1
FORM 10-K

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

(Mark One)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From _____________ To_______________

Commission File Number: 000-16893

CROSS MEDICAL PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
(formerly known as Danninger Medical Technology, Inc.)

DELAWARE 31-0992628
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

5160 - A BLAZER MEMORIAL PARKWAY
DUBLIN, OHIO 43017-1339 (614) 718-0530
(Address of principal executive offices, (Registrant's telephone number,
including zip code) including area code)

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

COMMON STOCK, $.01 PAR VALUE
(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes X No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. ( X )

Based upon the closing price reported on NASDAQ SmallCap Market on March
25, 1997, the aggregate market value of the registrant's voting stock held by
non-affiliates on that date was $22,173,676. As of March 25, 1997,
4,921,298 shares of Common Stock, $.01 par value, were outstanding.

Documents incorporated by reference:

Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1996, are incorporated by reference in Part II.

Portions of the registrant's Definitive Proxy Statement for its Annual
Meeting of Stockholders to be held on May 21, 1996, are incorporated by
reference into Part III of this report.

PART I

ITEM 1. BUSINESS.

In 1996, Cross Medical Products, Inc. (the "Company"), a Delaware
corporation, formerly known as Danninger Medical Technology, Inc. and
subsidiaries, was engaged in two distinct business segments of the orthopedic
device industry: (1) the design, manufacture, distribution and rental of
orthopedic rehabilitation products ("Recovery Products") and (2) the design,
manufacture and marketing of implants and instruments for the surgical treatment
of degenerative diseases, deformities and trauma of the spine ("Spinal
Implants"). On March 12, 1997, the Company sold substantially all of the assets
and the buyer assumed substantially all of the liabilities of the Recovery
Products segment. The Company will focus exclusively on the development of new
products and increasing market penetration both domestically and internationally
for its Spinal Implant business.

Unless the context otherwise requires, the following discussion relates
only to the continuing operations of the Spinal Implant business. On March 21,
1997, the Company formally changed its name to Cross Medical Products, Inc.

SPINAL IMPLANT PRODUCTS

The initial spinal implant system offered by the Company in 1988 was the
Puno/Winter/Byrd Screw/Rod System (the "PWB Screw/Rod System") for fusion of the
lumbar spine. The Company elected to market the PWB Screw/Rod System in the
United States for clinical studies under an Investigational Device Exemption
("IDE"). The IDE allowed the Company to develop a clinical study in order to
gather the data necessary to assess safety and efficacy of the PWB Screw/Rod
System. The IDE did not permit commercial distribution and limited use of the
PWB Screw/Rod System to a small number of surgeons participating in the study.
The study and patient follow-up has been completed and the Company is preparing
to submit a Pre-Market Application ("PMA") with the U.S. Food and Drug
Administration ("FDA") to permit distribution of the PWB Screw/Rod System in the
United States.

After developing the PWB Screw/Rod System, the Company also developed
lumbar hooks for the treatment of unstable, degenerative conditions of the
lumbar spine. The lumbar hooks, when used in conjunction with rods and sacral
screws, comprise the Puno/Winter/Byrd Lumbosacral System (the "PWB Lumbosacral
System"). The PWB Lumbosacral System did not require clinical study and the
Company received 510(k) clearance from the FDA in April 1992, permitting
marketing, sale and use of the PWB Lumbosacral System. In May 1993, the Company
received 510(k) clearance from the FDA to market the INTEGRAL(TM) Screw System.
The INTEGRAL(TM) Screw System was developed to be used with the PWB Lumbosacral
System, allowing surgeons the option of additional diameters as well as a more
rigid construct. It also allowed the Company to expand its potential market
penetration as spinal surgeons sought more rigid constructs, while the Company
developed its next generation of implants.

The Company formed its Medical Advisory Board and began development of
the SYNERGY(TM) Spinal Implant System in 1992. The SYNERGY(TM) Spinal Implant
System is a "universal" implant system that allows surgeons to treat both the
thoracic (middle) and lumbar (lower) portions of the spine, allowing use of the
SYNERGY(TM) Spinal Implant System in approximately 70% of all instrumented
spinal fusion surgeries in the United States. The SYNERGY(TM) Spinal Implant
System is flexible, strong, and easy for surgeons to use. The SYNERGY(TM) Spinal
Implant System does not demand that surgeons follow a single surgical protocol,
rather, it provides several options. Implants come in various sizes and types to
meet the surgeon's preferences and the patients anatomy, providing a secure
anatomic fit for virtually any pathology. The SYNERGY(TM) Spinal Implant System
features unique implant locking mechanism designs that, combined with the use of
nitrogen-strengthened stainless steel, allow surgeons to assemble constructs of
exceptional strength while keeping the profile extremely low. The SYNERGY(TM)
Spinal Implant System was engineered to be easy for surgeons to use, reducing
surgical time and requiring less fiddle. The screws and hooks are top
tightening, the rods do not require pre-loading of additional components, and
all implants allow for free rod rotation. The Company received 510(k) clearance
from the FDA to market the anterior portion of the SYNERGY(TM) Spinal Implant
System in

- 2 -

October 1994 and for the posterior portion of the system in July 1995. In
September 1996, the Company developed a titanium version of the SYNERGY(TM)
Spinal Implant System for international distribution. The Company received FDA
marketing clearance for the anterior portion of the titanium version in October
1995 and the posterior portion in January 1997. Titanium implant systems are
preferred in many foreign markets and are used in the United States in cases
where magnetic resonance imaging of the spinal area is anticipated to be needed.
The Company is currently developing a cervical version of the SYNERGY(TM) Spinal
Implant System. The cervical implant version will permit surgeons to treat the
cervical (upper) portion of the spine and, if successful, will expand the
Company's product line to cover 100% of instrumented spinal fusion surgeries.
The Company believes that the SYNERGY(TM) Spinal Implant System is one of the
few "universal" spinal implant systems on the market.

In March 1997, the Company entered into a license agreement with
Polaris Biotechnology, Inc. to develop and market a spinal cage implant. Spinal
cage implants provide a supporting framework for bone in-growth for patients
with trauma, tumors, or degenerative diseases. Distribution of the spinal cage
implant within the United States is subject to regulatory approval which will
involve clinical trials, while international distribution is expected to begin
next year.

Spinal Implant Marketing. The Company markets its spinal implant
products to orthopedic and neurological spine surgeons. The Company estimates
that more than 2,000 physicians perform spinal surgery in the United States,
primarily in major metropolitan areas. Typically, the surgeon determines the
type of spinal implant system.

The Company believes that the key to its marketing success in the
United States is to convince spinal surgeons of the efficacy of its implant
system. This is done through direct selling efforts by the Company's independent
sales representatives and direct marketing to the surgeons, participation by the
Company in sponsoring symposiums and training workshops, and through the
education and training efforts of the members of the Company's Medical Advisory
Board.

The Company markets its spinal implant products through a network of
twenty-four independent commissioned sales agencies. The Company considers the
quality of its independent sales agencies and the level of training and service
they provide to surgeons to be a very important factor in its success, second
only to the technological advantages of its spinal implant products. The
independent sales agencies are prohibited from marketing competing spinal
implant products. However, they are permitted to market non-competing implants
and other orthopedic products. Independent sales agencies are required to
purchase the Company's proprietary surgical instruments that are used to install
the Company's spinal implant products. Spinal implant device inventories are
consigned to the independent sales agencies. The SYNERGY(TM) Spinal Implant
System contains a variety of related implantable devices from which the surgeon
can choose during each surgical procedure. After each procedure, the hospital is
invoiced by the Company for the implant devices actually used, and the consigned
inventory is replenished.

Foreign sales of spinal implants and instrumentation represented
approximately $4.2 million, or 49%, of the Company's total sales of spinal
implants and instruments in fiscal 1996. The Company has been able to market the
SYNERGY(TM) Spinal Implant System in those countries where governmental approval
either is not required or was obtained more quickly than in the United States.
The Company markets its spinal implants through the individual distributors in
each country who purchase implants and instrumentation directly from the
Company. The Company has distributors in approximately twenty countries and
intends to continue to seek qualified distributors in other foreign markets.

Medical Advisory Board. The Company has established a Medical Advisory
Board consisting of prominent spinal surgeons. The Medical Advisory Board meets
periodically to review and evaluate the Company's research and development
efforts and to identify promising new technologies for the Company. Individual
members of the Medical Advisory Board also meet and consult informally with
employees of the Company. In addition, members of the Medical Advisory Board
assist the Company in training other surgeons in the use of the Company's
products. Members of the Medical Advisory Board receive a fixed quarterly
payment from the Company and share an annual royalty payment based on sales of
the Company's spinal implant products. The Company is obligated to pay a
royalty, subject to certain

- 3 -

limitations, to its Medical Advisory Board in an amount equal to 6.5% (and
increasing 1/2% annually, up to 8%) of the net revenues generated from the sales
of spinal implant products. The Company's aggregate royalty expense will
increase, if and to the extent, sales of implants increase. The following
doctors are members of the Medical Advisory Board:

Robert B. Winter, M.D., Chairman Minneapolis, MN
J. Abbott Byrd, M.D. Norfolk, VA
Rolando M. Puno, M.D. Louisville, KY
John Lonstein, M.D. Minneapolis, NN
Joseph Perra, M.D. Minneapolis, NM
Manuel Pinto, M.D. Minneapolis, MN
Michael Smith, M.D. Minneapolis, MN

COMPETITION

Many companies compete in the spinal implant market and competition is
intense. The Company believes that its largest competitors in the United States
offering spinal implant systems are Sofamor Danek Group, Inc. and Acromed, Inc.,
each of which has substantially greater sales and financial resources than the
Company. The Company also competes with many other companies that offer similar
products. Other companies have developed and are marketing products based on
technologies that are different from the Company's, including spinal fusion
cages, spinal implants designed to be used with minimally invasive or
laparoscopic surgery, biodegradable polymer inserts and artificial bone
implants. The Company believes that it competes on the following basis: (a) the
technological design and functional performance of its implant products, (b) the
level of training and service support provided to spinal surgeons, (c) the
professional reputation of members of its Medical Advisory Board and the design
and training assistance they provide, and (d) the ability of its research and
development personnel to produce technologically superior products. Many of the
Company's competitors have capital resources, research and development staff,
facilities, experience in clinical trials and obtaining regulatory approvals,
physician relationships and experience in manufacturing and marketing
significantly greater than those of the Company. Because of intense competition,
there can be no assurance that the Company will be able to successfully market
its spinal implant products. Additionally, there can be no assurance that other
competing products or technologies will not be technologically superior to those
offered or developed by the Company.

RESEARCH AND DEVELOPMENT

The Company continually strives to improve existing products and
develop new products in the spinal implant market. The Company conducts its
research and development activities primarily through its engineering department
and with the assistance of outside consultants. The Company employs five
professional engineers and a technician engaged exclusively in research and
development.

In addition to research and development conducted by the Company, the
Medical Advisory Board plays an active role in the development of new spinal
implant products. The Company will continue to work with the members of its
Medical Advisory Board to develop new spinal systems which address spinal
deformities and degenerative disease in the cervical spine to be used with the
SYNERGY(TM) Spinal Implant System as well as a minimally invasive device. The
Company's spinal implant research and development is concentrated on the design
of these new systems, and it expects to submit 510(k) applications to the FDA in
1997 for the cervical version. The Company will also continue to develop the
spinal implant cage which it licensed in March 1997 under a license agreement
with Polaris Biotechnology, Inc.

The Company's research and development expenditures during the fiscal
years ended December 31, 1996, 1995, and 1994 were $687,000, $859,000, and
$977,000, respectively. The Company intends to continue to invest in the
development of new spinal implant products in 1997.

- 4 -

INTELLECTUAL PROPERTY LAW MATTERS

The Company holds the patent, manufacturing and marketing rights to
certain specialty orthopedic products. The SYNERGY(TM) Spinal Implant System is
covered by numerous pending U.S. and international patent applications belonging
to the Company. These applications concern various aspects of the SYNERGY(TM)
Spinal Implant System including the bone anchor, the rod/anchor interface,
instrumentation and transverse connectors. CROSS(TM), CROSS MEDICAL(TM),
INTEGRAL(TM), and SYNERGY(TM) are trademarks of the Company.

The Company intends to file patent applications on future products as
appropriate. The mere filing and prosecution of patent applications, however,
cannot guarantee the ultimate issuance of patents. To the extent that the
Company is unsuccessful in securing patents for its devices or for certain
features of its devices which are easily reverse-engineered, there is little to
prevent a competitor from copying the Company's products, although the Company
would have "lead time" in the marketplace during the period needed by its
competitors to copy and secure FDA approval for a duplicate product. Thus, while
the patents may have value, the Company believes that they are of lesser
significance than the innovative skills, technical competence, and marketing
ability of the Company's personnel.

GOVERNMENT REGULATION

The health care industry is subject to extensive government regulation
on both the federal and state levels. In particular, the U.S. Food, Drug and
Cosmetic Act, as amended, and regulations promulgated thereunder (collectively
the "FDA Act") provides for regulation by the FDA of the manufacture and sale of
medical devices.

Under the FDA Act, all medical devices are to be classified as Class I,
Class II, or Class III devices, depending upon the risk they present. Many Class
I and all Class II and III medical devices must be reviewed or approved for
marketing prior to their distribution unless they are specifically excluded from
the requirement to do so. The review/approval process is more or less difficult
depending upon the product Class. In general, Class I devices must comply with
labeling and recordkeeping requirements and are subject to other general
controls and periodic inspection. In addition to general controls, Class II
devices must comply with performance standards established by the FDA.
Manufacturers of Class II devices also are subject to periodic inspection by the
FDA. Class III devices must receive pre-market approval from the FDA before they
can be commercially distributed in the United States, and manufacturers of Class
III devices are also subject to periodic inspection. The FDA Act and FDA
regulations also cover all incoming materials control, processing control,
traceability of input materials and components, traceability of product
servicing and other quality and safety controls. All of these requirements are
covered in the broad FDA specifications known as "good manufacturing practice"
regulations.

The PWB Screw/Rod System implantable devices and the spinal implant
cage are Class III devices. Class III devices require pre-market approval from
the FDA before full distribution of the device may begin. The FDA allows only
devices proven to be both safe and effective to be offered for full
distribution. The FDA bases its judgment of both safety and effectiveness on
information gathered during studies conducted pursuant to an IDE. The Company is
following the premarket approval process for the PWB Screw/Rod System and having
completed the IDE is formulating its PMA for submission to the FDA. In addition,
the Company plans to pursue an IDE for multiple versions of the spinal implant
cage.

The PWB Lumbosacral System and SYNERGY(TM) Spinal Implant System are
Class II devices. The Company has received 510(k) marketing clearance for the
PWB Lumbosacral System and the SYNERGY(TM) Spinal Implant System. The 510(k)
notification is a document submitted to demonstrate that the device in question
is "substantially equivalent" to an already legally marketed device, thus
allowing faster clearance by the FDA than the PMA procedure.

- 5 -

PERSONNEL

As of March 21, 1997, the Company employed 39 full-time employees. The
Company has no part-time employees. None of the Company's employees are subject
to collective bargaining agreements, and the Company considers its relationship
with its employees to be good.

DISCONTINUED OPERATIONS

On March 12, 1997, the Company, Danninger Healthcare, Inc. ("DHI"), an
Ohio corporation and wholly owned subsidiary of the Company, and OrthoLogic
Corp. (OrthoLogic), a Delaware corporation, entered into an Asset Purchase
Agreement, dated March 12, 1997, whereby OrthoLogic purchased from the Company
and DHI certain assets and assumed certain liabilities related to the Company's
Recovery Products business. Under the Asset Purchase Agreement, the Company and
DHI, collectively, sold substantially all of their accounts receivables,
inventory, fixed assets, intangible assets and other assets related to the
Recovery Products business to OrthoLogic for approximately $8,600,000 in cash
plus the assumption by OrthoLogic of substantially all of the liabilities of the
Company and DHI including accounts payable, lease payable, bank debt and seller
financing debt. Assumed liabilities totaled approximately $5,000,000. In
addition, OrthoLogic acquired 30,000 restricted shares of the Company's Common
Stock for $243,750. The transaction was accomplished through arms-length
negotiations between the Company and DHI and OrthoLogic. There was no material
relationship between the Company, DHI and OrthoLogic or any affiliates,
directors or officers or associates of such directors or officers of any party
to the transaction. The following discussion describes the Company's Recovery
Products business prior to the sale.

Technology Overview. Continuous passive motion ("CPM") rehabilitation
therapy technology in the orthopedic field employs devices to slowly and
continuously move an injured joint without assistance of the patient's muscle
power. This therapy is most commonly used after joint surgery to improve blood
flow, reduce swelling, increase the range of motion, maintain muscle tone and
speed healing.

Prior to the development of CPM therapy, physicians generally believed
that it was necessary to immobilize a bone and adjacent joints in a cast or
splint subsequent to an injury or an operation during the healing process. This
immobilization resulted in muscle atrophy, cartilage degeneration, and tendon
and ligament stiffening, and often required additional rehabilitation to restore
the pre-injury range of motion and strength. Beginning in the early 1970s,
experiments were conducted to determine the rehabilitative benefits of joint
exercise following surgery. These experiments led to the development of CPM
machines to provide the desired exercise with no effort on the part of the
patient. Clinical research has established that CPM therapy can significantly
reduce post-operative joint pain and swelling and increase arterial blood flow,
thus increasing range of motion and reducing the length of hospitalization and
rehabilitation.

The major market for CPM devices is for use immediately following knee
and hip joint replacement surgeries. The primary function of this therapy is to
rehabilitate injured or diseased joints and to prevent injury to joints that
would otherwise occur through immobilization. The success that CPM has enjoyed
in post-operative knee and hip therapy has generated demand for CPM devices for
the elbow, shoulder, hand, wrist, ankle and toe joints.

Company Recovery Products. The majority of the Company's line of
recovery products were marketed under the trade name Danniflex(TM). The Company
offered a full range of CPM devices: with three leg models, a shoulder model,
hand and finger model, wrist model and toe model. The Company periodically
refined and updated its various CPM devices with the addition of new models to
expand its existing line or replace prior models. In addition to CPM devices,
the Company offered product accessories that made CPM devices easier to use and
apply.

Recovery Products Marketing. CPM devices are used primarily by
post-surgery orthopedic patients in hospitals and in their homes. CPM devices
are also used in nursing homes, sports medicine clinics and private practice
physical therapy clinics.

- 6 -

The Company sold the majority of its CPM devices to independent durable
medical equipment ("DME") dealers. Typically, DME dealers purchase and inventory
CPM devices in sufficient quantity for their rental markets. Dealers purchased
the unit outright from the Company or financed the purchase through a third
party lessor. Upon receiving a rental order, the dealer transports the unit to
and from the hospital, institution, or home (usually within a 20 to 50 mile
radius), aids in setting up the unit and bills the customer for the service at a
daily, weekly or monthly rental rate.

In recent years, the DME market has experienced a number of changes.
National DME dealers are consolidating while new dealers are entering the market
at the local level. In response to these changes, the Company was committed to
an open distribution policy for its products and, working with independent
financing companies, offered financing programs tailored to the DME marketplace.
In addition, in 1994, the Company formed Recovery Services, Inc. ("RSI") as a
wholly owned subsidiary to rent recovery products directly to end users. RSI was
formed to expand the geographic scope of the Company's recovery products market
in those areas without suitable DME dealers, to explore alternative distribution
methods for new and existing products, and to assist the Company in assessing
the product needs and requirements of the recovery products market.

In September 1996, the Company acquired Surgical and Orthopedic
Specialties, Inc. ("SOS"), a durable medical equipment dealer that rented
orthopedic rehabilitation equipment primarily to home-care patients in Michigan,
Indiana and Ohio. Upon completion of the merger, RSI and SOS operated under the
DHI name.

Recovery Products Manufacturing. The Company assembled its recovery
products, fabricating some of the mechanical parts and purchasing the remaining
mechanical and all of the electrical components from a variety of vendors. All
of the Company's Danniflex(TM) line of lower extremity CPM devices shared
certain basic structural elements. CPM devices were sold with a limited one year
warranty. Claims under the Company's CPM device warranty have been nominal.

BUSINESS RISKS

The Company desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995. In addition to the
other information in this report, readers should carefully consider the
following important factors, among others, in some cases have affected, and in
the future could affect, the company's actual results and could cause the
Company's actual consolidated results of operations for 1997 and beyond, to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, the Company.

Limited History of Profitability. In fiscal 1996, the Company reported
net income of $50,000, but had incurred net losses in the previous four years,
primarily as a result of the costs associated with the development of its
SYNERGY(TM) Spinal Implant System. The Company will continue to invest to expand
the distribution and marketing of the SYNERGY(TM) Spinal Implant System, as well
as to invest in research and development to expand the system to include a
cervical version and a spinal implant cage. The Company believes that the
SYNERGY(TM) Spinal Implant System has technological advantages over existing
spinal implant systems, although certain competitors have much greater market
share and well-developed distribution networks. There can be no assurance that
the Company will be successful in establishing a competitive distribution
network to enable it to increase its sales of spinal implants to a profitable
level.

Competition. The spinal implant industry is intensely competitive with
respect to technology, distribution, quality and variety, and there are two
well-established competitors with substantially greater financial and other
resources than the Company. Some of the Company's competitors have been in
existence for a substantially longer period than the Company and many are better
established with physicians in the markets where the Company distributes its
products. See "Business - Competition."

Government Regulation The manufacture and marketing of the Company's
products are subject to regulation by the FDA pursuant to the FDA Act and
numerous other federal, state and foreign governmental authorities. Although

- 7 -

the Company has obtained all necessary clearances for the marketing and sale of
all the products that the Company currently produces and sells, any products
developed in the future are likely to require FDA approval before they can be
sold in the United States.

To date, all FDA approvals of the Company's products have been obtained
under Section 510(k) of the FDA Act, which provides for FDA marketing approval
on an expedited basis for products that can be shown to be substantially
equivalent to devices in interstate commerce prior to May 1976, the date of
enactment of the FDA Act. The Company anticipates that substantially all of the
products currently being developed will qualify for marketing approval under
Section 510(k). However, if marketing approval for any product cannot be
obtained under Section 510(k), alternative approval procedures are likely to be
costly and time consuming and there can be no assurance that the required
approvals for marketing any newly developed products will be obtained. All
products and manufacturing facilities are subject to continual review and
periodic inspection by the FDA. The discovery of previously unknown problems
with the Company or its products or facilities may result in product labeling
restrictions, recall, or withdrawal of the products from the market. The Company
is required to obtain similar approvals, and is subject to similar regulation
for the sale of its products in foreign countries and is subject to similar
risks relating to the inability to obtain or the revocation of such approvals.
See "Business - Government Regulation."

Limited Sales and Marketing Experience. The Company anticipates the
majority of its sales growth, if any, in the future will be in spinal implants.
The Company has sold its spinal implant products in the United States through a
limited direct sales and marketing staff and a network of independent
commissioned sales agencies supported by the Company's technical support staff.
Independent commissioned sales agencies typically market orthopedic and
neurological implants and instruments for a variety of manufacturers. The
Company provides extensive sales training, however, existing or future sales
agencies may not have prior experience selling spinal implants. There can be no
assurance that the Company will be able to develop an effective distribution
network or that such commissioned sales agencies will be able to successfully
sell the Company's products.

Dependence on Management and Medical Advisory Board. The Company's
success will depend to a great extent on its senior management, including Joseph
A. Mussey, Chief Executive Officer. The Company's operations could be adversely
affected if, for any reason, one or more key executive officers ceases to be
active in the Company's management or in the event that any member of the
Company's Medical Advisory Board would choose to leave the board and support a
competing implant system. In addition, the Company's success depends in large
part on its ability to attract and retain highly qualified scientific,
technical, management and marketing personnel. Competition for such personnel is
intense and there can be no assurance that the Company will be able to attract
and retain the personnel necessary for the development and operation of its
business. The loss of the services of key personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations.

Product Liability Litigation and Insurance Coverage. The spinal implant
industry has been historically litigious and the Company faces an inherent
business risk of financial exposure to product liability claims. Such claims
against the Company, regardless of their merit or eventual outcome, could have a
material adverse effect upon the Company's business, financial condition and
results of operations. Since the Company's spinal products are designed to be
permanently implanted in the human body, manufacturing errors or design defects
could result in injury or death to the patient, and could result in a recall of
the Company's products and substantial monetary damages. The Company has been
named as a defendant in more than 500 cases alleging principally that the
Company participated in an industry-wide conspiracy to market pedicle screw
implants. The Company anticipates that additional similar suits will be filed in
the future. The Company has also been named as a defendant in 15 cases alleging
claims of products liability for defective products manufactured by the Company.
The Company's current liability insurance coverage limits are $5,000,000 per
occurrence per year and $5,000,000 in the aggregate per year. There can be no
assurance that the Company will not experience losses to the extent that its
insurance coverage is not adequate to cover the cost of defending these and
similar suits that may be filed in the future or the cost of settling such
claims or paying any adverse judgments. Such insurance is expensive, difficult
to obtain and may not be available in the future on acceptable terms, or at all.
In 1997, the Company's prior insurance carrier exited the spinal implant market.
The new insurance carrier

- 8 -

is providing similar insurance coverage for future claims. For claims that have
been incurred but not yet filed, the Company has purchased extended claims
coverage from its prior carrier. See "Legal Proceedings."

Product Concentration and Obsolescence. The Company anticipates that
most of its spinal implant sales and sales growth in the future, if any, will
come from the SYNERGY(TM) Spinal Implant System. In addition, the Company's
current primary product development efforts involve a cervical version of the
SYNERGY(TM) Spinal Implant System and a spinal implant cage. There can be no
assurance that the Company will be successful in marketing the SYNERGY(TM)
Spinal Implant System or the spinal implant cage or that a competitor will not
introduce a superior product or technology. In either event, the Company may not
be able to produce sufficient sales to achieve profitability.

Dependence on Suppliers. The Company does not manufacture the components
for its spinal implants and instruments and is dependent upon several suppliers
for the production of such components and expects to continue to be dependent
upon such manufacturers for the foreseeable future. The Company is dependent
upon these manufacturers for timely and cost-effective manufacturing services.
In the event that the Company is unable to obtain components, or obtain such
components on commercially reasonable terms, it may not be able to manufacture
or distribute its products on a timely and competitive basis, or at all.

Concentration of Ownership; Anti-Takeover Provisions. The Company's
directors and officers and their affiliates beneficially own approximately 40.9%
of the outstanding Common Stock. Accordingly, these persons have the ability to
exert significant influence over the business affairs of the Company, including
the ability to influence the election of directors and the results of voting on
all matters requiring stockholder approval. The Company has adopted certain
anti-takeover measures which, individually or collectively, may be
disadvantageous in that they may discourage takeovers in which stockholders
might receive a substantial premium for some or all of their shares of Common
Stock.

Volatility of Market Price. Market prices for securities of orthopedic
device companies have historically been highly volatile. Quarterly operating
results of the Company, the announcement of technological innovations or new
products by the Company or its competitors, governmental regulation, timing of
regulatory approvals, developments related to patents or proprietary rights or
publicity regarding actual or potential malfunctions of the Company's or its
competitors' products may cause the market price of the Common Stock to
fluctuate substantially.

ITEM 2. PROPERTIES.

On February 8, 1996, the Company entered into a lease for its new
office and production facilities in Dublin, Ohio. The lease term began on April
1, 1996, and terminates on June 1, 2001. The lease covers 27,680 square feet, of
which the Company plans to use approximately 13,680 square feet for office and
production and the remaining approximately 14,000 square feet will be used by
OrthoLogic, the purchaser of the recovery products segment. OrthoLogic may cease
using the space on 90 days notice, and must vacate by December 31, 1997. After
OrthoLogic vacates the space, the Company will expand into part of the space and
attempt to sublease the remainder. The facility is located at 5160 Blazer
Memorial Parkway, Dublin, Ohio 43017.

ITEM 3. LEGAL PROCEEDINGS.

The nature of the Company's business subjects the Company to product
liability and related claims from time to time. The Company maintains a claims
made product liability insurance policy with per occurrence ($100,000) and
aggregate ($500,000) retention limits. Beyond these retention limits, the policy
covers aggregate insured claims made during each policy year up to $5,000,000.
The Company believes that it has adequate insurance for its business, but there
can be no assurance that future operating results will not be materially
adversely affected by the formal resolution of pending cases or future claims.

The Company and other spinal implant manufacturers were named as
defendants in various purported class action product liability lawsuits alleging
that the plaintiffs were injured by spinal implants supplied by the Company

- 9 -

and others. All such lawsuits were consolidated for pretrial proceedings in the
Federal District Court for the Eastern District of Pennsylvania and, on February
22, 1995, Chief Judge Emeritus Lewis C. Bechtle denied class certification. The
federal court lawsuits before Judge Bechtle will remain coordinated for further
pretrial purposes, but are individual lawsuits. In response to the denial of
class certification, a large number of additional individual lawsuits have been
filed alleging, in addition to damages from spinal implants, a conspiracy among
manufacturers, physicians, and other spinal implant industry members. The
Company has been named as a defendant, among others, in approximately 500 such
lawsuits. The Company believes that only 15 of such cases involve individual
plaintiffs utilizing implants supplied by the Company. The Company cannot
estimate precisely at this time the number of such lawsuits that may eventually
be filed. Most of such lawsuits are pending in federal courts and are in
preliminary stages. Discovery proceedings, including the taking of depositions,
have commenced in certain of the lawsuits. Plaintiffs in these cases typically
seek relief in the form of monetary damages, often in unspecified amounts. While
the aggregate monetary damages eventually sought in all of such individual
actions is substantial and exceeds the limits of the Company's product
liability insurance policies, the Company believes that it has affirmative
defenses, including, without limitation, preemption, and that these individual
lawsuits are otherwise without merit. All pending cases are being defended by
the Company's insurance carrier, in some cases under a reservation of rights.
There can be no assurance, however, that the $5,000,000 per policy year limit of
the Company's coverage will be sufficient to cover the cost of defending all
lawsuits or the payment of any amounts that may be paid in satisfaction of any
settlements or judgments. Further, there can be no assurance that the Company
will continue to be able to obtain sufficient amounts of product liability
insurance coverage at commercially reasonable, premiums.

In addition to the above, in the ordinary course of business the
Company has been named as a defendant in various other legal proceedings. The
Company has denied liability in all such lawsuits and is vigorously defending
the same. The Company believes that it has adequate insurance for its business,
but there can be no assurance that future operating results will not be
materially adversely affected by the formal resolution of these matters.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS.

Not Applicable.

- 10 -

PART II

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

PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY

The Company's Common Stock is traded in the over-the-counter market and
is quoted on the Nasdaq SmallCap Market under the symbol "CRSS." The following
table sets forth, for the periods indicated, the high and low bid prices per
share for the Common Stock as reported by the Nasdaq SmallCap Market. Such bid
prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.

HIGH LOW
---- ---

1994
First Quarter $4.375 $1.8125
Second Quarter 4.125 2.625
Third Quarter 4.125 3.125
Fourth Quarter 4.50 3.625

1995
First Quarter ....... $4.375 $ 3.875
Second Quarter 10.00 4.00
Third Quarter 10.50 7.125
Fourth Quarter 7.875 5.375

1996
First Quarter ....... $8.00 $ 5.75
Second Quarter 9.00 6.25
Third Quarter 7.50 5.25
Fourth Quarter 9.00 6.25

On March 25, 1997, the last reported bid price of the Common Stock on
The Nasdaq SmallCap market was $7.25. At March 25, 1997, there were 413
holders of record of the outstanding Common Stock.

The Company has not declared or paid any cash dividends or
distributions on the Common Stock. The Company intends to retain its earnings to
finance the growth and development of its business and does not expect to
declare or pay any cash dividends in the foreseeable future. The declaration of
dividends is within the discretion of the Company's Board of Directors, subject
to the terms of the Company's revolving credit agreement.

- 11 -

ITEM 6. SELECTED FINANCIAL DATA.

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below for, and as of
the end of, each of the years in the five year period ended December 31, 1996 is
derived from the audited financial statements of the Company. The following
selected consolidated financial data should be read in conjunction with the
Company's consolidated financial statements and related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere herein.

YEARS ENDED DECEMBER 31,
(In thousands, except per share data)

STATEMENT OF OPERATIONS DATA: 1996 1995 1994 1993 1992
---- ---- ---- ---- ----

Revenue.............................................. $8,572 $4,091 $2,880 $1,360 $347
Cost of goods sold................................... 3,854 1,995 1,189 358 255
Gross margin......................................... 4,718 2,096 1,691 1,002 92
Selling, general and administrative expenses......... 4,330 3,224 2,483 1,984 1,413
Research and development expenses.................... 687 859 977 800 519
Operating loss ...................................... (299) (1,987) (1,769) (1,782) (1,840)
Interest expense, net................................ 439 101 3 15 9
Loss from continuing operations before income taxes.. (738) (2,088) (1,772) (1,797) (1,849)
Net income (loss) from continuing operations......... 50 (1,442) (1,176) (1,194) (1,207)
Net income (loss) per share from continuing
operations......................................... $ .01 $ (.31) $(.25) $(.27) $(.27)

BALANCE SHEET DATA:

Working Capital...................................... $8,241 $3,135 $2,599 $2,032 $3,742
Total assets......................................... 19,590 9,498 7,413 5,782 7,649
Short-term obligations............................... 1,659 3,081 6 7 157
Long-term obligations................................ 5,482 7 6 163
Total shareholders' equity........................... 5,648 3,522 3,390 3,008 3,727

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

The information required by this item is included under the caption
"MANAGEMENT DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION" in the Company's Annual Report and is incorporated herein by
reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Consolidated Financial Statements of the Company, together with
reports thereon from Coopers & Lybrand L.L.P. (dated March 12, 1997), appear in
the Company's Annual Report and are incorporated herein by reference.

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

None.

- 12 -
13

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

In accordance with General Instruction G(3) of Form 10-K, the
information appearing under the caption "Election of Directors" and the
subcaptions "Meetings and Committees of the Board of Directors" and "Officers
and Significant Employees" of the Company's Definitive Proxy Statement relating
to the Company's Annual Meeting of Stockholders to be held on May 21, 1997 (the
"Proxy Statement"), is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION.

In accordance with General Instruction G(3) of Form 10-K, the
information appearing under the subcaptions "Compensation of Officers and
Directors," and "Stock Options," and "Compensation of Directors" and "Employment
Contracts" of the Company's Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

In accordance with General Instruction G(3) of Form 10-K, the
information appearing under the subcaption "Security Ownership of Certain
Beneficial Owners" and the caption "Election of Directors" of the Company's
Definitive Proxy Statement relating to the Company's Annual Meeting of
Stockholders to be held on May 21, 1997, is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

In accordance with General Instruction G(3) of Form 10-K, the
information appearing under the subcaption "Related Party Transactions" of the
Company's Definitive Proxy Statement relating to the Company's Annual Meeting of
Stockholders to be held on May 21, 1997, is incorporated herein by reference.

- 13 -

PART IV

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

(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT AS INCORPORATED BY
REFERENCE IN ITEM 8:

FINANCIAL STATEMENTS AND SCHEDULE

Report of Independent Accountants

Consolidated Balance Sheet as of December 31, 1996 and 1995

Consolidated Statement of Operations for the three years ended
December 31, 1996, 1995 and 1994

Consolidated Statement of Changes in Shareholders' Equity for
the three years ended December 31, 1996, 1995 and 1994

Consolidated Statement of Cash Flows for the three years ended
December 31, 1996, 1995 and 1994

Notes to the Consolidated Financial Statements

Financial statement schedule:

Report of Independent Accountants on Financial
Statement Schedule

II. Valuation and Qualifying Accounts

Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the required information is
included in the financial statements or the notes thereto.

- 14 -

CROSS MEDICAL PRODUCTS, INC.
REPORT ON FORM 10-K

EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION PAGE NUMBER
--- ----------- -----------

3(a) Certificate of Incorporation of the Company. Previously filed as Exhibit 3(a) to
Form 10 (file number 0-16893) filed
May 3, 1988, and incorporated herein
by reference.

3(B) Bylaws of the Company. Previously filed as Exhibit 3(b) to Form
10 (file number 0-16893) filed May 3
1988, and incorporated herein by
reference.

4.1 Reference is made to Articles FOURTH, EIGHTH, Previously filed as Exhibit 4 to Form 10
NINTH and TENTH of the Certificate of Incorporation (file number 0-16893) filed May 3,
of the Company and Articles II, III, IV, VI, VII and VIII 1988, and incorporated herein by
of the Company's Bylaws. Instruments defining the reference.
rights of holders of long-term debt will be furnished to
the Securities and Exchange Commission upon request.

4.2 Form of the Company's Stock Certificate Page___.

10(a) Business Purpose Revolving Promissory Note, dated Previously filed as Exhibit 10(a) to
February 13, 1995, in the amount of $400,000 payable to Annual Report on Form 10-K (file
Bank One, Columbus, N.A. by the Company. number 0-16893) filed on March 30,
1995, and incorporated herein by
reference.

10(b) Non-Titled Personal Property Security Agreement, dated Previously filed as Exhibit 10(b) to
February 13, 1995, granting Bank One Columbus, N.A. a Annual Report on Form 10-K (file
security interest in all inventory, raw materials, work in number 0-16893) filed on March 30,
process, supplies, accounts, general intangibles, chattel 1995, and incorporated herein by
paper, instruments, other forms of obligations and reference.
receivables, goods, equipment, machinery, supplies and
other personal property of the Company.

10(c) Non-Titled Personal Property Security Agreement, dated Previously filed as Exhibit 10(c) to
February 13, 1995, granting Bank One Columbus, N.A. a Annual Report on Form 10-K (file
security interest in all inventory, raw materials, work in number 0-16893) filed on March 30,
process, supplies, accounts, general intangibles, chattel 1995, and incorporated herein by
paper, instruments, other forms of obligations and reference.
receivables, goods, equipment, machinery, supplies and
other personal property of the Company.

10(d) Loan Agreement, dated September 23, 1994, in the Previously filed as Exhibit 10 to Form
amount of $2,500,000 payable to Bank One, Columbus, 10 (file number 0-16893) filed
N.A. by Danninger Medical Technology, Inc., and the November 14, 1994, and incorporated
Company, secured by accounts receivable, lease herein by reference.
receivables, contract rights, chattels, general intangibles,
notes, drafts, acceptances and other forms of obligations
and inventory, goods, merchandise, and all other personal
property of the Company.

10(e) Loan Agreement, dated June 26, 1995, by and among the Previously filed as Exhibit 10 to
Company and Bank One, Columbus, N.A. Form 10-Q (file number 0-16893) filed
August 14, 1995, and incorporated
herein by reference.

- 15 -

10(f) Amendment to Loan Agreement, dated March 27, 1996, Previously filed as Exhibit L 10(f) to
by and among the Company and Bank One, Columbus, Annual Report on Form 10-K (file
N.A. number 0-16893) filed March 29, 1996,
and incorporated herein by reference.

10(g) Asset Purchase Agreement, dated March 12, 1997, by Page___.
and among the Company, Danninger Healthcare, Inc.
and OrthoLogic Corp.

The following are management contracts and compensatory plans and arrangements in which directors or
executive officers participate:

10(h) Confidentiality, Assignment and Non-Competition Previously filed as Exhibit 10(a) to
Agreement for Key Personnel, dated September 10, Form 10 (file number 0-16893) filed
1984, between the Company and Edward R. Funk.* May 3, 1988, and incorporated herein
by reference.

10(i) Schedule identifying material details of other agreements Previously filed as Exhibit 10(h) to
substantially identical to Exhibit 10(h).* Annual Report on Form 10-K (file
number 0-16893) filed on March 30,
1995, and incorporated herein by
reference.

10(j) Amended and Restated 1984 Incentive Stock Option Previously filed as Exhibit 10(e) to
Plan, reserving 750,000 shares of Common Stock, as Annual Report on Form 10-K (file
amended by the Board of Directors on April 2, 1992.* number 0-16893) filed March 30, 1993,
and incorporated herein by reference.

10(k) Form of Stock Option Agreement Under the Amended Previously filed as Exhibit 10(f) to
and Restated 1984 Incentive Stock Option Plan.* Annual Report on Form 10-K (file
number 0-16893) filed March 30, 1993,
and incorporated herein by reference.

10(l) Amended and Restated 1984 on-Statutory Stock Option Previously filed as Exhibit 10(h) to,
Plan reserving 300,000 shares of Common Stock, as Annual Report on Form 10-K (file number
amended by the Board of Directors on April 2, 1992.* 0-16893) filed March 30, 1993, and
incorporated herein by reference.

10(m) Form of Stock Option Agreement Under the Amended Previously filed as Exhibit 10(i) to
and Restated 1984 Non-Statutory Stock Option Plan.* Annual Report on Form 10-K (file
number 0-16893) filed March 30, 1993,
and incorporated herein by reference.

10(n) 1994 Stock Option Plan, reserving 600,000 shares of Previously filed as Exhibit 10(c) to
Common Stock.* Form 10 (file number 0-16893) filed
August 12, 1994, and incorporated
herein by this reference.

10(o) Form of Indemnification Agreement between the Previously filed as Exhibit 10(x) to
Company and its directors.* Form 10 (file number 0-16893) filed
May 3, 1988, and incorporated herein
by reference.

10(p) Schedule identifying material details of other Previously filed as Exhibit 10(o) to
Indemnification Agreements substantially Annual Report on Form 10-K (file
identical to Exhibit 10(n).* number 0-16893) filed on March 30,
1995, and incorporated herein by
reference.

10(q) Employment Agreement Between the Company and Previously filed as Exhibit 10(a) to
Edward R. Funk.* Form 10 (file number 0-16893) filed
August 12, 1994, and incorporated
herein by this reference.

- 16 -

10(r) Employment Agreement between the Company and Previously filed as Exhibit 10(b) to
Edward R. Funk.* Form 10 (file number 0-16893) filed
August 12, 1994, and incorporated
herein by this reference.

10(s) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(a) to the
between the Company and Joseph A. Mussey. Company's Quarterly Report on Form
10-Q for the quarter ended September
30, 1996 (file number 0-16893) filed
October 15, 1996, and incorporated
herein by reference.

10(t) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(b) to the
between the Company and Paul A. Miller. Company's Quarterly Report on Form
10-Q for the quarter ended September 30,
1996 (file number 0-16893) filed
October 15, 1996, and incorporated
herein by reference.

10(u) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(c) to the
between the Company and Ira Benson. Company's Quarterly Report on Form
10-Q for the quarter ended September 30,
1996 (file number 0-16893) filed October
15, 1996, and incorporated herein by
reference.

10(v) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(d) to the
between the Company and Thomas E. Zimmer. Company's Quarterly Report on Form 10-K
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by
reference.

10(w) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(e) to the
between the Company and Paul A. Mellinger. Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by
reference.

10(x) Non-Competition Agreement dated September 6, 1996, Previously filed as Exhibit 10(f) to the
between the Company and Stephen R. Draper. Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by
reference.

11 Statement Regarding Computation of Net Income Per Page ___.
Share.

13 Portions of the Company's Annual Report to Page ___.
Stockholders.

21 List of Subsidiaries. Previously filed as Exhibit 21 (file
number 0-16893) filed March 31, 1995,
and incorporated herein by this
reference.

23 Consent of Coopers & Lybrand L.L.P. Page ___.

24 Powers of Attorney. Page ___.

- 17 -

27 Financial Data Schedule Page ___.

- --------------------------------
*Management Contract or Compensatory Plan

(B) REPORTS ON FORM 8-K

None.

The exhibits to this report begin at page ___.

(D) FINANCIAL STATEMENT SCHEDULES

The Financial Statement Schedule of the Company, together with report
thereon from Coopers & Lybrand L.L.P. (dated March 12, 1997), are set forth on
the following pages.

- 18 -

19
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

Our report on the consolidated financial statements of Cross Medical Products,
Inc. and Subsidiaries (formerly Danninger Medical Technology, Inc. and
Subsidiaries) is included in this form 10-K. In connection with our audits of
such financial statements, we have also audited the related financial statement
schedule listed in the index in this Form 10-K.

In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information required to be included
therein.

/s/ COOPERS & LYBRAND L.L.P.

Columbus, Ohio
March 12, 1997

-19-

CROSS MEDICAL PRODUCTS, INC. AND SUBSIDIARY

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Charged
Balance to Costs
at and Balance
Beginning Expenses at End
of Year (Recoveries) Deductions of Year
------- ------------ ---------- -------

For the year ended December 31, 1996:
Allowance for doubtful accounts $ 78,947 $84,000 $(67,761) $ 95,186
Inventory valuation reserve 363,332 125,000 (184,386) 303,946
------- ------- ------- -------
$442,279 $209,000 $(252,147) $399,132
======== ======== ========== ========

For the year ended December 31, 1995:
Allowance for doubtful accounts $ 62,329 $16,618 $ 78,947
Inventory valuation reserve 126,186 237,146 363,332
------- ------- -------
$188,515 $253,764 $442,279
======== ======== ========

For the year ended December 31, 1994:
Allowance for doubtful accounts $ 6,000 $59,647 $(3,318) $ 62,329
Inventory valuation reserve 121,332 36,991 (32,137) 126,186
-------- -------- -------- -------
$127,332 $96,638 $(35,455) $188,515
======== ======= ========= ========

-20-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused the Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 27, 1997 CROSS MEDICAL PRODUCTS, INC.

By: /s/ Joseph A. Mussey
----------------------
Joseph A. Mussey
Chief Executive Officer, President
and Treasurer

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

SIGNATURE TITLE DATE
--------- ----- ----

/*/ Joseph A. Mussey President, Chief Executive Officer, ) March 27, 1997
- --------------------------- Treasurer and Director )
Joseph A. Mussey (Principal Executive Officer) )
)
)
/*/ Paul A. Miller Vice President and Chief Financial ) March 27, 1997
- --------------------------- Officer (Principal Financial and )
Paul A. Miller Accounting Officer) )
)
)
/*/ Edward R. Funk Chairman of the Board of Directors ) March 27, 1997
- --------------------------- )
Edward R. Funk )
)
)
/*/ Daniel A. Funk Director ) March 27, 1997
- --------------------------- )
Daniel A. Funk, M.D. )
)
)
/*/ Daniel A. Gregorie Director ) March 27, 1997
- --------------------------- )
Daniel A. Gregorie, M.D. )
)
)
/*/ Herbert J. Kahn Director ) March 27, 1997
- --------------------------- )
Herbert J. Kahn )
)
)
/*/ Curtis A. Loveland Director ) March 27, 1997
- --------------------------- )
Curtis A. Loveland )
)
)
/*/ C. Craig Waldbillig Director ) March 27, 1997
- --------------------------- )
C. Craig Waldbillig )
)
)

- 21 -

/*/ Peter H. Williams Director ) March 27, 1997
- --------------------------- )
Peter H. Williams )
)
)
/*/ Robert J. Williams Director ) March 27, 1997
- --------------------------- )
Robert J. Williams )
)

*By: /s/ Joseph A. Mussey
- -----------------------------------
Joseph A. Mussey, attorney-in-fact
for each of the persons indicated

- 22 -

CROSS MEDICAL PRODUCTS, INC.
REPORT ON FORM 10-K

EXHIBIT INDEX

EXHIBIT
NO. DESCRIPTION PAGE NUMBER
--- ----------- -----------

3(a) Certificate of Incorporation of the Company. Previously filed as Exhibit 3(a) to Form
10 (file number 0-16893) filed May 3,
1988, and incorporated herein by
reference.

3(B) Bylaws of the Company. Previously filed as Exhibit 3(b) to Form
10 (file number 0-16893) filed May 3
1988, and incorporated herein by
reference.

4.2 Form of the Company's Stock Certificate. Page___.

10(d) Loan Agreement, dated September 23, 1994, in the Previously filed as Exhibit 10 to Form
amount of $2,500,000 payable to Bank One, Columbus, 10 (file number 0-16893) filed
N.A. by Danninger Medical Technology, Inc., and the November 14, 1994, and incorporated
Company, secured by accounts receivable, lease herein by reference.
receivables, contract rights, chattels, general
intangibles, notes, drafts, acceptances and other
forms of obligations and inventory, goods, merchandise,
and all other personal property of the Company.

10(e) Loan Agreement, dated June 26, 1995, by and among the Previously filed as Exhibit 10 to Form
Company and Bank One, Columbus, N.A. 10-Q (file number 0-16893) filed
August 14, 1995, and incorporated herein
by reference.

- 23 -

10(g) Asset Purchase Agreement, dated March 12, 1997, by Page___.
and among the Company, Danninger Healthcare, Inc.
and OrthoLogic Corp.

The following are management contracts and compensatory plans and arrangements in which directors or
executive officers participate:

10(i) Schedule identifying material details of other Previously filed as Exhibit 10(h) to
agreements substantially identical to Exhibit 10(h).* Annual Report on Form 10-K (file number
0-16893) filed on March 30, 1995, and
incorporated herein by reference.

10(j) Amended and Restated 1984 Incentive Stock Option Previously file as Exhibit 10(e) to
Plan, reserving 750,000 shares of Common Annual Report on Form 10-K (file
Stock, as amended by the Board of number 0-16893) filed March 30, 1993,
Directors on April 2, 1992.* and incorporated herein by reference.

10(l) Amended and Restated 1984 on-Statutory Stock Option Previously filed as Exhibit 10(h) to
Plan, reserving 300,000 shares of Common Stock, as Annual Report on Form 10-K (file
amended by the Board of Directors on April 2, 1992.* number 0-16893) filed March 30, 1993,
and incorporated herein by reference.

- 24 -

10(s) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(a) to the
between the Company and Joseph A. Mussey. Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15, 1996
and incorporated herein by reference.

10(t) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(b) to the
between the Company and Paul A. Miller. Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by reference.

10(u) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(c) to the
between the Company and Ira Benson. Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1996
(file number 0-16893) filed October 15,
1996, and incorporated herein by reference.

10(w) Employment Agreement, dated November 7, 1996, Previously filed as Exhibit 10(e) to the
between the Company and Paul A. Mellinger. Company's Quarterly Report on Form

10-Q for the quarter ended September 30, 1996
(file number 0-16893) filed October 15, 1996,
and incorporated herein by reference.