE>

- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those instances where the aggregate amount of such
perquisites and other personal benefits constituted the lesser of $50,000 or
10% of the total of annual salary and bonuses for the Named Executive
Officer for 1997.

(2) Consists of car allowance pursuant to Mr. Yagoda's employment agreement.

OPTION GRANTS IN LAST FISCAL YEAR

There were no grants of stock options to the Named Executive Officers
during 1997.

FISCAL YEAR-END OPTION VALUES

The following table sets forth certain information concerning the number
and value of unexercised stock options held by each of the Named Executive
Officers as of December 31, 1997. No Named Executive Officer exercised any
options in fiscal 1997.

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
D. Ronald Yagoda........................... -- -- -- --
Gary R. Scheel............................. 16,667 -- $ 58,335 --
Jeffry B. Skiba............................ 53,334 13,333 $285,137 $61,598
</TABLE>

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

(1) There was no public trading market for the Common Stock as of December 31,
1997. Accordingly, as permitted by the rules of the Securities and Exchange
Commission, these values have been calculated on the basis of an assumed
market value of $6.50 per share.

1998 STOCK INCENTIVE PLAN

The Orthopaedic Biosystems Ltd., Inc. 1998 Stock Incentive Plan, as amended
(the "Incentive Plan"), became effective January 1998 and was amended and
restated in June 1998. The Company believes that the Incentive Plan promotes the
success and enhances the value of the Company by linking the personal interests
of its employees, officers, consultants and advisors to those of its
shareholders and by providing such individuals with an incentive for outstanding
performance.

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<PAGE> 46

Under the Incentive Plan, the Company may grant incentive stock options or
non-qualified stock options to employees, officers of, and consultants and
advisors to, the Company, including employees who are members of the Board, but
excluding directors who are not employees. Following the Offering, the Incentive
Plan will be administered by a committee appointed by the Board, consisting of
at least two non-employee directors. The committee will have the exclusive
authority to administer the Incentive Plan, including the power to determine
eligibility, the types and sizes of options, the price and timing of options,
and any vesting (and acceleration of vesting) of options. Although the intention
stated in the Incentive Plan is to price an option at a price not less than the
Fair Market Value (as defined in the Incentive Plan) of the Common Stock at the
date of the grant, the committee, in its discretion may grant options at less
than Fair Market Value. The exercise price for any incentive option shall be set
by the committee, provided that the exercise price is not less than the Fair
Market Value. No stock option may be granted under the Incentive Plan after
December 31, 2007. The committee may at any time offer to exchange or buy out
any previously granted option for a payment in cash, stock, or another option,
based on terms and conditions set by the committee.

An aggregate of 333,334 shares of the Company's Common Stock are available
for grant under the Incentive Plan, subject to a proportionate increase or
decrease in the event of a stock split, reverse stock split, stock dividend, or
other adjustment to the Company's shares of Common Stock. Under the Incentive
Plan, the maximum number of shares of Common Stock that may be subject to one or
more options to a single participant during any fiscal year is 200,000. As of
August 10, 1998, the Company had granted options to purchase 160,674 shares of
Common Stock under the Incentive Plan.

The committee, with Board approval, may terminate or amend the Plan to the
extent shareholder approval is not required by law. Termination or amendment
will not adversely affect options previously granted under the Plan.

In the event of a change of control of the Company (as defined in the
Incentive Plan), all options under the Incentive Plan become immediately
exercisable.

401(k)

Under the Company's 401(k) plan, adopted in March 1998, eligible employees
may direct that a portion of their compensation, up to a legally established
maximum, be withheld by the Company and contributed to their account. All 401(k)
plan contributions are placed in a trust fund to be invested by the 401(k)
plan's trustee, except that the 401(k) plan may permit participants to direct
the investment of their account balances among mutual or investment funds
available under the plan. The Company may, at management's discretion, make
matching contributions under the 401(k) plan.

To date, the Company has not made any matching contributions under the
401(k) plan. Amounts contributed to participant accounts under the 401(k) plan
and any earnings or interest accrued on the participant accounts are generally
not subject to federal income tax until distributed to the participant and may
not be withdrawn until death, retirement, or termination of employment.

COMMITTEES OF THE BOARD OF DIRECTORS

Effective upon the closing of the Offering, the Company will establish a
Compensation Committee and an Audit Committee. The Compensation Committee, all
the members of which will be independent directors, will review executive
salaries and administer any bonus, incentive compensation, and stock option
plans of the Company. In addition, the Compensation Committee will consult with
management of the Company regarding compensation policies and practices of the
Company. The Audit Committee, all the members of which will also be independent
directors, will review the professional services provided by the Company's
independent auditors, the annual financial statements of the Company, and the
Company's system of internal controls. The Company anticipates that the
Compensation Committee will consist of Gary Peterson, Steven P. Davis, Michael
D. Greenbaum, and Robert F. Lusch, and that the Audit Committee will consist of
Gary Peterson, Steven P. Davis, and Michael D. Greenbaum.

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<PAGE> 47

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

For the year ended December 31, 1997, the Company's Board of Directors
established levels of compensation for certain of the Company's executive
officers without the involvement of the Compensation Committee, which had not
yet been formed.

EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

D. Ronald Yagoda, the Company's Chief Executive Officer, is employed under
an agreement which expires on December 31, 1998. The term of the agreement will
be automatically extended for one year terms unless otherwise terminated by
either party. Mr. Yagoda's agreement provides for his compensation to be
determined by the Company's Board of Directors. Mr. Yagoda's current annual
salary is $100,000. In addition, Mr. Yagoda is entitled to receive an automobile
allowance of $500 per month. In the event that Mr. Yagoda is terminated by the
Company without cause or by reason of permanent disability, Mr. Yagoda will
receive an amount equal to his base salary at the time of termination for a
period of 18 months following termination. Mr. Yagoda is entitled to participate
in all of the Company's benefit plans. The agreement also contains
confidentiality and non-compete covenants.

James W. Hart, the Company's President and Chief Operating Officer, is
employed under an agreement that expires July 1, 1999. Pursuant to the
agreement, Mr. Hart receives minimum annual compensation of $140,000 and is
entitled to participate in all of the Company's benefit plans generally made
available to other employees. In addition, Mr. Hart is entitled to receive an
incentive based cash bonus of up to $60,000, an automobile allowance of $400 per
month, and a temporary living allowance of $370 per week for up to 26 weeks from
the initial date of his employment. In the event that Mr. Hart is terminated by
the Company without cause (as defined therein), or is not offered employment
following a change of control of the Company, Mr. Hart will receive an amount
equal to his annual base salary (currently $140,000) for a period of one year
following termination. Pursuant to the agreement, Mr. Hart was also granted
options to purchase 100,000 shares of Common Stock at an exercise price of $3.00
per share. The options vest at a rate of 25% per year beginning January 1, 1999.
Mr. Hart's outstanding options which have not yet vested will accelerate upon a
merger or sale of substantially all of the Common Stock or assets of the
Company. The agreement also contains confidentiality and non-compete covenants.

Gary R. Scheel, the Company's Vice President, Sales and Marketing, is
employed under an agreement which may be terminated by the Company upon 10 days
notice. Under the agreement, Mr. Scheel is entitled to salary determined by the
Board of Directors, a cash bonus based upon Company revenues, and is entitled to
participate in all of the Company's benefit plans generally made available to
other employees. Mr. Scheel's current annual salary is $120,000. Pursuant to the
agreement, Mr. Scheel was also granted options to purchase 16,667 shares of
Common Stock at an exercise price of $3.00 per share. The options are fully
vested. In addition, Mr. Scheel is entitled to receive a cash bonus based upon
the Company's revenues. Mr. Scheel's outstanding options which have not yet
vested will accelerate upon a merger or sale of substantially all of the Common
Stock or assets of the Company. The agreement also contains confidentiality and
non-complete covenants.

Jeffry B. Skiba, the Company's Vice President, Engineering & Manufacturing,
is employed under an agreement that expires December 31, 1998. Pursuant to the
agreement, Mr. Skiba receives minimum annual compensation of $100,000 and is
also entitled to participate in all of the Company's benefit plans generally
made available to other employees. Mr. Skiba's current annual salary is
$100,000. The agreement also contains confidentiality and non-compete covenants.

DIRECTOR COMPENSATION

Director Fees. The Company's independent directors will be reimbursed for
reasonable travel expenses incurred in connection with attendance at each Board
and committee meeting. Directors who are also officers of the Company will not
be compensated for their services as directors.

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<PAGE> 48

1998 Director Option Plan. In June 1998, the Company's Board of Directors
and shareholders adopted the Orthopaedic Biosystems Ltd., Inc. 1998 Director
Option Plan (the "Director Plan") to attract and retain qualified independent
directors. The Director Plan is administered by a committee appointed by the
Board and provides for automatic grants of non-qualified stock options to all
non-employee directors of the Company.

Pursuant to the Director Plan, each person who first becomes a non-employee
director of the Company on or after the effective date of the Director Plan will
automatically be granted 3,334 shares of Common Stock as of the date they become
a director. Additionally, each individual who is a non-employee director on the
third business day following the public release of the Company's year-end
earnings information will automatically be granted an option to purchase 1,000
shares of Common Stock. The option price for each of the grants is the fair
market value of the Common Stock per share on the relevant grant date. Each
option granted is fully vested and exercisable immediately and each option is
scheduled to expire on the tenth anniversary of the date of its grant, unless
the option is earlier terminated, forfeited, or surrendered as discussed below.
If a director granted options under the Director Plan ceases to be a director
for any reason, the options previously granted will remain exercisable for one
year after the director ceases to be a director, or until its scheduled
expiration date, whichever is earlier.

The total number of shares of Common Stock available for grants under the
Director Plan is 66,667, subject to a proportionate increase or decrease in the
event of a stock split, reverse stock split, stock dividend, or other adjustment
to the Company's shares of Common Stock. As of August 10, 1998, no options had
been granted under the Director Plan.

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<PAGE> 49

PRINCIPAL STOCKHOLDERS

The following table sets forth, as of August 10, 1998, the number and
percentage of outstanding shares of Common and Preferred Stock beneficially
owned by: (i) each director of the Company; (ii) the Named Executive Officers of
the Company; (iii) all directors and executive officers of the Company as a
group; and (iv) each beneficial owner of more than 5% of the outstanding Common
and Stock. To the knowledge of the Company, all persons listed below have sole
voting and investment power with respect to their shares, except to the extent
that authority is shared by their respective spouses under applicable law.

<TABLE>
<CAPTION>
PERCENT OF TOTAL(1)
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(2) BENEFICIALLY OWNED(1) OFFERING OFFERING
- --------------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Kerry Zang, D.P.M.(3).................................. 1,158,334 32.57% 19.12%
D. Ronald Yagoda(4).................................... 1,120,835 31.37 18.45
Joan Yagoda(5)......................................... 1,054,168 29.92 17.50
Michael D. Greenbaum(6)................................ 296,669 8.21 4.85
Vertical Fund Associates, L.P.(7)...................... 216,667 6.06 3.57
Gary Peterson(8)....................................... 206,669 5.75 3.39
Steven P. Davis(9)..................................... 107,501 3.02 1.78
Jeffry B. Skiba(10).................................... 60,001 1.67 *
Robert F. Lusch(11).................................... 33,334 * *
Leslie Matthews, M.D.(12).............................. 26,001 * *
Richard Previte(13).................................... 23,334 * *
Gary R. Scheel(14)..................................... 16,667 * *
All directors and executive officers as a group (12
persons)............................................. 3,049,345 77.47% 47.38%
</TABLE>

- ---------------
* Represents less than one percent of the outstanding Common Stock.

(1) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant, right, or conversion privilege. Shares of Common
Stock subject to options, warrants, rights, or conversion privileges which
are currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage of the person holding such
options, warrants, rights, or conversion privileges, but are not deemed
outstanding for computing the percentage of any other person. Shares and
percentages beneficially owned are based upon 3,523,365 shares of Common
Stock outstanding before the Offering, assuming conversion of all Preferred
Stock, which will be automatically converted into 581,541 shares of Common
Stock upon the completion of the Offering. Accordingly, shares and
percentages beneficially owned after the Offering are based upon 6,023,365
shares of Common Stock.

(2) Unless otherwise noted, the address of each of the listed stockholders is
15990 N. Greenway-Hayden Loop, Suite 100, Scottsdale, Arizona 85260.

(3) The total number of shares beneficially owned by Mr. Zang includes: (i)
250,000 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mr.
Zang may be deemed a beneficial owner; and (ii) 33,334 shares of Common
Stock issuable upon the exercise of warrants.

(4) The total number of shares beneficially owned by Mr. Yagoda includes: (i)
250,000 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mr.
Yagoda may be deemed a beneficial owner; (ii) 50,000 shares of Common Stock
issuable upon the exercise of warrants; and (iii) 804,168 shares of Common
Stock owned with Joan Yagoda.

(5) The total number of shares beneficially owned by Mrs. Yagoda include: (i)
250,000 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mrs.
Yagoda may be deemed a beneficial owner; and (ii) 804,168 shares of Common
Stock owned with D. Ronald Yagoda.

(6) The total number of shares beneficially owned by Mr. Greenbaum includes:
(i) 206,668 shares of Common Stock owned by the Greenbaum Family Trust of
which Mr. Greenbaum is trustee; (ii) 6,667

48
<PAGE> 50

shares of Common Stock issuable upon the exercise of options; and (iii)
83,334 shares of Common Stock issuable upon the exercise of warrants owned
by the Greenbaum Family Trust.

(7) The total number of shares beneficially owned by Vertical Fund Associates,
L.P., a venture capital fund, includes 50,000 shares of Common Stock
issuable upon the exercise of warrants. The address of Vertical Fund
Associates, L.P. is 18 Bank Street, Summit, New Jersey 07901.

(8) The total number of shares beneficially owned by Mr. Peterson, includes (i)
6,667 shares of Common Stock issuable upon the exercise of options; (ii)
133,334 shares of Common Stock owned by Affinity Ventures of which Mr.
Peterson is a general partner, (iii) 33,334 shares of Common Stock issuable
upon the exercise of warrants owned by Affinity Ventures II, L.L.C., a
venture capital fund; and (iv) 33,334 shares of Common Stock issuable upon
the exercise of warrants owned by Peterson Spencer-Fensler Health Care Fund
of which Mr. Peterson is a general partner.

(9) The total number of shares beneficially owned by Mr. Davis includes 33,334
shares of Common Stock issuable upon the exercise of options. Also includes
37,500 shares of Common Stock owned by the Lisa D. Yagoda Irrevocable Trust
of which Mr. Davis is the trustee.

(10) The total number of shares beneficially owned by Mr. Skiba includes 60,001
shares of Common Stock issuable upon exercise of the options.

(11) The total number of shares beneficially owned by Mr. Lusch includes 6,667
shares of Common Stock issuable upon exercise of options.

(12) The total number of shares beneficially owned by Dr. Matthews includes
26,001 shares of Common Stock issuable upon exercise of options.

(13) The total number of shares beneficially owned by Mr. Previte includes
23,334 shares of Common Stock issuable upon exercise of options.

(14) The total number of shares beneficially owned by Mr. Scheel includes 16,667
shares of Common Stock issuable upon exercise of options.

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<PAGE> 51

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In November and December 1997, and January 1998, the Company sold for cash
$900,000 principal amount of subordinated promissory notes (the "Series B
Notes") to certain investors. Each Series B Note bears interest at a rate equal
to 2% per annum in excess of the prime rate adjusted quarterly. The Series B
Notes mature on December 31, 1998. In addition, the Company issued to the
holders of the Series B Notes warrants to purchase an aggregate of 450,000
shares of Preferred Stock which, upon the consummation of the Offering, will be
converted into warrants to purchase an aggregate of 300,003 shares of Common
Stock at an exercise price of $3.00 per share. Purchasers of the Series B Notes
and related warrants included: (i) Vertical Fund Associates, L.P., a principal
shareholder of the Company; ($150,000 principal amount of the Series B Notes and
warrants to purchase 50,000 shares of Common Stock); (ii) the Greenbaum Family
Trust, of which Michael D. Greenbaum, a Director of the Company, is trustee
($250,000 principal amount of the Series B Notes and warrants to purchase 83,334
shares of Common Stock); (iii) Affinity Venture II, L.L.C., of which Gary A.
Peterson, a Director of the Company, is a general partner ($100,000 principal
amount of the Series B Notes and warrants to purchase 33,334 shares of Common
Stock); (iv) PSF Healthcare Fund, L.P., of which Mr. Peterson is a general
partner ($100,000 principal amount of the Series B Notes and warrants to
purchase 33,334 shares of Common Stock); (v) D. Ronald Yagoda, the Company's
Chairman and Chief Executive Officer ($150,000 principal amount of the Series B
Notes and warrants to purchase 50,000 shares of Common Stock); (vi) the Kerry
Zang and Virginia Zang Revocable Trust, of which Kerry Zang, a Director of the
Company, is trustee ($75,000 principal amount of the Series B Notes and warrants
to purchase 25,000 shares of Common Stock); and (vii) The Podiatric Physicians
Profit Sharing Money Market Account, of which Kerry Zang, a Director of the
Company, has an interest ($25,000 principal amount of the Series B Notes and
warrants to purchase 8,334 shares of Common Stock).

In May 1998, the Company sold for cash $200,000 principal amount of Series
B Notes to D. Ronald Yagoda, the Company's Chairman and Chief Executive Officer.
The note bears interest at a rate equal to 4% per annum in excess of the prime
rate adjusted quarterly, and matures on April 30, 1999. No warrants were issued
in connection with this note.

In May 1997, the Company issued for cash 872,300 shares of Preferred Stock
to 14 investors at a price of $2.00 per share. Each share of Preferred Stock is
convertible into two-thirds of a share of Common Stock simultaneously with the
payment to the Company of the purchase price of the Common Stock sold in this
Offering. These purchasers included: (i) Gary A. Peterson, a Director of the
Company who is deemed beneficial owner of stock held by Affinity Ventures,
L.L.C. (200,000 shares of Preferred Stock); (ii) Michael D. Greenbaum, a
Director of the Company who is deemed beneficial owner of stock held by The
Greenbaum Family Trust (140,000 shares of Preferred Stock); (iii) Vertical Fund
Associates, L.P., a principal shareholder of the Company (250,000 shares of
Preferred Stock); and (iv) D. Ronald Yagoda, the Company's Chairman and Chief
Executive Officer (25,000 shares of Preferred Stock).

In March 1996, the Company sold for cash $90,000 principal amount of
14 1/2% subordinated promissory notes (the "Series A Notes") to three investors.
In addition, the Company issued to the holders of the Series A Notes warrants to
purchase, in the aggregate, 10,002 shares of the Company's Common Stock at an
exercise price of $1.50 per share. The purchasers of the Series A Notes and
holders of the related warrants included Mr. Greenbaum, a director of the
Company ($30,000 principal amount of the Series A Notes and warrants to purchase
3,334 shares). In addition, during March 1996, the Company sold for cash a
$50,000 principal amount subordinated promissory note with terms equivalent to
the Series A Notes to Mr. Yagoda, the Company's Chairman and Chief Executive
Officer. Mr. Yagoda was not issued warrants in connection with such transaction.
The Company paid in full all amounts outstanding under these notes on March 31,
1997.

The Company believes that the foregoing transactions were consummated on
terms that would otherwise prevail in arms-length transactions.

In the future, any transactions between the Company and its affiliated
entities, executive officers, directors, or significant stockholders will
require the approval of a majority of the independent directors of the Company
and will be on terms that will be no less favorable to the Company than the
Company could obtain from non-affiliated parties.

50
<PAGE> 52

DESCRIPTION OF CAPITAL STOCK

The following description of the Company's capital stock does not purport
to be complete and is subject in all respects to applicable Arizona law and to
the provisions of the Company's Amended and Restated Articles of Incorporation
and Amended and Restated Bylaws, copies of which have been filed as exhibits to
the Registration Statement of which this Prospectus is a part.

The authorized capital stock of the Company consists of 20,000,000 shares
of Common Stock, no par value, and 5,000,000 shares of Preferred Stock, no par
value. Immediately following the completion of this Offering, 6,023,365 shares
of Common Stock will be issued and outstanding (assuming no exercise of
outstanding options or warrants), and no shares of Preferred Stock will be
issued and outstanding.

COMMON STOCK

Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying cash dividends in the
foreseeable future. In the event of liquidation, dissolution, or winding up of
the Company, the holders of Common Stock are entitled to share ratably in any
corporate assets remaining after payment of all debts, subject to any
preferential rights of any outstanding Preferred Stock. See "Dividend Policy."

Holders of Common Stock have no preemptive, conversion, or redemption
rights and are not subject to further calls or assessments by the Company. All
of the outstanding shares of Common Stock are, and the shares offered by the
Company hereby will be, if issued, validly issued, fully paid, and
nonassessable. As of the date of this Prospectus, there are 2,941,824 shares of
Common Stock issued and outstanding.

PREFERRED STOCK

The Board of Directors of the Company has the authority, without further
action by the Company's stockholders, to issue from time to time up to 5,000,000
shares of Preferred Stock in one or more series and to fix the number of shares,
designations, voting powers, preferences, optional and other special rights, and
the restrictions or qualifications thereof. The rights, preferences, privileges,
and restrictions or qualifications of different series of Preferred Stock may
differ with respect to dividend rates, amounts payable on liquidation, voting
rights, conversion rights, redemption provisions, sinking fund provisions, and
other matters. The issuance of Preferred Stock could: (i) decrease the amount of
earnings and assets available for distribution to holders of Common Stock; (ii)
adversely affect the rights and powers, including voting rights, of holders of
Common Stock; and (iii) have the effect of delaying, deferring, or preventing a
change in control of the Company. The Company has no present plans to issue any
shares of Preferred Stock.

WARRANTS AND STOCK OPTIONS

As of August 10, 1998, the Company had outstanding warrants to purchase
shares of its Preferred Stock which, upon the consummation of the Offering, will
be converted into warrants to purchase 301,170 shares of Common Stock with an
exercise price of $3.00. In addition, the Company had outstanding options to
purchase an aggregate of 516,690 shares of its Common Stock with exercise prices
ranging from $1.05 to $3.00. See "Management" and "Certain Relationships and
Related Transactions."

REGISTRATION RIGHTS

The holders of the Preferred Stock have been granted certain rights with
respect to the registration under the Securities Act of the shares of Common
Stock issued upon exercise of the Preferred Stock. Beginning 180 days after
completion of this Offering, the Company must, within 90 days of receipt of
requests for registration from holders of at least 50% of the Preferred Stock,
use its best efforts to effect the registration under the Securities Act of such
securities. In addition, holders of the Preferred Stock have been granted
"piggy-back" rights to register their shares of converted Common Stock, subject
to certain limitations, in connection with a registration initiated by the
Company.

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<PAGE> 53

Certain members of the Company's Scientific Advisory Board have been
granted certain rights with respect to the registration under the Securities Act
of the shares of Common Stock issuable upon exercise of options granted under
their consulting agreements. These advisors have been granted rights to register
the shares of Common Stock underlying their options in connection with a
registration initiated by the Company. The Company anticipates that it will
register such shares on a Form S-8 as soon as practicable after the closing of
the Offering.

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company's Amended and Restated Articles of Incorporation provide that,
to the fullest extent permitted by Arizona law, a director of the Company shall
not be personally liable to the Company or its stockholders for monetary damages
for breach of such director's fiduciary duty, except for liability: (i) for any
breach of the director's duty of loyalty to the Company or its stockholders;
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law; (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases; and (iv) for any
transaction from which the director derives an improper benefit. The effect of
the provision of the Company's Amended and Restated Articles of Incorporation is
to eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of the fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior), except in the situations described in clauses (i) through (iv) above.
This provision does not limit or eliminate the rights of the Company or any
stockholder to seek nonmonetary relief such as an injunction or recision in the
event of a breach of a director's duty of care. In addition, the Company's
Amended and Restated Articles of Incorporation provides that the Company shall
indemnify any person who is or was a director, officer, employee, or agent of
the Company, or who is or was serving at the request of the Company as a
director, officer, employee, or agent of another corporation or entity, against
expenses, liabilities, and losses incurred by any such person by reason of the
fact that such person is or was acting in such capacity. The Company's Amended
and Restated Articles of Incorporation also permits it to secure insurance on
behalf of any director, officer, employee, or agent of the Company for any
liability arising out of such person's actions in such capacity.

CERTAIN CHARTER AND BYLAW PROVISIONS

The Company's Amended and Restated Articles of Incorporation and Amended
and Restated Bylaws contain a number of provisions relating to corporate
governance and the rights of stockholders. These provisions: (i) establish a
classified Board of Directors; (ii) permit the removal of Directors only for
cause and only by vote of stockholders owning a majority of the voting power of
the Company; (iii) impose conditions on the ability of stockholders to nominate
persons for the position of Director; and (iv) prohibit stockholders from
calling special meetings.

The Company believes that these provisions promote the stability and
continuity of the Board of Directors of the Company and assure that stockholders
will receive adequate notice of and an opportunity to consider actions by
stockholders that could materially affect the Company. However, these provisions
could have the effect of deterring unsolicited takeovers or delaying or
preventing changes in control or management of the Company, including
transactions in which stockholders might otherwise receive a premium for their
shares over then-current market prices.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for the Common Stock of the Company is
Harris Trust Company of California.

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<PAGE> 54

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have outstanding
6,023,365 shares of Common Stock (assuming the Underwriter's over-allotment is
not exercised). These shares exclude 817,860 shares of Common Stock issuable
upon exercise of currently outstanding options and warrants. The Company has an
additional 239,327 shares of Common Stock available for grant under its existing
option plans. Of the outstanding shares, the 2,500,000 shares of Common Stock
sold in the Offering, plus any additional shares sold upon exercise of the
Underwriters' over-allotment option, will be freely tradeable without
restriction under the Securities Act (except for any shares purchased by an
"affiliate" of the Company as that term is defined in the Securities Act, which
will be subject to the limitations of Rule 144 adopted under the Securities
Act). Directors, officers and certain shareholders of the Company owning a total
of 2,842,676 shares of Common Stock have agreed with the Underwriters that,
except in certain circumstances, they will not issue, offer to sell, sell,
contract to sell, or otherwise dispose of any shares of Common Stock or other
securities of the Company for a period of 180 days after the date of this
Prospectus without the prior written consent of the Representatives. Upon the
expiration of the 180-day lock up period, 2,812,675 of these shares will become
eligible for sale under Rule 144, subject to compliance with the requirements of
such rule.

Immediately upon commencement of the Offering, 421,811 shares of Common
Stock not subject to lock-up arrangements will be available for sale pursuant to
Rule 144(k). Commencing 90 days following the date of this Prospectus, an
additional 52,002 shares of Common Stock not subject to lock-up arrangements
will become eligible for sale under Rule 144, subject to compliance with the
volume limitations and other requirements of Rule 144.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted" shares for
at least one year, including persons who may be deemed "affiliates" of the
Company, as that term is defined under Rule 144, would be entitled to sell (in
accordance with the provisions specified in the rule) within any three-month
period a number of shares that does not exceed the greater of (i) one percent of
the then outstanding shares of the Company's Common Stock (approximately 60,234
shares immediately following the offering assuming no exercise of the
Underwriters' over-allotment option) or (ii) the average weekly trading volume
of the Common Stock during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission. Sales pursuant to Rule 144 are
subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. An "affiliate" of
the Company may sell securities that are not "restricted" without regard to the
period of beneficial ownership but subject to the volume limitations described
above and other conditions of Rule 144. A person (or persons whose shares are
aggregated) who is not deemed an "affiliate" of the Company (and has not been at
any time during the three months immediately preceding the sale) and who has
beneficially owned his or her shares for at least two years would be entitled to
sell such shares under Rule 144(k) without regard to the volume limitations
described above, manner of sale provisions, notice requirements, or availability
of public information.

Prior to this Offering, there has been no public market for the Company's
Common Stock and no prediction can be made of the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of substantial amounts
of the Common Stock in the public market could adversely affect prevailing
market conditions and could impair the Company's future ability to raise capital
through the sale of its equity securities. See "Risk Factors -- Shares Eligible
for Future Sale."

53
<PAGE> 55

UNDERWRITING

The Underwriters named below (the "Underwriters"), for whom Cruttenden Roth
Incorporated ("Cruttenden Roth") and Josephthal & Co. Inc. are acting as
Representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions of the Underwriting Agreement, to purchase from the Company
the number of shares of Common Stock indicated below opposite their respective
names at the public offering price less underwriting discounts and commissions
set forth on the cover page of this Prospectus. The Underwriting Agreement
provides that the obligations of the Underwriters are subject to certain
conditions, and that the Underwriters are committed to purchase all of such
shares (other than those covered by the over-allotment options described below),
if any such shares are purchased.

<TABLE>
<CAPTION>
UNDERWRITER PARTICIPATION
----------- -------------
<S> <C>
Cruttenden Roth Incorporated................................
Josephthal & Co. Inc........................................
---------
Total............................................. 2,500,000
=========
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the public offering
price reflected on the cover page of this Prospectus and to selected securities
dealers at such price less a concession not exceeding $ per share. The
Underwriters may allow, and such dealers may reallow, a concession not exceeding
$ per share to other dealers. After the public offering of the shares of
Common Stock, the public offering price and other offering terms may be changed.
No change in such terms shall change the amount of proceeds to be received by
the Company as set forth on the cover page of this Prospectus.

The Company has granted the Underwriters an over-allotment option,
exercisable during the 45-day period after the date of this Prospectus, to
purchase up to 375,000 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus less the underwriting
discounts and commissions. The Underwriters may exercise the option only to
cover over-allotments in the sale of the Common Stock offered hereby. If the
Underwriters exercise the over-allotment option, each Underwriter will purchase
additional shares from the Selling Shareholders in approximately the same
proportion as the shares set forth in the table above.

In connection with the Offering, the Company has agreed to issue the
Representatives a warrant to purchase up to 250,000 shares of Common Stock (the
"Representatives' Warrant"). The Representatives' Warrant will have a term of
five years, and will be exercisable commencing one year after the effective date
of this Offering, at an exercise price per share of 120% of the initial price of
the Common Stock being offered hereby to the public. The Representatives'
Warrant cannot be transferred for a period of one year from the date of issuance
except to the Underwriters, selling group members and their officers or
partners. The Representatives' Warrant is not transferable except to (i)
officers of the Representatives, (ii) general partnerships, the general partners
of which are the Representatives and one or more persons, each of whom on the
date of transfer is an officer of the Representatives, (iii) a successor to the
Representatives in any merger or consolidation or a purchase of all or
substantially all of the Representatives' assets, (iv) any person receiving the
Warrant from any of the persons listed in (i)-(iii), upon such persons death, by
will, trust or intestate succession or (v) after one year from the effective
date of this Prospectus, any person receiving the Warrant from the persons
listed in (i)-(iv). During the exercise period, the holders of the Warrant are
entitled to certain demand and incidental registration rights which will expire
five years after the date of this Prospectus and which may require the Company
to register for public resale the shares of Common Stock issuable under the
Warrant. The number of shares covered by the Warrant and the exercise price
thereof are subject to adjustment in certain events to prevent dilution. Any
profit realized by the Representatives on the sale of securities issuable upon
exercise of the Warrant may be deemed to be additional underwriting
compensation.

The Company has also agreed to pay the Representatives a non-accountable
expense allowance equal to 3% of the aggregate public offering price of the
shares of Common Stock sold in the Offering. The

54
<PAGE> 56

Representatives expenses in excess of the non-accountable expense allowance,
including its legal expenses, will be borne by the Representatives. To the
extent that the expenses of the Representative are less than the non-accountable
expense allowance, the excess shall be deemed to be compensation to the
Representatives.

In addition, the Company has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute in certain events to any liabilities incurred by the Underwriters in
connection with the sale of shares of Common Stock.

Prior to this Offering, there has been no public market for the Common
Stock and there can be no assurance that a regular trading market will develop
upon the completion of this Offering. The public offering price has been
determined by arms-length negotiations between the Company and the
Representatives and will not necessarily bear any relationship to assets, book
value, earnings history or other investment criteria. The primary factors
considered in determining such offering price included the history of and
prospects for the industry in which the Company competes, market valuation of
comparable companies, market conditions for public offerings, the history of and
prospects for the Company's business, the Company's past and present operations
and earnings and the trend of such earnings, the prospects for future earnings
of the Company, the Company's current financial position, an assessment of the
Company's management, the general condition of the securities markets, the
demand for similar securities of comparable companies and other relevant
factors. There can be no assurance, however, that the prices at which the Common
Stock will trade in the public market following the Offering will not be lower
than the initial public offering price.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.

In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may overallot or engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock. Such transactions may include stabilization transactions effected in
accordance with the Securities Exchange Act of 1934 pursuant to which such
persons may bid for or purchase Common Stock for the purpose of stabilizing its
market price. The Underwriters also may create a short position for the account
of the Underwriters by selling more Common Stock in connection with the Offering
than they are committed to purchase from the Company, and in such case may
purchase Common Stock in the open market following completion of the offering to
cover all or a portion of such shares of Common Stock or may exercise the
Underwriter's over-allotment option referred to above. In addition, the
Representatives, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby they may reclaim from an
Underwriter (or dealers participating in he offering), for the account of the
other Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in stabilization or syndicate covering transactions or otherwise.
Any of these activities may stabilize or maintain the price of the Common Stock
at a level above that which might otherwise prevail in the open market. None of
the transactions described in this paragraph is required, and if they are
undertaken they may be discontinued at any time.

The foregoing sets forth the material terms and conditions of the
Underwriting Agreement but does not purport to be a complete statement of the
terms and conditions thereof. Copies of the Underwriting Agreement are on file
at the offices of the Representative, the Company and the SEC. See "Additional
Information."

LEGAL MATTERS

The validity of the shares offered hereby is being passed upon for the
Company by Snell & Wilmer L.L.P., Phoenix, Arizona. Certain legal matters will
be passed upon for the Underwriters by Brobeck, Phleger & Harrison LLP, San
Diego, California.

55
<PAGE> 57

EXPERTS

The Financial Statements of Orthopaedic Biosystems Ltd., Inc. at December
31, 1997 and for the year then ended, appearing in this Prospectus and
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon (which contains an explanatory
paragraph describing conditions that raise substantial doubt about the Company's
ability to continue as a going concern as described in Note 1 to the financial
statements), appearing elsewhere herein, and is included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.

The statement of operations, shareholders' equity and cash flows for the
period ended December 31, 1996 included in this Prospectus, have been included
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.

The statements in this Prospectus under the captions "Risk
Factors -- Reliance on and Uncertainty Relating to Patents and Proprietary
Technology; Risk of Infringement" and "Business -- Patents and Proprietary
Rights" have been reviewed and approved by Snell & Wilmer L.L.P., patent counsel
to the Company, as experts in such matters, and are included herein in reliance
on such review and approval.

ADDITIONAL INFORMATION

The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act of 1933 with respect to the Common Stock offered
hereby. This Prospectus constitutes a part of the Registration Statement and
does not contain all of the information set forth therein and in the exhibits
thereto, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the Common Stock offered hereby, reference is hereby made to such
Registration Statement and exhibits. Statements contained in this Prospectus as
to the contents of any document are not necessarily complete and in each
instance are qualified in their entirety by reference to the copy of the
appropriate document filed with the Commission. The Registration Statement,
including the exhibits thereto, may be examined without charge at the
Commission's public reference facility at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. In addition, copies of all or any part of
the Registration Statement, including such exhibits thereto, may be obtained
from the Commission at its principal office in Washington, D.C., upon payment of
the fees prescribed by the Commission. The Commission maintains a World Wide Web
site (http://www.sec.gov) that contains reports, proxy statements, and other
information regarding registrants, such as the Company, that file electronically
with the Commission.

The Registration Statement and the reports and other information to be
filed by the Company following the offering in accordance with the Securities
and Exchange Act of 1934, as amended, can be inspected and copied at the
principal office of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington D.C. 20549, and at the following regional offices of
the Commission: 7 World Trade Center, New York, NY 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, IL 60601. Copies of
such material may be obtained from the Public Reference Section of the
Commission at its principal office at 450 Fifth Street, N.W., Washington D.C.
20549, upon payment of the fees prescribed by the Commission.

56
<PAGE> 58

INDEX TO FINANCIAL STATEMENTS

ORTHOPAEDIC BIOSYSTEMS LTD. INC.

<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Report of Coopers & Lybrand L.L.P., Independent
Accountants............................................... F-3

Financial Statements

Balance Sheets as of December 31, 1997 and June 30, 1998
(unaudited)............................................... F-4
Statements of Operations for the years ended December 31,
1996 and 1997, and the six months ended June 30, 1997
(unaudited) and June 30, 1998 (unaudited)................. F-5
Statements of Shareholders' Equity for the years ended
December 31, 1996 and 1997 and the six months ended June
30, 1998 (unaudited)...................................... F-6
Statements of Cash Flows for the years ended December 31,
1996 and 1997, and the six months ended June 30, 1997
(unaudited) and June 30, 1998 (unaudited)................. F-7
Notes to the Financial Statements........................... F-8
</TABLE>

F-1
<PAGE> 59

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Shareholders
Orthopaedic Biosystems Ltd., Inc.

We have audited the accompanying balance sheet of Orthopaedic Biosystems
Ltd., Inc. as of December 31, 1997, and the related statements of operations,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Orthopaedic Biosystems Ltd., Inc. for the
year ended December 31, 1996, were audited by other auditors whose report dated
May 21, 1997, expressed an unqualified opinion on those statements.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Orthopaedic
Biosystems Ltd., Inc. at December 31, 1997, and the results of its operations
and its cash flows for the year then ended in conformity with generally accepted
accounting principles.

The accompanying financial statements have been prepared assuming
Orthopaedic Biosystems Ltd., Inc. will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring losses and has
limited working capital. These conditions raise substantial doubt about the
Company's ability to continue as a going concern (management's plans in regard
to those matters are also described in Note 1). The financial statements do not
include any adjustments to reflect the possible future effect on the
recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the outcome of this uncertainty.

ERNST & YOUNG LLP

Phoenix, Arizona
April 22, 1998, except for Note 14 as

to which the date is August 10, 1998

F-2
<PAGE> 60

REPORT OF COOPERS & LYBRAND L.L.P., INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Orthopaedic Biosystems Ltd., Inc.

We have audited the statement of operations, shareholders' equity and cash
flows of Orthopaedic Biosystems Ltd., Inc. for the year ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statement based
on our audit.

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

In our opinion, the financial statements referred to above presents fairly,
in all material respects, the results of operations and cash flows of
Orthopaedic Biosystems Ltd., Inc. for the year ended December 31, 1996 in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND, L.L.P.

Phoenix, Arizona
May 21, 1997,
except for Note 14,
Subsequent Events - Stock Split

as to which the date is August 10, 1998

F-3
<PAGE> 61

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 740,715 $ 25,216
Accounts receivable, net of allowance for bad debts and
sales returns of $103,000 in 1997 and $107,000 in
1998................................................... 368,856 496,961
Inventories, net of inventory valuation allowance of
$300,000 in 1997 and $346,000 in 1998.................. 657,912 843,870
Prepaid expenses and deposits............................. 38,605 226,372
----------- -----------
Total current assets................................... 1,806,088 1,592,419
Property and equipment, net................................. 250,206 375,864
Patent rights, net.......................................... 196,316 197,533
Deposits and other assets................................... 30,961 27,681
----------- -----------
Total assets...................................... $ 2,283,571 $ 2,193,497
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 236,857 $ 689,918
Accrued expenses.......................................... 72,664 206,281
Advance payments from customer............................ 95,500 3,000
Related party notes, net of discount of $49,000 in 1997
and $26,250 in 1998.................................... 801,000 1,073,750
Current portion of capital lease obligation............... 10,554 11,485
----------- -----------
Total current liabilities.............................. 1,216,575 1,984,434
Capital lease obligation.................................... 13,638 8,465
----------- -----------
Total liabilities................................. 1,230,213 1,992,899
Shareholders' equity:
Class A convertible preferred stock -- no par value;
5,000,000 shares authorized; 872,300 issued and
outstanding............................................ 1,713,464 1,713,464
Common stock, no par value; 20,000,000 shares authorized;
2,908,489 issued and outstanding in 1997 and 2,915,157
issued and outstanding in 1998......................... 1,574,632 1,584,632
Additional paid-in capital................................ 82,590 96,590
Accumulated deficit....................................... (2,309,486) (3,185,195)
Unearned compensation..................................... (7,842) (8,893)
----------- -----------
Total shareholders' equity............................. 1,053,358 200,598
----------- -----------
Total liabilities and shareholders' equity........ $ 2,283,571 $ 2,193,497
=========== ===========
</TABLE>

See accompanying notes.
F-4
<PAGE> 62

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
-------------------------- --------------------------
1996 1997 1997 1998
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues.......................... $ 782,835 $ 1,482,320 $ 695,039 $ 1,207,559
Cost of revenues...................... 486,325 824,715 339,684 538,476
----------- ----------- ----------- -----------
Gross profit........................ 296,510 657,605 355,355 669,083
Operating expenses:
Research and development expenses... 152,005 272,960 91,055 182,863
General and administrative
expenses......................... 375,918 820,892 289,708 759,822
Sales and marketing expenses........ 263,685 979,675 429,101 528,870
----------- ----------- ----------- -----------
Total operating expenses......... 791,608 2,073,527 809,864 1,471,555
----------- ----------- ----------- -----------
Operating loss................... (495,098) (1,415,922) (454,509) (802,472)
Other income (expenses)
Interest expense.................... (23,385) (14,745) (6,841) (78,706)
Interest income..................... -- 17,929 4,033 5,469
Other............................... 300,565 27,199 -- --
----------- ----------- ----------- -----------
Other income (expense) net............ 277,180 30,383 (2,808) (73,237)
----------- ----------- ----------- -----------
Net loss.............................. $ (217,918) $(1,385,539) $ (457,317) $ (875,709)
=========== =========== =========== ===========
Basic and diluted net loss per
share............................... $ (0.08) $ (0.49) $ (0.16) $ (0.30)
=========== =========== =========== ===========
Weighted average shares outstanding... 2,727,513 2,802,590 2,775,912 2,909,852
=========== =========== =========== ===========
</TABLE>

See accompanying notes.
F-5
<PAGE> 63

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
CLASS A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- --------------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
------- ---------- --------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1995...................... -- $ -- 2,725,353 $1,240,267 $ -- $ (706,029) $ -- $ 534,238
Fair value of options
granted for consulting
services................ -- -- -- -- 18,800 -- (6,020) 12,780
Stock issued for product
design work, $1.875 per
share................... -- -- 4,462 8,365 -- -- -- 8,365
Stock issued for
employment
agency fees, $3.00 per
share................... -- -- 10,000 30,000 -- -- -- 30,000
Net loss.................. -- -- -- -- -- (217,918) -- (217,918)
------- ---------- --------- ---------- ------- ----------- ------- -----------
BALANCE, DECEMBER 31,
1996...................... -- -- 2,739,815 1,278,632 18,800 (923,947) (6,020) 367,465
Fair value of options
granted for consulting
services................ -- -- -- -- 12,790 -- (7,842) 4,948
Amortization of
compensation............ -- -- -- -- -- -- 6,020 6,020
Fair value of warrants
issued in connection
with related party
notes................... -- -- -- -- 51,000 -- -- 51,000
Issuance of common stock
upon exercise of stock
options................. -- -- 30,001 37,000 -- -- -- 37,000
Issuance of common stock
upon exercise of
warrants................ -- -- 138,673 259,000 -- -- -- 259,000
Preferred stock issuances,
less $31,136 expenses... 872,300 1,713,464 -- -- -- -- -- 1,713,464
Net loss.................. -- -- -- -- -- (1,385,539) -- (1,385,539)
------- ---------- --------- ---------- ------- ----------- ------- -----------
BALANCE, DECEMBER 31,
1997...................... 872,300 1,713,464 2,908,489 1,574,632 82,590 (2,309,486) (7,842) 1,053,358
Fair value of options
granted for consulting
services (unaudited).... -- -- -- -- 11,000 -- (6,048) 4,952
Fair value of warrants
issued in connection
with related party notes
(unaudited)............. -- -- -- -- 3,000 -- -- 3,000
Amortization of
compensation
(unaudited)............. -- -- -- -- -- -- 4,997 4,997
Issuance of common stock
upon exercise of
warrants................ -- -- 6,668 10,000 -- -- -- 10,000
Net loss (unaudited)...... -- -- -- -- -- (875,709) -- (875,709)
------- ---------- --------- ---------- ------- ----------- ------- -----------
BALANCE, JUNE 30, 1998
(UNAUDITED)............... 872,300 $1,713,464 2,915,157 $1,584,632 $96,590 $(3,185,195) $(8,893) $ 200,598
======= ========== ========= ========== ======= =========== ======= ===========
</TABLE>

See accompanying notes.
F-6
<PAGE> 64

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- ----------------------
1996 1997 1997 1998
--------- ----------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss...................................... $(217,918) $(1,385,539) $ (457,317) $(875,709)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 33,358 62,450 21,231 68,361
Accretion of debt discount.................. -- 2,000 -- 25,750
Services exchanged for common stock......... 38,365 -- -- --
Services exchanged for common stock
options.................................. 12,780 4,948 2,893 4,952
Inventory valuation allowance............... 125,000 217,812 108,906 72,870
Provision for bad debts and sales returns... 22,000 62,788 31,394 48,115
Amortization of unearned compensation....... -- 6,020 1,393 4,997
Changes in operating assets and liabilities,
net:
Accounts receivable...................... (14,647) (319,685) (141,701) (176,220)
Inventories.............................. (86,465) (419,312) (276,685) (258,828)
Prepaid expenses......................... (18,508) (12,475) (64,957) (187,767)
Deposits................................. -- (23,890) (22,587) --
Accounts payable......................... 125,211 (105,161) 9,405 453,061
Accrued expenses......................... 17,798 48,867 55,687 133,617
Advance payments from customer........... 200,000 (104,500) (132,957) (92,500)
--------- ----------- ---------- ---------
Net cash provided by (used in) operating
activities.................................. 236,974 (1,965,677) (865,295) (779,301)
CASH FLOWS FROM INVESTING ACTIVITIES
Equipment and leasehold improvements
purchased................................... (4,991) (228,728) (60,729) (182,414)
Investment in patent rights................... (45,497) (38,389) (31,510) (9,542)
--------- ----------- ---------- ---------
Net cash used in investing activities......... (50,488) (267,117) (92,239) (191,956)
FINANCING ACTIVITIES
Borrowings on bank line of credit............. 65,000 -- -- --
Payments on bank line of credit............... -- (135,000) (135,000) --
Proceeds from related party notes............. 140,000 850,000 -- 250,000
Payments on related party notes............... -- (140,000) (140,000) --
Payments on capital lease obligations......... -- (8,686) (5,280) (4,242)
Net proceeds from issuance of preferred
stock....................................... -- 1,713,464 1,715,912 --
Net proceeds from issuance of common stock.... -- 296,000 135,750 10,000
--------- ----------- ---------- ---------
Net cash provided by financing activities..... 205,000 2,575,778 1,571,382 255,758
--------- ----------- ---------- ---------
Net increase (decrease) in cash............... 391,486 342,984 613,848 (715,499)
Cash, beginning of period..................... 6,245 397,731 397,731 740,715
--------- ----------- ---------- ---------
Cash, end of period........................... $ 397,731 $ 740,715 $1,011,579 $ 25,216
========= =========== ========== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest...................... $ 7,338 $ 25,406 $ 22,888 $ 1,039
Noncash financing activities:
Services exchanged for common stock...... 38,365 -- -- --
Services exchanged for common stock
options................................ 12,780 4,948 2,893 4,952
Capital lease obligation entered into.... -- 32,878 32,878 --
Warrants issued for related party
notes.................................. -- 51,000 -- 3,000
</TABLE>

See accompanying notes.
F-7
<PAGE> 65

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

1. DESCRIPTION OF BUSINESS

Orthopaedic Biosystems Ltd., Inc. (the "Company") was incorporated on
February 1, 1994, and at that date the net assets of Orthopaedic Biosystems Ltd.
(the "Partnership") were transferred to the Company in exchange for 2,000,000
shares of common stock. The Company designs, develops, and manufactures
innovative medical devices that are primarily used in orthopaedic surgery for
sports medicine and arthroscopy. The principal markets for these devices are
medical equipment distributors and hospitals located within the United States.
The Company contracts its manufacturing with various independent entities.

These financial statements have been prepared assuming the Company will
continue as a going concern. The Company has suffered losses from operations and
had limited working capital as of December 31, 1997. Management is continuing to
develop products and to market existing products. The Company plans to generate
a higher level of sales in 1998 while controlling costs. Additionally, principal
officers and shareholders have previously provided loans and contributed capital
to the Company when working capital requirements necessitated it. In addition,
the Company has plans to raise capital through equity offerings. The financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.

2. SIGNIFICANT ACCOUNTING POLICIES

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 assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Interim Financial Information

The financial statements for the six months ended June 30, 1997 and 1998
are unaudited but include all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of
financial position, results of operations and cash flows. Operating results for
the six months ended June 30, 1998 are not necessarily indicative of the results
that may be expected for any future periods.

Cash

For purposes of the statements of cash flows, the Company considers all
cash and highly liquid investments with an original maturity of three months or
less to be cash equivalents.

Inventories

Inventories consist of finished medical devices, supplies, and related
implements and are stated at the lower of first-in, first-out cost or market.
The Company provides inventory allowances for excess and obsolete inventory as
well as lower of cost or market.

Property and Equipment

Property and equipment are recorded at cost and depreciated on a
straight-line basis over useful lives ranging from three to ten years. Assets
purchased under capital leases are depreciated over the lesser of their
estimated useful lives or the term of the lease.

F-8
<PAGE> 66
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

Intangible Assets

Patent costs are recorded at cost and are amortized using the straight-line
method over their useful lives of fifteen years. The carrying value of
intangible assets is periodically reviewed by the Company based on expected
future undiscounted operating cash flows.

Revenue Recognition

Revenue is recognized at the time of shipment, including sales made to
distributors under agreements that allow limited right of return. An allowance
is recorded monthly based on sales and estimated returns.

Research and Development

Substantially all research and development expenditures relate to the
development and improvement of the Company's line of orthopaedic fixation
devices. Research and development costs consist of salaries, consultants,
supplies, and lab and prototype expense, which are expensed as incurred.

Income Taxes

Income taxes are accounted for by the asset/liability approach in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Deferred taxes represent the expected future tax consequences
when the reported amounts of assets and liabilities are recovered or paid. They
arise from differences between the financial reporting and tax bases of assets
and liabilities and are adjusted for changes in tax laws and tax rates when
those changes are enacted.

Stock Based Compensation

The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to the fair value of the shares at date of grant.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation," and
accordingly, recognizes no compensation expense for the employee stock option
grants. Stock option grants to nonemployees are charged to expense based upon
the fair value of the options granted.

Advertising Costs

All advertising costs are expensed when incurred. Advertising expenses were
$2,529, $12,027, $10,105, and $5,619 for the years ended December 31, 1996 and
1997 and the six months ended June 30, 1997 and 1998, respectively.

Net Loss Per Share

The Company computes net loss per share in accordance with Financial
Accounting Standards No. 128, "Earnings Per Share." Basic net loss per share
excludes any dilutive effects of options, warrants and convertible securities
and common shares outstanding during each period. Dilutive net loss per share
includes the dilutive effects of common share equivalents outstanding during the
year. Common share equivalents which were antidilutive were not included in the
computation of net loss per share. For the periods presented, because the
Company had operated at a loss, basic and diluted net loss per share are
identical.

The Company had options to purchase 399,011, 386,018, 404,013 and 543,357
shares of common stock outstanding at December 31, 1996 and 1997 and June 30,
1997 and 1998, and warrants to purchase 156,676, 6,668, and 96,674 shares of
common stock outstanding at December 31, 1996 and 1997 and June 30, 1997,

F-9
<PAGE> 67
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

respectively. Warrants to purchase Class A Convertible Preferred Stock were
425,000 and 450,000 at December 31, 1997 and June 30, 1998, respectively. Upon
the consummation of the Company's initial public offering, warrants to purchase
Class A Convertible Preferred Stock will be converted to warrants to purchase
Common Stock at a ratio of two common shares to three preferred shares. While
such options and warrants could potentially dilute future earnings per share,
none represented dilutive securities for the periods presented given that the
Company had net losses. Preferred shares convertible to 581,541 shares of common
stock outstanding at December 31, 1997 and June 30, 1998 were not included in
the computation of diluted earnings per share because their inclusion would be
antidilutive.

Impact of Recently Issued Accounting Standards

SFAS No. 130 "Reporting Comprehensive Income" (SFAS No. 130), issued by the
FASB in June 1997, is effective for periods beginning after December 15, 1997.
Under the new requirements for calculating income, this statement requires that
an enterprise (a) classify items of other comprehensive income by their nature
in a financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The impact
of SFAS No. 130 on the calculation of comprehensive income for these periods was
not material.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
SFAS No. 131 is effective for financial statements for fiscal years beginning
after December 15, 1997. The adoption of SFAS No. 131 did not have an impact on
the Company's results of operations, financial position or cash flows.

Reclassification

Certain prior year balances have been reclassified to conform to the
current year presentation.

3. CONCENTRATIONS OF CREDIT RISK

The Company has no significant off-balance sheet concentrations of credit
risk such as foreign exchange contracts, option contracts, or other foreign
hedging arrangements. The Company maintains the majority of its cash balances
with one financial institution in the form of demand deposits.

The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for estimated credit losses. Its accounts receivable balances are
primarily domestic. In 1996, no single customer accounted for 10 percent or more
of total revenue. During the year ended December 31, 1997 and the six months
ended June 30, 1998, one customer accounted for 20.9% and 12.5% of revenues,
respectively.

During the years ended December 31, 1996 and 1997 and the six months ended
June 30, 1997, the Company had less than 10% of its revenues made
internationally. During the six months ended June 30, 1998, revenues to Japan
were 16% of total revenues and other international revenues were an additional
7% of total revenues.

F-10
<PAGE> 68
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Computers and equipment.............................. $107,158 $138,713
Instrumentation...................................... 75,521 184,401
Furniture............................................ 45,748 46,938
Leasehold improvements............................... 63,158 63,158
Equipment under capital lease........................ 32,878 32,878
Purchased software................................... 7,862 35,977
Other................................................ 6,841 19,516
-------- --------
339,166 521,581
Less accumulated depreciation........................ 88,960 145,717
-------- --------
$250,206 $375,864
======== ========
</TABLE>

5. PATENT RIGHTS

The Company acquired various patents and systems with a net book value of
$140,337 from the Partnership, for the design and manufacture of orthopaedic
fixation devices. Subsequent to February 1, 1994, the Company capitalized costs
consisting of legal fees and other costs to maintain the rights to the domestic
patents and costs associated with the application for international patent
rights. Patent rights consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Cost of patents and systems.......................... $249,720 $259,261
Less amortization.................................... 53,404 61,728
-------- --------
$196,316 $197,533
======== ========
</TABLE>

6. DEBT

Related Party Notes

During 1996, the Company received loans totaling $140,000 from three
shareholders including the Company's chief executive officer. Principal and
interest bearing a rate of 14 1/2 percent were paid in full during 1997.

During 1997, the Company received loans totaling $850,000 from three
directors/shareholders, and two additional shareholders, including the Company's
chief executive officer. Principal and interest at prime plus two percent are
due and payable on December 31, 1998. At December 31, 1997, the interest rate
was 10.5%. Warrants were issued to purchase 283,336 shares of the Company's
Class A Convertible Preferred Stock at an exercise price of $3.00 per share in
conjunction with the notes (see Note 10). The warrants expire on December 31,
2002. Interest expense related to these notes was $5,385 for the year ended
December 31, 1997.

On January 20, 1998, the Company received a loan in the amount of $50,000
from a shareholder. Principal and interest at prime plus two percent are due and
payable on December 31, 1998. At December 31, 1997, the interest rate was 10.5%.
Warrants were issued to purchase 16,667 shares of the Company's Class A
Convertible Preferred Stock at an exercise price of $3.00 per share in
conjunction with the note. The warrants expire on December 31, 2002.

F-11
<PAGE> 69
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

On May 4, 1998, the Company received $200,000 from the Chief Executive
Officer in exchange for a note payable bearing interest at the prime rate of
interest plus four percent which is due April 30, 1999.

On July 2, 1998, the Company received $100,000 from a shareholder in
exchange for a note payable bearing interest at the prime rate of interest plus
four percent which is due June 30, 1999.

Bank Line of Credit

At December 31, 1996, the Company had available a $150,000 revolving line
of credit with a bank. This bank line of credit was collateralized by two
certificates of deposit owned by the Company's chief executive officer and a
principal shareholder and accrued interest at the current yield paid on 60 day
certificates of deposit plus 4.64 percent. The line was paid off on January 3,
1997 and was closed January 10, 1997. The Company has not renewed the line of
credit.

7. OTHER INCOME

On August 22, 1996, the Company entered into an agreement with Mentor
Urology Corporation ("Mentor"), a Delaware corporation. Under terms of the
agreement, Mentor paid the Company $300,000 during the year ended December 31,
1996 for the exclusive marketing and distribution rights of the 4.0 mm PeBA(R) C
anchor for urology applications both in the United States and in defined foreign
markets for an initial term of seven years. These amounts are nonrefundable and
have been included in the financial statements as other income.

Also under terms of the agreement, Mentor has agreed to purchase, as a
condition of preserving its exclusive distribution rights under the agreement, a
contractually defined number of anchors during each specified computational
period. Mentor paid the Company $200,000 in December 1996 for advance purchases
of inventory. The entire amount was carried as an advanced payment from customer
at December 31, 1996 and recognized as revenue during 1997. The $95,500 and
$3,000 in advance payments from customer at December 31, 1997 and June 30, 1998,
respectively, are related to another customer of the Company whereby the Company
received $100,000 in advances against future purchases in 1997 and subsequently
recognized revenue in 1998.

8. CAPITAL LEASES

The Company leases equipment under a noncancelable capital lease
obligation. Accordingly, the fair value of the equipment has been capitalized
and the related obligation recorded. The average implicit rate on the lease was
14.1 percent at December 31, 1997. Interest is charged to expense at a level
rate applied to declining principal over the period of the obligation.

Future minimum lease payments under the capital lease as of December 31,
1997 are as follows:

<TABLE>
<S> <C>
1998........................................................ $13,873
1999........................................................ 13,873
2000........................................................ 1,157
-------
Total minimum lease payments................................ 28,903
Less amount representing interest........................... 4,711
-------
Obligations under capital leases............................ 24,192
Less current portion........................................ 10,554
-------
Obligations under capital leases noncurrent................. $13,638
=======
</TABLE>

F-12
<PAGE> 70
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

Interest expense on the outstanding obligations under such leases was
$4,031 for the year ended December 31, 1997, and $1,882 for the six months ended
June 30, 1998.

9. STOCK OPTION PLAN

The Company's Board of Directors granted options for directors, officers,
scientific advisory board members, and employees of the Company or of any
affiliate thereof, entitling the holders to purchase shares of common stock.
Options generally vest and become exercisable over a period of three years.
Options expire over a four to five year period from the date of issuance.

Option activity during the years ended December 31, 1996 and 1997 and the
six months ended June 30, 1998 (after giving effect to the two-for-three reverse
stock split discussed in Note 14) is as follows:

<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES RANGE
--------- -------------
<S> <C> <C>
Outstanding at January 1, 1996............................ 315,675 $1.05 - $1.88
Granted, employees...................................... 96,668 1.88 - 3.00
Granted, advisory board................................. 40,002 1.88 - 3.00
Forfeited............................................... (53,334) 1.88
--------- -------------
Outstanding at December 31, 1996.......................... 399,011 1.05 - 3.00
Granted, employees...................................... 35,004 3.00
Granted, directors...................................... 33,335 3.00
Granted, advisory board................................. 71,339 3.00
Exercised............................................... (30,001) 1.05 - 1.88
Forfeited............................................... (122,670) 1.05 - 1.88
--------- -------------
Outstanding at December 31, 1997.......................... 386,018 1.05 - 3.00
Granted, advisory board................................. 38,336 3.00
--------- -------------
Granted, directors...................................... 23,334 3.00
Forfeited............................................... (65,005) 3.00
--------- -------------
Outstanding at June 30, 1998.............................. 382,683 $1.05 - $3.00
========= =============
Exercisable at December 31, 1997.......................... 299,000
=========
Exercisable at June 30, 1998.............................. 315,683
=========
Weighted average exercise price of options outstanding.... $ 2.17
=========
Weighted average remaining life of options outstanding in
years................................................... 2.78
=========
</TABLE>

During the first quarter of 1998, the Company's Board of Directors adopted
an incentive stock option plan (the "1998 Incentive Stock Option Plan") for
employees of the Company, entitling the holders to purchase shares of common
stock. Options generally vest and become exercisable over a period of four
years. Options expire over an eight to ten year period from the date of
issuance.

F-13
<PAGE> 71
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

Option activity under the 1998 Incentive Stock Option Plan during the six
months ended June 30, 1998 (after giving effect to the two-for-three reverse
stock split discussed in Note 14) is as follows:

<TABLE>
<CAPTION>
NUMBER OF PRICE
SHARES RANGE
--------- -----
<S> <C> <C>
Granted, employees.......................................... 160,674 $3.00
-------- -----
Outstanding at June 30, 1998................................ 160,674 $3.00
======== =====
Exercisable at June 30, 1998................................ 16,667
========
Weighted average exercise price of options outstanding...... $ 3.00
========
Weighted average remaining life of options outstanding in
years..................................................... 7.42
========
</TABLE>

The Company has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) for its transactions with
non-employees. Accordingly, compensation cost has been recognized for the
options granted to non-employees in exchange for consulting and advisory
services. During 1996, 1997 and the six months ended June 30, 1998, the Company
granted to non-employees options on 40,002, 71,339 and 38,336 shares,
respectively. The weighted average grant date estimated fair value of these
options was $18,800, $12,790, and $11,000 in 1996, 1997 and 1998, respectively.

The Company has adopted the disclosure-only provisions of SFAS No. 123 for
its transactions with employees. Accordingly, no compensation cost has been
recognized for the options granted to employees under the stock option plan. Had
the Company elected to adopt the recognition provision of SFAS No. 123, net loss
would have been increased by $2,250, $35,000, $36,871, and $5,700 for the years
ended December 31, 1996, and 1997, and during the six months ended June 30, 1997
and 1998, respectively.

Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that Statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model. The following assumptions were used for options granted
during the years ended December 31, 1996, 1997 and the six months ended June 30,
1998: no dividends, risk-free interest rates ranging from 5.29 percent to 6.60
percent, and expected lives of three to five years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options (principally vesting,
transfer and trading restrictions) and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

The fair value of each option grant is estimated on the date of grant using
the minimum value calculation prescribed by SFAS No. 123. The following
assumptions were used for options granted during the years ended December 31,
1996, 1997 and the six months ended June 30, 1998: no dividends, risk-free
interest rates ranging from 5.29 percent to 6.60 percent, and expected lives of
three to five years.

10. CAPITAL SHARES

In June 1997, the Company completed a private placement of Series A
Convertible Preferred Stock. The Company issued 872,300 shares at a price of
$2.00 per share and received net proceeds of $1,713,464. There

F-14
<PAGE> 72
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

are no specified dividends on Series A Convertible Preferred Stock; however,
holders are entitled to dividends declared on common stock on an as-converted
basis. In the event of liquidation, the holders of Series A Convertible
Preferred Stock shall be entitled to receive, prior and in preference to holders
of common stock, an amount per share equal to $2.00 for each outstanding share.

Each share of Series A Convertible Preferred Stock shall convert,
automatically and without any action on the part of the holder, into two-thirds
of a share of Common Stock (after giving effect to the two-for-three reverse
stock split discussed in Note 14) simultaneously with the closing of the
Company's first underwritten public offering yielding proceeds of $10.0 million
at a price per share of at least $4.00. Holders of the Series A Convertible
Preferred Stock may, at their option, convert any or all of the their preferred
shares into common shares.

In connection with loans made by shareholders and the Company's chief
executive officer in 1997, warrants for 425,000 shares were issued. The warrants
allow the holder the right to purchase one share of Class A Convertible
Preferred Stock at a price of $2.00 per share. The warrants expire in 2002, if
not earlier redeemed. The value of the warrants was computed to be $51,000. This
amount is accounted for as a discount to the debt proceeds and is being
amortized over the term of the related debt.

In connection with a loan made by a shareholder in 1998, warrants to
purchase 25,000 shares of Class A Convertible Preferred Stock at $2.00 per share
were issued. The warrants expire in 2002, if not earlier redeemed. The value of
the warrants was computed to be $3,000. This amount is accounted for as a
discount to the debt proceeds and is being amortized over the term of the
related debt.

In connection with loans made by shareholders and the Company's chief
executive officer in 1996, the Company issued warrants to purchase 10,002 common
shares at $1.50 per share. The warrants have been exercised by June 30, 1998.
The warrants were determined to have an immaterial value, and accordingly, no
discount of debt was recorded.

In connection with the Company's 1995 stock offering, warrants to purchase
146,674 common shares were issued. The warrants allow the holder the right to
purchase shares at a price of $1.88 per share. Unexercised warrants to purchase
8,001 common shares were forfeited at December 31, 1997.

F-15
<PAGE> 73
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

Warrant activity during the years 1996 and 1997 and the six months ended
June 30, 1998 is as follows:

<TABLE>
<CAPTION>
CLASS A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- --------------------------
NUMBER OF PRICE NUMBER OF PRICE
SHARES RANGE SHARES RANGE
---------- ------ --------- -------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1996......... -- -- 146,674 $1.88
Granted.............................. -- -- 10,002 1.50
------- ----- -------- -------------
Outstanding at December 31, 1996....... -- -- 156,676 1.50 - 1.88
Granted.............................. 425,000 $2.00 -- --
Exercised............................ -- -- (138,673) 1.50 - 1.88
Forfeited............................ -- -- (11,335) 1.88
------- ----- -------- -------------
Outstanding at December 31, 1997....... 425,000 2.00 6,668 1.50
Granted.............................. 25,000 2.00 --
Exercised............................ -- -- (6,668) 1.50
------- ----- -------- -------------
Outstanding at June 30, 1998........... 450,000 $2.00 -- --
======= ========
Exercisable at December 31, 1997....... 425,000 6,668
======= ========
Exercisable at June 30, 1998........... 450,000 --
======= ========
</TABLE>

Upon consummation of the Company's initial public offering, warrants to
purchase Class A Convertible Preferred Stock will be converted to warrants to
purchase Common Stock at a ratio of two common shares to three preferred shares.

11. 401(k)

In 1998, the Company adopted a 401(k) retirement savings plan (the Plan),
effective April 1998. All of the Company's employees who have provided one year
of service are eligible to participate and may elect to contribute up to 15
percent of their annual compensation to the Plan. The Company may make
discretionary matching contributions. The Company's matching contributions, if
made, will vest over a four-year period.

12. INCOME TAXES

The Company has incurred losses since inception for both financial
statement and income tax purposes, and accordingly, the income tax benefit has
been offset fully by a valuation allowance. At December 31, 1997, the Company
had federal and Arizona state tax net operating loss (NOL) carryovers of
approximately $1,920,000. The federal NOLs expire in 2009 through 2011. The
state NOLs expire in 1999 through 2001. Ownership changes as defined in the
Internal Revenue Code may limit the amount of net operating loss and tax credit
carryforwards that can be utilized to offset future taxable income or tax
liability.

F-16
<PAGE> 74
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

The temporary differences between financial and income tax reporting that
give rise to deferred income tax assets and valuation allowances are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
<S> <C> <C>
Current deferred tax assets:
Accounts receivable allowance........................... $ 41,000 $ 43,000
Inventory allowance..................................... 120,000 138,000
--------- -----------
161,000 181,000
Noncurrent deferred tax assets:
Net operating tax loss carryover........................ 768,000 1,100,000
--------- -----------
Total deferred tax assets................................. 929,000 1,281,000
Valuation allowance for deferred tax assets............... (914,000) (1,259,000)
--------- -----------
Net deferred assets....................................... 15,000 22,000
Noncurrent deferred tax liability:
Depreciation............................................ 15,000 22,000
--------- -----------
15,000 22,000
--------- -----------
Net deferred tax.......................................... $ -- $ --
========= ===========
</TABLE>

13. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company has entered into noncancelable operating lease agreements,
primarily related to the rental of office space. As of December 31, 1997, future
minimum lease payments required under such operating leases are as follows:

<TABLE>
<S> <C>
1998.................................................... $ 89,629
1999.................................................... 89,629
2000.................................................... 90,806
2001.................................................... 93,160
2002.................................................... 49,471
Thereafter.............................................. --
--------
$412,695
========
</TABLE>

Rent expense for the years ended December 31, 1996 and 1997 and the six
months ended June 30, 1998 was $33,680, $62,483, and $46,254, respectively.

Employment Agreement

The Company has entered into employment agreements with certain key
employees. One such employment agreement provides for bonus payments or stock
option grants upon the attainment of certain criteria, primarily related to
sales. No bonuses were paid in 1997 under the agreement and the minimum sales
threshold under which a bonus will be paid for 1998 is $6 million at which level
bonuses start at 1/2 percent of sales and can be up to 1 1/2 percent of sales.
Stock option grants under the agreement are at $3.00 per share and the number of
shares, if any, to be granted are subject to minimum sales levels. In accordance
with APB 25, the Company will record expense for the excess of the fair market
value at the date of grant and $3.00 when

F-17
<PAGE> 75
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997
(THE INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)

the number of shares to be granted are known. Options on up to 150,000 shares
could be granted through 2000 under the agreement.

14. SUBSEQUENT EVENTS

Capital Structure

On August 10, 1998, the Company filed amended and restated articles of
incorporation. The amendment authorizes the Company to issue 25,000,000 shares,
of which 20,000,000 shares shall be common stock, no par value, and 5,000,000
shares shall be preferred stock, no par value.

Stock Option Plans

In July 1998, the Company obtained shareholder approval to adopt amendments
to the 1998 Incentive Stock Option Plan and to adopt the 1998 Directors' Plan.
The 1998 Incentive Stock Option Plan, as amended, authorizes up to 333,334
options to purchase shares of common stock and incorporates the options
previously granted under the 1998 Incentive Stock Option Plan. The 1998
Directors' Plan authorizes up to 66,667 options to purchase shares of common
stock to be granted.

Stock Split

The Company's board of directors authorized a two-for-three reverse stock
split of the Company's common stock which was approved by the shareholders on
July 31, 1998. All share and per share amounts in the accompanying financial
statements have been adjusted to reflect the split.

F-18
<PAGE> 76

This page includes three drawings which depict suture anchors fastened to
bones in the hand and the shoulder. The language next to the first picture reads
as follows: "The Thumb Area: Depicts the Game Keeper's (Skiers) Thumb repair."
The language next to the second picture reads as follows: "The Shoulder Area:
Depicts the Bankart Lesion repair." The language next to the third picture reads
as follows: "The Wrist Area: Depicts the Scapholunate Ligament repair." The page
also includes a drawing of one of the Company's suture anchors; the following
language is printed below: "The Company's proprietary suture anchors facilitate
tissue-to-bone reattachment."

<PAGE> 77

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

NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS, OR ANY OTHER
PERSON. 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. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
------------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................ 3
Risk Factors.............................. 6
Use of Proceeds........................... 18
Dividend Policy........................... 18
Capitalization............................ 19
Dilution.................................. 20
Selected Financial Data................... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 22
Business.................................. 27
Management................................ 40
Principal Stockholders.................... 48
Certain Relationships and Related
Transactions............................ 50
Description of Capital Stock.............. 51
Shares Eligible for Future Sale........... 53
Underwriting.............................. 54
Legal Matters............................. 55
Experts................................... 56
Additional Information.................... 56
Index to Financial Statements............. F-1
Report of Independent Auditors............ F-2
Financial Statements...................... F-4
</TABLE>

UNTIL , 1998 (25 CALENDAR DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF THE DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------

2,500,000 SHARES

[ORTHOPAEDIC BIOSYSTEMS LTD, INC. LOGO]

COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
CRUTTENDEN ROTH
I N C O R P O R A T E D

JOSEPHTHAL & CO. INC.
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 78

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The Company's Amended and Restated Articles of Incorporation eliminate
personal liability of directors, to the Company or its shareholders, for
monetary damages for breach of their fiduciary duty as a director except for
liability for any of the following: (1) any breach of the director's duty of
loyalty to the Company or its shareholders; (2) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law; (3)
authorizing the unlawful payment of a dividend or other distribution on the
Company's capital stock or the unlawful purchase of its capital stock (4) any
transaction from which the director derived an improper personal benefit or (5)
a violation of Arizona Revised Statutes, Sections 10-860, 10-861, or 10-862. In
addition, the Company's Amended and Restated Articles of Incorporation and its
Amended and Restated Bylaws provide that the Company may indemnify any and all
of its directors and officers, to the fullest extent permitted by the Arizona
Revised Statutes, as the same exists or may be amended from time to time against
claims and liabilities to which such persons may become subject. Arizona general
corporation law provides that indemnification is permissible only when the
director or officer acted in good faith and in a manner reasonably believed to
be in or not opposed to the best interests of the corporation and, with respect
to any criminal action or proceeding, had no reasonable cause to believe the
conduct was unlawful. Arizona general corporation law also precludes
indemnification in respect of any claim, issue or matter as to which an officer
or director has been adjudged to be liable to the corporation.

The Registrant has agreed to indemnify the Underwriters and their
controlling persons and the Underwriters have agreed to indemnify the Registrant
and its controlling persons, against certain liabilities including liabilities
under the Securities Act. Reference is made to the Underwriting Agreement filed
as part of Exhibit 1 hereto.

For information regarding the Registrant's undertaking to submit to
adjudication the issue of indemnification for violation of the securities laws,
see Item 28 hereof.

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Other expenses in connection with the issuance and distribution of the
securities to be registered hereunder, all of which will be paid by the
registrant, will be substantially as follows:

<TABLE>
<CAPTION>
ITEM AMOUNT
- ------------------------------------------------------------ ----------
<S> <C>
SEC Registration Fee....................................... $ 5,937
*AMEX Filing Fee............................................ $ 32,500
*Blue Sky Fees and Expenses (including legal fees).......... $ 15,000
*Accounting Fees and Expenses............................... $ 100,000
*Legal Fees and Expenses.................................... $ 215,000
*Printing and Engraving..................................... $ 115,000
*Registrar and Transfer Agent's Fees........................ $ 5,000
*Underwriters' Non-Accountable Expense Allowance............ $ 487,500
*Miscellaneous Expenses..................................... $ 74,063
Total............................................. $1,050,000
==========
</TABLE>

- ---------------
* Estimated

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

During the preceding three years, the Company sold to accredited or
sophisticated investors Common Stock for cash at the price and during the
periods given: during the third quarter of 1996, 4,462 shares at an aggregate
offering price of $8,365; and during the fourth quarter of 1996, 10,000 shares
at an aggregate

II-1
<PAGE> 79

offering price of $30,000; during the first quarter of 1997, 20,668 shares at an
aggregate offering price of $33,500; during the second quarter of 1997, 62,668
shares at an aggregate offering price of $115,000; during the fourth quarter of
1997, 85,338 shares at an aggregate offering price of $160,000; and during the
second quarter of 1998, 6,668 shares at an aggregate offering price of $10,000.

In May 1997, the Company issued for cash 872,300 shares of Class A
Convertible Preferred Stock (the "Preferred Stock") to 14 accredited or
sophisticated investors at an aggregate offering price of $1,744,600. All
outstanding Preferred Stock is convertible into 581,541 shares of Common Stock.

During the period July 1995 through June 1998, the Company granted to
directors, executive officers, employees, advisors, and consultants 498,692
options to purchase Common Stock for an aggregate offering price of $1,368,500.

In March 1996, the Company sold for cash $90,000 principal amount of
14 1/2% subordinated promissory notes (the "Series A Notes") to three accredited
or sophisticated investors. In addition, the Company issued to the holders of
the Series A Notes warrants to purchase, in the aggregate, 10,002 shares of the
Company's Common Stock at an exercise price of $1.50 per share 3,334 of which
were exercised during the second quarter of 1997 and 6,668 of which were
exercised during the second quarter of 1998.

In November 1997, December 1997, and January 1998, the Company sold for
cash $900,000 principal amount of subordinated promissory notes (the "Series B
Notes") to eight accredited or sophisticated investors. Each note bears an
interest rate equal to 2% per annum in excess of the prime commercial lending
rate adjusted quarterly. The Notes mature on December 31, 1998. In addition, the
Company issued to the holders of the Series B Notes, warrants to purchase shares
of Preferred Stock which will be converted into warrants to purchase 300,003
shares of Common Stock upon the consummation of this Offering at an exercise of
$3.00 per share.

In May and July 1998, the Company sold for cash $300,000 principal amount
of Series B Notes. The notes bear interest at a rate equal to 4% per annum in
excess of the prime rate adjusted quarterly, and mature one year from the date
of issuance. No warrants were issued in connection with the notes.

All information above reflects a two-for-three reverse stock split to be
effected by the Company prior to the consummation of the Offering.

Each transaction described above was deemed exempt from registration under
the Securities Act pursuant to Section 4(2) of the Act regarding transactions
not involving in any public offering.

ITEM 27. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>

II-2
<PAGE> 80

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>
10.5 Series B Promissory Note, dated May 4, 1998, by and between
the Company and D. Ronald Yagoda (previously filed)
10.6 Employment Agreement by and between the Company and James W.
Hart (previously filed)
10.7 Employment Agreement by and between the Company and D.
Ronald Yagoda (previously filed)
10.8 Employment Agreement by and between the Company and Gary
Scheel (previously filed)
10.9 Employment Agreement by and between the Company and Jeffry
Skiba (previously filed)
10.10 1998 Stock Incentive Plan (previously filed)
10.11 1998 Director Option Plan (previously filed)
10.12 Form of Consulting Agreement with Addendum listing
signatories
10.13 Office Lease by and between SEOC I Limited Partnership
("SEOC") and the Company, dated as of May 6, 1997
10.14 First Amendment to Office Lease by and between SEOC and the
Company, dated as of July 1997
10.15 Form of the Company lock-up letter with Addendum listing
signatories
10.16 *Loan and Security Agreement by and between the Company and
Silicon Valley Bank
16 Letter on change in certifying accountant (previously filed)
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2 Consent of Ernst & Young LLP, independent auditors
23.3 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
27 Financial data schedule
27.1 Financial data schedule
</TABLE>

- ---------------
* To be filed by amendment.

+ Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text (the "Mark"). This Exhibit has been filed
separately with the Secretary of the Commission without the Mark pursuant to
the Company's Application Requesting Confidential Treatment under Rule 406
under the Securities Act.

ITEM 28. UNDERTAKINGS.

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

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the 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, 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 undertakes that:

(1) For the 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(b)

II-3
<PAGE> 81

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 purposes 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-4
<PAGE> 82

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Phoenix, State of Arizona, on August
12, 1998.

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

By: /s/ D. RONALD YAGODA

------------------------------------
D. Ronald Yagoda
Chairman and Chief Executive Officer

Each person whose signature appears below hereby constitutes and appoints
D. Ronald Yagoda and James W. Hart, and each of them, as his or her
attorney-in-fact and agent, with the power of substitutions, for and in the
name, place, and stead of the undersigned, to sign any and all amendments to
this Registration Statement, and to file the same with exhibits thereto, and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact or
his substitute or substitutes may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
------------------ ----- ----
<C> <S> <C>

/s/ D. RONALD YAGODA Chairman, Chief Executive Officer August 12, 1998
- ------------------------------------------------ (Principal executive officer)
D. Ronald Yagoda

/s/ JENNIFER L. GUELICH Vice President and Chief August 12, 1998
- ------------------------------------------------ Financial Officer (Principal
Jennifer L. Guelich financial and accounting
officer)

* Director August 12, 1998
- ------------------------------------------------
Steven P. Davis

* Director August 12, 1998
- ------------------------------------------------
Michael D. Greenbaum

* Director August 12, 1998
- ------------------------------------------------
Robert F. Lusch, Ph.D.

* Director August 12, 1998
- ------------------------------------------------
Leslie S. Matthews, M.D.

* Director August 12, 1998
- ------------------------------------------------
Gary A. Peterson

* Director August 12, 1998
- ------------------------------------------------
Richard Previte

* Director August 12, 1998
- ------------------------------------------------
Kerry Zang, D.P.M.

*By: /s/ D. RONALD YAGODA
- ------------------------------------------------
D. Ronald Yagoda
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 83

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
<S> <C>

1 *Form of Underwriting Agreement by and between the
Representatives and the Company
3.1 Amended and Restated Articles of Incorporation of the
Company
3.2 Amended and Restated Bylaws of the Company (previously
filed)
4.1 Amended and Restated Articles of Incorporation of the
Company (filed as Exhibit 3.1)
4.2 Form of Common Stock certificate
4.3 Form of Stock Purchase Warrant Certificate (previously
filed)
4.4 Agreement dated as of May 5, 1997, by and among the Company
and certain investors in the Company regarding Registrations
Rights (previously filed)
5 Opinion of Snell & Wilmer L.L.P. regarding the legality of
the common stock being registered
10.1 Exclusive Marketing and Distribution Agreement, dated as of
August 1, 1996, by and between the Company and Mentor
Urology Corporation+ (previously filed)
10.2 International Distribution Agreement, dated as of August 4,
1997, between the Company and Mizuho Medical Co., Ltd.
(previously filed)
10.3 Agreement dated as of January 1, 1998, by and between the
Company and Imcor, Inc.+ (previously filed)
10.4 Form of Series B Promissory Note (previously filed)
10.5 Series B Promissory Note, dated May 4, 1998, by and between
the Company and D. Ronald Yagoda (previously filed)
10.6 Employment Agreement by and between the Company and James W.
Hart (previously filed)
10.7 Employment Agreement by and between the Company and D.
Ronald Yagoda (previously filed)
10.8 Employment Agreement by and between the Company and Gary
Scheel (previously filed)
10.9 Employment Agreement by and between the Company and Jeffry
Skiba (previously filed)
10.10 1998 Stock Incentive Plan (previously filed)
10.11 1998 Director Option Plan (previously filed)
10.12 Form of Consulting Agreement with Addendum listing
signatories
10.13 Office Lease by and between SEOC I Limited Partnership
("SEOC") and the Company, dated as of May 6, 1997
10.14 First Amendment to Office Lease by and between SEOC and the
Company, dated as of July 1997
10.15 Form of the Company lock-up letter with Addendum listing
signatories
10.16 *Loan and Security Agreement by and between the Company and
Silicon Valley Bank
16 Letter on change in certifying accountant (previously filed)
23.1 Consent of PricewaterhouseCoopers LLP, independent
accountants
23.2 Consent of Ernst & Young LLP, independent auditors
23.3 Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
27 Financial data schedule (previously filed)
27.1 Financial data schedule (previously filed)
</TABLE>

- ---------------
* To be filed by amendment.

II-6

<PAGE> 1
Exhibit 3.1

STATE OF ARIZONA
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

Pursuant to the provisions of Arizona Revised Statutes, Section 10-1003
and Section 10-1007, the undersigned corporation, pursuant to a resolution duly
adopted by its Board of Directors and adopted by the shareholders of the
corporation in the manner prescribed by law, hereby adopts the amended and
restated articles of incorporation as follows:

FIRST: The name of the corporation is Orthopaedic Biosystems Ltd., Inc.

SECOND: The purposes for which the corporation is organized include the
transaction of any or all lawful business for which corporations may be
incorporated under Chapter 1 of Title 10, Arizona Revised Statutes, at any time.
The character of business which the corporation initially intends actually to
conduct in the State of Arizona is the manufacture, distribution and sale of
medical products consisting primarily of orthopaedic fixation and implant
devices.

THIRD: The aggregate number of shares that the Corporation shall have
authority to issue is 25,000,000 shares, of which 20,000,000 shares shall be
Common Stock, no par value, and 5,000,000 shares shall be Preferred Stock, no
par value.

On the effective date of these Amended and Restated Articles of
Incorporation (the "Effective Date"), the Common Stock of the corporation will
be split on a two-for-three basis so that each share of Common Stock issued and
outstanding immediately prior to the Effective Date shall automatically be
converted into and reconstituted as two-thirds of a share of Common Stock (the
"Reverse Split"). Each holder of a certificate or certificates which immediately
prior to the Effective Date represented outstanding shares of Common Stock (the
"Old Common Stock") shall be entitled to receive upon surrender of such
certificates a certificate or certificates representing the number of shares of
Common Stock (the "New Common Stock") into which and for which the shares of the
Old Common Stock are split under the terms hereof. From and after the Effective
Date, Old Common Stock certificates shall represent only the right to receive
New Common Stock certificates. No fractional shares shall be issued by the
Corporation as a result of the Reverse Split. In lieu thereof, each shareholder
whose shares of Common Stock are not evenly divisible will receive one
additional share of Common Stock for the fractional share that such shareholder
would otherwise be entitled to as a result of the Reverse Split.

Until automatic conversion simultaneously with the payment to the
Corporation of the purchase price of the Corporation's Common Shares sold by the
Corporation in its first underwritten public offering, made pursuant to a
registration statement filed on Form S-1 (or on such other form for which the
Corporation and the offering qualify), all Preferred Stock is designated Class A
<PAGE> 2
Convertible Preferred Stock, the rights, preferences, restrictions and other
matters relating to which are as follows:

1. Dividends. There are no dividends (cumulative or non-cumulative) on
Class A Convertible Preferred Stock, however, Class A Convertible Preferred
Stock shall be entitled to all dividends declared on Common Stock on an
as-converted basis, as if the Class A Convertible Preferred Stock had been
converted into Common Stock.

2. Liquidation Preference.

(a) In the event of any liquidation, dissolution or winding up
of this Corporation, either voluntary or involuntary, the holders of Class A
Convertible Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets of this Corporation to the
holders of Common Stock by reason of their ownership thereof, an amount per
share equal to $2.00 for each outstanding share of Class A Convertible Preferred
Stock before any payment shall be made on any assets distributed to the holders
of Common Stock. If, upon the occurrence of such event, the assets and funds
thus distributed among the holders of the full aforesaid preferential amounts,
then, the entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of the Class A
Convertible Preferred Stock in proportion to the amount of such stock owned by
each such holder.

(b) Upon the completion of the distribution required by
Subparagraph (a) of this Section 2, if assets remain in this Corporation, the
holders of the Common Stock of this Corporation shall next receive an amount
equal to $1.50 per Share before any further payment be made on any assets
distributed to the holders of the Class A Convertible Preferred Stock.

(c) After the distributions described in Subparagraphs (1) and
(b) above have been paid, the remaining assets of the Corporation available for
distribution to Shareholders shall be distributed among the holders of Class A
Convertible Preferred Stock and Common Stock pro rata based on the number of
shares of Common Stock held by each (assuming full conversion of all such Class
A Convertible Preferred Stock).

(d) The liquidation preferences set forth in this Section 2
shall cease to apply if the Corporation (i) sells additional equity securities
in a private financing or financings in the aggregate amount of $3,000,000 or
more, or (ii) receives payment of the purchase price for the Corporation's
Common Stock sold by the Corporation in its first underwritten public offering
("IPO"), as defined more completely in Section 3 of this Article Third,
whichever shall first occur.

3. Automatic Conversion Upon Public Offering. Each share (or warrant to
purchase shares) of Class A Convertible Preferred Stock shall convert,
automatically and without any action on the part of the holder thereof, into
that number of fully paid and non-assessable Common Shares

2
<PAGE> 3
(or warrants to purchase Common Shares) for each share (or warrant to purchase
shares) of Class A Convertible Preferred Stock as determined in accordance with
Section 5 below, simultaneously with the payment to the Corporation of the
purchase price of the Corporation's Common Shares sold by the Corporation in its
first underwritten public offering, made pursuant to a registration statement
filed on Form S-1 (or on such other form for which the Corporation and the
offering qualify) with the Securities and Exchange Commission under the
Securities Act of 1933, as amended. The Corporation shall provide prior written
notice to each holder of Class A Convertible Preferred Stock of its intention to
undertake a public offering of its Common Stock. Such notice shall include a
statement notifying the holder thereof of the automatic conversion of the Class
A Convertible Preferred Stock upon consummation of the public offering. The
Corporation may require that the holder of Class A Convertible Preferred Stock
surrender the certificates evidencing such holder's Class A Convertible
Preferred Stock prior to delivery to the holder of certificates evidencing the
Common Shares issued upon the foregoing automatic conversion. Notwithstanding
the foregoing, no automatic conversion shall occur unless (i) the Corporation
sells $10,000,000 or more of its Common Stock at a price of $4.00 or more per
share in the IPO described above, or (ii) more than 50% of the Class A
Convertible Preferred stock is converted into Common Stock in accordance with
the optional conversion rights conferred under Section 4 of this Article Third.

4. Conversion at Option of Holders. Holders of Class A Convertible
Preferred Stock may, at their option, upon surrender of the certificates
therefor, convert any or all of their shares of Class A Convertible Preferred
Stock into fully paid and non-assessable Common Shares at any time after
issuance thereof. Each share of Class A Convertible Preferred Stock shall be
convertible at the office of the Corporation or the office of any transfer agent
designated by the Corporation into that number of fully paid and non-assessable
Common Shares (calculated as to each conversion to the nearest 1/100th of a
share) as shall be equal to the number obtained by dividing the Issuance Price
(as hereinafter defined) per share of Class A Convertible Preferred Stock by the
Conversion Price computed as hereinafter set forth (the "Conversion Price") in
effect of the Class A Convertible Preferred Stock. The "Issuance Price" for the
Class A Convertible Preferred Stock is $2.00 per share and the initial
Conversion Price of the Class A Convertible Preferred Stock is $2.00. The
Conversion Price is subject to adjustment from time to time as provided in
Section 5 hereof.

No fractional Common Shares shall be issued upon conversion of the
Class A Convertible Preferred Stock, but, in lieu of any fraction of Common
Shares which would otherwise be issuable in respect of the aggregate number of
such shares surrendered for conversion at one time by the same holder, the
Corporation shall pay in cash an amount equal to the product of (a) the fair
market value of one common share on such day as determined in good faith by the
Board of Directors of the Corporation, and (b) such fraction of one share.

A number of authorized but unissued Common Shares sufficient to provide
for the conversion of the Class A Convertible Preferred Stock outstanding upon
the basis hereinbefore provided shall at all times be reserved by the
Corporation, free from preemptive rights, for such conversion. If the
Corporation shall issue any securities or make any change in its capital
structure which would change the number of Common Shares into which each share
of the Class A

3
<PAGE> 4
Convertible Preferred Stock shall be convertible as herein provided, the
Corporation shall at the same time also make proper provision so that thereafter
there shall be a sufficient number of Common Shares authorized and reserved,
free from preemptive rights, for conversion of the outstanding Class A
Convertible Preferred Stock on the new basis. The Corporation shall comply with
all securities laws regulating the offer and delivery of Common Shares upon
conversion of the Class A Convertible Preferred Stock and shall use its best
efforts to list such shares on each national securities exchange on which the
Common Shares are listed or to have such shares admitted for quotation on the
NASDAQ National Market System if the Common Shares are admitted for quotation
thereon.

5. Adjustments to Conversion Price. Notwithstanding anything in this
Section 5 to the contrary, no change in the Conversion Price shall be made until
the cumulative effect of the adjustments called for by this Section 5, since the
date of the last change in the Conversion Price, would change the Conversion
Price by more than 1%. However, once the cumulative effect would result in such
a change, then the Conversion Price shall be changed to reflect all adjustments
called for by this Section 5 and not previously made. Subject to the foregoing,
the Conversion Price shall be adjusted from time to time as follows:

(a) In the event of any consolidation of merger of the
Corporation with any other corporation (other than a wholly owned
subsidiary of the Corporation), or in case of any sale or transfer of
all or substantially all of the assets of the Corporation, or in case
of any share exchange pursuant to which all of the outstanding Common
Shares are converted into other securities or property, the Corporation
shall, prior to or at the time of such transaction, make appropriate
provision or cause appropriate provision to be made so that holders of
each share of Class A Convertible Preferred Stock then outstanding
shall have the right thereafter to convert such shares of Class A
Convertible Preferred Stock in the kind and amount of shares of stock
and other securities and property receivable upon such consolidation,
merger, sale, transfer or share exchange. If in connection with any
such consolidation, merger, sale, transfer or share exchange, each
holder of Common Shares is entitled to elect to receive either
securities, cash or other assets upon completion of such transaction,
the Corporation shall provide or cause to be provided to each holder of
Class A Convertible Preferred Stock the right to elect the securities,
cash or other assets into which the Class A Convertible Preferred Stock
held by such holder shall be convertible after completion of any such
transaction on the same terms and subject to the same conditions
applicable to holders of the Common Shares (including without
limitation, notice of the right to elect, limitations on the period in
which such election shall be made and the effect of failing to exercise
the election).

(b) In the event that the Corporation shall (i) pay a dividend
or make a distribution on its Common Shares in shares of its capital
stock, (ii) subdivide its outstanding Common Shares into a greater
number of shares, (iii) combine the outstanding Common Shares into a
smaller number of shares, or (iv) issue by reclassification of its
Common Shares any shares of its capital stock, then in each such case
the Conversion Price in effect immediately prior thereto shall be
proportionately adjusted so that the holder of any Class

4
<PAGE> 5
A Convertible Preferred Stock thereafter surrendered for conversion
shall be entitled to receive, to the extent permitted by applicable
law, the number and kind of shares of capital stock of the Corporation
which such holder would have owned or have been entitled to receive
after the happening of such event had such Class A Convertible
Preferred Stock been converted immediately prior to the record date for
such event (or if no record date is established in connection with such
event, the effective date for such action). An adjustment pursuant to
this Subparagraph (b) shall become effective immediately after the
record date in the case of a stock dividend or distribution and shall
become effective immediately after the effective date in the case of a
subdivision, combination or reclassification.

(c) In the event that the Corporation shall at any time or
from time to time prior to April 30, 1999 (i) issue or sell any of its
Common Shares, or any security convertible into Common Shares,
including the sale by the Corporation of any Common Shares in an
underwritten public offering described in Section 3 above, or (ii)
issue or sell any right or option to purchase Common Shares or any
security convertible into Common Shares, for a consideration per share
less than the Conversion Price for any of the Class A Convertible
Preferred Stock in effect immediately prior to the time of such
issuance or sale, then, forthwith upon such issuance or sale, the
Conversion Price for the Class A Convertible Preferred Stock shall be
reduced to the price at which such Common Shares are being issued or
sold by the Corporation or the price at which such other securities are
exercisable or convertible into Common Shares of the Corporation. Upon
each adjustment of the Conversion Price, the holder of Class A
Convertible Preferred Stock shall thereafter, or, in the event of an
automatic conversion pursuant to Section 3, prior to such conversion,
be entitled to acquire, at the Conversion Price resulting from such
adjustment, the number of shares obtained by multiplying the Conversion
Price in effect immediately prior to such adjustment by the number of
shares such holder may acquire pursuant hereto immediately prior to
such adjustment and dividing the product thereof by the Conversion
Price resulting from such adjustment. Notwithstanding the foregoing,
the conversion of any declared and unpaid dividends on the Class A
Convertible Preferred Stock shall be governed by the terms set forth in
Section 5 hereof. This subparagraph (c) shall be of no force and effect
with respect to any transaction that takes place after April 30, 1999.

(d) All calculations hereunder shall be made to the nearest
cent or to the nearest 1/100th of a share, as the case may be.

(e) In the event that at any time, as a result of an
adjustment made pursuant to subparagraph (a) or (b) above, the holder
of any Class A Convertible Preferred Stock thereafter surrendered for
conversion shall become entitled to receive securities, cash or assets
other than Common Shares, the number or amount of such securities or
property so receivable upon conversion shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to he Common Shares
contained in Subparagraphs (a) through (d) above.

5
<PAGE> 6
Except as otherwise provided above in this Section 5, no adjustment in
the Conversion Price shall be made for share distributions or dividends
theretofore declared and paid or payable on the Common Shares of the
Corporation.

The anti-dilution provisions of this Section 5 may be waived or
modified by the affirmative vote of the holders (acting together as a class) of
all of the then-outstanding shares of Class A Convertible Preferred Stock,
provided, however, that such holders may not modify the provisions of this
Section 5 in any manner that would adversely affect the Corporation, without the
written consent of the Corporation.

Whenever the Corporation shall propose to take any of the actions
specified in Subparagraphs (a), (b) or (c) of the first paragraph of this
Section 5 which would result in any adjustment in the Conversion Price, the
Corporation shall cause a notice to be mailed at least thirty (30) days prior to
the date on which the books of the Corporation will close or on which a record
will be taken for such action to the holders of record of the outstanding Class
A Convertible Preferred Stock on the date of such notice. Such notice shall
specify the action proposed to be taken by the Corporation and the date as of
which holders of record of the Common Shares shall participate in any such
actions or be entitled to exchange their Common Shares for securities or other
property, as the case may be. Failure by the Corporation to give such notice or
any defect in such notice shall not affect the validity of the transaction.

Upon any adjustment of the Conversion Price of the Class A Convertible
Preferred Stock, the Corporation shall give written notice thereof, by
first-class mail, postage prepaid, addressed to the registered holders of the
Class A Convertible Preferred Stock, at the addresses of such holders as shown
on the books of the Corporation, which notice shall state the Conversion Price
resulting from such adjustment and the increase or decrease, if any, in the
number of shares receivable at such price upon the conversion of the Class A
Convertible Preferred Stock, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.

6. Voting Rights. The holders of Class A Convertible Preferred Stock
shall be entitled to notice of and to attend all meetings of shareholders of the
Corporation and shall be entitled to vote together with the holders of Common
Shares, voting as a single class, on all matters presented to the Corporation's
shareholders for approval. The holders of Class A Convertible Preferred Stock
shall be entitled to the number of votes for each share of Class A Convertible
Preferred Stock held equal to the number of shares of Common Stock into which
such share of Class A Convertible Preferred Stock is then convertible as
determined in accordance with Section 5. The holders of the Class A Convertible
Preferred Stock shall only be entitled to vote as a class or as a distinct
voting group when such rights are mandated by the Arizona Business Corporation
act or as specifically provided herein.

Following automatic conversion of the Preferred Stock simultaneously
with the payment to the Corporation of the purchase price of the Corporation's
Common Shares sold by the Corporation in its first underwritten public offering,
made pursuant to a registration statement filed on Form S-1

6
<PAGE> 7
(or on such other form for which the Corporation and the offering qualify), the
rights, preferences, restrictions and other matters relating to the Preferred
Stock are as follows:

(a) The shares of Preferred Stock may be issued from time to time in
one or more series, each of which series may have voting powers, full
or limited, or no voting powers, and such designations, preferences and
relative, participating, optional or other special rights and
qualifications, limitations and restrictions, as shall be stated and
expressed in the resolution or resolutions adopted providing for the
issuance of such Preferred Stock of each such series adopted by the
Board of Directors of the Corporation, and authority to adopt such
resolutions stating and expressing any or all of the foregoing be and
hereby is expressly vested in the Board of Directors of the
Corporation.

(b) In particular and without limitation of the foregoing, the Board of
Directors may establish, designate and fix the following with respect
to each such series of Preferred Stock: the voting rights, if any, of
the stock of any such series which may, without limiting the generality
of the foregoing, include: (i) the right to more or less than one vote
per share on any or all matters voted upon by the stockholders; and
(ii) the right to vote, as a series by itself or together with other
series of Preferred Stock or together with all series of Preferred
Stock as a class, upon such matters, under such circumstances and upon
such conditions as the Board of Directors may fix, including, without
limitation, the right, voting as a series by itself or together with
other series of Preferred Stock or together with all series of
Preferred Stock as a class, to elect one or more directors of the
Corporation; (iii) the dividend rights, if any, of holders of stock of
each such series; (iv) the terms on which stock of each such series may
be redeemed, if the stock of such series is to be redeemable; (v) the
rights of holders of stock of each such series upon dissolution or any
distribution of assets; (vi) the terms or amounts of the sinking fund,
if any, to be provided for the purchase or redemption of stock of each
such series; (vii) the terms upon which the stock of each such series
may be converted into or exchanged for stock of any other class or
classes or any one or more series of Preferred Stock, if the stock of
such series is to be convertible or exchangeable; and (viii) such other
designations, preferences and relative, participating, optional or
other special rights and qualifications, limitations or restrictions
thereof, as shall be desired to be so fixed.

(c) The number of authorized shares of Preferred Stock may be increased
or decreased (but not below the number of shares thereof then
outstanding or reserved for issuance) by the affirmative vote of the
holders of a majority of the then-outstanding shares of Common Stock,
without a vote of the holders of the Preferred Stock, or of any series
thereof, unless a vote of any such holders is required pursuant to the
certificate or certificates establishing the series of Preferred Stock.

FOURTH: The name and address of the statutory agent of the corporation
is General Investment Company, 400 E. Van Buren, One Arizona Center, 19th Floor,
Phoenix, AZ 85004. The address of the place of business of the corporation is
15990 N. Greenway-Hayden Loop, Suite 100, Scottsdale, Arizona 85260.

7
<PAGE> 8
FIFTH: The directors, other than those who may be elected by the
holders of any series of Preferred Stock then outstanding, shall be divided into
three classes effective upon the filing hereof, with the term of the first class
to expire at the 1999 annual meeting of stockholders, the term of office of the
second class to expire at the 2000 annual meeting of stockholders and the term
of office of the third class to expire at the 2001 annual meeting of
stockholders. At each annual meeting of stockholders following such initial
classification and election, directors elected to succeed those directors whose
terms expire shall be elected for a term of office to expire at the third
succeeding annual meeting of stockholders after their election.

1. Removal of Directors. Notwithstanding any other provision of these
Articles of Incorporation or the Bylaws of the Corporation (and notwithstanding
the fact that some lesser percentage may be specified by law, these Articles of
Incorporation or the Bylaws of the Corporation), and subject to the rights of
the holders of any series of Preferred Stock then outstanding, any director, or
the entire Board of Directors, may be removed from office at any time but only
for cause by the affirmative vote of the holders of a majority of the voting
power of all of the shares of the Corporation entitled to vote generally in the
election of directors, voting together as a single class.

2. Current Board of Directors. The number of directors constituting the
current Board of Directors of the Corporation shall not be less than five (5)
nor more than ten (10). The names and addresses of the persons who are the
current directors until their successors be elected and qualified are:

<TABLE>
<CAPTION>
Name Address
- ---- -------

CLASS III

<S> <C>
Steven P. Davis 264 Cedar Lane
Glencoe, IL 60022

D. Ronald Yagoda 10040 East Happy Valley Road, #917
Scottsdale, AZ 85255

Kerry Zang, D.P.M. Footcare Physicians
736 N. Country Club
Mesa, AZ 85201
CLASS II

Michael D. Greenbaum 5315 Paradise Canyon Road
</TABLE>

8
<PAGE> 9
<TABLE>
<S> <C>
Paradise Valley, AZ 85253

Robert F. Lusch 2433 Smoking Oak Road
Norman, OK 73072

Richard Previte Advanced Micro Devices
Mail Stop 54, P.O. Box 3453
Sunnyvale, CA 94088-3453
CLASS I

Leslie S. Matthews Department of Orthopaedics
Union Memorial Hospital
3333 N. Calvert Street, #400
Baltimore, MD 21218

Gary Peterson Baton Development, Inc.
10040 E. Happy Valley Road, Lot 37
Scottsdale, AZ 85255
</TABLE>

SIXTH: The Corporation may create and issue rights or options (without
limitation) to directors, officers, or employees or the Corporation or of any
affiliate thereof, entitling the holders thereof to purchase from the
Corporation shares of any class or classes, and no shareholder approval or
ratification thereof shall be required.

SEVENTH: The Corporation shall have the right to purchase, directly or
indirectly, its own shares to the extent of the unreserved and unrestricted
earned and capital surplus available therefor.

EIGHTH: The Board of Directors may, from time to time, distribute on a
pro rata basis to its shareholders out of capital surplus of the Corporation a
portion of its assets, in cash or property, and no shareholder authorization
shall be required.

NINTH: A director of the Corporation shall not be personally liable to
the Corporation or its shareholders for monetary damages for breach of fiduciary
duty as a director, except for liability for any of the following:

(a) any breach of the director's duty of loyalty to the Corporation or
its shareholders,

(b) acts or omissions which are not in good faith or which involve
intentional misconduct or a knowing violation of law,

(c) authorizing the unlawful payment of a dividend or other
distribution on the Corporation's capital stock or the unlawful purchase of its
capital stock,

9
<PAGE> 10
(d) any transaction from which the director derived an improper
personal benefit, or

(e) a violation of Arizona Revised Statutes, Sections 10-860, 10-861 or
10-862.

Any repeal or modification of the foregoing paragraph shall not
adversely affect any right or protection of a director of the corporation
existing hereunder with respect to any act or omission occurring prior to or at
the time of such repeal or modification.

TENTH: The Corporation shall indemnify its directors and officers to
the fullest extent authorized or permitted by Arizona Revised Statutes, as the
same exists or may hereafter be amended, and such right to indemnification shall
continue as to a person who has ceased to be a director or officer of the
Corporation and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except for proceedings to enforce
rights to indemnification, the Corporation shall not be obligated to indemnify
any director of officer (or his or her heirs, executors or administrators) in
connection with a proceeding (or part thereof) initiated by such person unless
such proceeding (or part thereof) was authorized or consented to by the Board of
Directors of the Corporation. The right to indemnification conferred in this
Article shall include the right to receive from the Corporation advances in
respect of the expenses incurred in defending or otherwise participating in any
proceeding in advance of its final disposition, subject to any written
undertaking to repay such advances that may be required by Arizona Revised
Statutes.

1. Additional Rights to Indemnification. The Corporation may, to the
extent authorized from time to time by the Board of Directors, provide rights to
indemnification and to the advancement of expenses to employees and agents of
the Corporation who are not directors or officers similar to those conferred in
this Article to directors and officers of the Corporation. The rights to
indemnification and to the advancement of expenses conferred in this Article
shall not be exclusive of any other right which any person may have or hereafter
acquire under these Articles of Incorporation, the Bylaws, any statute
agreement, vote of stockholders or disinterested directors, or otherwise.

2. Repeal. Any repeal or modification of this Article by the
stockholders of the Corporation shall not adversely affect any rights to
indemnification and advancement of expenses of a director or officer of the
Corporation existing pursuant to this Article with respect to any acts or
omissions occurring prior to such repeal or modification.

3. Insurance. The Corporation shall have the power to purchase and
maintain insurance, at its expense, to protect itself and any director, officer,
employee or agent of the Corporation or another corporation, partnership, joint
venture, trust or other enterprise (including an employee benefit plan) against
any expense, liability or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability or loss under the
Arizona Revised Statutes.

10
<PAGE> 11
ELEVENTH: The Corporation elects not to be subject to the control share
acquisition provisions set forth in Arizona Revised Statutes, Section 10-2721.

The amended and restated articles of incorporation set forth above
correctly set forth the provisions of the articles of incorporation as
heretofore amended and as amended hereby, and supersedes the original articles
of incorporation and all amendments thereto.

Dated: August 10, 1998.

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

By: /s/ D. Ronald Yagoda
-----------------------------------
Chairman/Chief Executive Officer

ATTEST:

/s/ Jennifer L. Guelich
- ----------------------------------
Assistant Secretary

<PAGE> 1

EXHIBIT 4.2

COMMON STOCK COMMON STOCK

OBL

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

Number OB ____________________ Shares _________________

INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR
THE STATE OF ARIZONA CERTAIN DEFINITIONS
CUSIP 68751A 10 5

THIS CERTIFIES THAT

IS THE RECORD HOLDER OF

FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, NO PAR VALUE, OF

ORTHOPAEDIC BIOSYSTEMS LTD., 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 is not valid until 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.

ASSISTANT SECRETARY [SEAL] CHAIRMAN AND CHIEF EXECUTIVE OFFICER
<PAGE> 2
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN OR
DESTROYED, THE BANK MAY REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE
ISSUANCE OF A REPLACEMENT CERTIFICATE.

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:

<TABLE>
<S> <C> <C>
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 under Uniform Gifts to Minors
survivorship and not as tenants Act___________________________
in common (State)
UNIF TRF MIN ACT - ______Custodian (until age _____)
(Cust)
_______under Uniform Transfers
(Minor)
to Minors Act________________
(State)
</TABLE>

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 ZIP CODE, OF ASSIGNEE)

Shares
- -------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint

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

Dated:

X
---------------------------------

NOTICE: THE SIGNATURES TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE
CERTIFICATE IN EVERY
PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATSOEVER.

Signature(s) Guaranteed

By
--------------------------------------

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

<PAGE> 1
Exhibit 5

August 11, 1998

Orthopaedic Biosystems Ltd., Inc.
15990 N. Greenway-Hayden Loop, Suite 100
Scottsdale, Arizona 85260

Re: Registration Statement on Form SB-2

Ladies and Gentlemen:

We have acted as counsel to Orthopaedic Biosystems Ltd., Inc., an Arizona
corporation (the "Company"), in connection with the preparation and filing with
the United States Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Securities Act"), of the Company's Registration Statement
on Form SB-2 (the "Registration Statement"), relating to the registration of
2,875,000 shares of common stock, no par value ("Common Stock"), including
375,000 shares which may be issued pursuant to the underwriters' over-allotment
option. In arriving at the opinion expressed below, we have reviewed the
Registration Statement and the exhibits thereto. In addition, we have reviewed
the originals or copies certified or otherwise identified to our satisfaction,
of all such corporate records of the Company and such other instruments and
other certificates of public officials, officers and representatives of the
Company, and other persons, and we have made such investigation of law, as we
have deemed appropriate as a basis for the opinions expressed below. In
rendering the opinions expressed below, we have assumed (i) the genuineness of
signatures not witnessed, the authenticity of documents submitted as originals,
and the conformity to originals of documents submitted as copies, (ii) the legal
capacity of all natural persons executing the documents discussed herein, (iii)
that such documents accurately describe and contain the mutual understanding of
the parties and that there are no oral or written statements or agreements that
modify, amend, or vary or purport to modify, amend, or vary any of the terms of
such documents, and (iv) that, as to documents executed by entities other than
the Company, that such entity had the power to enter into and perform its
obligations under such documents, and that such documents have been duly
authorized, executed, and delivered by, and are valid, binding upon, and
enforceable against, such entities.

Based upon the foregoing, we advise you that, in our opinion, when the
following events have occurred:

(a) The Registration Statement has become effective under the Securities
Act;

<PAGE> 2
Orthopaedic Biosystems Ltd., Inc.
August 11, 1998
Page 2

(b) The due authorization, registration, and delivery of the certificate or
certificates evidencing the Common Stock;

(c) The Common Stock is issued and sold and consideration has been
received therefor in the manner specified in the Registration Statement and the
exhibits thereto;

(d) The compliance with all applicable contracts, agreements, and
instruments in respect of the issuance of the Common Stock has occurred; and

(e) The receipt of all necessary approvals, consents or waivers, and the
satisfaction of all necessary conditions, to the issuance of the Common Stock
shall have been obtained or satisfied; then

1. The Common Stock to be issued by you will be legally issued, fully
paid, and non-assessable.

The foregoing opinions are limited to the federal law of the United States
of America and the laws of the State of Arizona. We express no opinion as to the
application of the various state securities laws to the offer, sale, issuance,
or delivery of the Common Stock.

We hereby consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.

We have also reviewed and approved the statements in the Prospectus under
the captions "Risk Factors--Reliance on and Uncertainty Relating to Patents and
Proprietary Technology; Risk of Infringement" and "Business--Patents and
Proprietary Rights" and to the references to our firm under the caption
"Experts."

Very truly yours,

SNELL & WILMER L.L.P.

/s/ Snell & Wilmer L.L.P.

<PAGE> 1
Exhibit 10.12

CONSULTING AGREEMENT

THIS AGREEMENT is made and entered into as of the __ day of ______,
____, by and between ORTHOPAEDIC BIOSYSTEMS LTD., INC. ("OBL"), an
Arizona corporation having its principal office at 15990 N.
Greenway-Hayden Loop, Suite 100, Scottsdale, Arizona 85260, and _____
_______, of _____________, the ("Consultant").

RECITALS

A. OBL is engaged in the business of inventing, developing and
selling orthopaedic, podiatric and other medical products and
devices which it sells to physicians, hospitals, clinics and
other health care providers.

B. OBL desires to retain Consultant as a professional advisor
upon the terms and conditions hereinafter set forth, and
Consultant has agreed to serve as a professional advisor upon
such terms and conditions.

STATEMENT OF AGREEMENT

NOW, THEREFORE, in consideration of the above recitals and the mutual
covenants and agreements hereinafter set forth, the parties hereto agree as
follows:

1. Services to be Provided by Consultant. Consultant agrees for a
period of three (3) years to serve as a professional advisor to OBL and, as
such, to perform the following services:

(a) Consult with OBL on the design and
development of new products and
instrumentation materials, promotional
materials and the improvement of existing
products and instrumentation.

(b) Perform and publish clinical studies and
tests of OBL products.

(d) Lecture and conduct two (2)
workshops on OBL products each
year.
<PAGE> 2
Consultant agrees to commit twenty (20) hours per year to consultation with OBL
and, in addition, will meet with OBL representatives from time to time on an
as-needed basis. Further, Consultant agrees to allow OBL representatives to
observe surgeries he performs in which OBL products are being used.

2. Consideration to be issued to Consultant. As full and
exclusive consideration for the services to be provided by
Consultant described in Paragraph 1 above, and for the
confidentiality agreement set forth in Paragraph 4 below, OBL
hereby grants to Consultant the option to purchase ______
shares of OBL Common Stock currently valued at the price of
_____ per share, all in accordance with the option letter
attached hereto as Exhibit A.

3. Right of First Refusal. Consultant, during the term of the
Agreement, hereby grants OBL the right of first negotiation
and right of first refusal for OBL to manufacture and sell any
soft tissue reattachment products or devices invented or
developed by consideration, in cash or stock, paid by OBL to
Consultant for the rights to any such product or device will
be negotiated on a per-product basis and in each instance
shall be in addition to the stock option granted to Consultant
under Paragraph 2 above.

4. Confidentiality and Non-Disclosure Agreement. Consultant
acknowledges that the business of OBL includes specifically
and primarily the development of new orthopaedic and podiatric
devices for use in medical and surgical treatment. At meetings
of the Consultant and OBL, there may be disclosed to the
Consultant proprietary, secret or confidential information
relating to products, techniques or devices that are being
developed or contemplated for development by OBL. Consultant
further acknowledges that it is the intent of OBL to preserve
the secrecy and confidentiality of such confidential
information and from time to time to seek patents for the
products developed by OBL. Consequently, Consultant agrees
that he will not, during or after secret or confidential
information, knowledge or data relating to the business
affairs or contemplated or developed products of OBL acquired
by, disclosed to or

2
<PAGE> 3
otherwise learned by Consultant and will use such information,
knowledge or data only for the benefit of OBL, its successors
and assigns and not for his own benefit or the benefit of
others.

Upon termination of his service as a professional advisor to OBL, for whatever
reason whatsoever, all documents, records, notebooks and other papers and
computer software, if any, containing secret, proprietary or confidential
information of OBL and information relating to new products developed or
contemplated by OBL, including all copies thereof then in Consultant's
possession or control, whether prepared by him or others, will be promptly
delivered to OBL by Consultant, and no copies shall be retained by Consultant.

It is understood that the following information shall not be regarded
as "confidential": Information already known to Consultant when disclosed to
him, including technical information, processes, techniques or methods already
practiced by Consultant or described in published literature or otherwise in the
public domain.

OBL acknowledges that from time to time Consultant may, during the
course of his service as a professional advisor, disclose to OBL confidential or
proprietary information owned by or under the control of Consultant. In such
event, prior to the disclosure of any such confidential information, Consultant
shall identify such information as proprietary, secret or confidential, and in
such event, OBL agrees that it will not disclose any such secret, confidential
or proprietary information, knowledge or data to any third party and will not
use such information, knowledge or data in the development of OBL's products
without the prior consent of Consultant. Notwithstanding the foregoing, no
information identified as confidential by Consultant shall be deemed
confidential it at the time of disclosure by Consultant such information was
already known by OBL from other sources, described in published literature or
otherwise in the public domain.

5. Professional Ethics and Disclosures. OBL and Consultant agree
to make full and complete disclosures of their relationship
and to comply in all respects thereto with all applicable laws
and the ethical and moral canon, standards and rules of
conduct of the medical-profession generally and in particular
all surgical, podiatric or other applicable organizations or
societies.

3
<PAGE> 4
6. Remedies. Consultant and OBL each acknowledge that compliance
with this Agreement and, in particular, with the provisions of
Paragraph 4 above, is necessary to protect the proprietary
interests of the parties and that a breach thereof will be no
adequate remedy at law. In the event of any breach of the
covenants contained in this Agreement, the non-breaching
party, in addition to any damages that may be awarded, shall
be entitled to injunctive and such other relief as may by
awarded by a court having competent jurisdiction over the
parties. In addition, if Consultant shall in any way breach
the covenants and agreements of Paragraph 4 hereof, as an
additional remedy to OBL for such breach, Consultant shall
forfeit his option to purchase OBL stock, and OBL shall have
the right, but not the obligation, to redeem from Consultant
all shares of OBL stock purchased by Consultant through prior
exercise of his stock option, at consultant's acquisition
cost.

7. Non-competition. Consultant acknowledges the importance of OBL
maintaining strict confidentiality of its proprietary and
confidential information, and all plans for product
development. Consequently, during the three (3) year term of
this Agreement, Consultant agrees that he will not in any
capacity, directly or indirectly, consult, work on or
otherwise participate in any projects for any third party that
relate to the development, modification, evolution, formation
or enhancement of any product currently sold or marketed by
OBL.

8. Indemnity. OBL agrees to indemnify and hold harmless
Consultant from any loss, cost or damage, including reasonable
attorneys' fees, arising out of any action taken or advice
given in good faith by Consultant while performing services
for OBL as required herein.

9. Independent Contractor. Consultant acknowledges that he is
acting as an independent contractor to OBL and that he has no
authority express or implied to act for or on behalf of OBL in
dealing with any third party.

4
<PAGE> 5
10. Work for Hire. Consultant agrees that all work performed by
Consultant for OBL, including but not limited to the
development or enhancement of processions, products, concepts
or devices relating to orthopaedic or podiatric products,
invented, developed, enhanced or produced by OBL shall be
considered works made for hire, the ownership and all rights
to which shall remain perpetually in OBL.

11. Successors and Assigns. This Agreement shall be binding upon
the parties hereto and their respective successor and assigns.

12. Entire Agreement/Amendment. This Agreement represents the
entire contract between the parties with respect to the
subject matter hereof. This Agreement may not be amended or
modified except by an instrument in writing signed by the
party to be charged.

13. No Waiver. No default by Consultant hereunder shall be waived
by OBL except in writing and no waiver of any other default or
of another occurrence of the same default at a future time.

14. Severability. Should any term, provision or clause hereof be
held to be invalid or unenforceable, such invalidity or
unenforceability shall not affect any other of the provisions
or clauses hereof or thereof which can be given effect without
such invalid or unenforceable provision, all of which shall
remain in full force and effect.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

By:
-----------------------------------
D. Ronald Yagoda, Chairman

By:
-----------------------------------
Consultant

<PAGE> 6
ADDENDUM TO EXHIBIT 10.12

The following persons have signed an agreement substantially in the form of
Exhibit 10.12:

Champ L. Baker
Donald E. Baxter
Brian J. Cole
James C. Esch
Larry Field
Gary M. Gartsman
Warren D. King
Leslie S. Matthews
Mark Myerson
Patrick A. Ruwe
James P. Tasto
Arthur Ting

<PAGE> 1

Exhibit 10.13

OFFICE LEASE

by and between

SEOC I LIMITED PARTNERSHIP,
an Arizona limited partnership

"Landlord"

and

ORTHOPAEDIC BIOSYSTEMS LTD., INC.,
an Arizona corporation

"Tenant"

May 6, 1997

EXECUTIVE OFFICE CENTER

Scottsdale Airpark
159990 North Greenway/Hayden Loop
Scottsdale, Arizona 85260
<PAGE> 2
TABLE OF CONTENTS

Page
----

1. BASIC PROVISIONS..........................................................1

2. LEASED PREMISES; ADJUSTMENTS..............................................3

3. LEASE TERM; COMMENCEMENT DATE.............................................3

4. SECURITY DEPOSIT..........................................................4

5. RENT; RENT TAX; ADDITIONAL RENT...........................................5

6. OPERATING COSTS...........................................................6

7. CONDITION, REPAIRS AND ALTERATIONS........................................9

8. SERVICES.................................................................12

9. LIABILITY AND PROPERTY INSURANCE.........................................13

10. RECONSTRUCTION..........................................................16

11. WAIVER OF SUBROGATION...................................................18

12. LANDLORD'S RIGHT TO PERFORM TENANT OBLIGATIONS..........................18

13. DEFAULT AND REMEDIES....................................................19

14. LATE PAYMENTS...........................................................22

15. ABANDONMENT AND SURRENDER...............................................22

16. INDEMNIFICATION AND EXCULPATION.........................................23

17. ENTRY BY LANDLORD.......................................................24

18. SUBSTITUTE PREMISES.....................................................25

19. ASSIGNMENT AND SUBLETTING...............................................26

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<PAGE> 3
20. USE OF LEASED PREMISES AND RUBBISH REMOVAL..............................28

21. SUBORDINATION AND ATTORNMENT............................................29

22. ESTOPPEL CERTIFICATE....................................................30

23. SIGNS .................................................................31

24. PARKING.................................................................31

25. LIENS .................................................................32

26. HOLDING OVER............................................................32

27. ATTORNEYS' FEES.........................................................32

28. RESERVED RIGHTS OF LANDLORD.............................................33

29. EMINENT DOMAIN..........................................................34

30. NOTICES.................................................................35

31. RULES AND REGULATIONS...................................................35

32. ACCORD AND SATISFACTION.................................................35

33. BANKRUPTCY OF TENANT....................................................36

34. HAZARDOUS MATERIALS.....................................................39

35. MISCELLANEOUS...........................................................41

ii
<PAGE> 4
OFFICE LEASE

1. BASIC PROVISIONS

1.1 Date: May 6, 1997

1.2 Landlord: SEOC I Limited Partnership, an
Arizona limited partnership

1.3 Landlord's Address: c/o Cavan Investments, Ltd.
15880 North Greenway Hayden Loop,
Suite 700
Scottsdale, Arizona 85260
Attention: Mr. Steven E. Barger

1.4 Tenant: Orthopaedic Biosystems Ltd., Inc., an
Arizona corporation

1.5 Tenant's Address:

(a) Prior to Commencement 7320 East Butherus, Suite 206
Date: Scottsdale, Arizona 85260
Attention: D. Ronald Yagoda,
President

(b) Subsequent to 159990 North Greenway/Hayden Loop,
Commencement Date: Suite 200
Scottsdale, Arizona 85260

1.6 Project: The parcel of real estate commonly
known as Executive Office Center,
located in Scottsdale, Maricopa
County, Arizona, legally described on
Exhibit "A" attached hereto and
incorporated herein by this
reference, together with the office
buildings now or hereafter situated
thereon, the landscaping, parking
facilities and all other improvements
and appurtenances thereto.

1.7 Building: That certain office building known as
Executive Office Center located at
159990 North Greenway Hayden Loop,
Scottsdale Airpark, Scottsdale,
Maricopa County, Arizona 85260, and
situated on the Project.
<PAGE> 5
1.8 Leased Premises: Approximately 6,130 rentable square
feet of office space commonly known
as Suite 200, as outlined on the
Floor Plan attached hereto as Exhibit
"B".

1.9 Permitted Use: General office use.

1.10 Lease Term: Five (5) years.

1.11 Scheduled Commencement Date
and Expiration Date: July 1, 1997 until June 30, 2002.

1.12 Annual Basic Rent: Lease Years 1-3: $79,690 ($6,640.83
per month); based upon a rental rate
of $13.00 per rentable square foot.

Lease Year 4: $82,142 ($6,845.16 per
month); based upon a rental rate of
$13.40 per rentable square foot.

Lease Year 5: $84,594 ($7,049.50 per
month); based upon a rental rate of
$13.80 per rentable square foot.

1.13 Security Deposit: $20,290.29

1.14 Building Hours: 7:00 a.m. to 6:00 p.m., Monday
through Friday, and 8:00 a.m. to
12:00 p.m. on Saturday, excluding
recognized federal, state and local
holidays.

1.15 Parking Spaces: 20 total parking spaces, of which 5
are covered reserved and 15 are
uncovered unreserved.

1.16 Parking Charge: $25.00 per covered reserved space per
month.

1.17 Guarantors: None.

1.18 Broker: Grubb & Ellis Company

1.19 Exhibits: A = Legal Description of the Project
B = Floor Plan
C = Memorandum of Commencement Date
D = Reserved Covered Parking License
E = Intentionally Omitted
F = Unreserved parking License
G = Work Letter

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<PAGE> 6
H = Building Rules and Regulations
I = Letter of Credit

1.20 Riders: Ride 1 = Option to Extend Term

2. LEASED PREMISES; ADJUSTMENTS

2.1 Leased Premises. Landlord hereby leases to Tenant, and Tenant
hereby leases and accepts from Landlord, the Leased Premises, upon the terms and
conditions set forth in this Lease and any modifications, supplements or addenda
hereto (the "Lease"), including the Basic Provisions of Article 1 which are
incorporated herein by this reference, together with the nonexclusive right to
use, in common with Landlord and others, the Building Common Areas (defined
below) and the Project Common Areas (defined below). For the purposes of this
Lease, the term "Building Common Areas" means common hallways, corridors,
walkways and footpaths, foyers and lobbies, bathrooms and janitorial closets,
electrical and telephone closets, landscaped areas, and such other areas within
or adjacent to the Building which are subject to or are designed or intended
solely for the common enjoyment, use and/or benefit of the tenants of the
Building. The term "Project Common Areas" means common walkways, footpaths,
driveways, parking areas, service areas, landscaped areas, and such other areas
within or adjacent to the Project which are subject to or are designed or
intended solely for the common enjoyment, use and/or benefit of the tenants of
the Project.

2.2 Adjustments. The Annual Basic Rent at the Commencement Date (as
hereinafter defined) as based on the Leased Premises containing the rentable
square footage set forth in Article 1.8 above. If the actual rentable square
footage of the Leased Premises is more or less than the square footage set forth
in Article 1.8 above (to be computed, at Landlord's option, after completion of
the Leased Premises, by an architect designated by Landlord and licensed to
practice in the State of Arizona), the Annual Basic Rent shall be increased or
decreased in accordance with the rental rate set forth in Article 1.12 above.

3. LEASE TERM; COMMENCEMENT DATE

3.1 Lease Term. The Lease Term shall begin on the Commencement Date
and shall be for the period set forth in Article 1.10 above, plus any period of
less than one (1) month between the Commencement Date and the first day of the
next succeeding calendar month, unless sooner terminated in accordance with the
further provisions of this Lease.

3.2 Commencement Date. The Commencement Date shall mean the earliest
of (a) the date on which Landlord tenders possession of he Leased Premises to
Tenant; (b) the date on which Landlord would have tendered possession of the
Leased Premises to Tenant but for any act or omission of Tenant, its agents,
contractors or employees, or (c) the date on which Tenant takes possession of
the Leased Premises.

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<PAGE> 7
3.3 Memorandum of Commencement Date. Landlord and Tenant shall,
within ten (10) day after the Commencement Date, execute a declaration in the
form of Exhibit "C" attached hereto specifying the Commencement Date should the
Commencement Date be a date other than the Scheduled Commencement Date.

3.4 Delay in Commencement Date. In the event Landlord shall be
unable, for any reason, to deliver possession of the Leased Premises to Tenant
on the Scheduled Commencement Date, Landlord shall not be liable for any loss or
damage occasioned thereby, nor shall such inability affect the validity of this
Lease or the obligations of Tenant. In such event, Tenant shall not be obligated
to pay Annual Basic Rent or Additional Rent until the Commencement Date. In the
event Landlord shall not have delivered possession of the Leased Premises to
Tenant within thirty (30) days after the Scheduled Commencement Date, and if
such failure to deliver possession was (a) used solely by the fault or neglect
of Landlord, and (b) not caused by any fault or neglect of Tenant or due to
additional time required to plan for and install other work for Tenant beyond
the amount of time which would have been required if only building standard
improvements had been installed, then, as its sole and exclusive remedy for
Landlord's failure to deliver possession of the Leased Premises in a timely
manner, Tenant shall have the right to terminate this Lease by delivering
written notice of termination to Landlord at any time within thirty (30) days
after the expiration of such thirty (30) day period. Such termination shall be
effective thirty (30) days after receipt by Landlord of Tenant's notice of
termination unless Landlord shall, prior to the expiration of such thirty (30)
day period, deliver possession of the Leased Premises to Tenant. Upon a
termination of this Lease pursuant to the provisions of this Article 3.4, the
parties shall have no further obligations or liabilities to the other and
Landlord shall promptly return any monies previously deposited or paid by
Tenant.

3.5 Lease Year. Each "Lease Year" shall be a period of twelve (12)
consecutive calendar months, the first Lease Year beginning on the Commencement
Date or on the first day of the calendar month next succeeding the Commencement
Date if the Commencement Date is not on the first day of a calendar month. Each
Lease Year after the first Lease Year shall begin on the calendar day next
succeeding the expiration of the immediately preceding Lease Year.

4. SECURITY DEPOSIT

Tenant shall pay to Landlord, upon the execution of this Lease, the
Security Deposit set forth in Article 1.13 above as security for the performance
by Tenant of its obligations under this Lease, which amount shall be returned to
Tenant after the expiration or earlier termination of this Lease, provided that
Tenant shall have fully performed all of its obligations contained in this
Lease. The Security Deposit, at the election of Landlord, may be retained by
Landlord as and for its full damages or may be applied in reduction of any loss
and/or damage sustained by Landlord by reason of the occurrence of any breach,
nonperformance or default by Tenant under this Lease without the waiver of any
other right or remedy available to Landlord at law, in equity or under the terms
of this Lease If any portion of the Security Deposit is so sued or applied,
Tenant shall, within five (5) days after written notice from Landlord, deposit
with Landlord immediately available funds in an amount sufficient to restore the
Security Deposit to its original amount, and Tenant's failure to do so shall

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<PAGE> 8
be a breach of this Lease. Tenant acknowledges and agrees that in the event
Tenant shall file a voluntary petition pursuant to the Bankruptcy Code or any
successor thereto, or if an involuntary petition is filed against Tenant
pursuant to the Bankruptcy Code or any successor thereto, then Landlord may
apply the Security Deposit toward those obligations of Tenant to Landlord which
accrued prior to the filing of such petition. Tenant acknowledges further that
the Security Deposit may be commingled with Landlord's other funds and that
Landlord shall be entitled to retain any interest earnings thereon. In the event
of termination of Landlord's interest in this Lease, Landlord shall transfer the
Security Deposit to Landlord's other funds and that Landlord shall be entitled
to retain any interest earnings thereon. In the event of termination of
Landlord's interest in this Lease, Landlord shall transfer the Security Deposit
to Landlord's successor in interest, whereupon Landlord shall be released from
liability by Tenant for the return of such deposit or the accounting therefore.

5. RENT; RENT TAX; ADDITIONAL RENT

5.1 Payment of Rent. Tenant shall pay to Landlord the Annual Basic
Rent set forth in Article 1.12 above, subject to adjustment as provided herein.
The Annual Basic Rent shall be paid in equal monthly installments, on or before
the first day of each and every calendar month during the Lease Term, in
advance, without notice or demand and without abatement, deduction or offset. If
the Commencement date is other than the first day of a calendar month, the
payment for the partial month following the Commencement Date shall be prorated
and shall be payable on the first day of the first full calendar month of the
Lease Term. The Annual Basic Rent for the first full month of the Lease Term
shall be paid upon the execution of this Lease. All payments requiring proration
shall be prorated on the basis of a thirty (30) day month. In addition, all
payments to be made under this Lease shall be paid in lawful money of the United
States of America to Landlord or its agent at the address set forth in Article
1.3 above, or to such other person or a such other place as Landlord may from
time to time designate in writing.

5.2 Rent Tax. In addition the Annual Basic Rent and Additional Rent,
Tenant shall pay to Landlord, together with the monthly installments of Annual
Basic Rent and payments of Additional Rent, an amount equal to any governmental
taxes, including, without limitation, any sales, rental, occupancy, excise, use
or transactional privilege taxes assessed or levied upon Landlord with respect
to the amounts paid by Tenant to Landlord hereunder, as well as all taxes
assessed or imposed upon Landlord's gross receipts or gross income from leasing
the Leased Premises to Tenant, including, without limitation, transaction
privilege taxes, education excise taxes, and tax now or hereafter imposed by the
City of Scottsdale, the State of Arizona, any other governmental body, and any
taxes assessed or imposed in lieu of or in substitution of any of the foregoing
taxes. Such taxes shall not, however, include any franchise, gift, estate,
inheritance, conveyance, transfer or net income tax assessed against Landlord.

5.3 Additional Rent. In addition to Annual Basic Rent, all other
amounts to be paid by Tenant to Landlord pursuant to this Lease (including
amounts to be paid by Tenant pursuant to Article 6 below and parking charges to
be paid by Tenant pursuant to Exhibits "D" and "F"), if any, shall be deemed to
be Additional Rent, whether or not designated as such, and shall be due and

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<PAGE> 9
payable within five (5) days after receipt by Tenant of Landlord's statement or
together with the next succeeding installment of Annual Basic Rent, whichever
shall first occur. Landlord shall have the same remedies for the failure to pay
Additional Rent as for the nonpayment of Annual Basic Rent.

6. OPERATING COSTS

6.1 Tenant's Obligation. The Annual Basic Rent does not include
amounts attributable to Taxes (defined below) or amounts attributable to the
cost of the use, management, repair, service insurance, condition, operation and
maintenance of the Building and the Project. therefore, in order that the Annual
Basic Rent payable throughout the Lease Term shall reflect such amounts, Tenant
shall pay to Landlord, in accordance with the further provisions of this Article
6, an amount equal to the Operating Costs (as hereinafter defined) per rentable
square foot of the Leased Preemies.

6.2 Landlord's Estimate. Landlord shall furnish Tenant an estimate
of the Operating Costs per rentable square foot for each calendar year. In
addition, Landlord may, from time to time, furnish Tenant a revised estimate of
Operating Costs should Landlord anticipate any increase in Operating Costs from
that set forth in a prior estimate. Commencing with the first month to which an
estimate applies, Tenant shall pay, in addition to the monthly installments of
Annual Basic Rent, an amount equal to one-twelfth (1/12th) of the Operating
Expenses per rentable square foot of the Leased Premises; provided, however, if
less than ninety-five percent (95%) of the rentable area of the Building shall
be occupied by tenants during the period covered by such estimate, the estimated
Operating Costs for such period shall be, for the purposes of this Article 6,
increased to an amount reasonably determined by Landlord to be equivalent to the
Operating Costs that would be incurred if occupancy would be at least
ninety-five percent (95%) during the entire period. Within one hundred twenty
(120) days after the expiration of each calendar year of such longer period of
time as may be necessary to compile such statement, Landlord shall deliver to
Tenant a statement of the actual Operating Costs for such calendar year. If the
actual Operating Costs for such calendar year are more or less than the
estimated Operating Costs, a proper adjustment shall be made; provided, however,
if less than ninety-five percent (95%) of the rentable area of the Building
shall have been occupied by tenants at any time during such period, the actual
Operating Costs for such period shall be, for the purposes of this Article 6,
increased to an amount reasonably determined by Landlord to be equivalent to the
Operating Costs that would have been incurred had such occupancy been at least
ninety-five (95%) during the entire period. Any excess amounts paid by Tenant
shall be refunded to Tenant with such statement or, at Landlord's option, may be
applied to any amounts then payable by Tenant to Landlord or to the next
maturing monthly installment of annual Basic Rent or Additional Rent. Any
deficiency between the estimated and actual Operating Costs shall be paid by
Tenant to Landlord concurrently with the monthly installment of Annual Basic
Rent next due. Any amount owing for a fractional calendar year in the first or
final lease Years of the Lease Term shall be prorated.

6.3 Operating Costs - Defined. For the purposes of this Lease,
"Operating Costs" shall mean all costs and expenses accrued, paid or incurred by
Landlord, or on Landlord's behalf, in

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<PAGE> 10
respect of the use, management, repair, service, insurance, condition, operation
and maintenance of the Project including, but not limited to the following:

(a) Salaries, wages and benefits of all persons who perform
duties in connection with landscaping, parking, janitorial and general cleaning
services for the Project Common Areas and Building Common Areas, security
services and any and all other employees engaged by or on behalf of Landlord;

(b) Payroll taxes, workmen's compensation, uniforms and related
expenses for such employees;

(c) The cost of all charges for oil, gas, electricity, any
alternate source of energy, heat, ventilation, air-conditioning, refrigeration,
water, sewer service, trash collection, termite and pest control and all other
utilities, together with any taxes on such utilities provided to the Project
Common Areas or the Building Common Areas;

(d) The cost of painting the Building Common Areas and Project
Common Areas;

(e) The cost of all charges for rent, casualty, liability,
fidelity and other insurance maintained by Landlord, including any deductible
amounts incurred with respect to an insured loss;

(f) The cost of all supplies (including cleaning supplies),
tools, materials, equipment and personal property, the rental thereof and sales,
transaction privilege, excise and other taxes thereon;

(g) Depreciation of hand tools and other moveable equipment;

(h) The cost of all charges for window and other cleaning,
janitorial, security, refuse and lot sweeping;

(i) The cost of charges for independent contractors;

(j) The cost of repairs and replacements made by Landlord at its
expense and the fees and other charges for maintenance and service agreements;

(k) The cost of exterior and interior landscaping;

(l) Costs relating to the operation and maintenance of all real
property and improvements appurtenant to the Project, including, without
limitation, all parking areas, service areas, walkways and landscaping;

(m) The cost of alterations and improvements made by reason of
the laws and requirements of any public authorities or the requirements of
insurance bodies;

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<PAGE> 11
(n) All management fees and other charges for management
services and overhead costs (including travel and related expenses), whether
provided by an independent management company, Landlord or an affiliate of
Landlord, not to exceed, however, the then prevailing range of rates charges in
comparable office buildings in the Phoenix, Arizona metropolitan area;

(o) The cost of any capital improvements or additions which
improve the comfort or amenities available to tenants of the Project, provided,
however, that any such costs shall be amortized with interest over the useful
life of the improvement or addition;

(p) The cost of any capital improvements or additions which are
intended to enhance the safety of the Project or reduce (or avoid increases in)
Operating Costs, provided, however, that any such costs shall be amortized with
interest over the useful life of the improvement or addition;

(q) The cost of licenses and permits, inspection fees and
reasonable legal, accounting and other professional fees and expenses;

(r) Taxes (as hereinafter defined);

(s) Costs relating to the use, management, repair, service,
insurance, condition, operation and maintenance of the Project Common Areas in
an amount equal to a fraction;

(t) Costs of monitoring and maintaining good internal air
quality in the Building and regularly inspecting, monitoring, maintaining and
repairing the Building's air quality systems, hiring outside consultants to
investigate and identify the sources of any suspected internal air quality
problems that may be identified, remedying any such problems, modifying,
renovating or encapsulating any portion of the Building or systems or components
thereof reasonably required in order to continuously and efficiently maintain
reasonably acceptable internal air quality in the Building and comply with any
and all local, state and federal regulations, or real estate industry standards
relating to internal air quality; and

(u) All other charges properly allowable in the use, management,
repair, service, insurance, condition, operation and maintenance of the Project
in accordance with generally accepted accounting principles.

6.4 Operating Costs - Exclusions. Excluded from Operating Costs
shall be the following: (a) depreciation, except to the extent expressly
included pursuant to Article 6.3 above; (b) interest on and amortization of
debts, except to the extent expressly included pursuant to Article 6.3 above;
(c) leasehold improvements, including redecorating made for tenants of the
Building; (d) brokerage commissions and advertising expenses for procuring
tenants for the Building; (e) refinancing costs; (f) the cost of any repair,
replacement or addition which would be required to be capitalized under general
accepted accounting principles, except to the extent expressly included pursuant
to Article

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<PAGE> 12
6.3 above; (g) the cost of any item included in Operating Costs under Article
6.3 above to the extent that such cost is reimbursed or paid directly by an
insurance company, condemnor, a tenant of the Project or any other party; and
(h) the cost of any item included in Operating Costs under Article 6.3 above to
the extent that such cost is attributable solely to the use, management, repair,
service, insurance, condition, operation or maintenance of the Project Common
Areas, to the extent such cost is paid by tenants of other office buildings in
the Project.

6.5 Taxes - Defined. For the purposes of this Lease, "Taxes" shall
mean and include all real property taxes and personal property taxes, general
and special assessments, foreseen as well as unforseen, which are levied or
assessed upon or with respect to the Project, any improvements, fixtures,
equipment and other property of Landlord, real or personal, located on the
Project and used in connection with the operation of all or any portion of the
Project, as well as any tax, surcharge or assessment which shall be levied or
assessed in addition to or in lieu of such real or personal property taxes and
assessments. Taxes shall also include any expenses incurred by Landlord in
contesting the amount or validity of any real or personal property taxes and
assessments. Taxes shall not, however, include any franchise, gift, estate,
inheritance, conveyance, transfer or income tax assessed against Landlord.

6.6 No Waiver. The failure by Landlord to furnish Tenant with a
statement of Operating Costs shall not constitute a wavier by Landlord of its
right to require Tenant to pay excess Operating Costs per rentable square foot.

6.7 Inspection Rights. Landlord shall, if requested by Tenant,
furnish Tenant any and all reasonable backup information and documentation
pertaining to any component of Operating Costs. Tenant or its authorized agent
shall have the right, within one (1) year after receipt of Landlord's itemized
statement of Operating Costs, upon ten (10) days prior written notice to
Landlord, to inspect, at Landlord's main accounting offices, Landlord's books
and records regarding Operating Costs. Landlord agrees to maintain is books and
records at its main accounting offices for a minimum of one (1) year following
the expiation of each accounting year to which such books and records pertain.
In the event Tenant's audit shall disclose that Landlord has overstated Tenant's
pro rata share of Operating Costs by Five percent (5%) or more during any one
(1) accounting year, then Landlord shall pay for the reasonable costs of the
audit. Any refund due Tenant shall be payable in any event within forty-five
(45) days of Tenant's notice to Landlord of the conclusion of the audit together
with reasonable substantiating evidence.

7. CONDITION, REPAIRS AND ALTERATIONS

7.1 Condition. The respective obligations of Landlord and Tenant
with respect to the condition of the Leased Premises are set forth on Exhibit G
to this Lease.

7.2 Alterations and Improvements. Tenant may place partitions and
fixtures and may make improvements and other alterations to the interior of the
Leased Premises at Tenant's expense, provided, however, that prior to commencing
any such work, Tenant shall first obtain the written

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consent of Landlord which consent shall not be unreasonably withheld, to the
proposed work, including the plans, specifications, the proposed architect
and/or contractor(s) for such alterations and/or improvements and the materials
used in connection with such alterations, including, without limitation, paint,
carpeting, wall or window coverings and the use of carpet glues and other
chemicals for installation of such materials. At least ten (10) days prior to
the commencement of any construction in the Leased Premises, Tenants shall
deliver to Landlord copies of the plans and specifications for the contemplated
work and shall identify the contractor(s) selected by Tenant to perform such
work. Landlord may require that he work be done by Landlord's employees, its
construction contractors, or under Landlord's direction, but at the expense of
Tenant, and Landlord may, as a condition to consenting to such work, require
that Tenant provide security adequate in Landlord's judgment so that the
improvements or other alterations to the Leased Premises will be completed in a
good, workmanlike and lien free manner. Landlord may also require that any work
done to the interior of the Leased Premises be subject to the supervision of
Landlord or its designee, and Tenant shall pay to Landlord, upon completion of
such work, a supervision fee in an amount equal to ten percent (10%) of the cost
of such work. All such improvements or alterations must conform to and be in
substantial accordance in quality and appearance with the quality and appearance
of the improvements in the remainder of the Building. All such improvements
shall be the property of Landlord. In the event Landlord consents to the use by
Tenant of its own architect and/or contractor for the installation of any such
alterations or improvements, prior to the commencement of such work, Tenant
shall provide Landlord with evidence that Tenant's contractor has procured
worker's compensation, liability and property damage insurance (naming Landlord
as an additional insured) in a form and in an amount approved by Landlord, and
evidence that Tenant's architect and/or contractor has procured the necessary
permits, certificates and approvals from the appropriate governmental
authorities. Tenant acknowledge and agree that any review by Landlord of
Tenant's plans and specifications and/or right of approval exercised by Landlord
with respect to Tenant's architect and/or contractor is for Landlord's benefit
only and Landlord shall not, by virtue of such review or right of approval, by
deemed to make any representation, warranty or acknowledgment to Tenant or to
any other person or entity as to the adequacy of Tenant's plans and
specifications or as to the ability, capability or reputation of Tenant's
architect and/or contractor.

7.3 Tenant's Obligations. Tenant shall, at Tenant's sole cost and
expense, repair, replace and maintain the Leased Premises in a clean, neat and
sanitary condition and shall keep the Leased Premises and every part thereof in
good condition and repair (except where the same is required to be done by
Landlord) including, without limitation, the utility meters, pipers and
conduits, all fixtures, and other equipment therein, all of Tenant's signs,
locks and closing devices, all window sachets, easements or frames, doors and
door frames, floor coverings, including carpeting, terrazzo or other special
floor covering, and all such items of repair, maintenance, alteration and
improvement or reconstruction as may at any time or from time to time be
required by a governmental authority having jurisdiction whether or not
presently in effect or anticipated, including, but not limited to, enforcement
of the Americans With Disabilities Act. Tenant hereby waives all rights to make
repairs at the expense of Landlord as provided by any law, statute or ordinance
now or hereafter in effect. All of Tenant's alterations and/or improvements are
the property of the Landlord, and Tenant shall, upon the expiration or earlier
termination of the Lease Term, surrender the Leased Premises,

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including tenant's alterations and/or improvements, to Landlord, janitorial
clean and in the same condition as when received, ordinary wear and tear
excepted. Except as set forth in Article 7.4 below, Landlord has no obligation
to construct, remodel, improve, repair, decorate or paint the Leased Premises
not required to be made by Landlord and shall be responsible for any
redecorating, remodeling, alterations and painting during the Lease Term as
Tenant deems necessary. Tenant shall pay for any repairs to the Leased Premises,
the Building and/or the Project made necessary by any negligence or carelessness
of Tenant, its employees or invitees.

7.4 Landlord's Obligations. Landlord shall (a) make all necessary
repairs to the exterior walls, exterior doors, windows and corridors of the
Building, (b) maintain, repair and replace all components of the heating,
ventilating and air conditioning equipment outside of the Leased remise, and (c)
keep the Building, the Building Common Areas and the Project Common Areas in a
clean, neat and attractive condition. Landlord, shall have the right, at
Landlord's sole option, to obtain and keep a heating ventilating, and air
conditioning service contract in force and in such event, Tenant's pro rata
share of the cost of such contract shall be included in the Operating Expense
and paid by Tenant in accordance with Article 6 hereof.

7.5 Removal of Alterations. Upon the expiration or earlier
termination of this Lease, Tenant shall remove from the Leased Premises all
movable trade fixture and other movable personal property, and shall promptly
repair any damage to the Leased Premises, the Building and/or the Project caused
by such removal. All such removal and repair shall be entirely at Tenant's sole
cost and expense. Landlord may require that Tenant remove from the Leased
Premises any alterations, additions, improvements, trade fixtures, equipment,
shelving, cabinet units or movable furniture (and other personal property)
designated by Landlord to be removed. In such event, Tenant shall, in accordance
with the provisions of Article 7.2 above, complete such removal (including the
repair of any damage caused thereby) entirely at its own expense and within
fifteen (15) days after notice from Landlord. All repairs, required of tenant
pursuant to the provisions of this Article 7.5 shall be performed in a manner
reasonably satisfactory to Landlord, and shall include, but no limited to,
repairing plumbing, electrical wiring and holes in walls, restoring damaged
floor and/or ceiling tiles, repairing any other cosmetic damage and cleaning the
Leased Premises.

7.6 No Abatement. Except as provided herein, Landlord shall have no
liability to Tenant, nor shall Tenant's covenants and obligations under this
Lease including without limitation, Tenant's obligation to pay Annual Basic Rent
and Additional Rent, to be reduced or abated in any manner whatsoever by reason
of any inconvenience, annoyance, interruption or injury to business arising from
Landlord's making any repairs or changes which Landlord is required or permitted
to make pursuant to the terms of this Lease or by any other tenant's Lease or
are required by law to be made in and to any portion of the Leased Premises, the
Building or the Project. Landlord shall, nevertheless, use reasonable efforts to
minimize any interference with Tenant's business in the Leased Premises.

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8. SERVICES

8.1 Climate Control. Landlord shall provide reasonable climate
control to the Building Common Areas during the Building Hours as is suitable,
in Landlord's judgment, for the comfortable use and occupation of the Building
Common Areas.

8.2 Janitorial Services. Landlord shall make janitorial and cleaning
services available to the Building Common Areas and the Project Common Areas.
Tenant shall be responsible and shall procure janitorial and cleaning services
for the Leased Premises.

8.3 Electricity. Electricity shall be separately metered and Tenant
shall be solely responsible for the cost of all electric current furnished to
the Leased Premises. Tenant's use of electric energy in the Leased Premises
shall not at any time exceed the capacity of any of the risers, piping,
electrical conductors and other equipment in or serving the Leased Premises. In
order to insure that such capacity is not exceeded and to avert any possible
adverse effect on the Building's electric system, Tenant shall not, without
Landlord's prior written consent in each instance, connect appliances, machines
using current in excess of 120 volts or heavy-duty equipment other than ordinary
office equipment to the Building's electric system or make any alterations or
additions to the Building's electric system. Should Landlord grant such consent,
all additional risers, piping and electrical conductors and other equipment
therefor shall be provided by Landlord and the cost thereof shall be paid by
Tenant within ten (10) days after receipt of Landlord's bill.

8.4 Water. Landlord shall furnish cold and heated water for drinking
and lavatory purposes to the Building Common Areas.

8.5 Heat Generating Equipment. Whenever heat generating machines or
equipment used in the Leased Premises affect the temperature otherwise
maintained by the climate control system, Landlord shall have the right to
install supplementary air-conditioning units in the Leased Premises and the cost
thereof, including the cost of installation, operation and maintenance shall be
paid by Tenant to Landlord within five (5) days after receipt by Tenant of
Landlord's statement.

8.6 Separate Meters. Landlord may install separate meters for the
Leased Premises to register the usage of all or any one of the utilities serving
the Leased Premises and in such event, Tenant shall pay for the cost of utility
usage as metered (a) during other than Building Hours, or (b) which is in excess
of that usage customary for general office use. Tenant shall reimburse Landlord
for the cost of installation of the meters. In addition, Landlord shall have the
right to require that Tenant reduce its consumption of utilities furnished to
the Leased Premise to a level not exceeding normal consumption for general
office use as determined by Landlord in its reasonable business judgment.

8.7 Additional Services. Tenant shall pay to Landlord, monthly as
billed, as Additional Rent, Landlord's charge for services furnished by Landlord
to Tenant in excess of that agreed to be furnished by Landlord pursuant to this
Article 8, including, but not limited to (a) any utility services

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utilized by Tenant during other than Building Hours or for computers, data
processing equipment or other electrical equipment in excess of the amounts of
electric current used for general office use in buildings comparable to the
Building, and (b) climate control in excess of that agreed to be furnished by
Landlord pursuant to Article 8.1 above or provided at times other than Building
Hours.

8.8 Interruptions in Service. Landlord does not warrant that any of
the foregoing services or any other services which Landlord may supply will be
free from interruption. Tenant acknowledges that any one or more of such
services may be suspended by reason of accident, repairs, inspections,
alterations or improvements necessary to be made, or by strikes or lockouts, or
by reason of operation of law, or by causes beyond the reasonable control of
Landlord. Landlord shall not be liable for and Tenant shall not be entitled to
any abatement or reduction of Annual Base Rent or Additional Rent by reason of
any disruption of the services to be provided by Landlord pursuant to this
Lease.

9. LIABILITY AND PROPERTY INSURANCE

9.1 Liability Insurance. Tenant shall, during the Lease Term, keep
in full force and effect, a policy or policies of commercial general liability
insurance for personal injury (including wrongful death) and damage to property
covering (a) any occurrence in the Leased Premises, (b) any act or omission by
Tenant, by any subtenant of Tenant, or by any of their respective invitees,
agents, servants or employees anywhere in the Leased Premises or the Project,
(c) the business operated by Tenant and by any subtenant of Tenant in the Leased
Premises, and (d) the contractual liability of Tenant to Landlord pursuant to
the indemnification provisions of Article 16.1 below, which coverage shall not
be less than One Million and No/100 Dollars ($1,000,000.00) per occurrence and
Two Million and No/100 dollars ($2,000,000.00) combined single limit. If
Landlord shall so request, Tenant shall increase the amount of such liability
insurance to the amount then customary for premises and uses similar to the
Leased Premises and Tenant's use thereof. The liability policy or policies shall
contain an endorsement naming Landlord, its partners and any persons, firms or
corporations designated by Landlord as additional insureds, and shall provide
that the insurance carrier shall have the duty to defend and/or settle any legal
proceeding filed against Landlord seeking damages based upon bodily injury or
property damage liability even if any of the allegations of such legal
proceedings are groundless, false or fraudulent.

9.2 Property Insurance. Tenant shall, during the Lease Term, keep in
full force and effect, a policy or policies of insurance with "Special Form
Coverage," including coverage for vandalism or malicious mischief, insuring the
Tenant Improvements as defined on Exhibit G hereto or Tenant's alterations
and/or improvements made pursuant to Article 7.2 above and Tenant's stock in
trade, furniture, personal property, fixtures, equipment and other items in the
Leased Premises, with coverage in an amount equal to the full replacement cost
thereof.

9.3 Worker's Compensation Insurance. Tenant shall, during the Lease
Term, keep in full force and effect, a policy or policies of worker's
compensation insurance with an insurance carrier and in amounts approved by the
Industrial Commission of the State of Arizona.

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9.4 Business Interruption Insurance. Tenant shall, during the Lease
Term, keep in full force and effect, a policy or policies of business
interruption insurance in an amount equal to twelve (12) monthly installments of
Annual Basic Rent and Additional Rent payable to Landlord, together with the
taxes thereon, insuring Tenant against losses sustained by Tenant as a result of
any cessation or interruption of Tenant's business in the Leased Premises for
any reason.

9.5 Insurance Requirements. Each insurance policy and certificate
thereof obtained by Tenant pursuant to this Lease shall contain a clause that
the insurer will provide Landlord, its partners and any persons, firms or
corporations designated by Landlord with at least thirty (30) days prior written
notice of any material change, non-renewal or cancellation of the policy. Each
such insurance policy shall be with an insurance company authorized to do
business in the State of Arizona and reasonably acceptable to Landlord.
Certified copies of all insurance policies evidencing the coverage under each
such policy, as well as a certified copy of the required additional insured
endorsement(s) shall be delivered to Landlord prior to commencement of the Lease
Term. Each such policy shall provide that any loss payable thereunder shall be
payable notwithstanding (a) any act, omission or neglect by Tenant or by any
subtenant of Tenant, or (b) any occupation or use of the Leased Premises or any
portion thereof by Tenant or by any subtenant of Tenant for purposes more
hazardous than permitted by the terms of such policy or policies, or (c) any
foreclosure or other action or proceeding taken by any mortgagee or trustee
pursuant to any provision of any mortgage or deed of rust covering the Leased
Premises, the Building or the Project, or (d) any change in title or ownership
of the Project. All insurance policies required pursuant to this Article 9 shall
be written as primary policies, not contributing with or in excess of any
coverage which Landlord may carry. Tenant shall procure and maintain all
policies entirely at its own expense and shall, at least twenty (20) days prior
to the expiration of such policies, furnish Landlord with certified copies of
replacement policies or renewal certificates for existing policies in
conformance with Accord Form No. 27 (March 1993). Tenant shall not do or permit
to be done anything which shall invalidate the insurance policies maintained by
Landlord or the insurance policies required pursuant to this Article 9 or the
coverage thereunder. If Tenant or any subtenant of Tenant does or permits to be
done anything which shall increase the cost of any insurance policies maintained
by Landlord, then Tenant shall reimburse Landlord for any additional premiums
attributable to any act or omission or operation of Tenant or any subtenant of
Tenant causing such increase in the cost of insurance. Any such amount shall be
payable as Additional Rent within five (5) days after receipt by Tenant of a
bill from Landlord. All policies of insurance shall name both Landlord and
Tenant (and/or such other party or parties as Landlord may require) as insureds
and shall be endorsed to indicate that the coverage provided shall not be
invalid due to any act or omission on he part of Landlord.

9.6 Co-Insurance. If on account of the failure of Tenant to comply
with the provisions of this Article 9, Landlord is deemed a co-insurer by its
insurance carrier, then any loss or damage which Landlord shall sustain by
reason thereof shall be borne by Tenant, and shall be paid by Tenant within five
(5) days after receipt of a bill therefore

9.7 Adequacy of Insurance. Landlord makes no representation or
warranty to Tenant that the amount of insurance to be carried by Tenant under
the terms of this Lease is adequate to fully

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protect Tenant's interests. If Tenant believes that the amount of any such
insurance is insufficient, Tenant is encouraged to obtain, at its sole cost and
expense, such additional insurance as Tenant may deem desirable or adequate.
Tenant acknowledges that Landlord shall not, by the fact of approving
disapproving, waiving, accepting, or obtaining any insurance, incur any
liability for or with respect to the amount of insurance carried, the form or
legal sufficiency of such insurance, the solvency of any insurance companies or
the payment or defense of any lawsuit in connection with such insurance
coverage, and Tenant hereby expressly assumes full responsibility therefor and
all liability, if any, with respect thereto.

9.8 Self-Insurance. Tenant shall have the right to self-insure for
the liability insurance, the property insurance and the business interruption
insurance required by Articles 9.1, 9.2 and 9.4, respectively, subject to the
requirements of this Article 9.8.

(a) For purposes of this Article 9.8, "self-insurance" shall
mean that Tenant is itself acting as though it were the insurance company
providing the insurance required under the provisions of this Article 9 and
Tenant shall pay any amounts due in lieu of insurance proceeds as required under
the provisions of this Lease, which amounts shall be treated as insurance
proceeds for all purposes under this Lease.

(b) All amounts which Tenant pays or is required to pay and all
losses or damages resulting from risks for which Tenant has elected to
self-insure shall be subject to the waiver of subrogation provisions in Article
11 below and shall not limit Tenant's indemnification obligations set forth in
Article 16.1 below.

(i) The Tenant having a net worth, calculated in accordance
with generally accepted accounting principles, consistently applied,
of at least One Hundred Million Dollars ($100,000,000.00).

(ii) The Tenant providing an audited financial statement,
prepared in accordance with generally accepted accounting principles
consistently applied, to Landlord on or before the date which is
thirty (30) days prior to the upcoming annual anniversary of the
Commencement Date which establishes and confirms that Tenant has the
required net worth, unless events occur that make it apparent that
such net worth has diminished below the required level (such as the
bankruptcy of Tenant), in which event Tenant shall not be permitted
to continue to self-insure; and

(iii) The Tenant maintaining appropriate loss reserves which
are actuarially derived in accordance with accepted standards of the
insurance industry and accrued (i.e., charged against earnings) or
otherwise funded.

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(d) In the event that Tenant elects to self-insure and an event
or claim occurs for which a defense and/or coverage would have been available
from the insurance company Tenant shall:

(i) undertake the defense of any such claim, including a
defense of Landlord, at Tenant's sole cost and expense, and

(ii) use its own funds to pay any claim or replace any
property or otherwise provide the funding which would have been
available from insurance proceeds but for such election by Tenant to
self-insure.

(e) In the event Tenant has the right and elects that it will
not operate its business in the Leased Premises after the Leased Premises are
damaged or destroyed, Landlord shall have the right to determine that the
self-insurance proceeds either be paid to Landlord:

(i) for restoration of the Leased Premises in accordance
with Article 10 below and Tenant's liability and obligations under
this Lease shall continue in full force and effect, or

(ii) to terminate this Lease in accordance with the
provisions of Article 10 below.

(f) Tenant shall provide Landlord and Superior Mortgagee
(defined below) or Superior Lessor (defined below) with certificates of
self-insurance specifying the extent of self-insurance coverage hereunder and
containing a waiver of subrogation provision reasonably satisfactory to
Landlord. Any insurance coverage provided by Tenant shall be for the benefit of
Landlord, the superior Mortgagee and the Superior Lessor as their respective
interests may appear.

10. RECONSTRUCTION

10.1 Insured Damage. In the event the Leased Premises are damaged
during the Lease Term by fire or other perils covered by Landlord's insurance,
Landlord shall:

(a) Subject to Force Majeure, within a period of thirty (30)
days after receipt by Landlord of insurance proceeds and the adjustment of the
loss with the Superior Mortgagee and/or the Superior Lessor, as the case may be,
and its insurer, and provided there is not then in existence of an Event of
Default, commence repair, reconstruction and restoration of the Leased Premises
and prosecute the same diligently to completion, in which event this Lease shall
continue in full force and effect.

(b) In the event of a partial or total destruction of either
the Leased Premises, the Building or the Project during the last two (2) years
of the Lease Term, Landlord shall have the option to terminate this Lease upon
giving written notice to Tenant within sixty (60) days after such

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destruction. For purpose of this Article 10, "partial destruction" shall be
deemed destruction to an extent of at least thirty-three and one-third percent
(33.33%) of the then full replacement cost of the Leased Premises, the Building
or the Project as of the date of destruction.

(c) In the event that Superior Mortgagee shall require that
insurance proceeds be applied against the principal balance due on the Superior
Mortgage (defined below), then Landlord may, at Landlord's option and upon sixty
(60) days written notice to Tenant, elect to terminate this Lease.

10.2 Uninsured Damage. In the event the Leased Premises, the
Building or the Project shall be damaged as a result of any casualty not covered
by Landlord's insurance, to any extent whatsoever, Landlord may, subject to
Force Majeure, within sixty (60) days following the date of the casualty,
commence repair, reconstruction or restoration of the Leased Premises, in which
event this Lease shall continue in full force and effect, or within such sixty
(60) day period elect not to so repair, reconstruct or restore the Leased
Premises, the Building or the Project, as the case may be, in which event this
Lease shall cease and terminate. In either event, Landlord shall give Tenant
written notice of Landlord's intention within such one hundred eighty (180) day
period.

10.3 Reconstruction. In the event of any reconstruction of the
Leased Premises, the Building or the Project pursuant to this Article 10, such
reconstruction shall be in conformity with all city, county, state and federal
ordinances, rules and regulations then in existence, as the same may be
interpreted and enforced. Notwithstanding that all reconstruction work shall be
performed by Landlord's contractor unless Landlord shall otherwise agree in
writing, Landlord's obligation to reconstruct the Leased Premises shall be only
to the comparable condition of the Leased Premises immediately prior to the
Commencement Date. Landlord's obligation to repair and reconstruct the Leased
Premises shall be limited to the amount of net proceeds of insurance received by
Landlord, subject to reduction pursuant to Article 10.1(c) above. Any extra
expenses incurred by Landlord in the reconstruction of the Leased Premises, the
Building or any other portion of the Project as a result of the violation by
Tenant of the terms and conditions set forth in Article 34 below shall be borne
by Tenant. Tenant, at Tenant's sole cost and expense, shall be responsible for
the repair and restoration of all items of the Tenant Improvements or Tenant's
improvements and/or alterations installed pursuant to Article 7.2 and the
replacement of Tenant's stock in trade, trade fixtures, furniture, furnishings
and equipment. Tenant shall commence the installation of fixtures, equipment and
merchandise promptly upon delivery to Tenant of possession of the Leased
Premises and shall diligently prosecute such installation to completion.

10.4 Termination. Upon any termination of this Lease under any of
the provisions of this Article 10, Landlord and Tenant each shall be released
without further obligations to the other coincident with the surrender of
possession of the Leased Premises to Landlord, except for items which have
previously accrued and remain unpaid. In the event of termination, all proceeds
from Tenant's property insurance coverage and covering the Tenant Improvements
or Tenant's improvements and/or alterations installed pursuant to Article 7.2,
but excluding proceeds for trade

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fixtures, merchandise, signs and other removable personal property, shall be
disbursed and paid to Landlord.

10.5 Abatement. In the event of repair, reconstruction and
restoration of the Leased Premises, the Minimum Annual Rental and Additional
Rent shall be abated proportionately with the degree to which Tenant's use of
the Leased Premises is impaired commencing from the date of destruction and
continuing during the period of such repair, reconstruction or restoration.
Tenant shall continue the operation of Tenant's business at the Leased Premises
during any such period to the extent reasonably practicable from the standpoint
of prudent business management. Tenant shall not be entitled to any compensation
or damages from Landlord for loss of the use of the whole or any part of the
Leased Premises, or the building of which the Leased Premises are a part,
Tenant's personal property or for any inconvenience or annoyance occasioned by
such damage, repair, reconstruction or restoration.

10.6 Waiver. Tenant hereby waives any statutory and common law
rights or termination which may arise by reason of any partial or total
destruction of the Leased Premises which Landlord is obligated to restore or may
restore under any of the provisions of this Lease, including the provisions of
A.R.S. Section 33-343.

11. WAIVER OF SUBROGATION

Tenant hereby waives its rights and the subrogation rights of its
insurer against Landlord and any other tenants of space in the Building of the
Project, as well as their respective members, officers, employees, agents,
authorized representatives and invitees, with respect to any claims including,
but not limited to, claims for injury to any persons, and/or damage to the
Leased Premises and/or any fixtures, equipment, personal property, furniture,
improvements and/or alterations in or to the Leased Premises, which are caused
by or result from (a) risks or damages required to be insured against under this
Lease, or (b) risks and damages which are insured against by insurance policies
maintained by Tenant from time to time. Tenant shall obtain for Landlord from
its insurers under each policy required by this Lease a waiver of all rights of
subrogation which such insurers of Tenant might otherwise have against Landlord.

12. LANDLORD'S RIGHT TO PERFORM TENANT OBLIGATIONS

All covenants and agreements to be performed by Tenant under any of
the terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense and without any abatement of Annual Basic Rent or Additional Rent. If
Tenant shall fail to pay any sum of money, other than Annual Basic Rent,
required to be paid by it hereunder, or shall fail to perform any other act on
its part to be performed hereunder, and such failure shall continue for five (5)
days after notice thereof by Landlord (or such shorter period of time as may be
reasonable following oral notice to Tenant's personnel in the Leased Premises),
Landlord may (but shall not be obligated to do so) without waiving or releasing
Tenant from any of Tenant's obligations, make any such payment or perform any
such other act on behalf of Tenant. All sums so paid by Landlord and all
necessary incidental

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costs, together with interest thereon at the greater of (a) eighteen percent
(18%) per annum or (b) the rate of interest per annum publicly announced, quoted
or published, from time to time, by Bank of America, at its Phoenix, Arizona
office as its "reference rate" plus four (4) percentage points, from the date of
such payment by Landlord until reimbursement in full by Tenant (the "Default
Rate"), shall be payable to Landlord as Additional Rent with the next monthly
installment of Annual Basic Rent; provided, however, in no event shall the
Default Rate exceed the maximum rate (if any) permitted by applicable law.

13. DEFAULT AND REMEDIES

13.1 Event of Default. The occurrence of any one or more of the
following events will constitute an "Event of Default" on the part of Tenant:

(a) Failure to pay any installment of Annual Basic Rent, any
Additional Rent or any other sum required to be paid by Tenant under this Lease,
and such failure shall continue for five (5) days;

(b) Failure to perform any of the other covenants or conditions
which Tenant is required to observe and perform (except failure in the payment
of Annual Basic Rent, Additional Rent or any other monetary obligation contained
in this Lease) and such failure shall continue for fifteen (15) days (or such
shorter period of time as may be specified by Landlord in the event of an
emergency) after written notice thereof by Landlord to Tenant, provided that if
such default is other than the payment of money and cannot be cured within such
fifteen (15) day period, then an Event of Default shall not have occurred if
Tenant, within such fifteen (15) period, commences curing of such failure and
diligently in good faith prosecutes the same to completion and furnishes
evidence thereof to Landlord within thirty (30) days thereafter;

(c) If any warranty, representation or statement made by Tenant
to Landlord in connection with this Lease is or was materially false or
misleading when made or furnished;

(d) The occurrence of an Event of Default under any other
agreement between Landlord and Tenant;

(e) The levy of a writ of attachment or execution or other
judicial seizure of substantially all of Tenant's assets or its interest in this
Lease, such attachment, execution or other seizure remaining undismissed or
discharged for a period of thirty (30) days after the levy thereof;

(f) The filing of any petition by or against Tenant or any
Guarantor to declare Tenant or any Guarantor a bankrupt or to delay, reduce or
modify Tenant's or any Guarantor's debts or obligations, which petition is not
discharged within forty five (45) days after the date of filing;

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<PAGE> 23
(g) The filing of any petition or other action taken to
reorganize or modify Tenant's or any Guarantor's capital structure, which
petition is not discharged within forty five (45) days after the date of filing;

(h) If Tenant or any Guarantor shall be declared insolvent
according to law;

(i) A general assignment by Tenant or any Guarantor for the
benefit of creditors;

(j) The appointment of a receiver or trustee for Tenant or any
Guarantor or all or any of their respective property, which appointment is not
discharged within forty five (45) days after the date of filing;

(k) The filing by Tenant or any Guarantor of a voluntary
petition pursuant to the Bankruptcy Code or any successor thereto or the filing
of an involuntary petition against Tenant or any Guarantor pursuant to the
Bankruptcy Code or any successor legislation, which petition is not discharged
within forty five (45) days after the date of filing; or

(l) The occurrence of an Event of Default under the other
provisions of this Lease.

13. Remedies. Upon the occurrence of an Event of Default under this
Lease by Tenant, Landlord may, without prejudice to any other rights and
remedies available to a landlord at law, in equity or by statute, Landlord may
exercise one or more of the following remedies, all of which shall be construed
and held to be cumulative and non-exclusive: (a) Terminate this Lease and
re-enter and take possession of the Leased Premises, in which event, Landlord is
authorized to make such repairs, redecorating, refurbishments or improvements to
the Leased Premises as may be necessary in the reasonably opinion of Landlord
acting in good faith for the purposes of reletting the Leased Premises and the
costs and expenses incurred in respect of such repairs, redecorating and
refurbishments and the expenses of such reletting (including brokerage
commissions) shall be paid by Tenant to Landlord within five (5) days after
receipt of Landlord's statement; or (b) without terminating this Lease, re-enter
and take possession of the Leased Premises; or (c) Without such re-entry,
recover possession of the Leased Premises in the manner prescribed by any
statute relating to summary process, and any demand for Annual Basic Rent,
re-entry for condition broken, and any and all notices to quit, or other
formalities of any nature to which Tenant may be entitled, are hereby
specifically waived to the extent permitted by law; or (d) Without terminating
this Lease, Landlord may relet the Leased Premises as Landlord may see fit
without thereby avoiding or terminating this Lease, and for the purposes of such
reletting, Landlord is authorized to make such repairs, redecorating,
refurbishments or improvements to the Leased Premises as may be necessary in the
reasonable opinion of Landlord acting in good faith for the purpose of such
reletting, and if a sufficient sum is not realized from such reletting (after
payment of all costs and expenses of such repairs, redecorating and
refurbishments and expenses of such reletting (including brokerage commissions)
and the collection of rent accruing therefrom) each month to equal the Annual
Basic Rent and Additional Rent payable hereunder, then Tenant shall pay such
deficiency each month

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within five (5) days after receipt of Landlord's statement; or (c) Landlord may
declare immediately due and payable all the remaining installments of Annual
Basic Rent and Additional Rent, and such amount, less the fair rental value of
the Leased Premises for the remainder of the Lease Term shall be paid by Tenant
within five (5) days after receipt of Landlord's statement. Landlord shall not
by re-entry or any other act, be deemed to have terminated this Lease, or the
liability of Tenant for the total Annual Basic Rent and Additional Rent reserved
hereunder or for any installment thereof then due or thereafter accruing, or for
damages, unless Landlord notifies Tenant in writing that Landlord has so elected
to terminate this Lease. After the occurrence of an Event of Default, the
acceptance of Annual Basic Rent or Additional Rent, or the failure to re-enter
by Landlord shall not be deemed to be a waiver of Landlord's right to thereafter
terminate this Lease and exercise any other rights and remedies available to it,
and Landlord may re-enter and take possession of the Leased Premises as if no
Annual Basic Rent or Additional Rent had been accepted after the occurrence of
an Event of Default. Upon an Event of Default, Tenant shall also pay to Landlord
all costs and expenses incurred by Landlord, including court costs and
reasonable attorneys' fees, in retaking or otherwise obtaining possession of the
Leased Premises, removing and storing all equipment, fixtures and personal
property on the Leased Premises and otherwise enforcing any of Landlord's
rights, remedies or recourses arising as a result of an Event of Default.

13.3 Additional Remedies. All of the remedies given to Landlord in
this Lease in the event tenant commits an Event of Default are in addition to
all other rights or remedies available to a landlord at law, in equity or by
statute, including, without limitation, the right to seizure and sell all goods,
equipment and personal property of Tenant located in the Leased Premises and
apply the proceeds thereof to all due and unpaid Annual Basic Rent, Additional
Rent and other amounts owing under the Lease. All rights, options and remedies
available to Landlord shall be construed and held to be cumulative, and no one
of them shall be exclusive of the other. Upon the occurrence of an Event of
Default, all rights, privileges and contingencies which may be exercised by
Tenant under the Lease, including, without limitation, options to renew, extend
and expand, as well as relocation rights, contraction rights and any other
rights which may be exercised by Tenant during the Lease Term, shall be
suspended until such Event of Default is cured; provided, however, if two (2) or
more Events of Default have occurred in any twelve (12) month period such
relocation rights, construction rights and any other rights which may be
executed by Tenant during the Lease Term shall be void and of no further force
and effect.

13.4 Interest on Past Due Amounts. In addition to the late charge
described in Article 14 below, if any installment of Annual Basic Rent or
Additional Rent is not paid promptly when due, it shall bear interest at the
Default Rate; provided, however, this provision shall not relieve Tenant from
any default in the making of any payment at the time and in the manner required
by this Lease; and provided, further, in no event shall the Default Rate exceed
the maximum rate (if any) permitted by applicable law.

13.5 Landlord Default. In the event Landlord should neglect or fail
to perform or observe any of the covenants, provisions or conditions contained
in this Lease on its part to be performed or observed, and such failure
continues for thirty (30) days after written notice of default (or if more

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than thirty (30) days shall be required because of the nature of the default, if
Landlord shall fail to commence the curing of such default within such thirty
(30) day period and proceed diligently thereafter), then Landlord shall be
responsible to Tenant for any actual damages sustained by Tenant as a result of
Landlord's breach, but not special or consequential damages. Should Tenant given
written notice to Landlord to correct any default, tenant shall give similar
notice to the holder of any mortgages or deed of trust against the Building or
the lessor of any ground lease, and prior to any cancellation of this Lease, the
holder of such mortgage or deed of trust and/or the lessor under such ground
lease shall be given a reasonable period of time to correct or remedy such
default. If and when such holder of such mortgage or deed of trust and/or the
lessor under any such ground lease has made performance on behalf of Landlord,
the default of Landlord shall be deemed cured. Notwithstanding any other
provisions in this Lease, any claim which Tenant may have against Landlord for
failure to perform or observe any of the covenants, provisions or conditions
contained in this Lease shall be deemed waived unless such claim is asserted by
written notice thereof to Landlord within ten (10) days of commencement of the
alleged default or of occurrence of the cause of action and unless suit be
brought thereon within six (6) months subsequent to the occurrence of such cause
of action. Tenant shall have no right to terminate this Lease, except as
expressly provided elsewhere in this Lease.

14. LATE PAYMENTS

Tenant hereby acknowledges that the late payment by Tenant to
Landlord of any monthly installment of Annual Basic Rent, any Additional Rent or
any other sums due hereunder will cause Landlord to incur costs not contemplated
by this Lease, the exact amount of which will be extremely difficult and
impracticable to ascertain. Such costs include but are not limited to
processing, administrative and accounting costs. Accordingly, if any monthly
installment of Annual Basic Rent, any Additional Rent or any other sum due from
Tenant shall not be received by Landlord within five (5) days after the date
when due, Tenant shall pay to Landlord a late charge equal to five percent (5%)
of such overdue amount or One Hundred and No/100 Dollars ($100.00), whichever is
greater. Tenant acknowledges that such late charge represents a fair and
reasonable estimate of the costs Landlord will incur by reason of late payments
by Tenant. Neither assessment nor acceptance of a late charge by Landlord shall
constitute a wavier of Tenant's default with respect to such overdue amount, nor
prevent Landlord from exercising any of the other rights and remedies available
to Landlord. Nothing contained in this Article 14 shall be deemed to condone,
authorize, sanction or grant to Tenant an option for the late payment of Annual
Basic Rent, Additional Rent or any other sum due hereunder.

15. ABANDONMENT AND SURRENDER

15.1 Abandonment. No act or thing done by Landlord or by any agent
or employee of Landlord during the Lease Term shall be deemed an acceptance of a
surrender of the Leased Premise unless such acceptance is expressed in writing
and duly executed by Landlord. Unless Landlord so agrees in writing, the
delivery of the Key to the Leased Premises to any employee or agent of Landlord
shall not operate as a termination of this Lease or as a surrender of the Leased
Premises.

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15.2 Surrender. Tenant shall, upon the expiration or earlier
termination of this Lease, peaceably surrender the Leased Premises, including
any [Tenant Improvements] or [Tenant's improvements and/or alterations installed
pursuant to Article 7.2], in a janitorial clean condition and otherwise in as
good condition as when Tenant took possession, except for (i) reasonable wear
and tear subsequent to the last repair, replacement, restoration, alteration or
renewal; (ii) loss by fire or other casualty, and (iii) loss by condemnation. If
Tenant shall abandon, vacate or surrender the Leased Premises, or be
dispossessed by process of law or otherwise, any personal property and fixtures
belonging to Tenant and left in the Leased Premises shall be deemed abandoned
and, at Landlord's option, title shall pass to Landlord under this Lease as by a
bill of sale. Landlord may, however, if it so elects, remove all or any part of
such personal property from the Leased Premises and the costs incurred by
Landlord in connection with such removal, including storage costs and the cost
of repairing any damage to the Leased Premises, the Building and/or the Project
caused by such removal shall be paid by Tenant within five (5) days after
receipt of Landlord's statement. Upon the expiration or earlier termination of
this Lease, Tenant shall surrender to Landlord all keys to the Leased Premises
and shall inform Landlord of the combination of any vaults, locks and safes left
on the Leased Premises. The obligations of Tenant under this Article 15.2 shall
survive the expiration or earlier termination of this Lease. Tenant shall
indemnify Landlord against any loss or liability resulting from delay by Tenant
in so surrendering the Premises, including, without limitation, any claims made
by any succeeding Tenant founded on such delay. Tenant shall given written
notice to Landlord at least thirty (30) days prior to vacating the Leased
Premises for the express purpose of arranging a meeting with Landlord for a
joint inspection of the Leased Premises. In the event of Tenant's failure to
give such notice or to participate in such joint inspection, Landlord's
inspection at or after Tenant's vacation of the Leased Premises shall be
conclusively deemed correct for purpose of determining Tenant's liabilities for
repairs and restoration hereunder.

16. INDEMNIFICATION AND EXCULPATION

16.1 Indemnification. Tenant shall indemnify, protect, defend and
hold Landlord harmless from and against, and shall be responsible for, all
claims, damages, losses, costs, liens, encumbrances, liabilities and expenses,
including reasonable attorneys', accountants' and investigators' fees and court
costs (collectively, the "Claims"), however caused (unless caused by Landlord's
gross negligence or willful misconduct), arising in whole or in part from
Tenant's use of all or any part of the Leased Premises, the Building and/or the
Project or the conduct of Tenant's business or from any activity, work or thing
done, permitted or suffered by Tenant or by any invitee, servant, agent,
employee or subtenant of Tenant in the Leased Premises, the Building and/or the
Project, and shall further indemnify, protect, defend and hold Landlord harmless
from and against, and shall be responsible for, all Claims arising in whole or
in part from any breach or default in the performance of any obligation on
Tenant's part to be performed under the terms of this Lease or arising in whole
or in part from any act, neglect, fault or omission by Tenant or by any invitee,
servant, agent, employee or subtenant of Tenant anywhere in the Leased Premises,
the Building and/or the Project. In the case any action or proceeding is brought
against Landlord to which this indemnification shall be applicable, Tenant shall
pay all Claims resulting therefrom and shall defend such action or proceeding,
if Landlord shall so request, at Tenant's sole cost and expense, by counsel

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reasonably satisfactory to Landlord. The obligations of Tenant under this
Article 16.1 shall survive the expiration or earlier termination of this lease.

16.2 Exculpation. Tenant, as a material par of the consideration to
Landlord, hereby assumes all risk of damage to property, injury and death to
persons and all claims of any other nature resulting from Tenant's use of all or
any part of the Leased Premises, the Building and/or the Project, and Tenant
hereby waives all claims in respect thereof against Landlord. Neither Landlord
nor its agents or employees shall be liable for any damaged property of Tenant
entrusted to any employee or agent of Landlord or for loss of or damage to any
property of Tenant by theft or otherwise. Landlord shall not be liable for any
injury or damage to persons or property resulting from any cause, including, but
not limited to, fire, explosion, falling plaster, steam, gas, electricity,
sewage, odor, noise, water or rain which may leak from any part of the Building
or from the pipes, appliances or plumbing works therein, or from the roof of any
structure on the Project, or from any streets or subsurfaces on or adjacent to
the Building or the Project, or from any other place or resulting from dampness
or any other causes whatsoever, unless caused by the gross negligence or willful
misconduct of Landlord. Neither Landlord nor its employees or agents shall be
liable for any defects in the Leased Premises, the Building and/or Project, nor
shall Landlord be liable for the negligence or misconduct, including, but not
limited to, criminal acts, by maintenance or other personnel or contractors
serving the Leased Premises, the Building and/or the Project, other tenants or
third parties, unless Landlord is grossly negligent or guilty of willful
misconduct. All property of Tenant kept or stored on the Project shall be so
kept or stored at the risk of Tenant only, and Tenant shall indemnify, defend
and hold Landlord harmless from and against, and shall be responsible for, any
Claims arising out of damage to the same, including subrogation claims by
Tenant's insurance carriers, unless such damage shall be caused by the willful
act or gross neglect of Landlord and through no fault of Tenant. None of the
events or conditions set forth in this Article 16 shall be deemed a constructive
or actual eviction or result in a termination of this Lease, nor shall Tenant be
entitled to any abatement or reduction of Annual Basic Rent or Additional Rent
by reason thereof. Tenant shall give prompt notice to Landlord with respect to
any defects, fires or accidents which Tenant observes in the Leased Premises,
the Building and/or the Project.

17. ENTRY BY LANDLORD

Landlord reserves and shall at any and all times have the right,
upon not less than 24 hours notice (except in emergencies), to enter the Leased
Premise, to inspect the same, to supply janitorial service and other services to
be provided by Landlord to Tenant hereunder, to submit the Leased Premises to
prospective purchasers or tenants, to post notices of non-responsibility, and to
alter, improve or repair the Leased Premises and any portion of the Building of
which the Leased Premises are a part, without abatement of Annual Basic Rent or
Additional Rent, and may for that purpose erect scaffolding and other necessary
structures where reasonably required by the character of the work to be
performed, always providing that access into the Leased Premises shall not be
blocked thereby, and further providing that the business of Tenant shall not be
interfered with unreasonably. Tenant hereby waives any claim for damages for any
injury or inconvenience to or interference with Tenant's business, any loss of
occupancy or quiet enjoyment of the Leased Premises or any loss

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occasioned thereby. For each of the aforesaid purposes, Landlord shall at all
times have and retain a key with which to unlock all the doors in, upon or about
the Leased Premises, excluding Tenant's vaults and safes, and Landlord shall
have the right to use any and all means which Landlord may deem proper to open
such doors in an emergency in order to obtain entry to the Leased Premises, and
any entry to the Leased Premises obtained by Landlord by any such means or
otherwise shall not under any circumstances be construed or deemed to be a
forcible or unlawful entry into, or a detainer of, the Leased Premises or an
eviction of Tenant from all or any portion of the Leased Premises. Nothing in
this Article 17 shall be construed as obligation Landlord to perform any
repairs, alterations or maintenance except as otherwise expressly required
elsewhere in this Lease.

18. SUBSTITUTE PREMISES

18.1 Relocation of Leased Premises. Landlord may, before or after
the Commencement Date, elect by notice to Tenant, to substitute for the Leased
Premises other office space in the Project (the "Substitute Premises")
designated by Landlord, provided that the Substitute Premises shall contain at
least the same useable area as the Leased Premises and have a configuration
substantially similar to the Leased Premises. Landlord's notice shall be
accompanied by a plan of the Substitute Premises. Tenant shall vacate and
surrender the Leased Premises and shall occupy the Substitute Premises promptly
(and, in any event, not later than fifteen (15) days) after Landlord has
substantially completed the work to be performed by Landlord in the Substitute
Premises pursuant to Article 18.2 below. Tenant shall pay the same Annual Basic
Rent and Additional Rent with respect to the Substitute Premises as was payable
with respect to the Leased Premises. This Lease shall remain in full force and
effect and the Substitute Premises shall thereafter be deemed to be the Leased
Premises.

18.2 Compensation to Tenant. In the event Landlord shall elect to
relocate Tenant to Substitute Premises, Tenant shall not be entitled to any
compensation for any inconvenience or interference with Tenant's business, nor
any abatement or reduction of Annual Basic Rent or Additional Rent, but Landlord
shall, at Landlord's expense perform the following:

(a) Furnish and install in the Substitute Premises fixtures,
equipment, improvements, appurtenances and leasehold improvements at least equal
in kind and quality to those contained or to be contained in the Leased Premises
at the time such notices of substitution is given by Landlord;

(b) Provide personnel to perform, under Tenant's direction, the
moving of Tenant's personal property and trade fixtures from the Leased Premises
to the Substitute Premises;

(c) Promptly reimburse Tenant for Tenant's actual and
reasonable out-of-pocket costs incurred in connection with the relocation of any
telephone or other communications equipment from the Leased Premises to the
Substitute Premises; and

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(d) Promptly reimburse Tenant for any other actual and
reasonable out-of-pocket costs incurred by Tenant in connection with Tenant's
move from Leased Premises to the Substitute Premises, provided such costs are
approved by Landlord in advance which approval shall not be unreasonably
withheld.

Tenant shall cooperate with Landlord so as to facilitate the performance by
Landlord of its obligations under this Article 18.2 and the prompt surrender by
Tenant of the Leased Premises. Without limiting the generality of the preceding
sentence, Tenant shall provide Landlord promptly any approvals or instructions
and any plans or specifications or any other information reasonably requested by
Landlord, and Tenant shall perform promptly in the Substitute Premises any work
to be performed therein by Tenant to prepare the same for Tenant's occupancy.

19. ASSIGNMENT AND SUBLETTING

19.1 Consent of Landlord Required. Tenant shall not transfer or
assign this Lease or any right or interest hereunder, or sublet the Leased
Premises or any part thereof, without first obtaining Landlord's prior written
consent, which consent Landlord may withhold in its reasonable discretion. No
transfer or assignment (whether voluntary or involuntary, by operation of law or
otherwise) or subletting shall be valid or effective without such prior written
consent. Should Tenant attempt to make or allow to be made any such transfer,
assignment or subletting, except as aforesaid, or should any of Tenant's rights
under this Lease be sold or otherwise transferred by or under court order or
legal process or otherwise, then, and in any of the foregoing events Landlord
may, at its option, treat such as an Event of Default by Tenant. Should Landlord
consent to a transfer, assignment or subletting, such restrictions or
prohibitions shall apply to each successive transfer, assignment or subletting
hereunder, if any.

19.2 Deemed Transfers. For the purposes of this Article 19, an
assignment shall be deemed to include the following: (a) if Tenant is a
partnership, a withdrawal or change (voluntary, involuntary, by operation of law
or otherwise) of any of the partners thereof, a purported assignment, transfer,
mortgage or encumbrances (voluntary, involuntary, by operation of law or
otherwise) by any partner thereof of such partner's interest in Tenant, or the
dissolution of the partnership; (b) if Tenant consists of more than one person,
a purported assignment, transfer, mortgage or encumbrance (voluntary,
involuntary, by operation of law or otherwise) from one person unto the other or
others; (c) if Tenant (or a constituent partner of Tenant) is a corporation, any
dissolution, merger, consolidation or reorganization of Tenant (or such
constituent partner), or any change in the ownership (voluntary, involuntary, by
operation of law, creation of new stock or otherwise) of twenty percent (20%) or
more of its capital stock from the ownership existing on the date set forth in
Article 1.1 above; (d) if Tenant is an unincorporated association, a purported
assignment, transfer, mortgage or encumbrance voluntary, involuntary, by
operation of law or otherwise) of any interest in such unincorporated
association; or (e) if Tenant is a limited liability company, a withdrawal or
change of any of the members thereof, a purported assignment, transfer, mortgage
or encumbrance (voluntary, involuntary, by operation of law or otherwise) by any
member of such member's interest

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in Tenant, or the dissolution of the limited liability company; or (f) the sale
of twenty percent (20%) or more in value of the assets of Tenant.

19.3 Delivery of Information. If Tenant wishes at any time to assign
this Lease or sublet the Leased Premises or any portion thereof, it shall first
notify Landlord of its desire to do so and shall submit in writing to Landlord:
(a) the name of the proposed subtenant or assignee; (b) the nature of the
proposed subtenant's or assignee's business to be carried on in the Leased
Premises; (c) the terms and the provisions of the proposed sublease or
assignment; and (d) such financial information as Landlord may reasonably
request concerning the proposed subtenant or assignee. Tenant's failure to
comply with the provisions of this Article 19.3 shall entitle Landlord to
withhold its consent to the proposed assignment or subletting.

19.4 Recapture. If Tenant proposes to assign its interest in this
Lease or sublet all or any part of the Leased Premises, Landlord may, at its
option, upon written notice to Tenant within ten (10) days after Landlord's
receipt of the information specified in Article 19.3 above, elect to recapture
all or any portion of the Leased Premises, and within sixty (60) days after
notice of such election has been given to Tenant, this Lease shall terminate as
to the portion of the Leased Premises recaptured. If all or a portion of the
Leased Premises is recaptured by Landlord pursuant to this Article 19.4, Tenant
shall promptly execute and deliver to Landlord a termination agreement setting
forth the termination date with respect to the Leased Premises or the recaptured
portion thereof, and prorating the Annual Basic Rent, Additional Rent and other
charges payable hereunder to such date. If Landlord does not elect to recapture
as set forth above, Tenant may thereafter enter into a valid assignment or
sublease with respect to the Leased Premises, provided that Landlord consents
thereto pursuant to this Article 19, and provided further, that (a) such
assignment or sublease is executed within ninety (90) days after Landlord has
given its consent, (b) Tenant pays all amounts then owed to Landlord under this
Lease, (c) there is not in existence an Event of Default as of the effective
date of the assignment or sublease, (d) there have been no material changes with
respect to the financial condition of the proposed subtenant or assignee or the
business such party intends to conduct in the Leased Premises, and (e) a fully
executed original of such assignment or sublease providing for an express
assumption by the assignee or subtenant of all of the terms, covenants and
conditions of this Lease is promptly delivered to Landlord.

19.5 Adjustment to Rental. In the event Tenant assigns its interest
in this Lease or sublets the Leased Premises, the Annual Basic Rent set forth in
Article 1.12 above, as adjusted, shall be increased effective as of the date of
such assignment or subletting to the rent and other consideration payable by any
such assignee or sublessee pursuant to such assignment or sublease if such
assignee or sublessee is paying rent in excess of the Annual Basic Rent as
adjusted. Notwithstanding the foregoing, in no event shall the Annual Basic Rent
after any such assignment or subletting be less than the Annual Basic Rent
specified in Article 1.12 above, as adjusted.

19.6 No Release from Liability. Landlord may collect Annual Basic
Rent and Additional Rent from the assignee, subtenant, occupant or other
transferee, and apply the amount so collected, first to the monthly installment
of Annual Basic Rent, then to any Additional Rent and other sums

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due and payable to Landlord, and the balance, if any, to Landlord, but no such
assignment, subletting, occupancy, transfer or collection shall be deemed a
waiver of Landlord's rights under this Article 19, or the acceptance of the
proposed assignee, subtenant, occupant or transferee. Notwithstanding any
assignment, sublease or other transfer (with or without the consent of
Landlord), Tenant shall remain primarily liable under this Lease and shall not
be released from performance of any of the terms, covenants and conditions of
this Lease.

19.7 Landlord's Expenses. If Landlord consent to an assignment,
sublease or other transfer by Tenant of all or any portion of Tenant's interest
under this Lease, Tenant shall pay or cause to be paid to Landlord, a transfer
fee to reimburse Landlord for administrative expenses and for legal, accounting
and other out of pocket expenses incurred by Landlord not to exceed Five Hundred
and No/100 Dollars ($500.00).

19.8 Assumption Agreement. If Landlord consents to an assignment,
sublease or other transfer by Tenant of all or any portion of Tenant's interest
under this Lease, Tenant shall execute and deliver to Landlord, and cause the
transferee to execute and deliver to Landlord, an instrument in the form and
substance acceptable to Landlord in which (a) the transferee adopts his Lease
and assumes and agrees to perform, jointly and severally with Tenant, all of the
obligations of Tenant hereunder, (b) Tenant acknowledges that it remains
primarily liable for the payment of Annual Basic Rent, Additional Rent and other
obligations under this Lease, (c) Tenant subordinates to Landlord's statutory
lien, contract lien and security interest, any liens, security interests or
other rights which Tenant may claim with respect to any property of transferee
and (d) the transferee agrees to us and occupy the Leased Premises solely for
the purpose specified in Article 20 and otherwise in strict accordance with this
Lease.

20. USE OF LEASED PREMISES AND RUBBISH REMOVAL

20.1 Use. The Leased Premises are leased to Tenant solely for the
Permitted Use set forth in Article 1.9 above and for no other purpose
whatsoever. Tenant shall not use or occupy or permit the Leased Premisses to be
used or occupied, nor shall Tenant do or permit anything to be done in or about
the Leased Premises nor bring or keep anything therein which will in any way
increase the existing rate of or affect any casualty or other insurance on the
Building, the Project or any of their respective contents, or make void or
voidable or cause a cancellation of any insurance policy covering the Building,
the Project or any part thereof or any of their respective contents. Tenant
shall not do or permit anything to be done in or about the Leased Premises, the
Building and/or the Project which will in any way obstruct or interfere with the
rights of other tenants or occupants of the Building or the Project or injure or
annoy them. Tenant shall not use or allow the Leased Premises to be used for any
improper, unlawful or unauthorized purpose, nor shall Tenant cause, maintain or
permit any nuisance in, or on about the Leased Premises, the Building and/or the
Project. In addition, Tenant shall not commit or suffer to be committed any
waste in or upon the Leased Premises, the Building and/or the Project. Tenant
shall not use the Leased Premises, the Building and/or the Project or permit
anything to be done in or about the Leased Premises, the Building and/or the
Project which will in any way conflict with any matters of record, or any law,
statute, ordinance

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or governmental rule or regulation now in force or which may hereafter be
enacted or promulgated, and shall, at its sole cost and expense, promptly comply
with all matters of record and all laws, statutes, ordinances and governmental
rules, regulations and requirements now in force or which may hereafter be in
force and with the requirements of any Board of Fire Underwriters or other
similar body now or hereafter constituted, foreseen or unforeseen, ordinary as
well as extraordinary, relating to or affecting the condition, use or occupancy
of the Project, excluding structural change not relating to or affected by
Tenant's improvements or acts. The judgment of any court of competent
jurisdiction or the admission by Tenant in any action against Tenant, whether
Landlord be a party thereto or not, that Tenant has violated any matters of
record or any law, statute, ordinance or governmental rule, regulation or
requirement, shall be conclusive of that fact between Landlord and Tenant. In
addition, Tenant shall not place a load upon any floor of the Leased Premises
which exceeds the load per square foot which the floor was designed to carry,
nor shall Tenant install business machines or other mechanical equipment in the
Leased Premises which cause noise or vibration that may be transmitted to the
structure of the Building.

20.2 Rubbish Removal. Tenant shall keep the Leased Premises clean.
Tenant shall not burn any materials or rubbish of any description upon the
Leased Premises. Tenant shall keep all accumulated rubbish in covered
containers. In the event Tenant fails to keep the Leased Premises in the proper
condition, Landlord may cause the same to be done for Tenant and Tenant shall
pay the expenses incurred by Landlord on demand, together with interest at the
Default Rate, as Additional Rent. Tenant shall, at its sole cost and expense,
comply with all present and future laws, orders and regulations of all state,
county, federal, municipal governments, departments, commissions and boards
regarding the collection, sorting, separation, and recycling of waste products,
garbage, refuse and trash. Tenant shall sort and separate such waste products
garbage, refuse and trash into such categories as provided by law. Each
separately sorted category of waste products, garbage, refuse and trash shall be
placed in separate receptacles reasonably approved by Landlord. Such separate
receptacles may, at Landlord's option, be removed from the Leased Premises in
accordance with a collection schedule prescribed by law. Landlord reserves the
right to refuse to collect or accept from Tenant any waste products, garbage,
refuse or trash that is not separated and sorted as required by law, and to
require Tenant to arrange for such collection at Tenant's sole cost and expense
using a contractor satisfactory to Landlord. Tenant shall pay all costs,
expenses, fines, penalties or damages that may be imposed on Landlord or Tenant
by reason of Tenant's failure to comply with the provisions of this Article
20.2, and, at Tenant's sole cost and expense, Tenant shall indemnify, defend and
hold Landlord and Landlord's agents and employees harmless (including legal fees
and expenses) from and against, and shall be responsible for, all actions,
claims, liabilities and suits arising from such noncompliance, utilizing counsel
reasonably satisfactory to Landlord.

21. SUBORDINATION AND ATTORNMENT

21.1 Subordination. This Lease and all rights of Tenant hereunder
shall be, at the option of Landlord, subordinate to (a) all matters of record,
(b) all ground leases, overriding leases and underlying leases (collectively
referred to as the "leases") of the Building or the Project now or

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hereafter existing, (c) all mortgages and deeds of trust (collectively referred
to as the "mortgages") which may now or hereafter encumber or affect the
Building or the Project, and (d) all renewals, modifications, amendments,
replacements and extensions of leases and mortgages and to spreaders and
consolidations of the mortgages, whether or not leases or mortgages shall also
cover other lands, buildings or leases. The provisions of this Article 21.1
shall be self-operative and no further instruments of subordination shall be
required. In confirmation of such subordination, Tenant shall promptly execute,
acknowledge and deliver any instrument that Landlord, the lessor under any lease
or the holder of any mortgage or any of their respective assigns or successors
in interest may reasonably request to evidence such subordination provided such
instrument contains nondisturbance language reasonably satisfactory to Tenant.
Any lease to which this Lease is subject and subordinate is called a "Superior
Lease" and the lessor under a Superior Lease or its assigns or successors in
interest is called a "Superior Lessor". Any mortgage to which this Lease is
subject and subordinate is called a "Superior Mortgage" and the holder of a
superior Mortgage is called a "Superior Mortgagee". If Landlord, a Superior
Lessor or a Superior Mortgagee requires that such instruments be executed by
Tenant, Tenant's failure to do so within ten (10) days after request therefor
shall be deemed an Event of Default under this Lease. Tenant waives any right to
terminate this Lease because of any foreclosure proceedings. Tenancy hereby
irrevocably constitute and appoints Landlord (and any successor Landlord) as
Tenant's attorney-in-fact, with full power of substitution coupled with an
interest, to execute and deliver to any Superior Lessor or Superior Mortgagee
any documents required to be executed by Tenant for and on behalf of Tenant if
Tenant shall have failed to do so within ten (10) days after request therefore.

21.2 Attornment. If any Superior Lessor or Superior Mortgagee (or
any purchaser at a foreclosure sale) succeeds to the rights of Landlord under
this Lease, whether through possession or foreclosure action, or the delivery of
a new lease or deed (a "Successor Landlord"), Tenant shall attorn to and
recognize such Successor Landlord as Tenant's landlord under this Lease and
shall promptly execute and deliver any instrument that such Successor Landlord
may reasonably request to evidence such attornment.

22. ESTOPPEL CERTIFICATE

Tenant shall, whenever requested by Landlord, within twenty (20)
days after written request by Landlord, execute, acknowledge and deliver to
Landlord a statement in writing certifying: (a) that this Lease is unmodified
and in full force and effect, (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect); (b) the dates to which Annual Basic Rent, Additional Rent and other
charges are paid in advance, if any; (c) that there are not, to Tenant's
knowledge, any uncured defaults on the part of Landlord hereunder or specifying
such defaults if any are claimed; (d) that Tenant has paid Landlord the Security
Deposit, (e) the Commencement Date and the scheduled expiration date of the
Lease Term, (f) the rights (if any) of Tenant to extend or renew this Lease or
to expand the Leased Premises and (g) the amount of Annual Basic Rent,
Additional Rent and other charges currently payable under this Lease. In
addition, such statement shall provide such other information and facts Landlord
may reasonably require. Any such statement may be relied upon by any prospective
or existing purchaser, ground

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lessee or mortgagee of all or any portion of the Project, as well as by any
other assignee of Landlord's interest in this Lease. Tenant's failure to deliver
such statement within such time shall be conclusive upon Tenant (i) that this
Lease is in full force and effect, without modification except as may be
represented by Landlord; (ii) that there are no uncured defaults in Landlord's
performance hereunder; (iii) that Tenant has paid to Landlord the Security
Deposit; (iv) that not more than one month's installment of Annual Basic Rent or
Additional Rent has been paid in advance; (v) that the Commencement Date and the
scheduled expiration date of the Lease Term are as stated therein, (vi) that
Tenant has no rights to extend or renew this Lease or to expand the Leased
Premises, (vii) that the Annual Basic Rent, Additional Rent and other charges
are as set forth therein and (viii) that the other information and facts set
forth therein are true and correct.

23. SIGNS

Landlord shall retain absolute control over the exterior appearance
of the Building and the exterior appearance of the Leased Premises as viewed
from the public halls. Tenant shall not install, or permit to be installed, any
drapes, shutters, signs, lettering, advertising, or any items that will in any
way, in the sole opinion of Landlord, adversely alter the exterior appearance of
the Building or the exterior appearance of the Leased Premises as viewed from
the public halls or the exterior of the Building. Notwithstanding the foregoing,
Landlord shall install, at Tenant's sole cost and expense, letters or numerals
at or near the entryway to the Leased Premises provided Tenant obtains
Landlord's prior written consent as to size, color, design and location. All
such letters or numerals shall be in accordance with the criteria established by
Landlord for the Building.

24. PARKING

24.1 Parking Facility. Landlord shall provide, operate and maintain
parking accommodations (the "Parking Accommodations"), together with necessary
access, having a capacity adequate in Landlord's opinion to accommodate the
requirements of the Building and the Project. No storage of vehicles or parking
for more than twenty-four (24) hours shall be allowed without Landlord's prior
written consent. Tenant acknowledges and agrees that Landlord shall not be
liable for damage, loss or theft of property or injury to a person in, upon or
about the Parking Accommodations from any cause whatsoever. Landlord shall have
the right to establish, and from time to time change, alter and amend, and to
enforce against all users of the Parking Accommodations, such reasonable
requirements and restrictions as Landlord deems necessary and advisable for the
proper operation and maintenance of the Parking Accommodations, including,
without limitation, designation of particular areas for reserved, visitor and/or
employee parking, and establishment of a reasonable rental charge for the use of
the Parking Accommodations by tenants of the Building, the Project and/or the
general public, as a part of the Rules and Regulations of the Building
referenced in Article 31 hereof.

24.2 Parking Spaces. Tenant is hereby allocated the number of
reserved covered, reserved uncovered and unreserved parking spaces designated in
Article 1.15 hereof, entitling holders to park in either reserved covered,
reserved uncovered or unreserved parking spaces, as the case may be,

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located in the Parking Accommodations as designated by Landlord from time to
time for use by Tenant, its employees and licensees, and for which Tenant shall
pay the monthly charges set forth in Article 1.16 hereof. Landlord and Tenant
shall execute, prior to the Commencement Date a Reserved Covered Parking License
in the form attached hereto as Exhibit "D", and an Unreserved Parking License in
the form attached as Exhibit "F", as applicable. The unreserved parking spaces
shall be available to Tenant, its employees and licensees on a "first come,
first serve" basis. Holders of parking passes shall not be entitled to park in
visitor parking spaces so designated by Landlord, or in any other parking spaces
other than those designated by Landlord for use by holders of parking passes.

25. LIENS

Tenant shall keep the Leased Premises free and clear of all
mechanic's and materialmen's liens. If, because of any act or omission (or
alleged act or omission) of Tenant, any mechanics', materialmen's or other lien,
charge or order for the payment of money shall be filed or recorded against the
Leased Premises, the Project or the Building, or against any other property of
Landlord (whether or not such lien, charge or order is valid or enforceable as
such), Tenant shall, at its own expense, cause the same to be canceled or
discharged of record within thirty (30) days after Tenant shall have received
written notice of the filing thereof, or Tenant may, within such thirty (30) day
period, furnish to Landlord, a bond pursuant to A.R.S. Section 33-1004 (or any
successor statute) and satisfactory to Landlord and all superior Lessors and
Superior Mortgagees against the lien, charge or order, in which case Tenant
shall have the right to contest, in good faith, the validity or amount thereof.

26. HOLDING OVER

It is agreed that the date of termination of this Lease and the
right of Landlord to recover immediate possession of the Leased Premises
thereupon is an important and material matter affecting the parties hereto and
the rights of third parties, all of which have been specifically considered by
Landlord and Tenant. In the event of any continued occupancy or holding over of
the Leased Premises without the express written consent of Landlord beyond the
expiration or earlier termination of this Lease or of Tenants rights to occupy
the Leased Premises, whether in whole or in part, or by leaving property on the
Leased Premises or otherwise, this Lease shall be deemed a monthly tenancy and
Tenant shall pay two (2) times the Annual Basic Rent then in effect, in advance
at the beginning of the hold-over month(s), plus any Additional Rent or other
charges or payments contemplated in this Lease, and any other costs, expenses,
damages, liabilities and attorneys' fees incurred by Landlord on account of
Tenant's holding over.

27. ATTORNEYS' FEES

Tenant shall pay to Landlord all amounts for costs (including
reasonable attorneys' fees) incurred by Landlord in connection with any breach
or default by Tenant under this Lease or incurred in order to enforce or
interpret the terms or provisions of this Lease. Such amounts shall

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be payable within five (5) days after receipt by Tenant of Landlord's statement.
In addition, if any action shall be instituted by either of the parties hereto
for the enforcement or interpretation of any of their respective rights or
remedies in or under this Lease, the prevailing party shall be entitled to
recover from the losing party all costs incurred by the prevailing party in such
action and any appeal therefrom, including reasonable attorneys' fees to be
fixed by the court. Further, should Landlord be made a party to any litigation
between Tenant and any third party, then Tenant shall pay all costs and
attorneys' fees incurred by or imposed upon Landlord in connection with such
litigation.

28. RESERVED RIGHTS OF LANDLORD

Landlord reserves the following rights, exercisable without
liability to Tenant for damage or injury to property, persons or business and
without effecting an eviction, constructive or actual, or disturbance of
Tenant's use or possession or giving rise to any claim:

(a) To name the Building and the Project and to change the name or
street address of the Building or the Project;

(b) To install and maintain all signs on the exterior and interior
of the Building and the Project;

(d) During the last ninety (90) days of the Lease Term, if Tenant
has vacated the Leased Premises, to decorate, remodel, repair, alter or
otherwise prepare the Leased Premises for re-occupancy, without affecting
Tenant's obligation to pay Annual Basic Rent;

(e) To have pass keys to the Leased Premises and all doors therein,
excluding Tenant's vaults and safes;

(f) On reasonable prior notice to Tenant, to exhibit the Leased
Premises to any prospective purchaser, mortgagee, or assignee or any mortgage on
the Building or the Project and to others having interest therein at any time
during the Lease Term, and to prospective Tenants during the last six (6) months
of the Lease Term;

(g) To take any and all measures, including entering the Leased
Premises, upon not less than twenty-four (24) hours notice (except in
emergencies), for the purposes of making inspections, repairs, alterations,
additions and improvements to the Leased Premises or to the Building (including,
for the purposes of checking, calibrating, adjusting and balancing controls and
other parts of the Building systems) as may be necessary or desirable for the
operation, improvement, safety, protection or preservation of the Leased
Premises or the Building, or in order to comply with all laws, orders and
requirements of governmental or other authorities, or as may otherwise be
permitted or required by this Lease; provided, however, that Landlord shall
endeavor (except in an emergency) to minimize interference with Tenant's
business in the Leased Premises;

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(h) To relocate various facilities within the Building and/or the
Project if Landlord shall determine such relocation to be in the best interest
of the development of the Building and/or the Project, provided that such
relocation shall not materially restrict access to the Leased Premises;

(i) To change the nature, extent, arrangement, use and location of
the Building Common Areas and the Project Common Areas;

(j) To make alterations or additions to and to build additional
stories on the Building and to build additional buildings or improvements on the
Project; and

(k) To install vending machines of all kinds in the Leased Premises
and the Building, and to receive all of the revenue derived therefrom, provided,
however, that no vending machines shall be installed by Landlord in the Leased
Premises unless Tenant so requests.

Landlord further reserves the right to the roof of the Building. No easement for
light, air, or view is included in the leasing of the Leased Premises to Tenant.
Accordingly, any diminution or shutting off of light, air or view by any
structure which may be erected on the Project or other properties n the vicinity
of the Building shall in no way affect this Lease or impose any liability upon
Landlord.

29. EMINENT DOMAIN

29.1 Taking. If the whole of the Building is lawfully and
permanently taken by condemnation or any other manner for any public or
quasi-public purpose, or by deed in lieu thereof, this Lease shall terminate as
of the date of vesting of title in such condemning authority and the Annual
Basic Rent and Additional Rent shall be pro rated to such date. If any part of
the Building or the Project is so taken, or if the whole of the Building is
taken, but not permanently, then this Lease shall be unaffected thereby, except
that (a) Landlord may terminate this Lease by notice to Tenant within ninety
(90) days after the date of vesting of title in the condemning authority, and
(b) if twenty percent (20%) or more of the Leased Premises shall be permanently
taken and the remaining portion of the Leased Premises shall not be reasonably
sufficient for Tenant to continue operation of its business, Tenant may
terminate this Lease by notice to Landlord within ninety (90) days after the
date of vesting of title in such condemning authority. This Lease shall
terminate on the thirtieth (30th) day after receipt by Landlord of such notice,
by which date Tenant shall vacate and surrender the Leased Premises to Landlord.
The Annual Basic Rent and Additional Rent shall be pro rated to the earlier of
the termination of this Lease or such date as Tenant is required to vacate the
Leased Premises by reason of the taking. If this Lease is not terminated as a
result of a partial taking of the Leased Premises, the Annual Basic Rent and
Additional Rent shall be equitably adjusted according to the rentable area of
the Leased Premise and Building remaining.

29.2 Award. In he event of a taking of all or any part of the
Building or the Project, all of the proceeds or the award, judgment, settlement
or damages payable by the condemning authority shall be and remain the sole and
exclusive property of Landlord, and Tenant hereby assigns all of its right,
title and interest in and to any such award, judgment, settlement or damages to
Landlord.

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Tenant shall, however, have the right, to the extent that the same shall not
reduce or prejudice amounts available to Landlord, to claim from the condemning
authority, but not from Landlord, such compensation as may be recoverable by
Tenant in its own right for relocation benefits, moving expenses, and damage to
Tenant's personal property and trade fixtures.

30. NOTICES

Any notice or communication given under the terms of this Lease
shall be in writing and shall be delivered in person, sent by any public or
private express delivery service or deposited with the United States Postal
Service or a successor agency, certified or registered mail, return receipt
requested, postage pre-paid, addressed as set forth in the Basic Provisions, or
at such other address as a party may from time to time designate by notice
hereunder. Notice shall be effective upon delivery. The inability to deliver a
notice because of a changed address of which no notice was given or a rejection
or other refusal to accept any notice shall be deemed to be the receipt of the
notice as of the date of such inability to deliver or rejection or refusal to
accept. Any notice to be given by Landlord may be given by the legal counsel
and/or the authorized agent of Landlord.

31. RULES AND REGULATIONS

Tenant shall abide by all rules and regulations (the "Rules and
Regulations") of the Building and the Project imposed by Landlord, as attached
hereto as Exhibit "H" or as may hereafter be issued by Landlord. Such Rules and
Regulations are imposed to enhance the cleanliness, appearance, maintenance,
order and use of the Leased Premises, the Building and the Project, and the
proper enjoyment of the Building and the Project by all tenants and their
clients, customers and employees. The Rules and Regulations may be changed from
time to time upon ten (10) days notice to Tenant. Breach of the Rules and
Regulations, by Tenant shall constitute an Event of Default if such breach is
not fully cured within ten (10) days after written notice to Tenant by Landlord.
Landlord shall not be responsible to Tenant for nonperformance by any other
tenant, occupant or invitee of the Building or the Project of any Rules or
Regulations.

32. ACCORD AND SATISFACTION

No payment by Tenant or receipt by Landlord of a lesser amount than
the monthly installment of Annual Base Rent and Additional Rent (jointly called
"Rent" in this Article 32), shall be deemed to be other than on account of the
earliest stipulated Rent due and not yet paid, nor shall any endorsement or
statement on any check or any letter accompanying any check or payment as Rent
be deemed an accord and satisfaction. Landlord may accept such check or payment
without prejudice to Landlord's right to recover the balance of such Rent or to
pursue any other remedy in this Lease. No receipt of money by Landlord from
Tenant after the termination of this Lease, after the service of any notice
relating to the termination of this Lease, after the commencement of any suit,
or after final judgment for possession of the Leased Premises, shall reinstate,
continue or extend the Lease Term or affect any such notice, demand, suit or
judgment.

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33. BANKRUPTCY OF TENANT

33.1 Chapter 7. If a petition is filed by, or an order for relief is
entered against Tenant under Chapter 7 of the Bankruptcy Code and the trustee of
Tenant elects to assume this Lease for the purpose of assigning it, the election
or assignment, or both, may be made only if all of the terms and conditions of
Articles 33.2 and 33.4 below are satisfied. If the trustee fails to elect to
assume this Lease for the purpose of assigning it within sixty (60) days after
appointment, this Lease will be deemed to have been rejected. To be effective,
an election to assume this Lease must be in writing and addressed to Landlord
ad, in Landlord's business judgment, all of the conditions hereinafter stated,
which Landlord and Tenant acknowledge to be commercially reasonable, must have
been satisfied. Landlord shall then immediately be entitled to possession of the
Premises without further obligation to Tenant or the trustee, and this Lease
will be terminated. Landlord's right to be compensated for damages in the
bankruptcy proceeding, however, shall survive.

33.2 Chapters 11 and 13. If Tenant files a petition for
reorganization under Chapters 11 or 13 of the Bankruptcy Code or a proceeding
that is filed by or against Tenant under any other chapter of the Bankruptcy
Code is converted to a Chapter 1 or 13 proceeding and Tenant's trustee or Tenant
as a debtor-in-possession fails to assume this Lease within sixty (60) days from
the date of the filing of the petition or the conversion, the trustee or the
debtor-in-possession will be deemed to have rejected this Lease. to be
effective, an election to assume this Lease must be in writing and addressed to
Landlord and, in Landlord's business judgment, all of the following conditions,
which Landlord and Tenant acknowledge to be commercially reasonable, must have
been satisfied:

(a) The trustee or the debtor-in-possession has cured or has
provided to Landlord adequate assurance, as defined in this Article 33.2, that;

(1) The trustee will cure all monetary defaults under this
Lease within ten (10) days from the date of the assumption; and

(2) The trustee will cure all non-monetary defaults under
this Lease within thirty (30) days from the date of the assumption.

(b) The trustee or the debtor-in-possession has compensated
Landlord, or has provided to Landlord adequate assurance, as defined in this
Article 33.2, that within ten (10) days from the date of the assumption Landlord
will be compensated for any pecuniary loss it incurred arising from the default
of Tenant, the trustee, or the debtor-in-possession as recited in Landlord's
written statement of pecuniary loss sent to the trustee or the
debtor-in-possession. For purposes of this Lease, pecuniary loss shall include
all attorneys' fees and court costs incurred by Landlord in connection with any
bankruptcy proceeding filed by or against Tenant.

(c) The trustee or the debtor-in-possession has provided
Landlord with adequate assurance of the future performance of each of Tenant's
obligations under the Lease; provided, however, that:

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(1) The trustee or debtor-in-possession will also deposit
with Landlord as security for the timely payment of Annual Basic Rent and
Additional Rent, an amount equal to three months Annual Basic Rent and
Additional Rent accruing under this Lease.

(2) If not otherwise required by the terms of this Lease,
the trustee or the debtor-in-possession will also pay in advance, on each day
that the Annual Basic Rent is payable, one-twelfth of Tenant's estimated annual
obligations under the Lease for the Additional Rent.

(3) From and after the date of the assumption of this
Lease, the trustee or the debtor-in-possession will pay the Annual Basic Rent
and Additional Rent as provided in Article 5 above.

(4) The obligations imposed upon the trustee or the
debtor-in-possession will continue for Tenant after the completion of bankruptcy
proceedings.

(d) Landlord has determined that the assumption of the Lease
will not:

(1) Breach any provisions in any other lease, mortgage,
financing agreement, or other agreement by which Landlord is bound relating to
the Project; or

(2) Disrupt, in Landlord's judgment, the tenant mix of the
Building or the Project or any other attempt by Landlord to provide a specific
variety of Tenants in the Building or the Project that, in Landlord's judgment,
would be most beneficial to all of the tenants of the Building and the Project
and would enhance the image, reputation, and profitability of the Building and
the Project.

(e) For purposes of this Article 33.2 "adequate assurance"
means that:

(1) Landlord will determine that the trustee or the
debtor-in-possession has, and will continue to have, sufficient unencumbered
assets after the payment of all secured obligations and administrative expenses
to assure Landlord that the trustee or the debtor-in-possession will have
sufficient funds to fulfill Tenant's obligations under this Lease and to keep
the Leased Premises properly staffed with sufficient employees to conduct a
fully operational, actively promoted business on the Leased Premise; and

(2) An order will have been entered segregating sufficient
cash payable to Landlord and/or a valid and perfected first lien and security
interest will have been granted in property of Tenant, trustee, or
debtor-in-possession that is acceptable for value and kind to Landlord, to
secure to Landlord the obligation of the trustee or debtor-in-possession to cure
the monetary or non-monetary defaults under this Lease within the time periods
set forth above.

33.3 Landlord's Right to Terminate. In the event that this Lease is
assumed by a trustee appointed for Tenant or by Tenant as debtor-in-possession
under the provisions of Article 33.2 above

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and, thereafter, Tenant is either adjudicated a bankrupt or files a subsequent
petition for arrangement under chapter 11 of the Bankruptcy Code, then Landlord
may terminate, at is option, this Lease and all Tenant's rights under it, by
giving written notice of Landlord's election to terminate.

33.4 Assignment by Trustee. If the trustee or the
debtor-in-possession has assumed the Lease, under the terms of Article 33.1 or
33.2 above, and elects to assign Tenant's interest under this Lease or the
estate created by that interest to any other person, that interest or estate may
be assigned only if Landlord acknowledges in writing that the intended assignee
has provided adequate assurance, as defined in this Article 33.4, of future
performance of all of the terms, covenants, and conditions of this Lease to be
performed by Tenant.

33.5 Adequate Assurance. For the purposes of this Article 33
"adequate assurance of future performance" means that Landlord has ascertained
that each of the following conditions has been satisfied:

(1) The assignee has submitted a current financial statement,
audited by a certified public accountant, that shows a net worth and working
capital in amounts determined by Landlord to be sufficient to assure the future
performance by the assignee of Tenant's obligations under this Lease;

(2) If requested by Landlord the assignee will obtain
guarantees, in form and substance satisfactory to Landlord from one or more
persons who satisfy Landlord's standards of creditworthiness;

(3) Landlord has obtained all consents or waivers from any
third party required under any lease, mortgage, financing arrangement or other
agreement by which Landlord is bound, to enable Landlord to permit the
assignment;

(4) When, pursuant to the Bankruptcy Code, the trustee or the
debtor-in-possession is obligated to pay reasonable use and occupancy charges
for the use of all or part of the Leased Premises, the charges will not be less
than the Annual Basic Rent and Additional Rent.

33.6 Consent of Landlord. Neither Tenant's interest in the Lease nor
any estate of Tenant created in the Lease will pass to any trustee, receiver,
assignee for the benefits of creditors, or any other person or entity, or
otherwise by operation of law under the laws of any state having jurisdiction of
the person or property of Tenant unless Landlord consents in writing to the
transfer. Landlord's acceptance of Annual Basic Rent or Additional Rent or any
other payments from any trustee, receiver, assignee, person, or other entity
will not be deemed to have waived, or waive, the need to obtain Landlord's
consent or Landlord's right to terminate this Lease for any transfer of Tenant's
interest under this Lease without that consent.

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34. HAZARDOUS MATERIALS

34.1 Hazardous Materials Laws. "Hazardous Materials Laws" means any
and all federal, state or local laws, ordinances, rules, decrees, orders,
regulations or court decisions (including the so-called "common-law") relating
to hazardous substances, hazardous materials, hazardous waste, toxic substances,
environmental conditions on, under or about the Premises, or soil and ground
water conditions, including, but not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA"), as amended, 42
U.S.C. Section 9601, et seq., the Resource Conversation and Recovery Act
("RCRA"), 42 U.S.C. Section 6901, et seq., the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801, et seq., any amendments to the
foregoing, and any similar federal, state or local laws, ordinances, rules,
decrees, orders or regulations.

34.2 Hazardous Materials. "Hazardous Materials" means any chemical,
compound, material, substance or other matter that: (i) is a flammable
explosive, asbestos, radioactive material, nuclear medicine material, drug,
vaccine, bacteria, virus, hazardous waste, toxic substance, petroleum product,
or related injurious or potentially injurious material, whether injurious or
potentially injurious by itself or in combination with other materials; (ii) is
controlled, designated in or governed by any Hazardous Materials Law; (iii)
gives rise to any reporting, notice or publication requirements under any
Hazardous Materials Law; or (iv) gives rise to any liability, responsibility or
duty on the part of Tenant or Landlord with respect to any third person under
any Hazardous Materials Law.

34.3 Use. Tenant shall not allow any Hazardous Material to be used,
generated, released, stored or disposed of on, under or about, or transported
from, the Leased Premises, the Building or the Project, unless: (i) such use is
specifically disclosed to and approved by Landlord in writing prior to such use;
and (ii) such use is conducted in compliance with the provisions of this Article
34. Landlord may approve such use subject to reasonable conditions to protect
the Leased Premises, the Building or the Project, and Landlord's interests.
Landlord any withhold approval of Landlord determines that such proposed use
involves a material risk of a release or discharge of Hazardous Materials or a
violation of any Hazardous Materials Laws or that Tenant has not provided
reasonable assurances of its ability to remedy such a violation and fulfill its
obligations under this Article 34.

34.4 Compliance With Laws. Tenant shall strictly comply with, and
shall maintain the Leased Premises in compliance with, all Hazardous Materials
Laws. Tenant shall obtain and maintain in full force and effect all permits,
licenses and other governmental approvals required for Tenant's operations on
the Leased Premises under any Hazardous Materials Laws and shall comply with all
terms and conditions thereof. At Landlord's request, Tenant shall deliver copies
of, or allow Landlord to inspect, all such permits, licenses and approvals.
Tenant shall perform any monitoring, investigation, clean-up, removal and other
remedial work (collectively, "Remedial Work") required as a result of any
release or discharge of Hazardous Materials affecting the Leased Premises, the
Building or the Project, or any violation of Hazardous Materials Laws by Tenant
or any assignee or sublessee of Tenant or their respective agents, contractors,
employees, licensees, or invitees.

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Landlord shall have the right to intervene in any governmental action or
proceeding involving any Remedial Work, and to approve performance of the work,
in order to protect Landlord's interests.

34.5 Compliance With Insurance Requirements. Tenant shall comply
with the requirements of Landlord's and Tenant's respective insurers regarding
hazardous Materials and with such insurers' recommendations based upon prudent
industry practices regarding management of Hazardous Materials.

34.6 Notice; Reporting. Tenant shall notify Landlord, in writing,
within two (2) days after any of the following: (a) a release or discharge of
any Hazardous Material, whether or not the release or discharge is in quantities
that would otherwise be reportable to a public agency; (b) Tenant's receipt of
any order of a governmental agency requiring any Remedial Work pursuant to any
Hazardous Materials Laws; (c) Tenant's receipt of any warning, notice of
inspection, notice of violation or alleged violation, or Tenant's receipt of
notice or knowledge of any proceeding, investigation of enforcement action,
pursuant to any Hazardous Materials Laws; or (d) Tenant's receipt of notice or
knowledge of any claims made or threatened by any third party against Tenant or
the Leased Premises, the Building or the Project, relating to any loss or injury
resulting from Hazardous Materials. Tenant shall deliver to Landlord copies of
all test results, reports and business or management plans required to be filed
with any governmental agency pursuant to any Hazardous Materials Laws.

34.7 Termination; Expiration. Upon the termination or expiration of
this Lease, Tenant shall remove any equipment, improvements or storage
facilities utilized in connection with any Hazardous Materials and shall, clean
up, detoxify, repair and otherwise restore the Leased Premises to a condition
free of Hazardous Materials.

34.8 Indemnity. Tenant shall protect, indemnify, defend and hold
Landlord harmless from and against, and shall be responsible for, any and all
claims, costs, expenses, suits, judgments, actions, investigations, proceedings
and liabilities arising out of or in connection with any breach of any
provisions of this Article 34 or directly or indirectly arising out of the use,
generation, storage, release, disposal or transportation of Hazardous Materials
by Tenant or any sublessee or assignee of Tenant, or their respective agents,
contractors, employees, licensees, or invitees, on, under or about the Leased
Premises, the Building or the Project during the Lease Term or Tenant's
occupancy of the Leased Premises, including, but not limited to, all foreseeable
and unforeseeable consequential damages and the cost of any Remedial Work.
Neither the consent by Landlord to the use, generation, storage, release,
disposal or transportation of Hazardous Materials nor the strict compliance with
all Hazardous Material Laws shall excuse Tenant from Tenant's indemnification
obligations pursuant to this Article 34. The foregoing indemnity shall be in
addition to and not a limitation of the indemnification provisions of Article 16
of this Lease. Tenant's obligations pursuant to this Article 34 shall survive
the termination or expiration of this Lease.

34.9 Assignment; Subletting. If Landlord's consent is required for
an assignment of this Lease or a subletting of the Leased Premises, Landlord
shall have the right to refuse such consent

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if the possibility of a release of Hazardous Materials is materially increased
as a result of the assignment or sublease or if Landlord does not receive
reasonable assurances that the new tenant has the experience and the financial
ability to remedy a violation of the Hazardous Materials Laws and fulfill its
obligations under this Article 34.

34.10 Entry and Inspection; Cure. Landlord and its agents, employees
and contractors, shall have the right, but not the obligation, to enter the
Leased Premises at all reasonable times to inspect the Leased Premises and
Tenant's compliance with the term sand conditions of this Article 34, or to
conduct investigations and tests. No prior notice to Tenant shall be required in
the event of an emergency, or if Landlord has reasonable cause to believe that
violations of this Article 34 have occurred, or if Tenant consents at the time
of entry. In all other cases, Landlord shall give at least twenty-four (24)
hours prior notice to Tenant. Landlord shall have the right, but not the
obligation, to remedy any violation by Tenant of the provisions of this Article
34 or to perform any Remedial Work which is necessary or appropriate as a result
of any governmental order, investigation or proceeding. Tenant shall pay, upon
demand, as Additional Rent, all costs incurred by Landlord in remedying such
violations or performing all Remedial Work, plus interest thereon at the Default
Rate from the date of demand until the date received by Landlord.

34.11 Event of Default. The release or discharge of any Hazardous
Material or the violation of any Hazardous Materials Law shall constitute an
Event of Default by Tenant under this Lease. In addition to and not in lieu of
the remedies available under this Lease as a result of such Event of Default,
Landlord shall have the right, without terminating this Lease, to require Tenant
to suspend its operations and activities on the Leased Premises until Landlord
is satisfied that appropriate Remedial Work has been or is being adequately
performed and Landlord's election of this remedy shall not constitute a waiver
of Landlord's right thereafter to pursue the other remedies set forth in this
Lease.

35. MISCELLANEOUS

35.1 Entire Agreement, Amendments. This Lease and any Exhibits and
Riders attached hereto and forming a part hereof, set forth all of the
covenants, promises, agreements, conditions and understandings between Landlord
and Tenant concerning the Leased Premises and there are no covenants, promises,
agreements, representations, warranties, conditions or understandings either
oral or written between them other than as contained in this Lease. Except as
otherwise provided in this Lease, no subsequent alteration, amendment, change or
addition to this Lease shall be binding unless it is in writing and signed by
both Landlord and Tenant.

35.2 Time of the Essence. Time is of the essence of each and every
term, covenant and condition of this Lease.

35.3 Binding Effect. The covenants and conditions of this Lease
shall, subject to the restrictions on assignment and subletting, apply to and
bind the heirs, executors, administrators, personal representatives, successors
and assigns of the parties hereto.

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35.4 Recordation. Neither this Lease nor any memorandum hereof shall be
recorded by Tenant. At the sole option of Landlord, Tenant and Landlord shall
execute, and Landlord may record, a short form memorandum of this Lease in form
and substance satisfactory to Landlord.

35.5 Governing Law. This Lease and all the terms and conditions thereof
shall be governed by and construed in accordance with the laws of the State of
Arizona.

35.6 Defined Terms and Paragraph Headings. The words "Landlord" and
"Tenant" as used in this Lease shall include the plural as well as the singular.
Words used in masculine gender include the feminine and neuter. If there is more
than one Tenant, the obligations in this Lease imposed upon Tenant shall be
joint and several. The paragraph headings and titles to the paragraphs of this
Lease are not a part of this Lease and shall have no effect upon the
construction or interpretation of any part hereof.

35.7 Representations and Warranties of Tenant. Tenant represents and
warrants to Landlord as follows:

(a) Tenant has been duly organized, is validly existing, and
is in good standing under the laws of its state of [incorporation-organization-
formation] and is [qualified-registered] to transact business in Arizona. All
necessary action on the part of Tenant has been taken to authorize the
execution, delivery and performance of this Lease and of the other documents,
instruments and agreements, if any, provided for herein. The persons who have
executed this Lease on behalf of Tenant are duly authorized to do so;

(b) This Lease constitutes the legal, valid and binding
obligation of Tenant, enforceable against Tenant in accordance with its terms,
subject, however, to bankruptcy, insolvency, reorganization, arrangement,
moratorium or other similar laws relating to or affecting the rights of
creditors generally, general principles of equity, whether enforceability is
considered in a proceeding in equity or at law, and to the qualification that
certain waivers, procedures, remedies and other provisions of this Lease may be
unenforceable under or limited by applicable law, however, none of the foregoing
shall prevent the practical realization to Landlord of the benefits intended by
this Lease;

(c) To the best of its knowledge, there are no suits, actions,
proceedings or investigations pending, or to the best of its knowledge,
threatened against or involving Tenant before any court, arbitrator or
administrative or governmental body which might reasonably result in any
material adviser change in the contemplated business, condition or operations of
Tenant;

(d) to the best of its knowledge, Tenant is not, and the
execution, delivery and performance of this Lease and the documents, instruments
and agreements, if any, provided for herein will not result in any breach of or
default under any other document, instrument or agreement to which Tenant is a
party or by which Tenant is subject or bound;

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(e) To the best of its knowledge, Tenant has obtained all
required licenses and permits, both governmental and private, to use and operate
the Leased Premises in the manner intended by this Lease.

35.8 No Waiver. The failure of either party to insist in any one or
more instances upon the strict performance of any one or more of the obligations
of this Lease, or to exercise any election herein contained, shall not be
construed as a waiver or relinquishment for the future of the performance of
such one or more obligations of this Lease or the right to exercise such
election, but the same shall continue and remain in full force and effect with
respect to any subsequent breach, act or omission.

35.9 Severability. If any clause or provision of this Lease is or
becomes illegal or unenforceable because of any present or future law or
regulation of any governmental body or entity effective during the Lease Term,
the intention of the parties is that the remaining provisions of this Lease
shall not be affected thereby.

35.10 Exhibits. If any provision contained in an Exhibit, Rider or
Addenda to this Lease is inconsistent with any other provision of this Lease,
the provision contained in this Lease shall supersede the provisions contained
in such Exhibit, Rider or Addenda, unless otherwise provided.

35.11 Fair Meaning. The language of this Lease shall be construed to
its normal and usual meaning and not strictly for or against either Landlord or
Tenant. Landlord and Tenant acknowledge and agree that each party has reviewed
and revised this Lease and that any rule of construction to the effect that
ambiguities are to be resolved against the drafting party shall not apply to the
interpretation of this Lease, or any Exhibits, Riders or amendments hereto.

35.12 No Merger. The voluntary or other surrender of this Lease by
Tenant or a mutual cancellation of this Lease shall not work as a merger and
shall, at Landlord's option, either terminate any ro all existing subleases or
subtenancies, or operate as an assignment to Landlord of any or all of such
subleases or subtenancies.

35.13 Force Majeure. Any prevention, delay or stoppage due to strikes,
lockouts, labor disputes, acts of God, inability to obtain labor or materials
for reasonable substitutes therefor, governmental restrictions, regulations or
controls, judicial orders, enemy or hostile governmental actions, civil
commotion, fire or other casualty and other causes beyond the reasonable control
of Landlord shall excuse the Landlord's performance hereunder for the period of
any such prevention, delay, or stoppage.

35.14 Government Energy or Utility Controls. In the event of the
imposition of federal, state or local governmental controls, rules, regulations
or restrictions on the use or consumption of energy or other utilities during
the Lease Term, both Landlord and Tenant shall be bound thereby. In the event of
a difference in interpretation of any governmental control, rule, regulation or
restriction between Landlord and Tenant, the interpretation of Landlord shall
prevail, and Landlord

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shall have the right to enforce compliance, including the right of entry into
the Leased Premises to effect compliance.

35.15 Shoring. If any excavation or construction is made adjacent to,
upon or within the Building, or any part thereof, Tenant shall afford to any and
all persons causing or authorized to cause such excavation or construction
license to enter onto the Leased Premises for the purpose of doing such work as
such persons shall deem necessary to preserve the Building or any portion
thereof from injury or damage and to support the same by proper foundations,
braces and supports without any claim for damages, indemnity or abatement of
Annual Basic Rent or Additional Rent or for a constructive or actual eviction of
Tenant.

35.16 Transfer of Landlord's Interest. The term "Landlord" as used in
this Lease, insofar as the covenants or agreements on the part of the Landlord
are concerned, shall be limited to mean and include only the owner or owners of
Landlord's interest in this Lease at the time in question. Upon any transfer or
transfers of such interest, the Landlord herein named (and in the case of any
subsequent transfer, the then transferor) shall thereafter be relieved of all
liability for the performance of any covenants or agreements on the part of the
Landlord contained in this Lease.

35.17 Limitation on Landlord's Liability. If Landlord becomes obligated
to pay Tenant any judgment arising out of any failure by the Landlord to perform
or observe any of the terms, covenants, conditions or provisions to be performed
or observed by Landlord under this Lease, Tenant shall be limited in the
satisfaction of such judgment solely to Landlord's interest in the Building and
the Project or any proceeds arising from the sale thereof and no other property
or assets of Landlord or the individual partners, directors, officers or
shareholders of Landlord or its constituent partners shall be subject to levy,
execution or other enforcement procedure whatsoever for the satisfaction of any
such money judgment.

35.18 Brokerage Fees. Tenant warrants and represents that it has not
dealt with any realtor, broker or agent in connection with this Lease except the
Broker identified in Article 1.18 above. Tenant shall indemnify, defend and hold
Landlord harmless from and against, and shall be responsible for, any cost,
expense or liability (including the cost of suit and reasonable attorneys' fees)
for any compensation, commission or charges claimed by any other realtor, broker
or agent in connection with this Lease or by reason of any act of Tenant.

35.19 Letter of Credit. Concurrently with the execution of this Lease,
Tenant shall deliver to Landlord, a one (1) year irrevocable standby letter of
credit in the amount of Forty Thousand and No/100 Dollars ($40,000.00), issued
by a bank or other financial institution reasonably acceptable to Landlord, as
additional security for the performance by Tenant of its obligations under this
Lease in the form of Exhibit 1 hereto. At least thirty (30) days prior to the
expiration date of such letter of credit, Tenant shall deliver to Landlord a
renewal one (1) year irrevocable standby letter of credit. In substitution of
the existing letter of credit, failing which, Landlord shall be authorized to
draw upon the letter of credit in its possession. At the election of Landlord,
Landlord any draw upon the letter of credit as and for its full damages or may
draw upon the letter of credit and apply the

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proceeds thereof in reduction of any loss and/or damage sustained by Landlord by
reason of the occurrence of any breach, nonperformance or default by Tenant
under this Lease without the waiver of any other right or remedy available to
Landlord at law, and equity or under the terms of this Lease. Tenant
acknowledges and agrees that in event Tenant shall file a voluntary petition
pursuant to the Bankruptcy Code or any successor thereto, or if any involuntary
petition is filed against Tenant pursuant to the Bankruptcy Code or any
successor thereto, then Landlord may apply the proceeds of the letter of credit
towards those obligations of Tenant to Landlord which accrued prior to the
filing of such petition. Tenant's obligation to maintain the letter of credit
shall terminate after written notice from Landlord reflecting that Landlord has
reviewed Tenant's financial statements and has determined that Tenant has
eliminated its current "retained deficit." Tenant shall furnish to Landlord all
federal income tax returns within thirty (30) days of filing tax returns, and
annual and interim financial statements within thirty (30) days of preparation.
All such financial statements shall be certified by an officer of Tenant to be
true, correct and complete in all material respects.

35.20 Continuing Obligations. All obligations of Lessee hereunder not
fully performed as of the expiration or earlier termination of this Lease shall
survive the expiration or earlier termination of this Lease, including, without
limitation, all payment obligations with respect to Annual Basic Rent,
Additional Rent and all obligations concerning the condition of the Premises.

IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of
the date and year first above written.

LANDLORD

SEOC I Limited Partnership, an Arizona limited
partnership

By: Cavan Investments, Ltd., an Arizona
corporation, its General Partner

By: /s/ David V. Cavan
Name: David V. Cavan
Its: President

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TENANT:

ORTHOPAEDIC BIOSYSTEMS LTD., INC., an
Arizona corporation

By: /s/ D. Ronald Yagoda
Name: D. Ronald Yagoda
Its: President

Witness for purposes of
Power of Attorney:

By: /s/ Steven P. Davis
Witness Name: Steven P. Davis
Name: Its: Secretary

It Tenant is a CORPORATION, the authorized officers must sign on behalf of the
corporation and indicate the capacity in which they are signing. The Lease must
be executed by the president or vice-president and the secretary or assistance
secretary, unless the bylaws or a resolution of the board of directors shall
otherwise provide, in which event, the bylaws or a certified copy of the
resolution, as the case may be, must be attached to this Lease.

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RIDER "1"

Rider 1 to Lease dated May ___, 1997 between SEOC I LIMITED
PARTNERSHIP, an Arizona limited partnership ("Landlord"), and
ORTHOPAEDIC BIOSYSTEMS LTD., INC., an Arizona corporation ("Tenant").

1. Option to Extent. Provided that Tenant is not in breach or default
of any of the terms, conditions, covenants, obligations or provisions of the
Lease to which this Rider is attached, and that no event shall have occurred or
state of facts exists which if continued uncured will, with he lapse of time or
the delivery of notice, or both, constitute an Event of Default, then Tenant
shall have, and is hereby granted, the option to extend the Initial Term for one
(1) additional period of three (3) years. Except as set forth in Section 2 of
this Rider, Tenant's occupancy of the Leased Premises during the Renewal Term
shall be governed by all of the terms, conditions covenants and provisions of
the Lease to which this Rider is attached except that Tenant shall have no
further option to extend the Initial Term after the expiration of the Renewal
Term. If Tenant desires to exercise its option to extend the Initial Term, it
must give Landlord notice in writing ("Option Notice") of its intent to do so at
least twelve (12) months, but not more than twenty-four (24) months prior to the
expiration of the Initial Term. For the purposes of the Lease to which this
Rider is attached, the phrase "Lease Term" shall be deemed to refer to the
Initial Term and the Renewal Term to the extent applicable.

2. Amendment to Basic Provisions.

2.1 Lease Term. Article 1.11 of the Lease entitled "Lease
Term" is hereby deleted and replaced with the following:

1.10 Lease Term.

(a) Initial Term: Five (5) years;

(b) Renewal Term: Three (3) years.

2.2 Annual Basic Rent.

1.12 Annual Basic Rent for the Renewal Term.

(a) Landlord and Tenant shall have
fifteen (15) days after Landlord receives the Option Notice within which to
agree on the Annual Basic Rental for the Renewal Term based upon the "THEN FAIR
MARKET RENTAL VALUE OF THE PREMISES" as defined below. If the parties agree on
the Annual Basic Rental for the Renewal Term within fifteen (15) days, then
shall amend this Lease by stating the Annual Basic Rental for the Renewal Term.

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(b) If they are unable to agree on the
Annual Basic Rental for the Renewal Term within the fifteen (15) day period,
then the Annual Basic Rental shall be the "THEN FAIR MARKET RENTAL VALUE OF THE
PREMISES" as determined in accordance with this Rider.

(c) The "THEN FAIR MARKET RENTAL VALUE
OF THE PREMISES" means what a landlord under no compulsion to lease the Premises
and a tenant under no compulsion to lease the Premises, would determine as rent
for the Renewal Term, as of the commencement of the Renewal Term, taking into
consideration the use permitted under the Lease, the quality, size, shape,
design and location of the Premises within the Building. The then fair market
rental value of the Premises for the first year of the Renewal Term will not be
less than the Annual Basic Rental payable during the last year of the Initial
Term.

(d) Within seven (7) days after the
expiration of the fifteen (15) day period set forth in Subsection 1.13 above,
Landlord and Tenant shall each appoint a real estate appraiser with at least
five (5) full years full-time commercial appraisal experience in the area in
which the Premises are located to appraise the then fair market rental value of
the Premises. If either the Landlord or the Tenant does not appoint an appraiser
within ten (10) days after the other has given notice of the name of its
appraiser, the single appraiser appointed shall be the sole appraiser and shall
set the then fair market rental value of the Premises. If two (2) appraisers are
appointed pursuant to this paragraph, they shall meet promptly and attempt to
set the then fair market rental value of the Premises. If they are unable to
agree within the thirty (30) days after the second appraiser has been appointed,
they shall attempt to elect a third appraiser meeting the qualifications stated
in this paragraph within ten (10) days after the last day the two (2) appraisers
are given to set the then fair market rental value of the Premises. If they are
unable to agree on the third appraiser, either the Landlord or Tenant may
petition the presiding civil court judge of the Maricopa County Superior Court
for the selection of a third appraiser who meets the qualifications stated in
this paragraph. Tenant shall bear the cost of appointing the appraisers and of
paying the appraiser's fees.

Within thirty (30) days after the
selection of the third appraiser, a majority of the appraisers shall set the
then fair market rental value of the Premises. If a majority of the appraisers
are unable to set the then fair market rental value of the Premises within
thirty (30) days after selection of the third appraiser, the three (3)
appraisals shall be averaged and the average shall be the then fair market
rental value of the Premises.

The Parking Charge payable during
the Renewal Term as provided in Article 1.16 of the Lease may be increased
during each year of the Renewal Term in accordance with increases charged to
other tenants of the Project.

3. Definitions. Capitalized terms used in this Rider without definition
shall have the definition assigned to such terms in the Lease to which this
Rider is attached, unless the context requires otherwise.

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4. Full Force and Effect. Except as specifically modified by this
Rider, the Lease to which this Rider is attached remains in full force and
effect.

______________________________________ _____________________________
Landlord's Initials Tenant's Initials

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PARCEL NO. 1:

A portion of the North half of the Southeast quarter of Section 2, Township 3
North, Range 4 East of the Gila and Salt River Base and Meridian, Maricopa
County, Arizona, as shown on the Map of Dedication for SCOTTSDALE RESEARCH PARK,
recorded in Book 259 of Maps, Page 38, Maricopa County Records, more
particularly described as follows:

COMMENCING at the center of said Section 2;

thence South 89 degrees 39 minutes 41 seconds East along the North line of said
Southeast quarter 1077.16 feet to the centerline intersection of Paradise Lane
and 78th Street as shown on said Map of Dedication;

thence South 00 degrees 20 minutes 19 seconds West along said centerline of 78th
Street 365.70 feet;

thence South 89 degrees 39 minutes 41 seconds East departing said centerline
30.00 feet to the TRUE POINT OF BEGINNING, said point also being the Easterly
right of way line of said 78th Street;

thence South 89 degrees 39 minutes 41 seconds East 546.86 feet;

thence South 00 degrees 20 minutes 19 seconds West 281.74 feet to the beginning
of a curve concave Easterly and having a radius of 200.00 feet;

thence Southeasterly along the arc of said curve through a central angle of 40
degrees 44 minutes 47 seconds a distance of 142.23 feet to a point of tangency;

then South 40 degrees 24 minutes 28 seconds East 45.00 feet to a point on the
Northerly right of way line of Greenway Arterial as shown on said Map of
Dedication;

thence South 49 degrees 35 minutes 32 seconds West along said Northerly right of
way line 685.63 feet to the beginning of a curve concave Northwesterly and
having a radius of 20.00 feet;

thence Northwesterly along said Northerly right of way line and the arc of said
curve through a central angle of 93 degrees 16 minutes 32 seconds a distance of
32.56 feet to the beginning of a compound curve the radius of which bears North
52 degrees 52 minutes 04 seconds East 370.00 feet; said point also lying on said
Easterly right of way line 78th Street;

thence Northwesterly along said Easterly right of way line and the arc of said
curve through a central angle of 37 degrees 28 minutes 15 seconds a distance of
241.98 feet to a point of tangency;

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thence North 00 degrees 20 minutes 19 seconds East along said Easterly right of
way line 665.82 feet to the TRUE POINT OF BEGINNING.

EXHIBIT "A"
"LEGAL DESCRIPTION"

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PARCEL NO. 2:

A Non-exclusive perpetual easement for ingress and egress, drainage and public
utilities as created by instrument recorded May 21, 1996 in 96-352271, Official
Records over a portion of the North half of the southeast quarter of Section 2,
Township 3 North, Range 4 East of the Gila and Salt River Base and Meridian,
Maricopa County, Arizona, as shown on the Map of Dedication for SCOTTSDALE
RESEARCH PARK, recorded in Book 259 of Maps, Page 38, Maricopa County Records,
more particularly described as follows:

COMMENCING at the center of said Section 2;

thence South 00 degrees 20 minutes 19 seconds West along said centerline of 78th
Street 365.70 feet;

thence South 89 degrees 39 minutes 41 seconds East leaving said centerline
576.86 feet to the TRUE POINT OF BEGINNING;

thence South 89 degrees 39 minutes 41 seconds East 15.00 feet;

thence South 00 degrees 20 minutes 19 seconds West 281.74 feet to the beginning
of a curve concave Northeasterly and having a radius of 185.00 feet;

thence Southeasterly along the arc of said curve through a central angle of 40
degrees 44 minutes 47 seconds a distance of 131.56 feet to a point of tangency;

thence South 40 degrees 24 minutes 28 seconds East 45.00 feet to a point on the
Northerly right of way line of Greenway Arterial as shown on said Map of
Dedication;

thence South 49 degrees 35 minutes 32 seconds West along said Northerly right of
way line 15.00 feet;

thence North 40 degrees 24 minutes 28 seconds West leaving said Northerly
right-of-way 45.00 feet to the beginning of a curve concave Northeasterly and
having a radius of 200.00 feet;

thence Northwesterly, along the arc of said curve through a central angle of 40
degrees 44 minutes 47 seconds, a distance of 142.23 feet to a point of tangency;

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thence North 00 degrees 20 minutes 19 seconds East 281.74 feet to the TRUE POINT
OF BEGINNING.

EXHIBIT "A"
"LEGAL DESCRIPTION"
PAGE 2 OF 2

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EXHIBIT "C"

MEMORANDUM OF COMMENCEMENT DATE

THIS MEMORANDUM OF COMMENCEMENT DATE is entered into this ____ day of
________________, 19____ by SEOC I LIMITED PARTNERSHIP, an Arizona limited
partnership ("Landlord"), and ORTHOPAEDIC BIOSYSTEMS LTD., INC., an Arizona
corporation ("Tenant").

RECITALS

A. Landlord and Tenant have previously executed that certain Office
Lease dated May _____, 1997 ("Lease"), pursuant to which Tenant has leased from
Landlord certain premises more particularly described therein.

B. Pursuant to the provisions of Article 3.4 of the Lease, Landlord and
Tenant have agreed to execute this Memorandum of Commencement Date to specify
the Commencement Date of the Lease Term.

NOW, THEREFORE, in consideration of the foregoing recitals, the
execution and delivery of the Lease and other good and valuable considerations,
the receipt, sufficiency and validity which is hereby acknowledged, landlord and
Tenant agree as follows:

1. Commencement Date. The Commencement Date is ______________________,
and the expiration date of the Lease is ___________________________.

2. Definitions. Capitalized terms used in this Memorandum of
Commencement Date without definition shall have the meanings assigned to such
terms in the Lease, unless the context requires otherwise.

3. Full Force and Effect. Except as specifically modified by this
Memorandum of Commencement Date, the Lease remains in full force and effect.

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IN WITNESS WHEREOF, Landlord and Tenant have executed this memorandum
of Commencement Date as of the date and year first above written.

TENANT: LANDLORD:

ORTHOPAEDIC BIOSYSTEMS LTD., INC., SEOC I LIMITED PARTNERSHIP, an
an Arizona corporation Arizona limited partnership

By: Cavan Investments, Ltd., an Arizona
corporation, its General Partner

By:
Name: By:
Its: Name:
Its:

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EXHIBIT "D"

RESERVED COVERED PARKING LICENSE

THIS RESERVED COVERED PARKING LICENSE (this "License") is made as of
the ____ day of May _______, 1997, between SEOC I LIMITED PARTNERSHIP, an
Arizona limited partnership ("Licensor"), and ORTHOPAEDIC BIOSYSTEM LTD., INC.,
an Arizona corporation ("Licensee"), whose address is 15990 North
Greenway/Hayden Loop, Suite 200, Scottsdale, Arizona 85260.

1. LICENSE. Licensor hereby grants Licensee a license to use five (5)
reserved covered parking spaces (the "Spaces") in the parking accommodations
(the "Parking Accommodations") of the project (the "Project") located at 15990
North Greenway/Hayden Loop, Scottsdale, Arizona 85260, as cross-hatched on the
site plan attached hereto as Exhibit "A", for a term the same as the term of the
Lease referred to in Paragraph 2 hereof. Each space shall be used solely for the
parking of one automobile therein by Licensee in accordance with the terms of
this License.

2. THE LEASE. Anything herein to the contrary notwithstanding, this
License shall terminate no later than the date of termination of the Lease (the
"Lease") between Licensor, as Landlord, and Licensee, as Tenant, for space in
the Project of even date herewith, whether such termination occurs at the end of
the scheduled Lease term or prior thereto. A breach of this License by Tenant
shall be deemed a breach of the Lease by Tenant and after notice given in
accordance with the terms of the Lease and the failure of Tenant to cure within
fifteen (15) days of such notice, Landlord shall have all remedies available
herein, under the Lease, and at law or in equity. In the event the term of the
Lease is extended, the term of this License shall also be extended to correspond
with the Lease Term.

3. MONTHLY FEE. Licensee agrees to pay as a monthly fee for this
License Licensor's current fee for each Space licensed, payable on or before the
first day of each month in advance. The monthly fee which Licensee shall pay is
$125.00.

4. DESIGNATION OF SPACES. This License is for five (5) reserved covered
parking Spaces in the area of the Parking Accommodations cross-hatched on
Exhibit "B" attached hereto, which area may be redesignated from time to time by
Licensor. The initial Spaces designated for Licensee are cross-hatched on
Exhibit "B" attached hereto.

5. DESIGNATION OF AUTOMOBILE. Only vehicles designated by Licensee to
Licensor may be parked or stored in the Spaces, provided, however, that Licensee
may change its automobile designations at any time upon written notice to
Licensor or for temporary use upon notification given to the garage attendant,
if any. No more than one (1) automobile per Space licensed hereunder shall be
parked or stored under Licensee's rights hereunder at any one time.

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<PAGE> 60
6. NO ADDITIONAL SERVICES. This License is for self-service storage or
parking only and does not include the rights to any additional services, which
services may be made available by Licensor from time to time at an additional
charge.

7. INDEMNITY. Licensor and its agents and employees shall not be liable
for loss or damage to any vehicle parked or stored by Licensee or under
Licensee's rights herein and/or to the contents thereof caused by fire, theft,
vandalism, collision, explosion, freezing, earthquake, storms, natural
disasters, strikes, riots or by any other causes, unless caused by the gross
negligence or willful misconduct of Licensor, and Licensee (1) waives and agrees
to hold Licensor harmless from any claim against Licensor, its agents and
employees for and in respect thereto, and (2) hereby agrees to indemnify and
defend Licensor, its agents and employees against all claims for any loss or
damage to any such vehicle or its contents from any cause whatsoever, unless
caused by the gross negligence or willful misconduct of Licensor.

8. RELATIONSHIP OF PARTIES. The relationship between Licensor and
Licensee constitutes a license to use the Parking Accommodations subject to the
terms and conditions of this License only and neither such relationship nor the
storage or parking of any automobile thereunder shall constitute a bailment nor
create the relationship of bailor and bailee.

9. NOTICES. All notices hereunder shall be given in accordance with the
terms of the Lease.

10. SUBORDINATION AND ATTORNMENT. This License shall be subject and
subordinate to any mortgage, deed of trust or ground lease now or hereafter
placed on the Project, or any portion thereof, and to replacements, renewals and
extensions thereof, and Licensee, upon request by Licensor, shall execute
instruments (in form satisfactory to Licensor) acknowledging such subordination.

11. NO WASTE. Licensee covenants not to cause any waste or damage or
disfigurement or injury to the Project.

12. CLOSURE OF FACILITY. Licensor shall have the right to close any
portion of the Parking Accommodations and deny access thereto in connection with
any repairs or in an emergency, as it may require, without liability, cost or
abatement of fee.

13. RULES. Licensee shall perform, observe and comply with such rules
of the Project as may be reasonably adopted by Licensor in respect of the use
and operation of said Parking Accommodations.

14. REGULATIONS. Licensee shall, when using the Parking Accommodations,
observe and obey all signs regarding fire lanes and no parking zones, and when
parking always park between designated lines. Licensor reserves the right to tow
away, or otherwise impound, at the expense of the owner or operator, any vehicle
which is improperly parked or parked in a no parking zone. No

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overnight parking shall be allowed in the Parking Accommodations.

IN WITNESS WHEREOF, the parties have executed this agreement as of the
day and year first above written.

LICENSOR: LICENSEE:

SEOC I LIMITED PARTNERSHIP, an ORTHOPAEDIC BIOSYSTEMS LTD., INC.,
Arizona limited partnership an Arizona corporation

By: Cavan Investments, Ltd., an Arizona
corporation, its General Partner
By:
Name: D. Ronald Yagoda
By: Its: President
Name:
Its:

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<PAGE> 62
EXHIBIT "E"

INTENTIONALLY OMITTED

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<PAGE> 63
EXHIBIT "F"

UNRESERVED PARKING LICENSE

THIS UNRESERVED PARKING LICENSE (this "License") is made as of the ____
day of May, 1997, between SEOC I LIMITED PARTNERSHIP, an Arizona limited
partnership ("Licensor"), and ORTHOPAEDIC BIOSYSTEMS LTD., INC., an Arizona
corporation ("Licensee"), whose address is 15990 North Greenway/Hayden Loop,
Suite 200, Scottsdale, Arizona 85260.

1. LICENSE. Licensor hereby grants Licensee a license to use fifteen
(15) unreserved uncovered parking spaces (the "Spaces") in the parking
accommodations (the "Parking Accommodations") of the project (the "Project")
located at 15990 North Greenway/Hayden Loop, Scottsdale, Arizona 85260, as
cross-hatched on the site plan attached hereto as Exhibit "A", for a term the
same as the term of the Lease referred to in Paragraph 2 hereof. each Space
shall be used solely for the parking of one automobile therein by Licensee in
accordance with the terms of this License.

3. MONTHLY FEE. No charge.

4. DESIGNATION OF SPACES. This License is for fifteen (15) unreserved
uncovered] parking Spaces in the area of the Parking Accommodations
cross-hatched on Exhibit "B" attached hereto, which area may be redesignated
from time to time by Licensor; provided, however, Licensor may designate
specific Spaces or otherwise require Licensee to park in another specific
location.

5. DESIGNATION OF AUTOMOBILE. Only vehicles designated by Licensee to
Licensor may be parked or stored in the Spaces, provided, however, that Licensee
may change its automobile designations at any time upon written notice to
Licensor or for temporary use upon notification given to the garage attendant,
if any. No more than one (1) automobile per space licensed hereunder shall be
parked or stored under Licensee's rights hereunder at any one time.

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6. NO ADDITIONAL SERVICES. This License is for self-service storage or
parking only and does not include the rights to any additional services, which
services may be made available by Licensor from time to time at an additional
charge.

9. NOTICES. All notices hereunder shall be given in accordance with the
terms of the Lease.

11. NO WASTE. Licensee covenants not to cause any waste or damage or
disfigurement or injury to the Project.

13. RULES. Licensee shall perform, observe and comply with such rules
of the Project as may be reasonably adopted by Licensor in respect of the use
and operation of said Parking Accommodations.

14. REGULATIONS. Licensee shall, when using the Parking Accommodations,
observe and obey all signs regarding fire lanes and no parking zones, and when
parking always park between

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designated lines. Licensor reserves the right to tow away, or otherwise impound,
at the expense of the owner or operator, any vehicle which is improperly parked
or parked in a no parking zone. No overnight parking shall be allowed in the
Parking Accommodations.

IN WITNESS WHEREOF, the parties have executed this agreement as of the
day and year first above written.

LICENSOR: LICENSEE:

SEOC I LIMITED PARTNERSHIP, an ORTHOPAEDIC BIOSYSTEMS LTD., INC.,
Arizona limited partnership an Arizona corporation

By: Cavan Investments, Ltd., an Arizona
corporation, its General Partner
By:
Name: D. Ronald Yagoda
By: Its: President
Name:
Its:

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<PAGE> 66
EXHIBIT "G"

WORK LETTER

In order to induce Tenant to enter into the Lease (which is
incorporated herein by reference to the extent that the provisions of this Work
Letter may apply thereto) and in consideration of the mutual covenants
hereinafter contained, Landlord and Tenant agree as follows:

1. COMPLETION SCHEDULE. Attached to this Work Letter is a schedule (the
"Work Schedule") setting forth the time table for the planning and completion of
the installation of the tenant improvements to be constructed in the Leased
Premises (the "Tenant Improvements"). The Work Schedule sets forth each of the
various items of work to be done in connection with the completion of the Tenant
Improvements and shall become the basis for completing the Tenant Improvements.
Landlord and Tenant acknowledge and agree that time is of the essence with
respect to their respective obligations as set forth in this Work Letter.

2. TENANT IMPROVEMENTS. The Tenant Improvements shall include the work
described on Annex I to this Exhibit "G", which work shall be done in the Leased
Premises pursuant to the Tenant Improvements Plans described in Paragraph 3
below.

3. TENANT IMPROVEMENT PLANS. Tenant shall meet with Landlord's
architect and/or space planner for the purposes of preparing a space plan for
the layout of the Premises. Based upon such space plan, Landlord's architect
shall prepare final working drawings and specifications for the Tenant
Improvements. Such final working drawings and specifications are referred to in
this Work Letter as the "Tenant Improvement Plans."

4. PREPARATION OF TENANT IMPROVEMENT PLANS AND FINAL PRICING. After the
preparation of the space plan and after Tenant's approval thereof in accordance
with the Work Schedule, Landlord shall cause its architect to prepare and submit
to Tenant the Tenant Improvement Plans. Promptly after the approval of the
Tenant Improvement Plans by Landlord and Tenant in accordance with the Work
Schedule, the Tenant Improvement Plans shall be submitted to the appropriate
governmental body for plan checking and building permits. Landlord, with
Tenant's cooperation, shall cause to be made such changes in the Tenant
Improvement Plans necessary to obtain required permits. Tenant acknowledges that
after final approval of the Tenant Improvement Plans, no further changes to the
Tenant Improvement Plans may be made without the prior written consent of
Landlord, which consent shall not be unreasonably withheld but may be
conditioned on the agreement by Tenant to pay all additional costs and expenses
resulting from such requested changes that exceed the Allowance (defined below).

5. CONSTRUCTION OF TENANT IMPROVEMENTS. After the Tenant Improvement
Plans have been prepared and approved, and building permits for the Tenant
Improvements have been issued, Landlord shall enter into a construction contract
with its contractor for the installation of the Tenant Improvements in
accordance with the Tenant Improvement Plans. The Tenant Improvements shall

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be constructed in a good, workmanlike and lien free manner, and in conformance
with applicable building codes. Landlord shall supervise the completion of the
Tenant Improvements and shall endeavor in good faith to secure the completion of
the Tenant Improvements in accordance with the Work Schedule. The cost of the
Tenant Improvements shall be paid as provided in Paragraph 6 below. Tenant shall
accept the Tenant Improvements upon substantial completion thereof, as
reasonably determined by Landlord's architect.

6. PAYMENT OF THE COST OF THE TENANT IMPROVEMENTS.

a. TENANT IMPROVEMENT ALLOWANCE. Landlord hereby grants to
Tenant a Tenant Improvement allowance (the "Allowance") based upon a calculation
of Sixteen and No/100 Dollars ($16.00) per usable square foot of the Leased
Premises. Landlord and Tenant agree that the usable square footage of the Leased
Premises is six thousand one hundred thirty (6,130) usable square fee subject to
adjustment as provided in Article 2.2 of the Lease. The Allowance shall be used
only for:

(i) Payment of the cost preparing the space plan
and the final working drawings and specifications, including mechanical,
electrical and structural drawings and of all other aspects of the Tenant
Improvement Plans, including the charges of Landlord's space planner and
Landlord's architect.

(ii) The payment of permit and license fees
relating to construction of the Tenant Improvements; and

(iii) Construction of the Tenant Improvements,
including without limitation the following:

(1) Installation within the Leased
Premises of all partitioning, doors, floor coverings, finishes, ceilings, wall
coverings and paintings, millwork and similar items;

(2) All electrical wiring, lighting
fixtures, outlets and switches, and other electrical work to be installed within
the Leased Premises;

(3) The furnishing and installation of
all duct work, terminal boxes, defusers and accessories required for the
completion of the heating, ventilation and air conditioning systems within the
Leased Premises.

(4) Any additional Tenant requirements
including, but not limited to odor control, special heating, ventilation and air
conditioning, noise or vibration control or other special system;

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(5) All fire and life safety control
systems such as fire walls, sprinklers, halon, fire alarms, including piping,
wiring and accessories installed within the Leased Premises; and

(6) All plumbing, fixtures, pipes and
accessories to be installed within the Leased Premises; and

(7) All monument and director signage.

b. ADDITIONAL COSTS. The cost of each of the items set forth
in Paragraph 6(a) above shall be charged against the Allowance. In the event the
anticipated cost of installing the Tenant Improvements, as established by
Landlord's final pricing schedule, shall exceed the Allowance, or in the event
any of the Tenant Improvements are not to be paid for from the Allowance, the
excess shall be paid by Tenant to Landlord prior to the commencement of
construction of the Tenant Improvements.

c. CHANGES TO TENANT IMPROVEMENT PLANS. In the event that
Tenant shall request any changes or substitutions to the Tenant Improvement
Plans, after the Tenant Improvement Plans have been prepared and the final
pricing established by Landlord, any additional costs attributable thereto shall
be paid by Tenant to Landlord prior to the commencement of the work represented
by such changes, unless covered under the Allowance.

d. UNUSED ALLOWANCE. Any unused part of the Allowance shall be
credited toward the first payments due from Tenant for the Annual Basic Rent and
Additional Rent.

7. EARLY ENTRY. Landlord shall permit Tenant and Tenant's agent to
enter the Leased Premises prior to the Commencement Date in order that Tenant
may do such work as may be required by Tenant to make the Leased Premises ready
for Tenant's use and occupancy. If Landlord permits such entry prior to the
Commencement Date, such permission is conditioned upon Tenant and its agents,
contractors, employees and invitees working in harmony and not interfering with
Landlord and its agents, contractors and employees in the installation of the
Tenant Improvements or in the performance of work for other tenants and
occupants of the Building. If at any time such entry shall cause or threaten to
cause disharmony or interference, Landlord shall have the right to withdraw such
permission upon twenty-four (24) hours notice to Tenant. Any entry into the
Leased Premises by Tenant prior to the Commencement Date shall be subject to all
of the terms, covenants, conditions and provisions of the Lease, other than with
respect to Tenant's obligation to pay Annual Basic Rent. Tenant acknowledges and
agrees that Landlord shall not be liable in any way for any injury, loss or
damage which may occur to Tenant, its agents, contractors and employees or to
Tenant's work and installations made in the Leased Premises or to property
placed therein prior to the Commencement Date, all of the same being at Tenant's
sole risk, provided, however, that Landlord shall be liable to Tenant for the
gross negligence of Landlord, its agents, contractors and employees.

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8. PUNCH LIST PROCEDURE. Not later than fourteen (14) days after the
Commencement Date, Tenant shall prepare a list (the "Punch List") of any
deficiencies or in completed work regarding any Tenant Improvements. Provided
that such items are Landlord's responsibility pursuant to the Tenant Improvement
Plans, Landlord shall correct such deficiencies or in completed work within a
reasonable period of time, but in no event later than sixty (60) days after
receipt of the Punch List, after which Landlord shall have no further obligation
to alter, change, decorate or improve the Leased Premises, whether to adapt the
same for the use for which it is leased or for any other purpose. The existence
of such deficiencies or in completed work shall not effect Tenant's obligation
to accept the Leased Premises as otherwise required hereunder.

9. ASSIGNMENT OF WARRANTIES. Landlord shall assign to Tenant the
non-exclusive right to enforce any and all warranties which Landlord may receive
from any contractor, supplier or other person or entity involved with
construction of the Tenant Improvements, which assignment shall continue until
the expiration or sooner termination of the Lease or the expiration of the
warranty, whichever occurs first.

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ANNEX I
TO
EXHIBIT "G"

TENANT IMPROVEMENTS

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<PAGE> 71
EXHIBIT "H"

RULES AND REGULATIONS

1. Unless otherwise specifically defined herein, all capitalized terms
in these Rules and Regulations shall have the meaning set forth in the Lease to
which these Rules and Regulations are attached.

2. The sidewalks, driveways, entrances, passages, courts, elevators,
vestibules, stairways, corridors or halls of the Building and the Project shall
not be obstructed or encumbered or used for any purpose other than ingress and
egress to and from the premises demised to any tenant or occupant.

3. No awnings or other projection shall be attached to the outside
walls or windows of the Building. No curtains, blinds, shades, or screens shall
be attached to or hung in, or used in connection with, any window or door of the
premises demised to any tenant or occupant, without the prior written consent of
Landlord. All electrical fixtures hung in any premises demised to any tenant or
occupant must be of a type, quality, design, color, size and general appearance
approved by Landlord.

4. No tenant shall place objects against glass partitions, doors or
windows which would be in sight from the Building corridors or from the exterior
of the Building and such tenant will promptly remove any such objects when
requested to do so by Landlord.

5. The windows and doors that reflect or admit light and air into the
halls, passengeways or other public places in the Building shall not be covered
or obstructed, nor shall any bottles, parcels, or other articles be placed on
any window sills.

6. No show cases or other articles shall be put in front of or affixed
to any part of the exterior of the Building or the other buildings in the
Project, nor placed in the halls, corridors, walkways, landscaped areas,
vestibules or other public parts of the Building or the Project.

7. The water and wash closets and other plumbing fixtures shall not be
used for any purposes other than those for which they were constructed, and no
sweepings, rubbish, rags or other substances shall be thrown therein. No tenant
shall bring or keep, or permit to be brought or kept, any inflammable,
combustible, explosive or hazardous fluid, material, chemical or substance in or
about the premises demised to such tenant or the Project.

8. Except for artwork to be hung on the walls, no tenant or occupant
shall mark, paint, drill into, or in any way deface any part of the Project, the
Building or the premises demised to such tenant or occupant. No boring, cutting
or strings of wires shall be permitted, except with the prior consent of
Landlord, and as Landlord may direct. No tenant or occupant shall install any
resilient

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tile or similar floor covering in the premises demised to such tenant or
occupant except in a manner approved by Landlord.

9. Any carpeting cemented down by a tenant shall be installed with a
releasable adhesive. In the event of a violation of the foregoing by a tenant,
Landlord may charge the expense incurred in such removal to such tenant.

10. No vehicles or animals of any kind (except seeing eye dogs) shall
be brought into or kept in or about the premises demised to any tenant. No
cooking shall be done or permitted in the Building by any tenant without the
written approval of Landlord. No tenant shall cause or permit any unusual or
objectionable odors to emanate from the premises demised to such tenant.

11. No space in the Building or the Project shall be used for
manufacturing, for the storage or merchandise, or for the sale of merchandise,
goods or property of any kind at auction.

12. No tenant shall make, or permit to be made, any unseemly or
disturbing noises or vibrations or disturb or interfere with other tenants or
occupants of the Building, the Project or neighboring buildings or premises
whether by the use of any musical instrument, radio, television set broadcasting
equipment or other audio device, unmusical noise, whistling, singing, or in any
other way. Nothing shall be thrown out of any doors.

13. No additional locks or bolts of any kind shall be placed upon any
of the doors, nor shall any changes be made in locks or the mechanism thereof.
Each tenant must, upon the termination of its tenancy, return to Landlord all
keys of stores, offices and toilet rooms, either furnished to, or otherwise
procured by, such Tenant.

14. All removals from the Building, or the carrying in or out of the
Building or from the premised demised to any tenant, of any safes, freight,
furniture or bulky matter of any description must take place at such time and in
such manner as Landlord or its agents may determine, from time to time. Landlord
reserves the right to inspect all freight to be brought into the Building and to
exclude from the Building all freight which violates any of the Rules and
Regulations or the provisions of such tenant's lease.

15. No tenant or occupant shall engage or pay any employees in the
Building or the Project, except those actually working for such tenant or
occupant in the Building or the Project, nor advertise for day laborers giving
an address at the Building or the Project.

16. No tenant or occupant shall purchase lighting maintenance, cleaning
towels or other like service, from any company or person not approved in writing
by Landlord.

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17. Landlord shall have the right to prohibit any advertising by any
tenant or occupant which, in Landlord's opinion, tends to impair the reputation
of the Building or the Project or its desirability as a building for offices,
and upon notice from Landlord, such tenant or occupant shall refrain from or
discontinue such advertising.

18. Each tenant, before closing and leaving the premises demised to
such tenant at any time, shall see that all entrance doors are locked and all
electrical equipment and lighting fixtures are turned off. Corridor doors, when
not in use, shall be kept closed.

19. Each tenant shall, at its expense, provide artificial light in the
premises demised to such tenant for Landlord's agents, contractors and employees
while performing janitorial or other cleaning services and making repairs or
alterations in said premises.

20. No premises shall be used, or permitted to be used for lodging or
sleeping, or for any unauthorized or illegal purposes.

21. The requirements of tenants will be attended to only upon
application at the management office of Landlord. Building employees shall not
be required to perform, and shall not be requested by any tenant or occupant to
perform, and work outside of their regular duties, unless under specific
instructions from the office of Landlord.

22. Canvassing, soliciting and peddling in the Building or the Project
are prohibited and each tenant and occupant shall cooperate in seeking their
prevention.

23. There shall not be used in the Building, either by any tenant or
occupant or by their gents or contractors, in the delivery or receipt of
merchandise, freight or other matter, any hand trucks or other means of
conveyance except those equipped with rubber tires, rubber side guards and such
other safeguards as Landlord may require.

24. If the premises demised to any tenant become infested with vermin,
such tenant, at its sole cost and expense, shall cause its premises to be
exterminated, from time to time, to the satisfaction of Landlord, and shall
employ such exterminators therefor as shall be approved in writing by Landlord.

25. No premises shall be used, or permitted to be used, at any time, as
a store for the sale or display of goods, wares or merchandise of any kind, or
as a restaurant shop, booth, bootblack or other stand, or for the conduct of any
business or occupation which predominantly involves direct patronage of the
general public in the premises demised to such tenant, or for manufacturing or
for other similar purposes.

26. No tenant shall clean any window of the Building from the outside.

27. No tenant shall move, or permit to be moved, into or out of the
Building or the

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premises demised to such tenant, any heavy or bulky matter, without the specific
approval of Landlord. If any such matter requires special handling, only a
qualified person shall be employed to perform such special handling. No tenant
shall place or permit to be placed, on any part of the floor or floors of the
premises demised to such tenant, a load exceeding the floor load per square foot
which such floor was designed to carry and which is allowed by law. Landlord
reserves the right to prescribe the weight and position of safes and other heavy
objects, which must be placed so as to distribute the weight.

28. With respect to work being performed by a tenant in its premises
with the approval of Landlord, the tenant shall refer all contractors,
contractors' representatives and installation technicians to Landlord for its
supervision, approval and control prior to the performance of any work or
services. This provision shall apply to all work performed in the Building and
the Project including installation of telephones, telegraph equipment,
electrical devices and attachments, and installations of every nature affecting
floors, walls, woodwork, trim, ceilings, equipment and any other physical
portion of the Building and the Project.

29. Landlord shall not be responsible for lost or stolen personal
property, equipment, money, or jewelry from the premises of tenants or public
rooms whether or not such loss occurs when the Building or the premises are
locked against entry.

30. Landlord may permit entrance to the premises of tenants by use of
pass keys controlled by Landlord employees, contractors, or service personnel
directly supervised by Landlord and employees of the United States Postal
Service.

31. Each tenant and all of tenant's representatives, shall observe and
comply with the directional and parking signs on the property surrounding the
Building, and Landlord shall not be responsible for any damages to any vehicle
towed because of non-compliance with parking regulations.

32. No tenant shall install any radio, telephone, television, microwave
or satellite antenna, loudspeaker, music system or other device on the roof or
exterior walls of the Building or on common walls with adjacent tenants or in
the Project Common Areas.

33. Each tenant shall store all rash and garbage within its premises.
No material shall be placed in the trash boxes or receptacles in the Building or
the Project unless such material may be disposed of in the ordinary and
customary manner of removing and disposing of trash and garbage and will not
result in a violation of any law or ordinance governing such disposal. All
garbage and refuse disposal shall be made only through entryways and elevators
provided for such purposes and at such times as Landlord shall designate.

34. Each tenant shall give prompt notice to landlord of any accidents
to or defects in plumbing, electrical or heating apparatus so that same may be
attended to properly.

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35. No tenant shall bring onto the Project or into the Building any
pollutants, contaminants, inflammable, gasolines, kerosene or hazardous
substances (as now or later defined under State or Federal law).

36. Landlord reserves the right to restrict access to and from the
Building between the hours of 6:00 P.M. and 7:00 A.M. on business days, 12:00
P.M. to 8:00 A.M. on Saturdays, and at all hours on Sundays and holidays.

37. All tenant and Tenants; servants, employees, agents, visitors,
invitees and licensees shall observe faithfully and comply strictly with the
foregoing Rules and Regulations and such other and further appropriate Rules and
Regulations as Landlord or Landlord's agent from time to time adopt.

38. Landlord shall furnish each tenant, at Landlord's expense, with two
(2) keys to unlock the entry level doors and two (2) keys to unlock each
corridor door entry to each tenant's premises and, at such tenant's expense,
with such additional keys as such tenant may request. No tenant shall install or
permit to be installed any additional lock on any door into or inside of the
premises demised to that tenant or make or permit to be made any duplicate of
keys to the entry level doors or the doors to such premises. Landlord shall be
entitled at all times to possession of a duplicate of all keys to all doors into
or inside of the premises demised to tenants of the Building. All keys shall
remain the property of Landlord. Upon the expiration of the Lease Term, each
tenant shall surrender all such keys to Landlord and shall deliver to Landlord
the combination to all locks on all safes, cabinets and vaults which will remain
in the premises demised to that tenant. Landlord shall be entitled to install,
operate and maintain security systems in or about the Project which monitor, by
computer, close circuit television or otherwise, persons entering or leaving the
Project, the Building and/or the premises demised to any tenant. For the purpose
of this rule the term "keys" shall mean traditional metallic keys, plastic or
other key cards and other lock opening devices.

39. Each person using the Parking Accommodations or other areas
designated by Landlord where parking will be permitted shall comply with all
Rules and Regulations adopted by Landlord with respect to the Parking
accommodations or other areas, including any employee or visitor parking
restrictions, and any sticker or other identification system established by
Landlord. Landlord may refuse to permit any person who violates any parking rule
or regulation to park in the Parking Accommodations or other areas, and may
remove any vehicle which is parked in the Parking Accommodations or other areas
in violation of the parking Rules and Regulations. The Rules and Regulations
applicable to the Parking Accommodations and the outside parking areas are as
follows:

(a) The maximum speed limit within the Parking
Accommodations shall be 5 miles per hour, the maximum
speed limit in other parking areas shall be 15 miles
per hour.

(b) All directional signs and arrows must be strictly
observed.

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(c) All vehicles must be parked entirely within painted
stall lines.

(d) No vehicle may be parked (i) in an area not striped
for parking, (ii) in a space which has been reserved
for visitors or for another person or firm, (iii) in
an aisle or on a ramp, (iv) where a "no parking" sign
is posted or which has otherwise designated as a no
parking area, (v) in a cross hatched area, (vi) in an
area bearing a "handicapped parking only" or similar
designation unless the vehicle bears an appropriate
handicapped designation, (vii) in an area bearing a
"loading zone" or similar designation unless the
vehicle is then engaged in a loading or unloading
function and (viii) in an area with a posted height
limitation if the vehicle exceeds the limitation.

(e) Parking passes, stickers or other identification
devices that may be supplied by Landlord shall remain
the property of Landlord and shall not be
transferable. A replacement charge determined by
Landlord will be payable by each tenant for loss of
any magnetic parking card or parking pass or sticker.

(f) Garage managers or attendants shall not be authorized
to make or allow any exceptions to these Rules and
Regulations.

(g) Each operator shall be required to park and lock his
or her own vehicle, shall use the Parking Facilities
at his or her own risk and shall bear full
responsibility for all damage to or loss of his or
her vehicle, and for all injury to persons and damage
to property caused by his or her operation of the
vehicle.

(h) Landlord reserves the right to tow away, at the
expense of the owner, any vehicle which is
inappropriately parked or parked in violation of
these Rules and Regulations.

40. Landlord reserve the right at any time and from time to time to
rescind, alter or waive, in whole or in part, any of the Building Rules and
Regulations when it is deemed necessary desirable or proper, in Landlord's
judgment for its best interest or of the best of the tenants of the Project.

41. No smoking is permitted within the premises or in the Building
pursuant to Scottsdale Revised Code , Section 19-16, Smoking Pollution Control
Ordinance.

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Tenant hereby acknowledges receipt of the Building Rules and
Regulations.

TENANT:

ORTHOPAEDIC BIOSYSTEMS LTD., INC., an
Arizona corporation

By:
Name:
Its:
Date:

<PAGE> 1

Exhibit 10.14

FIRST AMENDMENT TO OFFICE LEASE

This First Amendment to Office Lease (this "Amendment") is made and entered into
as of this ____ day of July, 1997 by and between SEOC I LIMITED PARTNERSHIP, an
Arizona limited partnership ("Landlord") and ORTHOPAEDIC BIOSYSTEMS, LTD., an
Arizona corporation ("Tenant").

RECITALS

A. Landlord and Tenant have previously entered into that certain Office Lease
dated May 6, 1997 (the "Lease").

B. Landlord and Tenant wish to amend the Lease, subject to and in accordance
with the terms, covenants and provisions of this First Amendment.

AGREEMENT

In consideration of the Lease, the foregoing recitals, and the mutual
agreements, covenants and promises contained in this Amendment and other
valuable consideration, the receipt, sufficiency and validity of which are
hereby acknowledged, Landlord and Tenant hereby agree as follows:

1. DEFINITIONS. All capitalized terms used in this First Amendment shall
have the meanings assigned to such terms in the Lease, unless the
context expressly requires otherwise.

2. ADJUSTMENT TO SQUARE FOOTAGE OF LEASED PREMISES. The reference to
"approximately 6,130 rentable square feet" in Article 1.8 and Exhibit G
is hereby amended to read "5,885 rentable square feet", and the parties
confirm that the actual rentable square footage of the Premises is
5,885 square feet.

3. ADJUSTMENT TO COMMENCEMENT DATE AND EXPIRATION DATE. Article 1.11 is
hereby amended to read "July 10, 1997 until July 9, 2002".

4. ADJUSTMENT TO ANNUAL BASIC RENT. The Annual Basic Rent as set forth in
Article 1.12 is hereby deleted in its entirety, and there is
substituted in its place the following:

Lease years 1-3: $76,505.00 ($6,375.42 per month); based upon
a rental rate of $13.00 per rentable square foot.

Lease Year 4: $78,859.00 ($6,571.58 per month); based upon a
rental rate of $13.40 per rentable square foot.

<PAGE> 2
Lease Year 5: $81,213.00 ($6,767.75 per month); based upon a
rental rate of $13.80 per rentable square foot.

5. FULL FORCE AND EFFECT. Except as specifically modified by this First
Amendment, all of the terms, conditions and provisions of the Lease
remain unmodified and in full force and effect. All references to the
Lease shall be deemed to be a reference to the Lease as modified by
this First Amendment.

LANDLORD: TENANT:

SEOC I LIMITED PARTNERSHIP, an ORTHOPAEDIC BIOSYSTEMS, LTD.
Arizona limited partnership an Arizona corporation

By: Cavan Investments, Ltd., an By: /s/ D. Ronald Yagoda
Arizona corporation Name: D. Ronald Yagoda
Its; General Partner Its: President

By:
David V. Cavan

Its: President

<PAGE> 1

Exhibit 10.15

ORTHOPAEDIC BIOSYSTEMS LTD., INC.
LOCK-UP LETTER

June , 1998

CRUTTENDEN ROTH INCORPORATED
JOSEPHTHAL & CO., INC.
c/o Cruttenden Roth Incorporated
18301 Von Karman, Suite 100
Irvine, California 92715

Dear Sirs:

The undersigned understands that you, as Representatives of the several
underwriters (the "Underwriters"), propose to enter into an Underwriting
Agreement (the "Underwriting Agreement") providing for the purchase by the
Underwriters, including yourselves, of shares (the "Shares") of Common Stock, no
par value (the "Common Stock"), of Orthopaedic Biosystems Ltd., Inc., an Arizona
corporation (the "Company"), and that the Underwriters, including yourselves,
propose to reoffer the Shares to the public (the "Public Offering") pursuant to
the Company's Registration Statement on Form SB-2 to be filed with the
Securities and Exchange Commission (the "Registration Statement").

In consideration of the Underwriter's Agreement to purchase and make the
Public Offering of the Common Stock, and for other good and valuable
consideration, receipt and sufficiency of which is hereby acknowledged, the
undersigned hereby irrevocably agrees that, without the prior written consent of
the Representatives (which consent may be withheld in its sole discretion), the
undersigned will not sell, offer to sell, solicit an offer to buy, contract to
sell, loan, pledge, grant any option to purchase, or otherwise transfer or
dispose of (collectively, a "Disposition"), any shares of Common Stock, or any
securities convertible into or exercisable or exchangeable for Common Stock
(collectively, "Securities"), now owned or hereafter acquired by the undersigned
or with respect to which the undersigned has or hereafter acquires the power of
disposition, for a period of 180 days after the date of the final Prospectus
relating to the offering of the Shares to the public by the Underwriters (the
"Lock-Up Period"). The foregoing restriction is expressly agreed to preclude the
holder of the Securities from engaging in any hedging, pledge or other
transaction which is designed to, or which may reasonably be expected to lead to
or result in a Disposition of Securities during the Lock-Up Period even if such
Securities would be disposed of by someone other than the undersigned. Such
prohibited hedging, pledge or other transactions would include without
limitation any short sale (whether or not against the box), any pledge of shares
covering an obligation that matures, or could reasonably mature during the
Lock-Up Period, or any purchase, sale or grant of

<PAGE> 2
any right (including without limitation any put or call option) with respect to
any Securities or with respect to any security that includes, relates to or
derives any significant part of its value from Securities. Notwithstanding the
foregoing, this Lock-Up Agreement does not prohibit the sale of shares by the
undersigned to the Underwriters in the Public Offering.

Notwithstanding the foregoing, the undersigned may (i) exercise (on a cash
or cashless basis, whether in a traditional cashless exercise or in a
"brokers" cashless exercise), Common Stock options or warrants outstanding on
the date hereof, it being understood, however, that the shares of Common Stock
received (net of shares sold by or on behalf of the undersigned in a "brokers"
cashless exercise or shares delivered to the Company in a traditional cashless
exercise thereof) by the undersigned upon exercise thereof shall be subject to
the terms of this agreement, (ii) transfer shares of Common Stock or Securities
during the undersigned's lifetime by bona fide gift or upon death by will or
intestacy, provided that any transferee agrees in writing to be bound by the
terms of this agreement, and (iii) transfer or otherwise dispose of shares of
Common Stock or Securities as a distribution to limited partners or
shareholders of the undersigned, provided that the distributees thereof agree
in writing to be bound by the terms of this Agreement.

The undersigned understands that the Underwriters will rely upon the
representations set forth in this Lock-Up Agreement in proceeding with the
Public Offering. The undersigned agrees that the provisions of this agreement
shall be binding upon the successors, assigns, heirs, personal and legal
representatives of the undersigned. Furthermore, the undersigned hereby agrees
and consents to the entry of stop transfer instructions with the Company's
transfer agent against the transfer of the Securities held by the undersigned
except in compliance with this Lock-Up Agreement.
<PAGE> 3

It is understood that, if the Underwriting Agreement does not become
effective prior to December 31, 1998, or if the Underwriting Agreement (other
than the provisions thereof which survive termination) shall terminate or be
terminated prior to payment for and delivery of the Shares, the obligations
under this letter agreement shall automatically terminate and be of no further
force and effect.

Very truly yours,

By:
------------------------------
Signature

----------------------------------
Printed name of person/entity

----------------------------------
Title if applicable

----------------------------------
Additional signature(s), if stock
jointly held

Accepted as of the date first
set forth above:

Cruttenden Roth Incorporated
Josephthal & Co., Inc.

By: Cruttenden Roth Incorporated

By:
Name:
Title:

For itself and on behalf of the Josephthal & Co., Inc. and the Underwriters.

<PAGE> 4
ADDENDUM TO EXHIBIT 10.15

The following persons have signed an agreement substantially in the form of
Exhibit 10.15:

Kerry Zang
Vertical Fund Associates
Gary A. Peterson
Stephen P. Davis
Jeffrey B. Skiba
Robert F. Lusch
Gary R. Scheel
Leslie Matthews
Affinity Ventures II, LLC
Claire Levenberg
Kenneth Bobrow, Central Clearing Co.
Thomas Beal
Gary Gartsman
Mark Myerson
PSF Health Care Fund, L.P.
Donald E. Baxter
Stephen D. Mettenthal
D. Ronald Yagoda
Joan Yagoda
Michael Greenbaum

<PAGE> 1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the inclusion in this registration statement on Form SB-2 (file
No. 333-58313) of our report dated May 21, 1997, except for Note 14, Subsequent
Events -- Stock Split for which the date is August 10, 1998, on our audit of the
statement of operations, shareholders' equity and cash flows of Orthopaedic
Biosystems Ltd., Inc. We also consent to the references to our firm under the
captions "Experts" and "Selected Financial Data."

PRICEWATERHOUSECOOPERS LLP

Phoenix, Arizona

August 10, 1998

<PAGE> 1

EXHIBIT 23.2

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the references to our firm under the captions "Experts" and
"Selected Financial Data," and to the use of our report dated April 22, 1998,
except for Note 14 as to which the date is August 10, 1998 in the Amendment No.
2 to Registration Statement (Form SB-2) and related Prospectus of Orthopaedic
Biosystems Ltd., Inc. for the registration of 2,875,000 shares of its common
stock.

/s/ ERNST & YOUNG LLP

Phoenix, Arizona

August 10, 1998