BIOMATRIX INC, 10-K, 1999-03-31

BIOMATRIX INC
10-K, 1999-03-31
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934

For the fiscal year ended December 31, 1998 Commission file number 0-19373

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

BIOMATRIX, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
Delaware (201) 945-9550 13-3058261
(State of other jurisdiction of (Registrant's telephone number, (IRS Employer
incorporation or organization) including area code) Identification No.)
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65 Railroad Avenue
Ridgefield, N.J. 07657
(Address of principal executive offices) (Zip Code)
--------------------

Securities registered pursuant to Section 12(b) of the Act:
Common Stock. $.0001 Par Value
(Title of Class)

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

Name of exchange on which registered shares are traded: New York Stock
Exchange

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

Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item-405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [ ].

The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 1, 1999, was approximately $497 million, based
upon the last reported sales price of the registrant's Common Stock on the New
York Stock Exchange.

At March 1, 1999 there were 11,392,036 shares of the registrant's
Common Stock outstanding.
--------------------

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement relating to the Annual Meeting of
Shareholders to be held on May 27, 1999, are incorporated by reference into Part
III of this report. Other documents incorporated by reference are listed in the
Exhibit Index.

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BIOMATRIX, INC.

1998 ANNUAL REPORT - FORM 10-K

TABLE OF CONTENTS
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Item No. Page
Part I
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1. Business..........................................................................................1
Overview........................................................................................1
Therapeutics....................................................................................2
Therapeutics In Development.....................................................................4
Dermaesthetics (Skin Care Products).............................................................5
Distribution Agreements.........................................................................6
Manufacturing...................................................................................7
Human Resources.................................................................................7
Research and Development Expenditures...........................................................7
Sales by Geographic Area and Significant Customer Data..........................................7
Risk Factors....................................................................................8
2. Properties.......................................................................................10
3. Legal Proceedings................................................................................10
4. Submission of Matters to a Vote of Security Holders..............................................10
Executive Officers...............................................................................11
Part II
5. Market for the Registrant's Common Equity and Related Shareholder Matters........................12
6. Selected Financial Data..........................................................................13
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................................14
7a. Quantitative and Qualitative Disclosures About Market Risk.......................................19
8. Financial Statements and Supplementary Data......................................................19
9. Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................................19
Part III
10. Directors and Executive Officers of the Registrant...............................................19
11. Executive Compensation...........................................................................19
12. Security Ownership of Certain Beneficial Owners and Management...................................19
13. Certain Relationships and Related Transactions...................................................19
Part IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................20
</TABLE>

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PART I

Item 1. Business

Overview

Biomatrix, Inc., together with its subsidiaries Biomatrix Medical
Canada Inc. ("BMC"), Biomatrix Svenska AB ("Biomatrix Svenska"), Biomatrix U.K.
Limited ("Biomatrix UK"), Biomatrix Hong Kong Limited ("Biomatrix Hong Kong"),
Biomatrix France SARL ("Biomatrix France"), Biomatrix Switzerland GmbH
("Biomatrix Switzerland"), and Biomatrix Germany GmbH ("Biomatrix Germany")
(together, "Biomatrix" or the "Company") develops, manufactures, markets and
sells a series of proprietary viscoelastic products made of biological polymers
called hylans for use in therapeutic medical applications and skin care. Hylans
are chemically modified forms of the naturally occurring hyaluronan (also known
as hyaluronic acid or sodium hyaluronate). Hylans are the second generation of
viscoelastics used in medicine, and are characterized by significantly enhanced
physical (rheological) properties (elasticity, viscosity and pseudoplasticity)
as compared to naturally occurring hyaluronan, from which the first generation
viscoelastics are made. The discovery of hylans has allowed the Company to
develop a range of patented products with superior viscoelastic properties in
the forms of fluids, gels and solids.

The Company was founded in 1981. In 1983, the Company established its
research and development department, laboratory facilities and a pilot
manufacturing plant at its corporate headquarters in Ridgefield, New Jersey.
During the period from 1987 through 1995, the Company also conducted research
and development work in Europe through its wholly-owned subsidiary Biomatrix
Svenska in Uppsala, Sweden. BMC was established in 1991 to manufacture medical
products and to market certain medical products in Canada. In 1997, Biomatrix
UK, Biomatrix Switzerland and Biomatrix Hong Kong were established to market and
sell certain medical products in the United Kingdom, Switzerland, and Hong Kong,
respectively. Biomatrix France was also established in 1997 to assist in
marketing certain products in France. In 1998, Biomatrix Germany was established
to assist in marketing certain products in Germany. In 1998, the Company
completed construction of a manufacturing plant in Ridgefield, New Jersey and
commenced manufacturing operations. The Company received certification (ISO
9001/EN46001) of its quality system for manufacturing viscoelastic medical
therapeutics in the fourth quarter of 1998. This certification permits the
Company to manufacture and ship its products from the New Jersey manufacturing
facility to the 19 countries of the European Economic Area and a number of
countries in Latin America and Asia. During the first quarter of 1999, the
Company also received FDA approval to ship Synvisc within the United States from
its New Jersey manufacturing facility.

The Company believes that it is distinguished from other companies in
the field by its association with Dr. Endre A. Balazs, a co-founder and current
Chief Executive Officer and Chief Scientific Officer of the Company, who has
authored numerous publications on the medical applications of hyaluronan based
viscoelastic products. Prior to the organization of the Company, Dr. Balazs
invented the use of hyaluronan in medicine and developed the first generation
hyaluronan based viscoelastics used in medicine worldwide. These products were
based on a highly purified fraction of the unmodified, naturally occurring
hyaluronan. In 1993, the Company obtained the rights from Dr. Balazs to use his
first generation technology for medical applications, except for ophthalmic
viscosurgery.

Under Dr. Balazs' leadership, the Company's scientists developed a new
class of biopolymers, called hylans. These polysaccharide molecules are derived
by chemical modification of hyaluronan. The Company's hylan products are highly
biocompatible like the naturally occurring hyaluronan, which allows them to be
used in the body without causing allergic or foreign body reactions. The Company
believes that products made of hylans are superior to the products made of first
generation hyaluronan due to the enhanced rheological properties and the
prolonged residence time in tissues.

Using its patented technology, the Company has developed clear
elastoviscous fluids, transparent viscoelastic semi-solid gels, solid particles,
sheaths, tubes and other useful configurations. This broad spectrum of
proprietary products is manufactured through several patented chemical
modifications and cross-linking processes.

The Company's business is to develop, manufacture, market and sell
viscoelastics used as medical therapeutic devices. The use of viscoelastics in
medicine during the past decades has created several new medical therapeutic
modalities including:

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o Viscoaugmentation, the use of viscoelastic gels for tissue
augmentation to provide a scaffolding for tissue regeneration or an
inert elastic filler in applications such as augmentation of dermal
tissue for the correction of facial wrinkles and depressed scars and
the augmentation of the sphincter muscle in urinary incontinence.

o Viscoprotection, the use of elastoviscous fluids and viscoelastic
gels to shield and protect sensitive tissue surfaces, such as those
of the eye, from dryness and noxious environmental conditions.

o Viscoregulation, the use of the rheological (physical) properties of
elastoviscous fluids and viscoelastic gels to regulate cell activity,
for example, the targeted delivery of drugs.

o Viscoseparation, the use of viscoelastic gels, membranes and fluids
to separate tissues, prevent adhesions, and cover internal and
external wounds to facilitate wound healing and decrease scar
formation.

o Viscosupplementation, the use of elastoviscous solutions and
viscoelastic gels in disease conditions to replace tissues and body
fluids.

o Viscosurgery, the use of elastoviscous fluids to facilitate surgical
procedures in ophthalmology, orthopedics and neurosurgery. The
viscoelastic acts as a surgical tool or implant to protect,
manipulate and separate delicate tissues.

Viscoelastic devices are ideally made from the body's own molecules
found in the intercellular matrix, the highly organized structure separating
cells and integrating them into functional tissues. Viscoelastic products are
used in medicine by introducing them into the intercellular matrix during, after
or instead of surgical procedures to supplement, augment, regulate and
manipulate the healing and regenerative processes of the body and to restore the
homeostasis (equilibrium) of the intercellular matrix. Therefore, the use of
viscoelastics for therapeutic purposes, i.e. engineering of the intercellular
matrix, is called matrix engineering.

Therapeutics
The following discussion addresses the Company's medical therapeutic
products, some of which, as noted below, are on the market in certain countries;
certain other products are in late stage development. See "Business-Government
Regulation."

Synvisc(R)
Synvisc(R), a viscoelastic device made of patented hylan biopolymers,
is used for the treatment of osteoarthritis of the knee to reduce pain and
improve joint mobility. Synvisc treatment involves a series of injections into
the affected joint. It supplements the elastoviscosity of the synovial fluid of
the arthritic joint, and is regarded as a liquid prosthesis for the joint
because it replaces the pathologically low elastoviscous fluid with a supplement
of fluid with enhanced elastoviscous properties. This medical treatment modality
is called viscosupplementation. Synvisc is administered over a fifteen day
period and involves a series of three injections into the arthritic joint.

The Company has completed thirteen clinical studies involving Synvisc
in which approximately 1,726 patients participated. These studies were carried
out and completed in the United States, Germany, the United Kingdom, Sweden and
Canada. The results of these studies indicate that Synvisc is a safe and
efficacious treatment for osteoarthritis of the knee.

The Company received approval to market Synvisc for treatment of
osteoarthritis of the knee joint in Canada in 1992, in Sweden in 1995 and
obtained the CE Mark in late 1995, which permits marketing in the 19 countries
of the European Economic Area ("EEA"). In March 1997, the Company received
approval from the People's Republic of China to register Synvisc, which allows
the Company to import and sell Synvisc as a medical device in every province in
China. In August 1997, the Company received approval from the United States Food
and Drug Administration ("FDA") for the use of Synvisc for treatment of
osteoarthritis of the knee in the United States. Additionally, the Company
received approvals in October 1997 and December 1997 to market Synvisc in Hong
Kong and Israel, respectively. During 1998, the Company received approvals in
the following countries: Malaysia, Brazil, Singapore, Chile, Argentina,
Slovenia, Guatemala, Mexico, Thailand, Australia and Peru. In early 1999 the
Company received approval to market Synvisc in South Africa and Colombia.

The Company began marketing Synvisc in Canada with its own sales force
in early 1993, and in 1995 signed a distribution agreement with Rhone-Poulenc
Rorer Canada Inc. ("RPR") to share the marketing effort. In September 1995,

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BMC and RPR began marketing Synvisc jointly in Canada. In June 1995, Roche AB, a
subsidiary of F. Hoffmann-La Roche Ltd., commenced sales of Synvisc in Sweden
and obtained the distribution rights for Synvisc in South Africa. In December
1996, the Company entered into an agreement with Boehringer Ingelheim France,
S.A. ("Boehringer Ingelheim") for the distribution of Synvisc in France, and in
October 1997 the product was officially launched in France. In February 1997,
the Company entered into an agreement with Wyeth-Ayerst Laboratories ("Wyeth"),
a division of American Home Products, for the distribution of Synvisc in the
United States, Germany, Austria, Spain, Portugal, Greece and certain countries
in the Middle East and Central Europe. The Company and Wyeth launched Synvisc in
Germany, Austria and the United States in 1997, and in Spain, Portugal, and
Greece in 1998. In April 1997, the Company entered into an agreement with Bayer
AG ("Bayer") for the distribution of Synvisc in Australia, Indonesia, Israel,
Malaysia, New Zealand, Singapore, Taiwan and Thailand. The Company and Bayer
launched Synvisc in Israel during 1998 and Malaysia during 1999. In February
1998, the Company entered into an agreement with Novartis Pharma AG ("Novartis")
for the distribution of Synvisc in Latin America and the Caribbean. The Company
and Novartis launched Synvisc in Argentina, Brazil, Chile, Peru and Panama
during 1998. In the first quarter of 1999, the Company and Roche launched
Synvisc in South Africa. The Company is currently seeking and negotiating with
potential marketing partners for distribution of Synvisc in certain other
European and Asian countries.

Hylaform(R)
Hylaform(R) is a patented viscoelastic device made of hylan and is used
for viscoaugmentation of dermal tissue to correct facial wrinkles and depressed
scars by injection directly into the dermal tissue. In late 1995, the Company
obtained approval (CE mark) to market this product as a medical device in the 19
countries of the EEA. In June 1996, the Company entered into an agreement with
Collagen Corporation, now Collagen Aesthetics, Inc., ("Collagen") for the
distribution of Hylaform in Europe, Canada, Japan, Australia and other select
countries worldwide. Collagen began marketing Hylaform in certain European
countries in November 1996 and completed the launch of Hylaform throughout
Europe during 1997. During 1997 the Company received regulatory approval to
market Hylaform in Canada, Israel, and Chile. Additionally, the Company received
regulatory approval to market Hylaform in Argentina in 1998 and in Australia in
1999. Collagen launched Hylaform in Canada and Israel during 1998. The Company's
Pre-Market Approval ("PMA") application for Hylaform was submitted to the Food
and Drug Administration ("FDA") in 1995 and was subsequently withdrawn in
December 1997. The Company has also entered into a distribution agreement with
Collagen for Hylaform in the United States. Under such agreement, Collagen has
the exclusive distribution rights to Hylaform in the United States subject to an
additional payment and FDA approval.

Gelvisc(R)Vet
Gelvisc(R)Vet, a viscoelastic device made of hylan biopolymers, was
developed by the Company for the treatment of arthritis in veterinary medicine.
It is used as a viscosupplementation device to treat traumatic arthritis and
osteoarthritis in racehorses. Approval to market this product in Sweden and
France was obtained in 1995 and 1996, respectively. The product is now marketed
by Equinord KB ("Equinord") in Sweden and by Boehringer Ingelheim in France.

Hylashield(R)
Hylashield(R) and Hylashield(R)Nite are sterile, preservative-free,
elastoviscous eye drops that are used to protect, lubricate and moisten the
surface of the eye for patients who experience discomfort or pain associated
with dryness, noxious environmental conditions and other common ocular symptoms
including itching, burning and foreign body sensation. In Canada, Hylashield and
Hylashield Nite have been marketed since June 1993 and October 1995,
respectively, through I-MED Pharma Inc. ("I-MED").

HsS(TM)
HsS(TM) is a sterile, preservative-free, viscoelastic, clear corneal
eye drop that is presented in a single-use container. HsS provides prolonged
moisture control and protection to corneal surfaces during surgery. Use of HsS
reduces the need for frequent applications of saline solution on the corneal
surface, allowing for safer and more efficient surgery. HsS received approval
for marketing in Canada and plans are being developed for its commercial launch.

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Therapeutics In Development

The following discussion addresses the Company's medical therapeutic
products that are in development. Preclinical studies have been completed for
these products, and some have been tested in exploratory clinical trials. None
of these products have been submitted to regulatory agencies for marketing
approval anywhere in the world. The Company analyzes its therapeutics in
development according to the following categories: anti-adhesion, ophthalmic and
other.

Anti-Adhesion

Hylagel(R) Nuro
Hylagel(R)Nuro is a proprietary hylan product that is used in
viscoseparation. The product is a resorbable, injectable treatment that inhibits
scar formation in patients undergoing various types of lumbar surgical
procedures. The Company has filed an Investigational Device Exemption ("IDE")
with the FDA for this product.

Hylafilm(R)
Hylafilm(R) is a proprietary hylan product in the form of films and
membranes to be used in viscoseparation. Clinical trials are planned to address
the prevention of postsurgical adhesions after pelvic, abdominal and
gynecological surgeries.

Hylasine(TM)
Hylasine(TM) is a viscoelastic proprietary hylan device for use in
viscoseparation of healing mucous membranes following various otolaryngological
surgeries. It is designed to prevent excessive scar formation and adhesions
between mucous membranes which could cause occlusion (stenosis) of vital air
passageways. The Company has successfully completed clinical studies in the
United States and Canada. Regulatory submissions are planned for marketing
approvals in the United States and abroad.

Ophthalmic

Hylashield(R) CL
Hylashield(R) CL is a sterile, preservative-free, elastoviscous shield
for use on the surface of the eye with all contact lens users to enhance comfort
and contact lens duration of use. Hylashield(R) CL is currently in clinical
trials in the United States.

Hylasol(TM)
Hylasol(TM) is a proprietary elastoviscous hylan solution designed for
various ophthalmic surgical indications, including contemporary surgical
techniques associated with cataract removal and intraocular lens implantation.
Exploratory clinical trials confirming the safety, efficacy and surgical utility
of these products have been completed. Additional trials are planned.

Hylagel(R) Eye
Hylagel(R)Eye is a proprietary elastoviscous hylan device. It was
developed by the Company as a viscosupplementation product for replacement of
the vitreus in retinal detachment surgery. Based on the results of exploratory
clinical trials, this product is being redesigned to meet newly emerged
therapeutic needs.

Other

Hylagel(R) Vasc
Hylagel(R) Vasc is a proprietary viscoelastic hylan device for
viscoregulation. It was developed to facilitate the delivery of blood
coagulating agents and drugs to targeted sites in arteriovenous malformations
and vascular tumors. The Company has completed exploratory human clinical trials
on this product. The cost of these trials was partially supported by a grant
from the Orphan Products Division of the FDA. The Company is planning to extend
and continue these clinical trials.

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Hylagel(R)Uro
Hylagel(R)Uro is a proprietary hylan polymer device. It was developed
to act as a long-lasting viscoelastic tissue implant for viscoaugmentation. Its
primary use is to enhance the function of the urinary sphincter muscle by acting
as a filler between weakened muscle tissue and the mucosa in cases of urinary
incontinence. The Company received FDA approval to begin multicenter clinical
trials for HylagelUro, and these trials have commenced.

Hylagel(R)Voc
Hylagel(R)Voc is a proprietary hylan B product designed for use in
vocal cord augmentation. Clinical trials are in progress in Europe using this
product in tissue augmentation after vocal cord dysfunction.

Dermaesthetics (Skin Care Products)

The Company has developed and manufactures ten viscoelastic products,
so-called specialty intermediates for the skin care industry. The Company's skin
care intermediates are proprietary hyaluronan or hylan products, and their
enhanced rheological properties (viscosity, elasticity and pseudoplasticity)
make them superior to low molecular weight hyaluronan products. These highly
elastoviscous formulations of hyaluronan and hylan are unique in their high
water-binding, free radical-scavenging and space-filling properties.

The following specialty intermediates are marketed worldwide by
Amerchol Corp. ("Amerchol"), a subsidiary of Union Carbide Corp.:

Biomatrix(R): a patented, highly elastoviscous complex of hyaluronan,
dermal lipids and proteins. Biomatrix is utilized as a component in several
cosmetic products introduced into the market in the early 1980s.

Hyladerm(R): a patented hylan polymer in the form of a highly
elastoviscous solution. Its high molecular weight enables it to be used at
relatively low concentrations in skin care preparations.

Biocare(R) HA-24: a patented elastoviscous polymer complex formed
between hylan and certain polymers that tightly anchors hylan to skin and hair
in a way that resists wash-off. In this way, the moisturizing and smoothening
benefits of hylan are augmented and made long lasting.

Biocare(R) HA-24-Bio: a patented elastoviscous polymer complex similar
to Biocare HA-24 in all respects, but using hyaluronan of non-animal origin.

Biocare(R) BHA-10: the first product available to the personal care
industry that enhances the utility of a bacteria-derived hyaluronan product by
greatly increasing its rheological properties. Biocare BHA-10 is approximately
ten-fold more elastoviscous and more substantive than the bacterial hyaluronan
from which it is prepared.

Biocare(R) SA: a patented elastoviscous combination of albumin, dextran
sulfate and hylan, Biocare SA is designed to create a light-reflecting layer
that diminishes the appearance of surface imperfections.

Biocare(R) SA-N: a patented elastoviscous combination of albumin,
dextran sulfate and hylan similar to Biocare SA, created to satisfy certain
regulatory requirements in certain countries.

Biocare(R) SA-J: a patented elastoviscous combination of albumin,
dextran sulfate and hylan similar to Biocare SA and Biocare SA-N, created to
satisfy certain regulatory requirements in certain countries.

Hylasome(R): a patented viscoelastic, cosmetic grade, water-insoluble
hylan B gel. This product, acting as a molecular sponge, has the ability to
entrap various substances, and can be used as a vehicle for the controlled
release of cosmetic ingredients.

Hylasome(R)LA50: a viscoelastic, cosmetic grade, water-insoluble hylan
B containing patented Hylasome(R). This product is able to deliver lactic acid
to the skin.

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Distribution Agreements

The Company has entered into distribution agreements with various
marketing partners for certain of the Company's medical products. The
distribution agreements generally provide that the Company manufactures and
supplies Synvisc for a contractual percentage of the marketing partner's sales
price, or a minimum price, whichever is greater. The Company has entered into
the following agreements:

Wyeth-Ayerst ("Wyeth"). In February 1997, the Company entered into a
distribution agreement with Wyeth, a division of American Home Products. The
agreement provides Wyeth with exclusive marketing rights to Synvisc in the
United States, Germany, Austria, Spain, Portugal, Greece and certain countries
in the Middle East and Central Europe. In 1997, the Company received various
non-refundable payments totaling $17.0 million. The Company also received a
milestone payment of $6.0 million during the first quarter of 1999 and could
receive additional payments in the future if sales reach certain levels.
Additionally, Wyeth reimburses the Company, up to a fixed amount and for a
certain period of time, for its costs of maintaining a team of area business
consultants to assist in selling Synvisc in Europe and the United States. Wyeth
launched Synvisc during 1997 in the United States, Germany and Austria and in
1998 launched the product in Spain, Portugal and Greece.

Bayer AG ("Bayer"). In April 1997, the Company entered into a
distribution agreement with Bayer. The agreement provides Bayer with exclusive
marketing rights to Synvisc in Australia, Indonesia, Israel, Malaysia, New
Zealand, Singapore, Taiwan and Thailand. In return the Company received an
up-front non-refundable payment of $3.0 million and could receive a milestone
payment of $2.0 million upon certain approvals or if sales reach a certain
level. Additionally, Bayer will reimburse the Company, up to a fixed amount and
for a certain period of time, for its costs of maintaining several area business
consultants to assist in selling Synvisc in certain countries. Bayer launched
Synvisc in Israel during 1998 and in Malaysia in 1999.

Novartis Pharma AG ("Novartis"). In February 1998, the Company entered
into a distribution agreement with Novartis. The agreement provides Novartis
with the exclusive marketing rights to Synvisc in Latin America and the
Caribbean. In return the Company received an up-front non-refundable payment of
$1.5 million and will receive an additional $1.6 million in the fourth quarter
of 1999. Additionally, Novartis will reimburse the Company for its costs of
maintaining several area business consultants to assist in selling Synvisc in
certain countries. During 1998 Novartis launched Synvisc in Argentina, Brazil,
Chile, Peru and Panama.

F. Hoffmann-La Roche Ltd. ("Roche"). In 1995, pursuant to the amendment
of previous distribution agreements with Syntex, Roche maintained exclusive
marketing rights to Synvisc in Sweden and South Africa. Roche began selling
Synvisc in Sweden in June 1995 and launched Synvisc in South Africa in 1999.

Rhone-Poulenc Rorer Canada Inc. ("RPR"). In September 1995, the
Company, through BMC, entered into a distribution agreement with RPR. The
agreement provides RPR with exclusive marketing rights for Synvisc in Canada. In
return, the Company received an up-front non-refundable payment of $3.5 million
and could receive a milestone payment if sales reach a certain level. RPR began
selling Synvisc in Canada in November 1995.

Collagen Aesthetics, Inc. ("Collagen"). In June 1996, the Company
entered into a distribution agreement with Collagen. The agreement provides
Collagen with exclusive marketing rights for Hylaform in Europe, Canada, Japan,
Australia and other select countries. In return, the Company received an
up-front, non-refundable payment of $5.0 million and is entitled to receive a
royalty based upon sales of Collagen's dermal augmentation products as well as
an additional royalty based on the growth of Collagen's total dermal
augmentation business. The Company has also entered into a distribution
agreement with Collagen for Hylaform in the United States. Under such agreement,
Collagen has the exclusive distribution rights for Hylaform in the United States
subject to an additional payment and FDA approval. Collagen began selling
Hylaform in certain European countries in November 1996 and successfully
completed the launch in every country of the European Economic Area during 1997.
In addition, Collagen launched Hylaform in Canada during 1998.

Boehringer Ingelheim France, S.A. ("Boehringer Ingelheim"). In December
1996, the Company entered into a distribution agreement with Boehringer
Ingelheim. The agreement provides Boehringer Ingelheim with exclusive marketing
rights for Synvisc in France. In return, the Company received an up-front
non-refundable payment of $1.0 million and could receive milestone payments if
sales reach certain levels. Additionally, Boehringer Ingelheim reimburses the
Company, up to a

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fixed amount and for a certain period of time, for its costs of
maintaining a team of area business consultants to assist in selling Synvisc in
France. Boehringer Ingelheim began selling Synvisc in France during 1997.

I-MED Pharma Inc. ("I-MED") In October 1995, the Company entered into a
distribution agreement in Canada with I-MED for three ophthalmic viscoprotection
products.

Farmila Farmaceutici Milano S.r.1. ("Farmila"). In December 1995, the
Company entered into a distribution agreement in Italy with Farmila for two
ophthalmic viscoprotection products. The Company received a non-refundable
up-front payment and will manufacture and supply the two products for an
agreed-upon percentage of Farmila's sales price.

Equinord KB ("Equinord"). The Company has entered into a distribution
agreement with Equinord for the distribution of Gelvisc(R)Vet in the veterinary
market in Sweden, France and Italy. Under the agreement, Equinord will obtain
the necessary regulatory approvals and advertise and promote the product in
these countries. Equinord currently sells GelviscVet itself in Sweden and
through Boehringer Ingelheim in France.

Manufacturing

In 1991, BMC acquired a manufacturing facility in Canada. BMC began
commercial manufacturing of medical devices made from hylan biopolymers in the
second half of 1992. During 1993, the Canadian facility was certified by the
Health Protection Branch ("HPB") of the Canadian Ministry of Health as meeting
good manufacturing practices ("GMPs") for the manufacturing of small volume
injectable products. Qualification of GMP was accomplished in the facility
inspection by the FDA. During 1997 and 1998, the Company increased the
production capacity of the Canadian facility.

In 1998, the Company completed construction of its New Jersey
manufacturing facility and commenced production of its various products there.
The Company received certification (ISO 9001/EN46001) of its quality system for
manufacturing viscoelastic medical therapeutics in the fourth quarter of 1998.
This certification permits the Company to manufacture and ship its products from
the New Jersey manufacturing facility to the 19 countries of the European
Economic Area and a number of countries in Latin America and Asia. During the
first quarter of 1999, the Company also received FDA approval to ship Synvisc
within the United States from its New Jersey manufacturing facility.

Human Resources

As of December 31, 1998, the Company, including its subsidiaries,
employed 369 full-time and 2 part-time employees. Of such employees, 14 hold
doctoral degrees (M.D., Ph.D.), 38 hold other advanced degrees and 123 hold
bachelor's degrees. Forty-eight of the Company's full-time employees are engaged
in research and development, 215 are engaged in manufacturing, quality control
and quality assurance, and 106 are engaged in sales, marketing, finance and
administration. The Company considers its employee relations to be good.

Research and Development Expenditures

For the years ended December 31, 1998, 1997 and 1996, the Company
expended $9.7 million, $5.9 million and $5.5 million, respectively, on research
and development relating primarily to new product development, development of
the manufacturing process, preclinical and clinical studies and regulatory
expenses in the United States and abroad. The increase in 1998 research and
development expenditures is primarily related to process development costs
associated with the Company's new U.S. manufacturing facility.

Sales by Geographic Area and Significant Customer Data

The information required is incorporated herein by reference to the
footnotes to the Company's consolidated financial statements.

7
<PAGE>

Risk Factors

Investing in Biomatrix securities involves risks. You should carefully
consider the following factors, in addition to the other information in this
Form 10-K.

Certain statements contained in this Annual Report on Form 10-K are
forward-looking within the meaning of Section 27A of the Securities Act of 1933
and involve risk and uncertainty. Such statements should be read in conjunction
with the Company's Securities and Exchange Commission filings and are also
subject to important factors that could cause actual results to differ
materially. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below, as well as those discussed
elsewhere in this Form 10-K.

Governmental Regulation. The FDA and foreign regulatory agencies regulate the
commercial distribution of the Company's medical products. The FDA classifies
medical products as either medical devices or drugs/biologicals. Currently, the
FDA and most foreign regulatory agencies consider most of the Company's medical
products to be medical devices. Some of the Company's products are currently
being reviewed for approval by various regulatory agencies. The approval process
is costly, complex, and time-consuming, and it is possible that these approvals
could be delayed or never granted. The regulatory process can delay marketing
new products for long periods and can add substantial costs. In addition,
changes in governmental rules and regulations could affect the Company in ways
the Company cannot predict. Changes could affect products already approved for
marketing, products that have not yet been approved, or the approval process
itself.

The FDA and foreign regulatory agencies inspect the Company's
manufacturing facilities both before and after giving their approval to market a
product. Additionally, if a material change is made to the manufacturing
process, equipment, or location after receiving approval for marketing from
regulatory agencies, additional regulatory review may be necessary.

The Company's skin care products are not subject to pre-market approval
requirements or FDA mandated performance standards. However, the Company is
subject to provisions of law prohibiting the commercial marketing of misbranded
or adulterated products.

Reimbursement. The availability of reimbursement by Medicare, Medicaid, private
health insurers, and other organizations may affect sales of the Company's
products. Limitations on reimbursement may negatively impact sales of its
medical products. In the United States, the Health Care Finance Administration,
also known as HCFA, and many private health insurance organizations currently
provide reimbursement for Synvisc. Synvisc is currently reimbursed by all of the
Medicare regional insurance carriers. Synvisc is also on the list of
government-reimbursable products in Sweden. Currently, Synvisc has not been
approved for reimbursement by the Canadian provincial governments; several
Canadian private insurance companies do, however, provide reimbursement for
Synvisc. In addition, the Company is currently discussing reimbursement for
Synvisc with European government agencies. The Company does not expect insurance
companies to pay for Hylaform, another of the Company's products. Changes in
reimbursement policies could significantly reduce the Company's ability to sell
its products.

Dependence on Distribution Relationships. The Company has entered into
several distribution agreements for marketing and distributing some of its
products, including Synvisc and Hylaform. As a result, the Company is dependent
on its marketing partners for sales of its product in countries in which the
Company has marketing and distribution agreements. It is possible that the
Company will not be able to maintain its current arrangements, and if that
happens, the Company may not be able to replace them with other acceptable
arrangements. It is also possible that the Company's marketing partners will not
be able to market and distribute its products successfully in the future.

Patents. In order to protect its core hylan technology, the Company has obtained
patents on its technologies and on its products in key countries. The Company
currently has 22 issued or allowed patents and 1 patent pending in the United
States, and 88 issued or allowed patents and over 68 patents pending in foreign
countries. The Company cannot be sure that any patents pending or patent
applications the Company may file in the future will result in issued patents.
Any patents the Company has now, or that are issued in the future, trade secrets
or know-how may not be enough to protect the Company's business against
competitors with similar technologies or processes. Others might still infringe
upon or design around the Company's issued patents. In addition, others might
develop proprietary technologies or processes on their own which are the same as
or substantially equivalent to the Company's. It could be very expensive if the
Company has to defend against patent infringement suits brought against it or if
the Company chooses to sue others to protect its patents against infringement.

8
<PAGE>

In addition to patent protection, the Company relies on trade secrets,
proprietary know-how and continuing technological developments. The Company
generally tries to protect this information by entering into confidentiality
agreements with its business partners, employees and consultants. Certain people
might break the promises they make in these agreements. If they do, the Company
may not be able to remedy the damage they cause to the Company's business. Even
if everyone honors these agreements, the Company's competitors might still
discover its trade secrets on their own.

Competition. The Company believes that its superior technology and its
longstanding know-how and experience give the Company its primary advantages
over its competitors. Competition for the Company's product, Synvisc, consists
primarily of products based on earlier technology. These products include, in
the United States, the FDA-approved Hyalgan(R), produced by Fidia S.p.A. and
marketed in the United States by OrthoLogic Corp. Another product based on
earlier technology is Orthovisc(R), which failed in 1998 to receive approval
from the FDA for marketing in the United States but is marketed in Canada and in
certain other countries. Orthovisc is produced by Anika Therapeutics, Inc. and
marketed by Zimmer, Inc. In Europe, the primary competitive products are Hyalgan
and Artz(R), a Japanese product. To the best knowledge of the Company, there are
no other viscosupplementation products on the market, or in development, which,
like Synvisc, have the physical properties of viscosity, elasticity and
molecular weight which are comparable to the physical properties of healthy,
young synovial fluid.

The Company's ability to compete depends primarily upon product
acceptance by doctors and other customers and whether or not health insurance
will pay for treatment with its products, as opposed to those of its
competitors.

The Company believes its patents on hylans make it more difficult for
others to develop and sell products made from similar substances. However, a
number of potential competitors are trying to develop similar substances. Other
substances or technologies may be, now or in the future, the basis of
competitive products that could render its technology obsolete or
non-competitive.

Manufacturing. The Company faces manufacturing risks. The Company's
manufacturing process is highly complex and is regulated by the government. It
is possible that the Company will have problems maintaining or expanding its
facilities in the future. These problems could cause delays in production or
delivery delays. Any significant disruption in its manufacturing operations
could significantly hurt the Company's business, results of operations, and
financial condition.

Rapid Growth. The Company has recently expanded rapidly and aggressively. In
1998 alone the Company more than doubled its number of employees. Also, the
Company now operates and has employees in eight countries. This expansion
requires that the Company spend a significant amount of money to support what
the Company hopes will be increased demand for its products. This strategy
involves risks, which include supporting higher levels of operating expenses,
attracting and retaining employees, and dealing with other management
difficulties that arise from rapid growth. Any failure to manage growth
effectively could have a significant adverse effect on the Company's ability to
run its business.

Dependence Upon Key Personnel. The Company's future success is highly dependent
on the members of its management and scientific staff. The loss of one or more
key employees could hurt the Company significantly. The Company does not
maintain any key person life insurance policies with respect to any of its
employees. The Company has entered into employment agreements with Dr. Endre A.
Balazs, Chief Executive Officer and Chief Scientific Officer, and Rory B.
Riggs, President. These agreements restrict Dr. Balazs and Mr. Riggs from
engaging in certain activities that are competitive with Biomatrix. The Company
has entered into similar agreements with most but not all of its employees.

Fluctuation in Operating Results. The Company's operating results may fluctuate
from period to period. The Company has planned its operating expenses on the
assumption that revenues from sales will continue to grow. If these revenues do
not grow as the Company has projected, its operating results for a particular
period may be lower than expected. A revenue shortfall could result from a
number of factors, including but not limited to those described in this
document, lower than expected demand for its products; fewer purchases of its
products by its distribution partners; inability to collect from those who owe
the Company money, goods, or services; manufacturing interruptions; and overall
economic conditions.

Product Liability. Producing and selling health-care products can lead to
allegations of product liability, and it is possible that product liability
claims could be brought against the Company. Although the Company carries
product liability insurance in an amount that the Company considers sufficient,
the Company cannot be sure that the amount of coverage that the Company
currently holds, or will hold in the future, will be adequate. If its insurance
coverage is not sufficient the Company may not be able to satisfy liability
claims out of its other assets. If the Company attempts to obtain additional
insurance in the future, the Company may not be able to do so on

9
<PAGE>

acceptable terms, and any additional insurance the Company does obtain may not
provide adequate coverage against asserted claims.

Stock Price Volatility. The market price of the Company's common stock, like
that of the securities of many other biomedical and medical device companies,
has fluctuated over a wide range, and the market price of the shares of its
common stock or other securities could be highly volatile in the future. Factors
including, but not limited to, fluctuation in the Company's operating results or
the Company's failure to meet the expectations of the investment community, its
ability to manufacture its products, demand for its products, announcements of
technological innovations or new commercial products by the Company or its
competitors, governmental regulation, changes in insurance reimbursement
policies, developments or disputes concerning patent or other proprietary
rights, public concern as to the safety of devices or other products developed
by the Company or its competitors, and general market conditions may have a
significant effect on the market price of its common stock or other securities.

Item 2. Properties

The Company's executive, administrative and research and development
are located in Ridgefield, New Jersey in leased premises of approximately 66,000
square feet. In the fourth quarter of 1998, the Company exercised an option to
purchase the 93,000 square foot facility in Ridgefield, NJ which houses its U.S.
manufacturing facility. The Company expects to complete the purchase of the U.S.
manufacturing facility in the first half of 1999. BMC owns a 28,000 square foot
manufacturing facility in Pointe-Claire, Quebec, Canada. The Company's
subsidiaries also lease small administrative offices in their respective
countries.

Item 3. Legal Proceedings

In August 1990, the Company received a notice from the Pennsylvania
Department of Environmental Protection ("DEP") that it was one of approximately
1,000 potentially responsible parties ("PRPs") that may have clean-up
responsibility at the Industrial Solvents and Chemical Company site in York
Haven, Pennsylvania (the "Site"). During the late 1980s, the Company, through a
licensed waste disposal transport company, shipped industrial solvents to the
Site, which was operating as a recycling facility. The DEP reviewed hazardous
waste found at the Site as well as the DER's own records in order to identify
additional PRPs and to quantify each PRP's volumetric contributions. The Company
is a member of a steering committee that consists of many PRPs. As of December
31, 1997 the Company had a reserve of $0.7 million related to this matter.
During the fourth quarter of 1998, the final remedy was selected by the DEP and
the Company settled out of the matter pursuant to a buy-out proposal prepared by
the steering committee and reversed the reserve. Therefore, at December 31, 1998
the Company no longer has a reserve for any potential litigation regarding this
matter.

In October 1996, Michael Jarcho ("Jarcho") filed suit in the United
States District Court for the Southern District of California seeking to recover
damages and declaratory judgment for the alleged breach by the Company of
Jarcho's consulting agreement. A consulting agreement had been entered into
between the Company and Jarcho on December 2, 1988. The agreement contains
certain royalty provisions for products that result from Jarcho's consultancy.
Jarcho contends, inaccurately in the Company's view, that Hylaform resulted from
his consultancy. Jarcho seeks compensatory damages of $0.3 million plus a
royalty on the Company's past and future net sales of Hylaform as well as
punitive damages and recovery of attorney fees. The Company believes that no
royalties are owed Jarcho as a result of Hylaform sales. Jarcho's case was
dismissed on January 10, 1997, on the grounds that the agreement requires such
disputes to be brought exclusively in New Jersey state court. Jarcho moved for a
partial reconsideration of the decision, the Company opposed that request, and
the request was denied. On June 16, 1997 Jarcho filed suit in New Jersey state
court. The Company intends to defend this matter vigorously. The Company has not
made any provisions for any liability that might result from the claims made by
Jarcho.

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

No matters were submitted to a vote of the Company's shareholders
during the last quarter of its fiscal year ended December 31, 1998.

10
<PAGE>

Executive Officers

Information with respect to the Executive Officers of the Company
furnished by them is set forth below:
<TABLE>
<CAPTION>

Name Age Position(s) with the Company
---- --- ----------------------------
<S> <C> <C>
Endre A. Balazs, M.D. .........................79 Chief Executive Officer and Chief Scientific Officer; Director
Rory B. Riggs....................................45 President; Director
Janet L. Denlinger, Ph.D. .......................53 Executive Vice President; Director
Wesley M. Domareki...............................49 President, ORLO Division
Beatrice Morales.................................49 Vice President, Quality Assurance and Quality Control
Richard S. Romasz, Ph.D..........................49 Vice President, Clinical Affairs
Maxine Seifert...................................45 Vice President, Finance and Chief Financial Officer
Donald E. Woodhouse..............................52 Vice President, Manufacturing
</TABLE>

Endre A. Balazs, M.D., Chief Executive Officer, Chief Scientific
Officer and Director. Dr. Balazs, a co-founder of the Company, became Chief
Executive Officer and Chief Scientific Officer of the Company in February 1987,
having served as President from inception of the Company until that time. He has
also served as a director from the inception of the Company to the present. He
is the Malcolm P. Aldrich Research Professor Emeritus at the College of
Physicians and Surgeons, Columbia University. Prior to joining Columbia in 1975,
he taught at Harvard Medical School for 25 years, during which time he was also
co-founder, research director and president of The Retina Foundation and the
Boston Biomedical Research Institute. From 1968 to 1978, Dr. Balazs was
president and owner of Biotrics, Inc., which developed and manufactured the
first hyaluronan therapeutic products used in medicine. He is the author of more
than 300 scientific articles and patents. Dr. Balazs received an M.D. degree
from the University of Budapest, Hungary. He is married to Dr. Denlinger.

Rory B. Riggs, President and Director. Mr. Riggs was elected President
of the Company on April 1, 1996 and served as the acting Chief Financial Officer
from September 1996 to January 1998. He has been a Director of the Company since
October 1990. Since 1991, he has been affiliated with ITIM Corp. and
Pharmaceutical Partners LLC, investment advisory and venture capital firms
specializing in pharmaceutical and biotechnology investments. From 1991 to 1994,
he was acting President and Chief Executive Officer of RF&P Corporation, a
company wholly owned by the Virginia Retirement System. Until 1990, Mr. Riggs
was a Managing Director in the Mergers and Acquisitions Department at
PaineWebber Incorporated, where he was employed for more than nine years. He is
a graduate of Middlebury College and Columbia University's Graduate School of
Business. Mr. Riggs is a member of the Board of Directors of Spartan, Inc. and
FibroGen, Inc..

Janet L. Denlinger, Ph.D., Executive Vice President and Director. Dr.
Denlinger, a co-founder of the Company, has been Executive Vice President of the
Company since 1989 and a Vice President and Director of the Company since its
inception. She was a research associate of Dr. Balazs for 20 years at the Boston
Biomedical Research Institute and then at the Department of Ophthalmology,
College of Physicians and Surgeons, Columbia University. She is the author of
numerous publications in physiology, biochemistry and biological activity and
metabolism of hyaluronan. Dr. Denlinger received a Ph.D. degree in biochemistry
from the University of Lille, France. She is married to Dr. Balazs.

Wesley M. Domareki, President, ORLO Division. Mr. Domareki joined the
Company in January 1991 as Vice President, International Marketing and Business
Development. In 1994, he was appointed President of the Company's
Otorhinolaryngology and Ophthalmology Division. Prior to joining the Company,
Mr. Domareki was employed by Pharmacia Inc. for 17 years. By 1989, as Vice
President, International Marketing and Business Development for Pharmacia
Ophthalmics, he had been involved in the successful commercialization and
marketing of Healon(R) in the United States, Japan, Australia and various
European countries. Mr. Domareki received a B.S. degree in business
administration from Villanova University and holds an M.B.A. degree in
pharmaceutical marketing and economics from Fairleigh Dickinson University.

Beatrice Morales, Vice President, Quality Assurance and Quality
Control. Ms. Morales joined the Company in 1981, as Assistant Scientist and
became Director of Quality Control and Quality Assurance in 1986. In 1991, she
was promoted to her present position. Prior to joining the Company, Ms. Morales
served on Dr. Balazs' research staff at the Department of Ophthalmology of
Columbia University. Ms. Morales received a B.S. degree in Biology from the City
College of New York.

11
<PAGE>

Richard S. Romasz, Ph.D., Vice President, Clinical Affairs. Dr. Romasz
joined the Company in November 1995 as Vice President, Clinical Affairs. Prior
to joining the Company, Dr. Romasz was employed for over 19 years with Pharmacia
Inc. in its Clinical Research Department. His last position was as Vice
President-Clinical Research, Pharmacia Inc., Ophthalmics. Dr. Romasz was
intensely involved with the clinical trials and regulatory proceedings related
to Healon(R) and Hylartin V(R) in the United States, the first hyaluronan
products ever marketed worldwide and developed by Dr. Balazs and licensed to
Pharmacia in 1972. Dr. Romasz received a Ph.D. in nutrition from Rutgers
University.

Maxine Seifert, Vice President, Finance and Chief Financial Officer.
Ms. Seifert joined the Company in January 1998. Prior to joining the Company,
Ms. Seifert was employed for over thirteen years with Colgate-Palmolive Company
in a variety of senior financial positions, most recently as Vice President,
Financial Business Development. Prior experiences include positions with
Deloitte & Touche, a public accounting firm. Ms. Seifert received a B.S.B.A. in
Accounting from Georgetown University and holds an MBA from the Harvard
University Graduate School of Business Administration.

Donald E. Woodhouse, Vice President, Manufacturing. Mr. Woodhouse
joined the Company in May 1991. Prior to joining the Company, Mr. Woodhouse was
employed for seven years with Sterling Drug, Inc. in a variety of manufacturing
and engineering positions, most recently as Director of Pharmaceutical
Engineering. Prior experience includes positions with Bausch & Lomb, American
Hospital Supply (Critical Care Division) and Merck, Sharp & Dohme in
manufacturing, engineering and general management over a 15-year period. Mr.
Woodhouse received a B.S. degree in biology from Hampden-Sydney College and has
completed graduate business courses at Temple University.

PART II

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

Market Information
On July 23, 1998 the Company's common stock began trading on the New
York Stock Exchange under the symbol "BXM." The Company's common stock had
previously been traded in the Nasdaq National Market under the symbol "BIOX."
The following table sets forth the range of high and low last sale prices per
share for the Company's common stock on the New York Stock Exchange and Nasdaq
National Market for 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------
High Low
---- ---
<S> <C> <C>
Fourth Quarter........................................................... $58.25 $25.00
Third Quarter............................................................ 57.56 37.25
Second Quarter........................................................... 41.00 29.13
First Quarter............................................................ 34.69 28.00

Year Ended December 31, 1997
----------------------------
High Low
---- ---
Fourth Quarter........................................................... $38.13 $26.50
Third Quarter............................................................ 41.00 19.38
Second Quarter........................................................... 21.13 11.25
First Quarter............................................................ 17.50 13.38
</TABLE>

Holders

As of March 1, 1999, there were approximately 270 shareholders of
record. This does not reflect beneficial shareholders who hold their stock in
nominee or "street" name through various brokerage firms.

Dividends

No cash dividends have been paid on the Common Stock to date, and the
Company does not anticipate any cash dividends in the foreseeable future.

12
<PAGE>

Sales of Unregistered Securities

In May 1998, the Company issued $15.0 million of subordinated
convertible debt to a third party. The debt has a five year term and a coupon
rate of 6.9% with interest payable on a semi-annual basis. The debt contains a
conversion feature that allows the third party to convert the debt into common
shares at $40 per share after one year. In addition, the Company can call the
debt at par after three years or after two years if certain conditions are
satisfied. Debt fees are included in other assets and are being amortized on a
straight-line basis over the five year term of the debt. The issuance of this
security was not registered with the Securities and Exchange Commission.

In April 1998, a Canadian venture capital firm exercised its right to
convert the 62,500 Class A shares it held in Biomatrix Medical Canada Inc.
("BMC") into 38,462 shares of Biomatrix, Inc. common stock. As a result, BMC is
now a wholly-owned subsidiary of Biomatrix, Inc. No gain or loss was recognized
on the conversion of shares. The issuance of these shares was not registered
with the Securities and Exchange Commission.

All of the foregoing securities were issued in private offerings, which
the Company believes qualify as transactions by an issuer not involving a public
offering within the meaning of Section 4(2) of the Securities Act of 1933, as
amended.

Item 6. Selected Financial Data

The following is a summary of selected historical financial data for
the Company. The data for each of the three years in the period ended December
31, 1998, have been derived from, and all data should be read in conjunction
with the audited consolidated financial statements of the Company, included in
Item 8 of this Report.
<TABLE>
<CAPTION>
(in millions, except share and per share data)
Years Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Operating Data:
Net Sales................................... $37.8 $11.7 $5.0 $3.6 $2.5
Income from license fees, royalties,
research contracts and grants............. 9.8 20.8 10.6 7.5 6.4
----- ----- ----- ----- -----
Total Revenues ............................. 47.6 32.5 15.6 11.1 8.9
Cost and Expenses:
Cost of Goods Sold........................ 9.7 3.6 2.6 1.9 1.6
Research and Development.................. 9.7 5.9 5.5 5.1 5.1
Selling, General and Administrative....... 14.5 7.8 5.3 5.0 7.1
----- ----- ----- ----- -----
Total Cost and Expenses..................... 33.9 17.3 13.4 12.0 13.8
----- ----- ----- ----- -----
Income (Loss) from Operations............... 13.7 15.2 2.2 (0.9) (4.9)
Other Income, net........................... 0.4 1.1 0.7 0.7 0.4
(Provision for) Benefit from Income Taxes... (2.0) (0.6) (0.1) - 0.1
----- ----- ----- ----- -----
Net Income (Loss)........................... $12.1 $15.7 $2.8 ($0.2) ($4.4)
===== ===== ===== ===== =====

Net Income (Loss) per Share - Basic......... $1.08 $1.44 $0.27 ($0.02) ($0.47)
Net Income (Loss) per Share - Diluted....... $1.02 $1.39 $0.25 ($0.02) ($0.47)

Shares used in computing
Net Income (Loss) per Share:
Basic..................................... 11,225,199 10,894,769 10,434,230 9,876,587 9,256,165
========== ========== ========== ========= =========
Diluted................................... 11,851,879 11,327,206 10,895,026 9,876,587 9,256,165
========== ========== ========== ========= =========
</TABLE>

13
<PAGE>
<TABLE>
<CAPTION>
(in millions)
Years Ended December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Working Capital............................ $27.0 $21.9 $13.8 $10.1 $7.8
Total Assets............................... 83.3 43.9 26.0 17.4 15.6
Long-Term Debt and Capital Lease
Obligations (Excluding Current Maturities) 17.6 5.6 5.8 0.7 1.5
Total Shareholders' Equity................. 51.4 34.3 17.7 14.1 10.2
</TABLE>

The following is a table setting forth quarterly financial data for the
Company's two most recent fiscal years:
<TABLE>
<CAPTION>
(in millions, except per share data)
For the Quarter Ended,
-------------------------------------------------------------------
Q498 Q398 Q298 Q198 Q497 Q397 Q297 Q197

<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales................................... $12.6 $11.4 $9.2 $4.6 $6.2 $1.8 $1.8 $1.9
Income from license fees, royalties,
research contracts and grants............. 6.2 0.2 0.5 2.9 1.5 12.1 3.1 4.1
--- --- --- --- --- ---- --- ---
Total Revenues ............................. 18.8 11.6 9.7 7.5 7.7 13.9 4.9 6.0
Cost and Expenses:
Cost of Goods Sold........................ 3.0 2.9 2.3 1.5 1.6 0.5 0.6 0.9
Research and Development.................. 2.5 2.6 2.4 2.2 1.6 1.5 1.4 1.4
Selling, General and Administrative....... 4.0 4.1 3.5 2.9 2.5 2.0 1.9 1.4
--- --- --- --- --- --- --- ---
Total Cost and Expenses..................... 9.5 9.6 8.2 6.6 5.7 4.0 3.9 3.7

Income from Operations...................... 9.3 2.0 1.5 0.9 2.0 9.9 1.0 2.3
Other (Expense) Income...................... (0.3) 0.3 0.2 0.2 0.4 0.2 0.3 0.2
(Provision for) Benefit From Income Taxes... (1.6) 0.4 (0.5) (0.3) (0.2) (0.3) (0.1) -
----- ---- ----- ----- ----- ----- ----- ---

Net Income.................................. $7.4 $2.7 $1.2 $0.8 $2.2 $9.8 $1.2 $2.5
==== ==== ==== ==== ==== ==== ==== ====

Net Income per Share - Basic................ $0.65 $0.24 $0.10 $0.07 $0.20 $0.89 $0.11 $0.24
Net Income per Share - Diluted.............. $0.61 $0.23 $0.10 $0.07 $0.19 $0.85 $0.11 $0.23
</TABLE>

The sum of the earnings per share for the four quarters in 1998 does not equal
the total for the year due to the greater dilution in the fourth quarter
calculation from the effect of the convertible debt using the if-converted
method. The convertible debt was anti-dilutive for the second quarter, third
quarter and the year and therefore was not included in those calculations. In
addition, the sum of the earnings per share for the four quarters in 1998 and
1997 does not equal the total for each year due to the change in the weighted
average number of shares from quarter to quarter and the change in the dilutive
effect of stock options included in the calculations for each reporting period.

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

Overview
The Company has been principally engaged in the research and
development, manufacturing and commercialization of proprietary viscoelastic
biological polymers, called hylans, for use in therapeutic medical applications
and skin care. During the past five years, a significant source of revenue for
the Company has been from certain up-front payments relating to corporate
license and distribution agreements. The Company expects milestone payments from
existing agreements to continue to be an important source of funds.

The Company's business is subject to significant risks. Forward-looking
comments included herein are subject to and should be read in conjunction with
the "Risk Factors" section of this Form 10-K. As a portion of the Company's
future revenues may be based on payments from corporate license and distribution
agreements, the Company's total revenues and net income will fluctuate from
quarter to quarter. Some of these fluctuations may be significant and, as a
result, quarter to quarter comparisons may not be meaningful. As of December 31,
1998, the Company's accumulated deficit was $7.7 million, a reduction of $12.1
million from the Company's accumulated deficit of $19.8 million as of December
31, 1997.

14
<PAGE>

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

Revenues. Total revenues for the year ended December 31, 1998 were
$47.6 million, representing an increase of $15.1 million or 46% over total
revenues in 1997. Net product sales for the year ended December 31, 1998 were
$37.8 million, representing an increase of $26.1 million or 223% over 1997. The
increase in product sales was due primarily to increased sales of Synvisc in the
United States and Europe and the launch of Synvisc in certain Latin American
countries. Income from licenses, royalties, research contracts and grants was
$9.8 million in 1998, a decrease of $11.0 million or 53% from 1997, and
represented 21% of total revenues in 1998 as compared to 64% of 1997 total
revenues. The $9.8 million recorded in 1998 includes $3.1 million of up-front
non-refundable fees from Novartis and a $6.0 million non-refundable milestone
fee from Wyeth which was recorded on the one year anniversary of the launch of
Synvisc in the United States. The decrease from 1997 was due primarily to the
fact that 1997 included non-refundable up-front and non-refundable milestone
payments from Wyeth and Bayer of $17.0 million and $3.0 million, respectively.
The up-front non-refundable fees recorded by the Company in 1998 and 1997
contained no future performance obligations and therefore the earnings process
was complete.

Costs and Expenses. Total costs and expenses were $33.9 million for the
year ended December 31, 1998, representing an increase of $16.6 million or 96%
over 1997. Cost of goods sold for the years ended December 31, 1998 and 1997
were $9.7 million and $3.6 million, respectively, which represented 26% and 31%
of net product sales, respectively. Research and development expenses were $9.7
million for the year ended December 31, 1998, representing an increase of $3.8
million or 64% over the prior year, due nearly entirely to process development
costs associated with the Company's new U.S. manufacturing facility. Selling,
general and administrative expenses for the year ended December 31, 1998 were
$14.5 million, representing an increase of $6.7 million or 86% over the prior
year. The increase in selling general and administrative expenses was due
primarily to increased personnel costs associated with establishing the
infrastructure required to manufacture and market the Company's products
globally. During the fourth quarter of 1998, the Company reversed a reserve of
$0.7 million related to an environmental issue and also established a litigation
reserve of $0.4 million for legal fees related to pending litigation.

Interest and Miscellaneous Income. Interest expense was $1.0 million
for the year ended December 31, 1998, which represented an increase of $0.9
million over the prior year. This increase in interest expense is attributable
to the convertible debt instrument issued by the Company in May 1998 and the
fact that the Company ceased the capitalization of interest related to the new
manufacturing facility in July 1998, when the facility was completed. Interest
and miscellaneous income for the year ended December 31, 1998 was $1.4 million,
representing an increase of $0.2 million over the prior year.

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

Revenues. Total revenues for the year ended December 31, 1997 were
$32.5 million, representing an increase of $16.9 million or 108% from total
revenues in 1996. Net product sales for the year ended December 31, 1997 were
$11.7 million representing an increase of $6.7 million or 134% over 1996. The
increase in product sales was due primarily to the launch of Synvisc in the
United States and in certain European countries and higher sales of Hylaform in
certain European countries. Income from licenses, royalties, research contracts
and grants was $20.8 million in 1997, an increase of $10.2 million or 96% from
1996, and represented 64% of 1997 total revenues. This increase was due
primarily to the receipt of up-front non-refundable fees of $8.2 million related
to the licensing of Synvisc for distribution in the United States and certain
foreign countries and a $12.0 million non-refundable milestone payment from
Wyeth which was received when the United States FDA approved Synvisc for
marketing in August 1997. Included in license fees for the year ended December
31, 1997 were non-refundable up-front and non-refundable milestone payments from
Wyeth and Bayer of $17.0 million and $3.0 million, respectively. Included in
license fees for the year ended December 31, 1996, were non-refundable payments
from Collagen Corporation, Roche, Pharmacia and Boehringer Ingelheim of $5.2
million, $1.9 million, $1.0 million and $1.0 million, respectively. The up-front
non-refundable fees recorded by the Company in 1997 and 1996 contained no future
performance obligations and therefore the earnings process was complete.

Costs and Expenses. Total costs and expenses were $17.3 million for the
year ended December 31, 1997, representing an increase of $3.9 million or 29%
over 1996. Cost of goods sold for the years ended December 31, 1997 and 1996
were $3.6 million and $2.6 million, respectively, which represented 31% and 52%
of net product sales, respectively.

15
<PAGE>

Research and development expenses were $5.9 million for the year ended December
31, 1997, representing an increase of $0.4 million or 7% over the prior year,
due primarily to higher personnel costs. Selling, general and administrative
expenses for the year ended December 31, 1997 were $7.8 million, representing an
increase of $2.5 million or 47% over the prior year. The increase in selling,
general and administrative expenses was due primarily to increased personnel and
legal costs associated with establishing the infrastructure required to
manufacture and market the Company's products globally.

Interest and Miscellaneous Income. Interest expense was $0.1 million
for the year ended December 31, 1997. Interest and miscellaneous income for the
year ended December 31, 1997 was $1.2 million, representing an increase of $0.4
million over the prior year, due to higher average cash and investment balances.

Income Taxes

In 1998, 1997 and 1996, the Company recorded federal and state tax
provisions totaling $2.0 million, $0.6 million and $0.1 million, respectively,
primarily for federal alternative minimum and state taxes. The effective rate
for 1998 was 14.3% which differed from the combined statutory federal and state
rate of 40% because of the Company's recognition of certain deferred tax assets
and the benefit of certain net operating losses. In fact, the 1998 provision of
$2.0 million is net of a one-time benefit of approximately $1.8 million related
to recognizing certain net deferred tax assets during 1998. The Company expects
its effective tax rate to approximate the combined statutory federal and state
rate in 1999. The effective rate could potentially exceed the combined statutory
federal and state rate in the future depending on the impact of certain foreign
operations and non-deductible items.

As of December 31, 1998 the Company had $2.8 million of net deferred
tax assets included in other long term assets on its balance sheet, as it is
more likely than not that the Company will realize the benefit of these assets.
However, the Company has provided a full valuation allowance on certain foreign
related deferred tax assets due to the uncertainty of realization.

Liquidity and Capital Resources

The Company had cash and cash equivalents of $16.5 million at December
31, 1998. In February 1999, the Company received a $6.0 million milestone
payment from Wyeth related to the anniversary of the launch of Synvisc. The
Company invests its excess cash in U.S. government securities and, accordingly,
any security purchased with a maturity of less than three months is classified
as cash and cash equivalents. As of December 31, 1998 all of the Company's cash
and cash equivalents were held in operating and money market accounts.

The Company's operations and capital growth over the past three years
have been financed primarily from non-refundable up-front and milestone license
fee payments from corporate partners, the utilization of the Company's cash and
investments, and the private placement of debt and equity securities. Over the
past three years, the Company has received funding of $21.0 million from the
private placement of debt and equity securities and $33.4 million from
non-refundable license fee payments.

For the year ended December 31, 1998 the Company had cash outflows from
operations of $3.9 million which was primarily related to the timing of receipts
of non-recurring fees coupled with the cash outflows related to increased
working capital levels needed to support Synvisc launches. In 1998 the Company
invested $19.5 million in property, plant and equipment, primarily associated
with the building of the manufacturing facility in the United States. The
Company continues to lease a 93,000 square foot building in New Jersey in which
the manufacturing capacity resides. In the fourth quarter of 1998, the Company
exercised its option to acquire this building. Therefore the Company expects to
purchase this building during 1999 at a price of approximately $4.6 million. The
Company also plans to relocate certain research and development laboratories to
this building in 1999. Additionally, the Company received $0.3 million in 1998
from the exercise of Company stock options and $2.8 million from the repayment
of a note related to the sale of common stock to a certain officer of the
Company.

In 1998, approximately $18.6 million of the $19.5 million invested in
property, plant and equipment was spent on the manufacturing facility and
research laboratories in the United States. During 1999, the Company expects to
invest an additional $7.0 million to complete certain research laboratories at
its New Jersey location. The Company expects to complete

16
<PAGE>

these laboratories by the summer of 1999. The Company plans to seek mortgage
financing which, if obtained, could fund a portion of these capital costs.

During 1999, the Company also expects to utilize cash for its increased
working capital requirements needed to support the higher anticipated sales
levels. The Company also expects to incur higher expenses in 1999 associated
with developing its internal infrastructure to support the administration of its
various distribution agreements and expanded global operations. The Company
believes that its capital needs and higher operating expenses will be supported
by its operations, its existing cash position, up-front license fee payments
from the potential completion of additional distribution agreements, milestone
payments from existing corporate partners and potential financing arrangements.

In December 1998, the Company entered into a $2.3 million equipment
loan with GE Capital. The debt has a five-year term and a coupon rate of 7.4%.
The debt is repayable in equal monthly payments over the five-year term. The
agreement includes certain financial covenants with which the Company has
complied.

Contingent Liability

Year 2000

The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. Some
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including a
temporary inability to process transactions, send invoices, or engage in normal
business and operating activities.

Some of the Company's systems are Year 2000 compliant. The Company has
a program in place to assess the remaining software and systems and bring them
into Year 2000 compliance in time to minimize any significant detrimental
effects on operations. The program focuses on three main functional areas:

17
<PAGE>

i) Information technology which addresses data, phone and administrative
systems, including personal computers, telecommunications, local area
networks, wide area networks and business applications. These systems are
computer devices and software that the company wrote or purchased which
are not supported by external vendors. The software systems include
applications developed or purchased by corporate departments and operated
by departmental personnel. The computer devices are desktop personal
computers and server computer equipment including system hardware,
firmware, and installed commercial application software.

ii) Embedded chip technology which addresses manufacturing systems,
laboratory instruments and plant maintenance systems with programmable
logic controllers with date functions. The Process Control and
Environmental Monitoring and Control Systems are used in the Company's
manufacturing and research and development processes, among other
operations. These generally are systems, devices and instruments which
utilize date functionality and generate, send, receive or manipulate
date-stamped data and signals. These systems may be found in data
acquisition/processing software, laboratory instrumentation, and other
equipment with embedded code.

iii) Material suppliers and marketing partners which address third parties
that are critical to the Company's manufacturing process and distribution
of product. The company has identified critical providers of information,
goods and services in order to assess their Year 2000
compliance/readiness. The Company has sent letters to all critical and
regular suppliers and marketing partners. Although the Company cannot
control the response time to its letters, the Company hopes to have
assessed all letters by May 31, 1999 and confirmed Year 2000 readiness of
selected suppliers and marketing partners by June 30, 1999. The Company
recognizes that to a certain degree it is relying on information provided
by such third parties regarding their Year 2000 compliance readiness.
While the Company is attempting to evaluate information provided by these
third parties, there can be no assurance that in all instances accurate
information is being provided. Failure of these third parties' systems to
be Year 2000 compliant could have a material adverse effect on the
Company's financial position, results of operations and cash flows.

In order to address the three noted areas, the Company has divided the
project into four phases including awareness, assessment, validation, and
implementation along the functional departments of the Company. The Company has
completed the awareness and assessment phases for all functional areas. The
Company expects to complete the validation phase by April 30, 1999. Full
implementation and compliance for all functional areas is expected by September
30, 1999.

The Company is using both internal and external resources to identify,
correct/reprogram, and test its computer systems, equipment and software for
Year 2000 compliance.

The Company estimates that the costs associated with the Year 2000 issue
will not be material, and as such will not have a significant impact on the
Company's financial position or operating results. However, the failure to
correct a material Year 2000 problem could result in an interruption in certain
normal business activities or operations. Such failures could materially and
adversely affect the Company's results of operations, liquidity and financial
condition. The Company believes that, with the implementation of the Year 2000
program, the possibility of significant interruptions of normal operations will
be reduced. To date the Company estimates that it has spent approximately $0.1
million replacing, upgrading, or repairing systems or equipment. The aggregate
additional costs of the Company's Year 2000 program cannot be known at this
time. However, given the current status of the validation phase the additional
costs are expected to be approximately $0.5 million. The actual additional costs
will depend on numerous factors, including without limitation, the costs of
replacing, upgrading or repairing systems, software and equipment, and
consulting fees and expenses. All costs are expected to be funded through
operations.

The Company is also developing a contingency plan to address a situation
in which Year 2000 problems do cause an interruption in normal business
activities. Once developed, contingency plans and related cost estimates will be
continually refined, as additional information becomes available. The Company
expects to have the contingency plan in place for critical operations by June
30, 1999.

There can be no assurance that the Company will be able to complete all of
the modifications in the required time frame, that unanticipated events will not
occur or that the Company will be able to identify all Year 2000 issues before
problems arise. Therefore, there can be no assurance that the Year 2000 issue
will not have a material adverse effect on the Company's financial position,
results of operations and cash flows.

The statements set forth herein concerning the Year 2000 problem which are
not historical facts are forward-looking statements that involve risk and
uncertainties that could cause actual results to differ materially from those in
the forward-looking statements. There can be no guarantee that any estimates or
other forward-looking statements will be achieved and actual results could
differ significantly from those planned or contemplated. The Company plans to
update the status of its Year 2000 program as necessary in its periodic filings
and in accordance with applicable securities laws.

18
<PAGE>

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

Because the Company currently has operations outside the U.S.A., the
Company is exposed to market risk from changes in foreign exchange rates. In
order to reduce the risk from fluctuations in foreign currencies the Company has
structured its various distribution agreements in United States dollars.
Approximately 2.5% of 1998 total revenues were generated in foreign currencies.
As of December 31, 1998 11.3% of the Company's total assets were located outside
of the United States, and no single country had a significant concentration of
cash.

Item 8. Financial Statements and Supplementary Data

See page F-1 of this Report, which includes an index to the
consolidated financial statements.

Item 9. Changes In and Disagreements With Accountants and Financial Disclosure

Not applicable

PART III

Item 10. Directors and Executive Officers of the Registrant

(a) Directors. The information with respect to directors required by
this item is incorporated herein by reference to the Company's Proxy Statement
relating to the Company's Annual Meeting of Shareholders to be held on May 27,
1999 (the "Proxy Statement").

(b) Executive Officers. The information with respect to executive
officers required by this item is set forth in Part I of the Report.

(c) Reports of Beneficial Ownership. The information with respect to
reports of beneficial ownership required by this item is incorporated herein by
reference to the Company's Proxy Statement.

Item 11. Executive Compensation

Information required under this Item is incorporated herein by
reference to the Company's Proxy Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

Information required under this Item is incorporated herein by
reference to the Company's Proxy Statement.

Item 13. Certain Relationships and Related Transactions

Information required under this Item is incorporated herein by
reference to the Company's Proxy Statement.

19
<PAGE>
PART IV

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

List of Financial Statements

See page F-1 of this Report, which includes an index to consolidated
financial statements.

List of Financial Statement Schedules

None.

List of Exhibits (numbered in accordance with Item 601 of Regulations S-K)

3.1 Amended and Restated Certificate of Incorporation of Biomatrix,
Inc. as filed as an Exhibit to Registration No. 33-41424, and
incorporated herein by reference thereto.

3.2 Amendment to Amended and Restated Certificate of Incorporation to
reflect the increase in authorized shares.

3.3 Amended and Restated Bylaws of the Company as filed as an Exhibit
to Registration No. 33-41424, and incorporated herein by reference
thereto.

4 Specimen Stock Certificate as filed as an Exhibit to Registration
No. 33-41424, and incorporated herein by reference thereto.

10.1 Technology License Agreement dated as of June 21, 1991 between
Biomatrix, Inc. and Biomatrix Medical Canada Inc. as filed as an
Exhibit to Registration No. 33-41424, and incorporated herein by
reference thereto.

10.2 Management Services Agreement dated as of June 21, 1991 between
Biomatrix, Inc. and Biomatrix Medical Canada Inc. as filed as an
Exhibit to Registration No. 33-41424, and incorporated herein by
reference thereto.

10.3 Employment Agreement dated December 30, 1988 between Biomatrix,
Inc. and Endre A. Balazs, M.D. as filed as an Exhibit to
Registration No. 33-41424, and incorporated herein by reference
thereto. Management contract or compensatory plan required to be
filed as an exhibit to this form pursuant to Item 14(c) of this
report.

10.4 Development Agreement by and among Biomatrix, Inc., Biomatrix
Svenska AB and OA Investor KB (Up-Will) dated February, 1990 as
filed as an Exhibit to Registration No. 33-41424, and incorporated
herein by reference thereto.

10.5 1984 Stock Option Plan (as amended), and forms of Incentive and
Non-Statutory Stock Option Agreements as filed as an Exhibit to
Registration No. 33-41424, and incorporated herein by reference
thereto. Management contract or compensatory plan required to be
filed as an exhibit to this form pursuant to Item 14(c) of this
report.

10.6 Forms of Employment and Confidentiality Agreements, as filed as an
Exhibit to Registration No. 33-41424, and incorporated herein by
reference thereto.

10.7 License Agreements dated as of May 21, 1982 by and between
Biomatrix, Inc. and each of Drs. Endre A. Balazs, Janet L.
Denlinger and Gerald S. Lazarus, as filed as an Exhibit to
Registration No. 33-41424, and incorporated herein by reference
thereto.

10.8 Amendment to Employment Agreement dated December 30, 1988 between
Biomatrix, Inc. and Endre A. Balazs, M.D., as filed as an Exhibit
to the 1992 annual report on Form 10-K, and incorporated herein by
reference thereto. Management contract or compensatory plan
required to be filed as an exhibit to this form pursuant to Item
14(c) of this report.

20
<PAGE>

10.9 Retirement Plan Agreement dated July 1, 1992 between Biomatrix,
Inc. and the trustees of the Company, as filed as an Exhibit to
the 1992 annual report on Form 10-K, and incorporated herein by
reference thereto. Management contract or compensatory plan
required to be filed as an exhibit to this form pursuant to Item
14(c) of this report.

10.10 Consulting Agreement dated June 1, 1993 between Biomatrix, Inc.
and Julius A. Vida, Ph.D., as filed as an Exhibit to the quarterly
report on Form 10-Q for the quarter ended June 30, 1993, and
incorporated herein by reference thereto. Management contract or
compensatory plan required to be filed as an exhibit to this form
pursuant to Item 14(c) of this report.

10.11 Agreement dated August 29, 1995, between Biomatrix, Inc. and Rory
B. Riggs, as filed as an Exhibit to the quarterly report on Form
10-Q for the quarter ended September 30, 1995, and incorporated
herein by reference thereto.

10.12 Amendment dated July 10, 1995, to the Consulting Agreement dated
June 1, 1993 between Biomatrix, Inc. and Julius A. Vida, as filed
as an Exhibit to the quarterly report on Form 10-Q for the quarter
ended September 30, 1995, and incorporated herein by reference
thereto. Management contract or compensatory plan required to be
filed as an exhibit to this form pursuant to Item 14(c) of this
report.

10.13 1994 Stock Option Plan. Filed as an exhibit to the Company's proxy
statement filed pursuant to Rule 14a-6 dated June 7, 1994, as
filed as an Exhibit to the 1995 annual report on Form 10-K, and
incorporated herein by reference thereto. Management contract or
compensatory plan required to be filed as an exhibit to this form
pursuant to Item 14(c) of this report.

10.14 Non-employee director stock option plan. Filed as an exhibit to
the Company's proxy statement filed pursuant to Rule 14a-6 dated
May 23, 1995, as filed as an Exhibit to the 1995 annual report on
Form 10-K, and incorporated herein by reference thereto.
Management contract or compensatory plan required to be filed as
an exhibit to this form pursuant to Item 14(c) of this report.

10.15 United States Distribution Agreement dated June 14, 1996 between
Biomatrix, Inc. and Collagen Corporation, as filed as an Exhibit
to the quarterly report on Form 10-Q for the quarter ended June
30, 1996 and incorporated herein by reference thereto.
(Confidential portions have been omitted and filed separately with
the Commission.)

10.16 International Distribution Agreement, dated June 14, 1996, between
Biomatrix, Inc. and Collagen Corporation, as filed as an Exhibit
to the quarterly report on Form 10-Q for the quarter ended June
30, 1996, and incorporated herein by reference thereto.
(Confidential portions have been omitted and filed separately with
the Commission.)

10.17 Agreement of Lease, dated April 18, 1996, between Ridgefield
Associates and Biomatrix, Inc., as filed as an Exhibit to the
quarterly report on Form 10-Q for the quarter ended June 30, 1996,
and incorporated herein by reference thereto. (Confidential
portions have been omitted and filed separately with the
Commission.)

10.18 Employment Agreement, dated April 2, 1996, between Biomatrix, Inc.
and Rory B. Riggs, as filed as an Exhibit to the quarterly report
on Form 10-Q for the quarter ended June 30, 1996, and incorporated
herein by reference thereto. Management contract or compensatory
plan required to be filed as an exhibit to this form pursuant to
Item 14(c) of this report.

10.19 Amendment dated March 31, 1996 to the Consulting Agreement, dated
June 1, 1993, between Biomatrix Inc. and Julius A. Vida, as filed
as and Exhibit to the quarterly report on Form 10-Q for the
quarter ended June 30, 1996, and incorporated herein by reference
thereto. Management contract or compensatory plan required to be
filed as an exhibit to this form pursuant to Item 14(c) of this
report.

10.20 United States Licensing Agreement dated February 7, 1997 between
Biomatrix, Inc. and American Home Products Corporation as filed as
an Exhibit to the quarterly report on Form 10Q for the quarter
ended March 31, 1997, and incorporated herein by reference
thereto. (Confidential portions have been omitted and filed
separately with the Commission.)

21
<PAGE>

10.21 International Licensing Agreement dated February 7, 1997 between
Biomatrix, Inc. and American Home Products Corporation as filed as
an Exhibit to the quarterly report on Form 10Q for the quarter
ended March 31, 1997, and incorporated herein by reference
thereto. (Confidential portions have been omitted and filed
separately with the Commission.)

10.22 Supply Agreement dated February 7, 1997 between Biomatrix, Inc.
and American Home Products Corporation as filed as an Exhibit to
the quarterly report on Form 10Q for the quarter ended March 31,
1997, and incorporated herein by reference thereto. (Confidential
portions have been omitted and filed separately with the
Commission.)

10.23 Trademark License Agreement dated February 7, 1997 between
Biomatrix, Inc. and American Home Products Corporation as filed as
an Exhibit to the quarterly report on Form 10Q for the quarter
ended March 31, 1997, and incorporated herein by reference
thereto. (Confidential portions have been omitted and filed
separately with the Commission.)

10.24 Form of Restricted Stock Purchase Agreement under the Company's
1997 Restricted Stock Plan as filed as an Exhibit to the quarterly
report on Form 10Q for the quarter ended June 30, 1997, and
incorporated herein by reference thereto. Management contract or
compensatory plan required to be filed as an exhibit to this form
pursuant to Item 14(c) of this report.

10.25 Form of Secured Promissory Note under the Company's 1997
Restricted Stock Plan as filed as an Exhibit to the quarterly
report on Form 10Q for the quarter ended June 30, 1997, and
incorporated herein by reference thereto. Management contract or
compensatory plan required to be filed as an exhibit to this form
pursuant to Item 14(c) of this report.

10.26 Form of Stock Pledge Agreement under the Company's 1997 Restricted
Stock Plan as filed as an Exhibit to the quarterly report on Form
10Q for the quarter ended June 30, 1997, and incorporated herein
by reference thereto. Management contract or compensatory plan
required to be filed as an exhibit to this form pursuant to Item
14(c) of this report.

21 List of Subsidiaries.

23.1 Consent of PricewaterhouseCoopers LLP, independent auditors of the
Company.

27.1 Financial Data Schedule
------------------

Reports on Form 8-K
None.

22
<PAGE>

SIGNATURES

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

BIOMATRIX, INC.

By: /s/ ENDRE A. BALAZS
-------------------------------
(Endre A. Balazs)
Chief Executive Officer, Chief
Scientific Officer, Director

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

Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ ENDRE A. BALAZS
....................................................Chief Executive Officer, Chief March 30, 1999
(Endre A. Balazs) Scientific Officer, Director
(Principal Executive Officer)

/s/ MAXINE SEIFERT
....................................................Chief Financial Officer March 30, 1999
(Maxine Seifert) (Principal Finance and
Accounting Officer)

/s/ RORY B. RIGGS
....................................................President, Director March 30, 1999
(Rory B. Riggs)

/s/ JANET L. DENLINGER
....................................................Executive Vice President, March 30, 1999
(Janet L. Denlinger) Director

/s/ H. STUART CAMPBELL
....................................................Chairman of the Board of March 30, 1999
(H. Stuart Campbell) Directors

/s/ KURT MARK
....................................................Director March 30, 1999
(Kurt Mark)

/s/ JUSTIN P. MORREALE
....................................................Director March 30, 1999
(Justin P. Morreale)

/s/ JULIUS A. VIDA
....................................................Director March 30, 1999
(Julius A. Vida)
</TABLE>

23
<PAGE>

BIOMATRIX, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements:
Page
----

<S> <C>
Report of Independent Accountants..................................................... F-2

Consolidated Balance Sheets as of December 31, 1998 and 1997.......................... F-3

Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996................................................................. F-4

Consolidated Statements of Changes in Shareholders' Equity for
the years ended December 31, 1998, 1997 and 1996.................................... F-5

Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996................................................................. F-6

Notes to Consolidated Financial Statements............................................ F-7 to F-19
</TABLE>

Financial statement schedules are omitted for the reason that they are not
applicable or the required information is included in the consolidated financial
statements or notes thereto.

F-1

<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and
Board of Directors of
Biomatrix, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the consolidated financial position of
Biomatrix, Inc. and its subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PRICEWATERHOUSECOOPERS LLP

New York, New York
February 17, 1999

F-2
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in millions, except share amounts)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 16.5 $ 17.4
Accounts receivable, less allowance for doubtful accounts..... 8.9 3.5
Inventory, at lower of cost or market......................... 6.8 3.1
License fees receivable....................................... 7.6 -
Prepaid expenses and other current assets..................... 1.5 1.9
------ ------

Total current assets.......................................... 41.3 25.9
Property, plant and equipment, net................................ 37.7 17.8
Other assets...................................................... 4.3 0.2
------ ------

Total assets........................................ $ 83.3 $ 43.9
====== ======

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 3.5 $ 0.8
Accrued expenses.............................................. 5.6 3.0
Current portion of notes payable.............................. 0.6 0.2
Current portion of capital lease obligations.................. 4.6 0.0
------ ------

Total current liabilities..................................... 14.3 4.0
Notes payable..................................................... 17.6 0.9
Capital lease obligations......................................... 0.0 4.7
------ ------

Total liabilities................................... 31.9 9.6
------ ------

Commitments and contingent liabilities

Shareholders' equity:
Preferred stock, 3,000 shares authorized; none issued......... - -
Common stock, $.0001 par value: 60,000,000 authorized;
11,424,179 and 11,013,035 issued and 11,378,032 and
10,966,888 outstanding in 1998 and 1997, respectively....... 0.0 0.0
Additional paid-in capital........................................ 72.8 59.8
Notes receivable - related parties................................ (10.6) (3.2)
Accumulated deficit............................................... (7.7) (19.8)
Accumulated other comprehensive loss.............................. (2.2) (1.6)
Treasury stock, 46,147 shares of common stock, at cost............ (0.9) (0.9)
------ ------

Total shareholders' equity ......................... 51.4 34.3
------ ------

Total liabilities and shareholders' equity.......... $ 83.3 $ 43.9
====== ======
</TABLE>
See notes to consolidated financial statements.

F-3
<PAGE>

BIOMATRIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except share and earnings per share data)
<TABLE>
<CAPTION>
Years ended December 31,
------------------------

1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net product sales................................ $37.8 $11.7 $ 5.0
Income from licenses, royalties, research
contracts and grants........................ 9.8 20.8 10.6
----- ----- -----

Total revenues.............................. 47.6 32.5 15.6
----- ----- -----

Costs and expenses:
Cost of goods sold.......................... 9.7 3.6 2.6
Research and development expenses........... 9.7 5.9 5.5
Selling, general and administrative expenses 14.5 7.8 5.3
----- ----- -----

Total costs and expenses......................... 33.9 17.3 13.4
----- ----- -----

Income from operations........................... 13.7 15.2 2.2

Interest expense................................. (1.0) (0.1) (0.1)
Interest and miscellaneous income................ 1.4 1.2 0.8
----- ----- -----

Income before taxes.............................. 14.1 16.3 2.9

Provision for income taxes....................... 2.0 0.6 0.1
----- ----- -----

Net income ...................................... $ 12.1 $ 15.7 $ 2.8
====== ====== ======

Net income per share:
Basic...................................... $ 1.08 $ 1.44 $ 0.27
========== =========== ===========
Weighted average shares outstanding........ 11,225,199 10,894,769 10,434,230
========== =========== ===========

Diluted.................................... $ 1.02 $ 1.39 $ 0.25
========== =========== ===========
Diluted shares outstanding................. 11,851,879 11,327,206 10,895,026
========== =========== ===========
</TABLE>

See notes to consolidated financial statements.

F-4
<PAGE>

BIOMATRIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY (in millions, except shares,
per share amounts and par value)

Capital stock $.0001 Par Value
---------------------------------
Common-voting Notes
--------------------- Additional Receivable
Shares Par Paid-in Related Accumulated
Issued Value Capital Parties Deficit
------------ -------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 10,125,949 $1,013 $53.3 ($38.3)

Sale of common stock to a
related party 200,000 20 2.5 ($2.5)
Interest on related party (0.1)
notes
Options exercised 261,666 26 0.9
Adjustments resulting from
translation adjustments
Net income - 1996 2.8
------------ -------- ----------- ----------- ------------
Balance at December 31, 1996 10,587,615 1,059 56.7 (2.6) (35.5)

Sale of common stock to
related parties 133,000 13 2.3 (0.4)
Interest on related party (0.2)
notes
Purchase of treasury stock
Options exercised 292,420 29 0.8
Adjustments resulting from
translation adjustments
Net income - 1997 15.7

------------ -------- ----------- ----------- ------------
Balance at December 31, 1997 11,013,035 1,101 59.8 (3.2) (19.8)

Sale of common stock to
related parties 303,000 30 9.8 (9.8)
Interest on related party (0.4)
notes
Repayment of note and
interest from a 2.8
related party
Issuance of common stock
in conversion for
subsidiary stock 38,462 4 --
Compensatory stock options 0.8
Unearned stock option
compensation (0.6)
Options exercised 69,682 7 0.4
Adjustments resulting from
translation adjustments
Tax benefit from stock 2.6
options
Net income - 1998 12.1

------------ -------- ----------- ----------- ------------
Balance at December 31, 1998 11,424,179 $1,142 $ 72.8 ($10.6) ($7.7)
========== ====== ====== ======= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Comprehensive Income
------------------------------

Accumulated
Other Total Treasury Stock
Comprehensive Comprehensive -------------------
Loss Income Shares Cost
------------- ------------- --------- ---------
<S> <C> <C> <C>
Balance at December 31, 1995 ( 0.9) 2,814 -

Sale of common stock to a
related party
Interest on related party
notes
Options exercised
Adjustments resulting from
translation adjustments (0.1)
Net income - 1996 2.7
------ ------ -----
Balance at December 31, 1996 (1.0) 2,814 -

Sale of common stock to
related parties
Interest on related party
notes
Purchase of treasury stock 43,333 (0.9)
Options exercised
Adjustments resulting from
translation adjustments (0.6)
Net income - 1997 15.1

------ ------ -----
Balance at December 31, 1997 (1.6) 46,147 (0.9)

Sale of common stock to
related parties
Interest on related party
notes
Repayment of note and
interest from a
related party
Issuance of common stock
in conversion for
subsidiary stock
Compensatory stock options
Unearned stock option
compensation
Options exercised
Adjustments resulting from
translation adjustments (0.6)
Tax benefit from stock
options
Net income - 1998 11.5

------ ------ ------
Balance at December 31, 1998 ($2.2) 46,147 ($0.9)
====== ====== ======
</TABLE>

See notes to consolidated financial statements.

F-5
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... $ 12.1 $ 15.7 $ 2.8
------ ----- -----
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization......................... 1.6 0.7 0.6
Stock option compensation............................. 0.2 0.1 0.0
Amortization of debt fees.............................. 0.1 - -
Change in assets and liabilities:
Accounts receivable.................................... (5.5) (2.4) (0.2)
Inventory.............................................. (3.9) (2.4) (0.1)
Prepaid expenses and other current assets.............. (7.3) (1.2) (0.3)
Other assets........................................... (4.2) (0.4) (0.1)
Accounts payable and accrued expenses.................. 3.0 1.2 0.5
------ ----- -----
Total adjustments..................................... (16.0) (4.4) 0.4
------ ----- -----
Net cash (used in) provided by operating activities........... (3.9) 11.3 3.2
------ ----- -----

Cash flows from investing activities:
Capital expenditures..................................... (19.5) (9.1) (0.8)
Purchases of held-to-maturity investments................ - - (18.6)
Maturity of held-to-maturity investments................. - 10.6 9.6
------ ----- -----
Net cash (used in) provided by investing activities........... (19.5) 1.5 (9.8)
------ ----- -----

Cash flows from financing activities:
Payments of notes payable and capital leases............. (0.2) (0.1) (0.2)
Proceeds from issuance of debt........................... 17.3 - -
Repayment of note by a related party..................... 2.5 - -
Stock options exercised.................................. 0.3 0.7 0.9
Income tax benefit related to stock options.............. 2.6 - -
Repurchase of common stock............................... - (0.9) -
Sale of common stock ................................... - 1.9 -
------ ----- -----
Net cash provided by financing activities..................... 22.5 1.6 0.7
------ ----- -----

Effect of exchange rate changes on cash....................... 0.0 0.0 (0.0)
------ ----- -----

Net (decrease) increase in cash and cash equivalents.......... (0.9) 14.4 (5.9)
Cash and cash equivalents at beginning of period.............. 17.4 3.0 8.9
------ ----- -----
Cash and cash equivalents at end of period.................... $16.5 $17.4 $ 3.0
====== ===== =====

Supplemental cash flow data:
Interest paid, net of capitalized interest............... $ 0.7 $ 0.1 $ 0.1
Income taxes paid........................................ $ 0.4 $ 0.2 $ 0.1
Non-cash investing and financing:
Capital expenditures financed by capital lease obligations $ - $ - $ 4.7
Sale of common stock financed with note receivable....... $ 9.8 $ 0.4 $ 2.5
</TABLE>

See notes to consolidated financial statements.

F-6
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations

Biomatrix, Inc. (the "Company") was founded in 1981 to develop,
manufacture and commercialize a series of proprietary viscoelastic products made
of biological polymers called hylans for use in therapeutic medical applications
and skin care. Hylans are chemically modified forms of the naturally occurring
hyaluronan (also known as hyaluronic acid or sodium hyaluronate). Hylans are the
second generation of viscoelastics used in medicine, and are characterized by
significantly enhanced physical (rheological) properties (elasticity, viscosity
and pseudoplasticity) as compared to naturally occurring hyaluronan, from which
the first generation viscoelastics are made. The discovery of hylans has allowed
the Company to develop a range of patented products with superior viscoelastic
properties in the forms of fluids, gels and solids. The Company's operations
consist of therapeutic medical products, skin care intermediate products and
toxicity testing. The Company's business is subject to certain risks and
uncertainties, including but not limited to governmental regulation,
reimbursement, dependence on distribution relationships, patents, competition,
manufacturing, rapid growth, dependence on key personnel, fluctuation in
operating results and product liability.

2. Summary of Significant Accounting Policies

Basis of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Biomatrix Medical Canada Inc., Biomatrix UK,
Biomatrix France SARL, Biomatrix Switzerland GmbH, Biomatrix Svenska AB,
Biomatrix Germany GmbH and its majority-owned subsidiary, Biomatrix Limited Hong
Kong. All significant intercompany accounts and transactions have been
eliminated in consolidation.

Property, Plant and Equipment and Capitalized Interest
Property, plant and equipment is recorded at cost. Interest related to
borrowings for a construction project with a term greater than one year is
capitalized. The interest is capitalized during the term of the project and
capitalization ceases when the project is completed.

Depreciation and Amortization
Building, research laboratory equipment, office equipment and
manufacturing equipment are depreciated on the straight-line method over their
estimated useful lives. Capital leases and leasehold improvements are amortized
on the straight-line method over the estimated useful life of the property or
the terms of the related lease, whichever is shorter. Expenditures for
additions, major renewals and improvements are capitalized and expenditures for
maintenance and repairs are charged to expense as incurred. When assets are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and the resulting gain or loss is recognized in income
for the period.

Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. If
the sum of the expected future undiscounted cash flows is less than the carrying
amount of the asset, a loss is recognized. There were no impaired long-lived
assets at December 31, 1998.

Cash and Cash Equivalents
Cash and cash equivalents include highly liquid short-term investments in
money market funds, at cost, and U.S. Government or Government Agency securities
purchased with a maturity of less than three months.

Fair Value of Financial Instruments
Cash, accounts receivable, notes receivable, accounts payable and accrued
liabilities are reflected in the financial statement at fair value because of
the short-term maturity of those instruments. The fair value of the Company's
notes payable and capital lease obligations (including current installments) are
estimated based on the current rate offered to the Company for debt of the same
remaining maturities. The estimated fair value of the Company's notes payable
and capital lease obligations approximates the carrying value at December 31,
1998 and 1997.

F-7
<PAGE>

BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2. Summary of Significant Accounting Policies (Continued)

Inventory
Inventory is stated at the lower of cost or market and costs are removed
on a first-in first-out (FIFO) basis.

Investments
Investments, which typically consist of U.S. Government and Government
Agency Securities, are classified as held-to-maturity and are reported at
amortized cost, which approximates market.

Deferred Debt Fees
Deferred debt fees are included in other assets and are amortized over the
term of the corresponding debt.

Revenue Recognition
The Company's product revenue is recognized at the time the products are
shipped. Revenue from non-refundable license payments is recognized in the
period earned, which is when all related material commitments have been
satisfied and no future consideration is required. Research contract revenue is
recognized at the time the service is performed.

Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Contingencies
The Company accounts for contingencies in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 5, "Accounting for Contingencies."
As such when a loss is probable and reasonably estimable a reserve is
established and information regarding such reserve is disclosed in the notes to
the financial statements. In the event the Company plans to defend a legal
matter vigorously, and the costs of such defense are not covered by an insurance
policy, the Company will establish a reserve for future probable estimated legal
fees, if estimable.

Income Taxes
Deferred taxes are provided on the liability method, in accordance with
SFAS No. 109, "Accounting for Income Taxes," whereby deferred tax assets are
recognized for deductible temporary differences, and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Deferred tax assets are reduced by a valuation allowance,
when, in the opinion of management, it is more likely than not that some
portions or all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.

Foreign Currency Translation
The assets and liabilities of the Company's subsidiaries are translated
into U.S. dollars at year-end exchange rates and revenue and expense items are
translated at average rates of exchange prevailing during the year. Resulting
translation adjustments are a component of accumulated other comprehensive loss
in shareholders' equity. Gains and losses resulting from foreign currency
transactions (transactions denominated in a currency other than the Company's
functional currency) are included in miscellaneous income.

F-8
<PAGE>

BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

2. Summary of Significant Accounting Policies (Continued)

Net Income Per Common Share
The Company has adopted SFAS No. 128, "Earnings per Share," which requires
the presentation of basic earnings per share and diluted earnings per share.
Basic net income per share is computed by dividing net income by the
weighted-average common shares outstanding for the period. Diluted net income
per share is reflective of all common share equivalents. The Company has
convertible debt which converts into 375,000 shares of common stock, however
this instrument has not been included in diluted earnings per share for 1998
because its effect would be anti-dilutive. Prior periods have been restated to
reflect the new standard. A reconciliation of weighted average shares
outstanding from basic to diluted is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average shares outstanding - Basic 11,225,199 10,894,769 10,434,230
Dilutive effect of stock options 626,680 432,437 460,796
----------- ---------- ----------
Weighted average shares outstanding - Diluted 11,851,879 11,327,206 10,895,026
========== ========== ==========
</TABLE>

Reclassification
Certain amounts in the 1997 and 1996 consolidated statements of operations
and the 1997 consolidated balance sheet have been reclassified in order to
conform to the 1998 presentation.

3. Inventories

Inventories at December 31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Finished goods................................................... $ 1.5 $ 0.6
Work-in-process.................................................. 4.8 1.6
Raw materials.................................................... 0.5 0.9
------ ------
$ 6.8 $ 3.1
====== ======
</TABLE>

4. Notes Receivable - Related Parties

Notes receivable - related parties relate to the acquisition of common
stock of the Company at fair market value by several officers and directors of
the Company during 1998, 1997 and 1996. The notes are with recourse and are
payable with simple interest upon maturity. The interest rates, which are
determined in accordance with Internal Revenue Service standards, on the notes
outstanding as of December 31, 1998 range from 5.91% to 7.18%. The amount of the
notes outstanding at December 31, 1998 and 1997 mature at the following dates:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
April 2000....................................................... $ - $ 2.6
May 2007......................................................... 0.5 0.6
January 2008..................................................... 0.9 -
March 2008....................................................... 0.6 -
April 2008....................................................... 1.7 -
June 2008........................................................ 6.9 -
------ ------

$ 10.6 $ 3.2
====== ======
</TABLE>
In August 1998, an officer of the Company repaid a note in the amount of $2.8
million including interest. All notes issued during 1998 and 1997 have been
for common stock issued pursuant to the Company's 1997 Restricted Stock Plan.

F-9
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

5. Property, Plant and Equipment

Property, plant and equipment at December 31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>
Estimated
1998 1997 Useful Life
---- ---- -----------
<S> <C> <C> <C>
Buildings................................................... $ 22.4 $ 2.3 25 years
Land ...................................................... 2.2 2.2 N/A
Construction in progress.................................... 4.9 9.7 N/A
Manufacturing equipment..................................... 7.7 3.2 5-10 years
Research laboratory equipment............................... 2.1 2.1 5-10 years
Office equipment............................................ 3.1 1.4 3-10 years
Leasehold improvements...................................... 1.1 1.1 1-7 years
--- ---
43.5 22.0
Less accumulated depreciation and amortization.............. (5.8) (4.2)
----- -----
$37.7 $17.8
===== =====
</TABLE>
Depreciation expense for the three years ended December 31, 1998, 1997 and
1996 was, $1.6 million, $0.7 million and $0.6 million, respectively. Capitalized
interest for the years ended December 31, 1998, 1997 and 1996 was $0.2 million,
$0.4 million and $0.1 million, respectively. Repairs and maintenance expenses
for the three years ended December 31, 1998, 1997 and 1996 were $0.4 million,
$0.1 million and $0.1 million, respectively.

Assets recorded under capital leases of $4.6 million as of December 31,
1998 and 1997 are included in land, buildings and construction in progress. The
accumulated depreciation of assets under capital leases was $0.1 million at
December 31, 1998. Assets pledged under equipment financing at December 31, 1998
are included in manufacturing equipment in the amount of $3.7 million. Assets
mortgaged as of December 31, 1998 and 1997 are included in buildings in the
amount of $2.1 million and $2.3 million, respectively.

6. Accrued Expenses

Accrued expenses at December 31, 1998 and 1997 consisted of:
<TABLE>
<CAPTION>

Accrued Expenses: 1998 1997
---- ----
<S> <C> <C>
Taxes payable............................................... $ 1.9 $ 0.3
Accrued personnel expenses.................................. 1.5 1.0
Environmental expenses...................................... - 0.7
Royalties................................................... 1.1 0.4
Other accrued expenses...................................... 1.1 0.6
----- ------
$ 5.6 $ 3.0
===== =====

7. Long-Term Debt and Capital Lease Obligations

1998 1997
---- ----
Notes Payable:
Equipment loan.................................................. $ 2.3 $ -
Mortgage note, payable in monthly installments through July 2001.. 0.3 0.4
Construction and equipment loan................................. 0.5 0.7
Capital lease obligations.......................................... 4.7 4.7
Convertible subordinated debt...................................... 15.0 -
---- -------
Total ................................................ 22.8 5.8
Less current maturities......................................... (5.2) (0.2)
-------- ------
Long term portion............................................... $ 17.6 $ 5.6
====== =====
</TABLE>

F-10
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

7. Long-Term Debt and Capital Lease Obligations (Continued)

In July 1996, the Company refinanced an outstanding mortgage on its
Canadian manufacturing facility with another mortgage that accrues interest at
an annual rate of 9.5% and has a final payment of $0.3 million due in June 2001.

The Company's majority-owned Canadian subsidiary obtained a $1.0 million
construction and manufacturing equipment loan from the Canadian government of
which $0.9 million and $0.1 million was funded in 1993 and 1994, respectively.
Interest on the loan accrues at the prevailing annual variable rate, which was
approximately 8.25% at December 31, 1998 and 7.5% at December 31, 1997. In
January 1996, the Company amended the repayment terms of the agreement, whereby
the Company will make quarterly principal payments and a final payment in 2001.
The principal payments shall correspond to 30% of the Canadian subsidiary's
quarterly net profit (excluding depreciation), with an annual maximum of $0.2
million and an annual minimum of $0.1 million. The loan agreement contains
covenants that require the maintenance of certain financial ratios by the
Canadian subsidiary.

In September 1996, the Company entered into a capital lease of a building
and land where the Company's U.S. manufacturing facility is located. This lease
has been accounted for as a capital lease and has an imputed interest rate of
approximately 9%. The Company has exercised its option to acquire this building
at a price of approximately $4.6 million. The Company expects to complete the
purchase of the building during 1999.

In May 1998, the Company issued $15.0 million of subordinated convertible
debt to a third party. The debt has a five-year term and a coupon rate of 6.9%
with interest payable on a semi-annual basis. The debt contains a conversion
feature that allows the third party to convert the debt into common shares at
$40 per share after one year. In addition, the Company can call the debt at par
after three years or after two years if certain conditions are satisfied. Debt
fees related to this transaction of $0.6 million at December 31, 1998 are
included in other assets and are being amortized on a straight-line basis over
the five-year term of the debt. The debt contains certain financial covenants.

In December 1998, the Company obtained equipment financing from GE Capital
in the amount of $2.3 million. The debt has a five-year term, a coupon rate of
7.4%, and is payable in equal monthly installments. Certain of the Company's
machinery and equipment is pledged as collateral for this financing.

Future minimum payments due under the note payable, mortgage and capital
lease obligations are as follows at December 31, 1998:

Year Amount
---- ------
1999....................................... $ 6.7
2000....................................... 1.8
2001....................................... 2.0
2002....................................... 1.6
2003....................................... 16.1
-----
Total minimum payments..................... $28.2
Less - amount representing interest........ (5.4)
-----
Principal obligations...................... $22.8
Less - current portion..................... (5.2)
-----
Long-Term portion.......................... $17.6
=====

Line of Credit
The Company has a $0.4 million credit agreement with a Canadian bank with
an interest rate at prime + 1/2 %. There were no borrowings outstanding at
December 31, 1998.

F-11
<PAGE>

BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

8. Capital Stock

In March 1995, the Company completed a private sale of 250,000 shares of
common stock to Recordati Industria Chimica e Farmaceutica S.p.A. ("Recordati").
Net proceeds to the Company related to this sale were $2.0 million. In July
1997, the Company repurchased 43,333 shares of common stock from Recordati. This
purchase required approximately $0.9 million of funds and these shares are
included at cost on the balance sheet as treasury stock.

In April 1996, the Company completed a private sale of 200,000 shares of
common stock at fair market value to an officer of the Company. The aggregate
purchase price of $2.5 million was financed in full with a full recourse
promissory note issued from the Company. In August 1998, the officer of the
Company repaid the note in full plus accrued interest.

In May 1997, the Company completed a sale of 28,000 shares of restricted
common stock to several officers and directors of the Company. The aggregate
purchase price of $0.4 million was financed with full recourse promissory notes
issued from the Company. In June 1997, the Company completed a sale of 105,000
shares of restricted common stock at fair market value to several officers of
the Company. Cash proceeds to the Company related to this sale were $1.9
million.

In January 1998, the Company completed the sale of 30,000 shares of
restricted common stock to an officer of the Company. The aggregate purchase
price of $0.9 million was financed with a full recourse promissory note issued
from the Company. In March 1998, the Company completed a sale of 20,000 shares
of restricted common stock to several officers of the Company. The aggregate
purchase price of $0.6 million was financed with full recourse promissory notes
issued from the Company. In April 1998, the Company completed a sale of 53,000
shares of restricted common stock to several directors of the Company. The
aggregate purchase price of $1.6 million was financed with full recourse
promissory notes issued from the Company. In June 1998, the Company completed
the sale of 200,000 shares of restricted common stock to an officer of the
Company. The aggregate purchase price of $6.7 million was financed with a full
recourse promissory note issued from the Company.

The 3,000 shares of authorized preferred stock are issuable by the Board
of Directors. The terms, designations and other criteria are determinable by the
Board of Directors upon issuance.

In June 1991, Biomatrix, Inc. capitalized Biomatrix Medical Canada
("BMC"). In connection with this transaction additional capital was raised
through a Canadian venture capital firm for which it received 62,500 shares of
Class A stock in BMC. In April 1998, the Canadian venture capital firm exercised
its right to convert the 62,500 shares of Class A stock in BMC into 38,462
shares of Biomatrix, Inc. common stock. As a result, BMC is now a wholly-owned
subsidiary of Biomatrix, Inc. No gain or loss was recognized on the conversion
of shares.

9. Income Taxes
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income (Loss) before income taxes:
Domestic................................... $14.3 $ 17.2 $ 3.9
Foreign.................................... ( 0.2) (0.9) (1.0)
----- ------ -----
$14.1 $ 16.3 $ 2.9
===== ====== =====
Income tax provision:
Domestic, Federal.......................... $ 1.3 $ 0.4 $ 0.1
Domestic, State............................ 0.7 0.2 -
Foreign.................................... - - -
----- ------ -----
$ 2.0 $ 0.6 $ 0.1
===== ====== =====
</TABLE>

F-12
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

9. Income Taxes (Continued)

A reconciliation of the United States federal statutory rate to the Company's
effective tax rate for the years ended December 31, 1998, 1997, and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory federal corporate rate................. 35.0% 35.0% 34.0%
State income taxes, net of federal tax benefit... 6.2 1.0 -
Foreign related items............................ 4.1 2.0 -
Research and development credits................. (2.4) - -
Benefit of net operating losses.................. (6.0) (35.8) (34.0)
Nondeductible items.............................. 1.6 - -
Change in valuation allowance.................... (27.2) (1.1) -
Other ........................................... 3.0 - -
Alternative minimum tax.......................... - 2.2 4.6
------- ------ ------
Effective tax rate............................... 14.3% 3.3% 4.6%
======= ====== ======
</TABLE>

Temporary differences and carryforwards which give rise to deferred tax
assets are as follows:
<TABLE>
<CAPTION>
Deferred Tax Assets
-------------------
1998 1997
----- -----
<S> <C> <C>
Net operating losses........................................ $ 1.9 $ 4.5
Research credits............................................ 1.9 2.8
Depreciation................................................ 1.3 0.3
Environmental reserve....................................... - 0.3
Alternative minimum tax credit.............................. 0.4 0.3
Other....................................................... 1.1 1.2
----- -----
6.6 9.4
Valuation allowance...................................... (3.8) (9.4)
----- -----
Total deferred taxes............................... $ 2.8 $ -
===== =====
</TABLE>

Total deferred tax assets of $2.8 million are included in other assets at
December 31, 1998. The Company's valuation allowance of $3.8 million in 1998 was
provided on deferred tax assets, which were primarily foreign related items, due
to the uncertainty of realization.

The Company has foreign federal net operating loss carryforwards of
approximately $5.8 million which expire at various times from December 31, 2001
through December 31, 2004. In addition, the Company has U.S. and foreign tax
credit carryovers at December 31, 1998 of approximately $1.7 million and $0.6
million, respectively. The U.S. tax credits expire at various times beginning
December 31, 1999 through December 31, 2018 while the alternative minimum tax
credit and foreign tax credits carryover indefinitely.

F-13
<PAGE>

BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

10. Commitments

Operating Lease
The Company occupies office, and laboratory space under a lease expiring
in July 1999. Rent expense for operating leases charged to operations for the
years ended December 31, 1998, 1997 and 1996 approximated $0.7 million, $0.5
million and $0.4 million, respectively. Future minimum operating lease payments
for the facility and other items are:

1999............................................ $ 0.5
2000............................................ 0.3
2001............................................ 0.2
2002............................................ 0.2
2003............................................ 0.1
---
Total minimum obligations....................... $ 1.3
=====

License Agreements

In November 1993 and June 1994, the Company entered into license and
distribution agreements with Syntex Pharmaceuticals International Limited
("Syntex") to market Synvisc in selected European countries and South Africa. In
return, for the exclusive marketing rights, Syntex paid up-front payments in
1993 and 1994 of $1.2 million, and $5.0 million, respectively. Subsequent to
these agreements, Syntex was acquired by Roche AB, ("Roche"), a subsidiary of F.
Hoffmann-LaRoche Ltd. Subsequent to the acquisition of Syntex by Roche, in the
fourth quarter of 1995 the Company signed an agreement with Roche reacquiring
the marketing rights to Synvisc for all countries identified in the previous
agreements, except for Sweden and South Africa. The Company received a
non-refundable initial payment in 1995 and a non-refundable final payment in
1996 in connection with the finalization of this agreement, which amounts have
been included in income from licenses in the respective years.

In September 1995, the Company entered into a distribution agreement with
Rhone-Poulenc Rorer Canada Inc. ("RPR"). The agreement provides RPR with
exclusive marketing rights for Synvisc in Canada. In return, in 1995, the
Company received an up-front non-refundable license fee payment of $3.5 million,
which has been included in income from licenses, and could receive a one-time
milestone payment of $2.0 million if sales reach a certain level. Additionally,
the Company manufactures and supplies Synvisc for a contractual percentage of
RPR's sales price.

In June 1996, the Company entered into a distribution agreement with
Collagen Corporation, now Collagen Aesthetics Inc., ("Collagen"). The agreement
provides Collagen with exclusive marketing rights for Hylaform in Europe,
Canada, Japan, Australia and other select countries. In return, the Company
received an up-front, non-refundable payment of $5.0 million in consideration of
the costs and expenses that have been incurred by the Company related to the
research and development of Hylaform. The Company is entitled to receive a
royalty based upon sales of Collagen's dermal augmentation products as well as
an additional royalty on the potential growth of Collagen's total dermal
augmentation business. Additionally, the Company manufactures and supplies
Hylaform to Collagen for a contractual percentage of Collagen's sales price. The
Company has also entered into a distribution agreement with Collagen for the
United States. Under such agreement, Collagen has the exclusive distribution
rights to Hylaform in the United States subject to an additional payment and FDA
approval.

In December 1996, the Company entered into a distribution agreement with
Boehringer Ingelheim France, S.A. ("Boehringer Ingelheim"). The agreement
provides Boehringer Ingelheim with exclusive marketing rights for Synvisc in
France. In return, the Company received an up-front non-refundable payment of
$1.0 million, which has been included in income from licenses in 1996, and could
receive milestone payments of up to $7.0 million if sales reach certain levels.
The Company manufactures and supplies Synvisc to Boehringer Ingelheim for a
contractual percentage of Boehringer Ingelheim's sales price. Additionally,
Boehringer Ingelheim reimburses the Company, up to a fixed amount and for a
certain period of time, for its costs of maintaining a team of area business
consultants to assist in selling Synvisc in France.

F-14
<PAGE>

BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

10. Commitments (Continued)

In February 1997, the Company entered into distribution agreements with
Wyeth-Ayerst Laboratories ("Wyeth"), a division of American Home Products. The
agreements provide Wyeth with exclusive marketing rights to Synvisc in the
United States, Germany, Austria, Spain, Portugal, Greece and certain countries
in the Middle East and Central Europe. In 1997, the Company received various
non-refundable payments totaling $17.0 million. In 1998, the Company earned a
non-refundable milestone of $6.0 million; such payment was received in February
1999. The Company could receive additional payments in the future if sales reach
certain levels. The Company manufactures and supplies Synvisc to Wyeth for a
contractual percentage of Wyeth's sales price. Additionally, Wyeth reimburses
the Company, up to a fixed amount and for a certain period of time, for its
costs of maintaining a team of area business consultants to assist in selling
Synvisc in Europe and the United States.

In April 1997, the Company entered into a distribution agreement with
Bayer AG ("Bayer"). The agreement provides Bayer with exclusive marketing rights
to Synvisc in Australia, Indonesia, Israel, Malaysia, New Zealand, Singapore,
Taiwan and Thailand. In return, the Company received an up-front non-refundable
payment of $3.0 million and could receive a milestone payment of $2.0 million
upon certain approvals or if sales reach a certain level. The Company
manufactures and supplies Synvisc to Bayer for a contractual percentage of
Bayer's sales price. Additionally, Bayer will reimburse the Company, up to a
fixed amount and for a certain period of time, for its costs of maintaining
several area business consultants to assist in selling Synvisc in certain
countries.

In February 1998, the Company entered into a distribution agreement with
Novartis Pharma AG ("Novartis"). The agreement provides Novartis with the
exclusive marketing rights to Synvisc in Central America, South America and the
Caribbean. In return, the Company received an up-front non-refundable payment of
$1.5 million and will receive an additional $1.6 million during the fourth
quarter of 1999. The Company manufactures and supplies Synvisc to Novartis for a
contractual percentage of Novartis' sales price. Additionally, Novartis will
reimburse the Company for its costs of maintaining several area business
consultants to assist in selling Synvisc in certain countries.

Research and Development Agreements
The Company entered into agreements with Pharmacia & Upjohn, Inc.
("Pharmacia") in 1992, and granted Pharmacia an exclusive worldwide license to
use, manufacture, market and sell its hylan fluid for use in human ophthalmic
viscosurgery. Under the terms of the agreements, the Company recorded royalty
revenue of $0.5 million in 1996. In July 1996, under the terms of the agreement,
Pharmacia exercised its right to terminate this agreement effective March 1996
and in connection with the termination paid the Company $1.0 million which has
been included in income from royalties for the year ended December 31, 1996.

In July 1991, the Company entered into an agreement with Pharmacia to
perform certain toxicity testing. The Company received $0.6 million, $0.6
million and $0.5 million of revenues relating to this testing for the years
ended December 31, 1998, 1997, and 1996, respectively. Such amounts have been
included in research contract revenue.

During February 1990, the Company and its wholly owned subsidiary,
Biomatrix Svenska AB, entered into an agreement with a Swedish Limited
Partnership, Up-Will Investor KB ("Up-Will"). Up-Will invested in Biomatrix
Svenska AB in order that the Company could pursue the obtainment of regulatory
approvals to manufacture and market Synvisc in Germany, France, Spain and the
United Kingdom. Up-Will provided Svenska AB with a total of approximately $1.5
million. In return, Up-Will shall receive a royalty from the Company equal to 6%
of all net sales of Synvisc in the countries referred to above, for a period of
10 years from the date of first commercial sale in each country, regardless of
whether the sales are made by the Company, Biomatrix Svenska AB or another
party. At December 31, 1998, sales of Synvisc had been made in the agreement
territories and therefore, royalties have been earned, accrued and paid.

F-15
<PAGE>

BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

11. Stock Options

The Company has two fixed stock option plans which reserve shares of
common stock for issuance to executives, employees and directors. The Company
applies the provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock based compensation plans. Accordingly, compensation
expense has been recognized to the extent applicable in the financial statements
with respect to the two plans in accordance with APB No. 25. Had compensation
cost for the Company's two stock option plans been determined based on the fair
value at the grant date for awards in 1998, 1997 and 1996 consistent with the
provisions of SFAS No. 123 "Accounting For Stock Based Compensation," the
Company's net earnings and earnings per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income - as reported........................ $12.1 $15.7 $ 2.8
Net income - pro forma.......................... 10.7 15.1 2.8

Net income per share - as reported (basic)...... 1.08 1.44 0.27
Net income per share - pro forma (basic)........ 0.92 1.39 0.26

Net income per share - as reported (diluted).... 1.02 1.39 0.25
Net income per share - pro forma (diluted)...... 0.87 1.33 0.25
</TABLE>
Since option grants awarded during 1998, 1997 and 1996 vest over several
years and additional awards are expected to be issued in the future, the pro
forma results shown above are not likely to be representative of the effects on
future years of the application of the fair value based method.

The fair market value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>

1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Dividend Yield N/A N/A N/A
Expected Volatility 70% 70% 80%
Risk-free Interest Rate 4.31% to 5.84% 5.85% to 6.79% 5.43% to 6.66%
Expected Option Life 6.0 6.0 6.5
</TABLE>

Under the amended plan approved by the shareholders in May 1997, the total
number of shares of common stock that may be granted is 2,500,000. In May 1995,
the shareholders approved a Stock Option Plan for Non-Employee Directors of the
Company. This plan authorizes the granting of options on 100,000 shares of
common stock to directors who are not employees of the Company, who will
automatically receive an option to acquire 15,000 shares upon election or
re-election to the Board.

F-16
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

11. Stock Options (Continued)

These plans provide that shares granted come from the Company's
authorized but unissued or reacquired common stock. The price of the options
granted pursuant to these plans is generally equal to the fair market value of
the shares on the date of grant. The options are generally exercisable over four
to five years. The options expire ten years from the grant date.

Information regarding these option plans for 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- ----------------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------- --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
beginning of year...... 927,357 $12.29 816,527 $6.12 942,866 $ 3.65
Options exercised........... (69,682) 6.27 (292,420) 2.63 (261,666) 3.10
Options granted............. 364,370 31.57 410,800 17.67 175,300 15.32
Options canceled............ (36,475) 21.38 (7,550) 9.67 (39,973) 5.29
---------- ----------- ----------
Options outstanding,
end of year............ 1,185,570 18.40 927,357 $12.29 816,527 $ 6.12

Option price range at
end of year............ $1.00 to $51.88 $1.00 to $32.00 $1.00 to $17.25

Options exercisable,
end of year............ 426,805 $ 10.36 319,407 $ 6.12 515,646 $ 3.18

Option price range for
exercised shares....... $1.00 to $17.25 $1.00 to $17.25 $2.00 to $7.50
Options available for grant
at end of year......... 488,139 840,483 743,733
Weighted-average fair value
of options granted
during the year....... $21.78 $11.98 $11.67
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
The following table summarizes information about stock options at December 31, 1998:

Options Outstanding Options Exercisable
---------------------------------------------------- -----------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Outstanding Contractual Exercise Exercisable Exercise
Range of Exercise Prices at 12/31/98 Life Price at 12/31/98 Price
- --------------------------- ----------------- ----------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
$ 1.00 - $ 2.00 27,305 6.54 $ 1.96 27,305 $ 1.96
$ 4.63 - $ 4.75 249,130 5.58 $ 4.74 199,220 $ 4.74
$ 11.25 - $15.88 280,315 8.03 $ 12.07 107,935 $ 12.93
----
$17.25 - $25.00 258,950 8.22 $ 20.69 75,000 $ 19.89
$26.50 - $37.25 329,365 9.28 $ 31.10 16,340 $ 30.19
$38.00 - $51.88 40,505 9.74 $ 39.35 1,005 $ 43.22
</TABLE>

Compensation expense of $0.2 million, $0.1 million and $0.0 million was
recorded for the years ended December 31, 1998, 1997 and 1996, respectively, in
accordance with APB No. 25.

F-17
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

12. Contingency

In August 1990, the Company received a notice from the Pennsylvania
Department of Environmental Protection ("DEP") that it is one of approximately
1,000 potentially responsible parties ("PRPs") that may have clean-up
responsibility at the Industrial Solvents and Chemical Company site in York
Haven, Pennsylvania (the "Site"). During the late 1980s, the Company, through a
licensed waste disposal transport company, shipped industrial solvents to the
Site, which was operating as a recycling facility. The DEP reviewed hazardous
waste found at the Site as well as the DER's own records in order to identify
additional PRPs and to quantify each PRP's volumetric contributions. The Company
is a member of a steering committee that consists of many PRPs. As of December
31, 1997 the Company had a reserve of $0.7 million related to this matter.
During the fourth quarter of 1998, the final remedy was selected by the DEP and
the Company settled out of the matter pursuant to a buy-out proposal prepared by
the steering committee and reversed the reserve. Therefore, at December 31, 1998
the Company no longer has a reserve for any potential litigation regarding this
matter.

Litigation

In October 1996, Michael Jarcho ("Jarcho") filed suit in the United
States District Court for the Southern District of California seeking to recover
damages and declaratory judgment for the alleged breach by the Company of
Jarcho's consulting agreement. A consulting agreement had been entered into
between the Company and Jarcho on December 2, 1988. The agreement contains
certain royalty provisions for products that result from Jarcho's consultancy.
Jarcho contends, inaccurately in the Company's view, that Hylaform resulted from
his consultancy. Jarcho seeks compensatory damages of $0.3 million plus a
royalty on the Company's past and future net sales of Hylaform as well as
punitive damages and recovery of attorney fees. The Company believes that no
royalties are owed Jarcho as a result of Hylaform sales. Jarcho's case was
dismissed on January 10, 1997, on the grounds that the agreement requires such
disputes to be brought exclusively in New Jersey state court. Jarcho moved for a
partial reconsideration of the decision, the Company opposed that request, and
the request was denied. On June 16, 1997 Jarcho filed suit in New Jersey state
court. The Company intends to defend this matter vigorously. In accordance with
the Company's policy on contingencies, a provision has been made in the
accompanying consolidated financial statements for estimated legal fees expected
to be incurred in defending the matter vigorously. The Company has not made any
provisions for any liability that might result from the claims made by Jarcho.

13. Employee Benefit Plan

The Company adopted a defined contribution retirement savings plan
effective January 1, 1992. Pursuant to Section 401k of the Internal Revenue
Code, if a participant decides to contribute, a portion of the contribution can
be matched by the Company. Company contributions are discretionary and plan
expenses are paid by the Company on behalf of the plan.

Presently, the Company does not offer its employees postretirement or
postemployment benefits. Therefore, the Company is not impacted by the SFAS No.
106, "Employers' Accounting for Postretirement Benefits other than Pensions" or
SFAS No. 112, "Employers' Accounting for Postemployment Benefits."

14. Concentration of Credit Risk

Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash investments
and trade receivables. The Company's temporary cash investments consist
primarily of cash and money market funds. Concentration of credit risk with
respect to trade receivables exists due to the Company's dependence on a few
customers. However, the Company has not sustained any losses related to these
customers.

F-18
<PAGE>
BIOMATRIX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

15. Segment Data

In the fourth quarter of 1998 the Company has adopted SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires a new basis of determining the reportable business segments using
the management reporting approach. The following data is utilized by the
Company's Executive Committee (the chief operating decision makers) when
analyzing the performance of the Company.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Product Sales:
Synvisc:
United States......................... $28.5 $4.0 -
Rest of the World..................... 5.2 3.6 $2.5
All Other Products...................... 4.1 4.1 2.5
----- ----- ----
Total Product Sales..................... $37.8 $11.7 $5.0
===== ===== ====

Identifiable Assets:
United States........................... $73.9 $36.1 $22.3
Rest of the World....................... 9.4 7.8 3.7
----- ----- -----
Total Assets............................ $83.3 $43.9 $26.0
===== ===== =====
</TABLE>

16. Major Customer and License Fee Data

A significant portion of the Company's products are sold to customers
under the terms of multiple-year marketing and distribution agreements. In many
cases, a customer has paid license fees to the Company for the exclusive rights
in the respective territory. Of the reported product sales for each of the years
ended December 31, 1998, 1997 and 1996, one customer accounted for 78% (Customer
A 78%), four customers accounted for 84% (Customer A 40%, Customer B 20%,
Customer C 14%, and Customer D 10%), and three customers accounted for 90%
(Customer B 40%, Customer D 25%) and Customer E 25%, respectively. Of the
reported income from licenses, royalties, research contracts, and grants for
each of the years ended December 31, 1998, 1997 and 1996, two corporate partners
accounted for 93% (Partner A 61% and Partner B 32%), two corporate partners
accounted for 96% (Partner A 82% and Partner C 14%), and three corporate
partners accounted for 86% (Partner D 49%, Partner E 19% and Partner F 18%),
respectively.

17. Impact of the Adoption of Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS 133 is effective for all fiscal quarters of all fiscal years beginning
after June 15, 1999 (January 1, 2000 for the Company). SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction an, if it is,
the type of hedge transaction. SFAS 133 is not expected to have an impact on the
Company's consolidated results of operations, financial position or cash flows.

<PAGE>

BIOMATRIX, INC.

EXHIBIT 21 - LIST OF SUBSIDIARIES

COUNTRY
NAME OF SUBSIDIARY WHERE INCORPORATED
- ------------------ ------------------

Biomatrix Medical Canada Inc. Canada

Biomatrix (U.K.) Limited Great Britain

Biomatrix Svenska AB Sweden

Biomatrix France SARL France

Biomatrix Schwiez GmbH Switzerland

Biomatrix Hong Kong Limited Hong Kong

Biomatrix (Germany) GmbH Germany

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statements of
Biomatrix, Inc. on Forms s-8 (File nos. 33-91066, 33-91064 and 333-29983) and
Form S-3 (File no. 33-99856) of our report dated February 17, 1999, on our
audits of the consolidated financial statements of Biomatrix, Inc. as of
December 31, 1998 and 1997, and for each of the years in the three year period
ended December 31, 1998, which report is included in this 1998 Annual Report on
Form 10-K.

PRICEWATERHOUSECOOPERS LLP

New York, New York
March 29, 1999

<ARTICLE> 5
<CIK> 0000747952
<NAME> BIOMATRIX, INC.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 16,500,000
<SECURITIES> 0
<RECEIVABLES> 8,900,000
<ALLOWANCES> 0
<INVENTORY> 6,800,000
<CURRENT-ASSETS> 41,300,000
<PP&E> 43,500,000
<DEPRECIATION> (5,800,000)
<TOTAL-ASSETS> 83,300,000
<CURRENT-LIABILITIES> 14,300,000
<BONDS> 17,600,000
0
0
<COMMON> 72,800,000
<OTHER-SE> (21,400,000)
<TOTAL-LIABILITY-AND-EQUITY> 83,300,000
<SALES> 37,800,000
<TOTAL-REVENUES> 47,600,000
<CGS> 9,700,000
<TOTAL-COSTS> 33,900,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,000,000
<INCOME-PRETAX> 14,100,000
<INCOME-TAX> 2,000,000
<INCOME-CONTINUING> 12,100,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,100,000
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.02

</TABLE>