AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1998

REGISTRATION NO. 333- .
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

ORTHOPAEDIC BIOSYSTEMS LTD., INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

ARIZONA 3842 86-0752231
(STATE OF INCORPORATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)

15990 N. GREENWAY-HAYDEN LOOP, SUITE 100
SCOTTSDALE, ARIZONA 85260
(602) 596-4066
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

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

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
------------------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE

=============================================================================================================================
TITLE OF EACH PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
CLASS OF SECURITIES AMOUNT TO BE OFFERING AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) PRICE(2) FEE
- -----------------------------------------------------------------------------------------------------------------------------

Common Stock, no par value..... $20,125,000 $5,937
=============================================================================================================================

(1) Includes shares of Common Stock that the Underwriters have the option
to purchase to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a).

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
================================================================================
2

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

SUBJECT TO COMPLETION DATED , 1998

[ORTHOPAEDIC BIOSYSTEMS LTD, INC. LOGO]

COMMON STOCK

All of the shares of Common Stock offered hereby are being sold by
Orthopaedic Biosystems Ltd., Inc. ("OBL" or the "Company"). Prior to this
offering (the "Offering"), there has been no public market for the Common Stock
of the Company. Application has been made for listing of the Common Stock on the
American Stock Exchange under the symbol "OBL." It is currently estimated that
the initial public offering price will be between $ and $ per share. See
"Underwriting," for a discussion of the factors considered in determining the
initial public offering price.
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 7 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK OFFERED HEREBY.
------------------------------

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

===========================================================================================================================
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
- ---------------------------------------------------------------------------------------------------------------------------

Per Share........................... $ $ $
- ---------------------------------------------------------------------------------------------------------------------------
Total(3)............................ $ $ $
===========================================================================================================================

(1) Excludes additional compensation to the Underwriters in the form of warrants
(the "Representatives' Warrants") to purchase up to shares of Common
Stock to be granted to the representatives for the several underwriters (the
"Representatives"). In addition, the Company has agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended, in connection with this Offering. See "Underwriting."

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

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

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

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

THE DATE OF THIS PROSPECTUS IS , 1998
3
The pages include an enlarged drawing of one of the Company's suture anchors.
This page also includes four small drawings of the OBL RC5, PEBA C 6.5 mm, PEBA
C 4.0mm, and PEBA S 2.8mm suture anchors. This page also includes a drawing of
a rotator cuff with a suture anchor being passed through the tissue.

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

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

EXCEPT WHERE OTHERWISE NOTED, ALL STATISTICS REGARDING THE ORTHOPAEDIC MARKET
ARE DERIVED FROM MEDICAL DATA INTERNATIONAL.
3
4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read
in conjunction with, the detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus assumes (i) shareholder
approval of the Company's Amended and Restated Articles of Incorporation, the
1998 Stock Incentive Plan, and the 1998 Directors' Plan, approval of which is
expected to be obtained prior to circulation of Preliminary Prospectuses, (ii)
conversion of all outstanding shares of Class A Convertible Preferred Stock (the
"Preferred Stock") of the Company into 872,300 shares of Common Stock and
conversion of warrants to purchase an aggregate of 450,000 shares of Preferred
Stock into warrants to purchase an equal number of shares of Common Stock, which
will occur simultaneously with the payment to the Company of the purchase price
of the Common Stock sold in this Offering, and (iii) no exercise of the
Underwriters' over-allotment option, the Representatives' Warrants or currently
outstanding options or warrants. Investors should carefully consider the
information set forth herein under the heading "Risk Factors" and are urged to
read this Prospectus in its entirety.

THE COMPANY

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

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

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

introduction of new arthroscopic procedures and increased physical activity by a
growing active adult population. This active adult population continues to grow.
For example, the age group between 45 and 54 is estimated to increase by 73%
between 1990 and 2010. This growth, coupled with increased activity among
adults, has led to a 60% rise in emergency room visits resulting from injuries
related to athletic activity from 1986 to 1996.

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

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

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

THE OFFERING

Common Stock Offered................ shares

Common Stock Outstanding after the
Offering............................ shares(1)

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

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

Proposed American Stock Exchange
symbol.............................. OBL
- ---------------
(1) Excludes 815,000 and 450,000 shares of Common Stock issuable upon exercise
of stock options and warrants, respectively, outstanding as of June 26,
1998, at a weighted average exercise price of $1.61 and $2.00, respectively,
per share, of which options and warrants to purchase 498,500 and 450,000
shares, respectively, were then exercisable. Includes 10,000 shares of
Common Stock issued upon exercise of warrants subsequent to March 31, 1998.
See "Capitalization," "Management -- Summary of Executive Compensation" and
"Description of Capital Stock -- Warrants and Stock Options."

5
6

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

YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------- ------------------
1996 1997 1997 1998
------ ------- ------- -------

SELECTED STATEMENT OF OPERATIONS DATA:
Net revenues........................................... $ 783 $ 1,482 $ 350 $ 440
Cost of revenues....................................... 486 825 180 188
------ ------- ------ ------
Gross profit......................................... 297 657 170 252
Research and development expenses...................... 152 273 36 89
General and administrative expenses.................... 376 821 124 346
Sales and marketing expenses........................... 264 979 176 226
------ ------- ------ ------
Operating loss....................................... (495) (1,416) (166) (409)
Other income (expense), net............................ 277 30 (5) (33)
------ ------- ------ ------
Net loss............................................... $ (218) $(1,386) $ (171) $ (442)
====== ======= ====== ======
Basic and diluted net loss per share................... $(0.05) $ (0.33) $(0.04) $(0.10)
Weighted average shares outstanding.................... 4,091 4,204 4,123 4,363

MARCH 31, 1998
------------------------
DECEMBER 31, PRO FORMA
1997 ACTUAL AS ADJUSTED(1)
------------ ------ --------------

SELECTED BALANCE SHEET DATA:
Cash.................................................... $ 741 $ 142
Working capital......................................... 590 50
Total assets............................................ 2,284 2,018
Total liabilities....................................... 1,230 1,401
Shareholders' equity.................................... 1,053 617

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

(1) Adjusted to reflect the sale by the Company of shares of Common Stock
in this Offering at an assumed initial offering price of $ per share and
the application of the net proceeds therefrom, including the application of
$900,000 of the proceeds for repayment of related party indebtedness of
$861,000, net of discount, of the Company. See "Use of Proceeds,"
"Capitalization," and Notes to Financial Statements.

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RISK FACTORS

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

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

The Company has been in existence less than five years and has incurred a
net loss in each year since inception in 1994. The Company incurred operating
losses of $356,000, $495,000, and $1,416,000 for the years 1995, 1996 and 1997,
respectively. In addition, the Company expects to incur a net loss in 1998. Such
losses are due in part to expenses associated with the Company's sales and
marketing, overhead, research and development, prosecution of patents, and
compliance with United States Food and Drug Administration ("FDA") and other
regulatory requirements. As a result, accumulated deficit has increased from
$706,000 at December 31, 1995 to $2,752,000 at March 31, 1998. The Company's
financial statements for the year ended December 31, 1997 were audited by the
Company's independent auditors, whose report includes an explanatory paragraph
which describes an uncertainty about the Company's ability to continue as a
going concern. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes to Financial Statements.

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

UNCERTAINTY OF MARKET ACCEPTANCE

The Company's future success depends significantly on increasing
penetration of existing markets, acceptance of the Company's products in new
markets, and the development of new products for its existing and future
markets. There can be no assurance that any of the Company's existing or future
products will achieve or maintain market acceptance among surgeons, patients or
healthcare payors, even if reimbursement and necessary regulatory clearances or
approvals are obtained. Failure of some or all of the Company's products to
achieve significant market acceptance would have a material adverse effect on
the Company's business, financial condition and results of operations. To date,
the Company's marketing efforts have been directed mainly to the sports
medicine/arthroscopy market for bone-to-bone and tissue-to-bone fixation
devices. The Company has limited experience in establishing marketing or
distribution channels in other clinical areas. With respect to its current
products, the Company was not the first to market devices for the attachment of
soft tissue to bone. To succeed, the Company must both take market share away
from its existing competitors and create new demand for its products. The size
of the market for the Company's products will depend in part on the Company's
ability to persuade surgeons that its products offer advantages over existing
means of attaching soft tissue to other tissue or bone and that its fixation
devices could be used for a wider variety of clinical applications. In addition,
the Company will need to demonstrate that its products are cost-effective and
convenient to use and the techniques for their use are relatively
straightforward and simple. There can be no assurance the market for the
Company's products will grow or that the Company's products will be accepted for
orthopaedic procedures not currently using fixation devices and in markets
outside of the sports medicine/arthroscopy market. See "Business."
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8

INTENSE COMPETITION

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

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

LIMITED PRODUCT LINE; CUSTOMER CONCENTRATION

A substantial portion of the Company's revenues to date have been derived
from the Company's core suture anchor products for use in open shoulder repair
applications. As of the date of this Prospectus, the uses of the PeBA and OBL
RC5 suture anchor line have been cleared by the FDA for certain applications
involving the shoulder, knee, ankle, wrist, elbow, and pelvis. To date, however,
the Company has had relatively little clinical experience with joints other than
the shoulder. In addition, while the Company's future prospects depend in part
on the use of its products in arthroscopic and less invasive procedures, most of
the clinical experience involving the Company's products has been in open
surgery procedures. For the fiscal year ended December 31, 1997, and the three
months ended March 31, 1998, the Company's suture anchors and related
instruments accounted for approximately 85.5% and 79.5%, respectively, of the
Company's revenues. In addition, for the fiscal year ended December 31, 1997,
and the three months ended March 31, 1998, approximately 20.9% and 17.6%,
respectively, of the Company's net revenues were derived from sales to Mentor.
The Company expects that most of its revenue in the foreseeable future will
continue to be derived from sales of its suture anchor products. Failure of the
suture anchor products to maintain and gain market acceptance or the loss of any
material customer, such as Mentor, would have a material adverse affect on the
Company's business, financial condition, and results of operations. See
"-- Uncertainties Relating to Strategic Partners," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business -- Products and Technology."

NO ASSURANCE OF SUCCESSFUL IMPLEMENTATION OF BUSINESS STRATEGY

The Company's business strategy is to (i) expand its core suture anchor
business by increasing sales and marketing efforts directed to its core shoulder
surgery market segment, (ii) continue to develop brand awareness with leading
surgeons by developing or acquiring rights to additional complementary products,
(iii) apply the Company's technology to additional applications both within and
outside of the sports medicine/arthroscopy market segments, (iv) develop new
technologies and materials to address specific surgical needs in tissue
fixation, and (v) pursue strategic alliances to facilitate product development
and
8
9

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

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

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

Additionally, the Company's strategy will focus in part on increasing its
international sales. Currently, the Company is represented outside the United
States by 14 distributors that collectively employ approximately 80 sales
representatives in 14 countries. The failure of the Company's foreign
distributors to generate substantial sales for the Company could have a material
adverse effect on the Company's business, financial condition, and results of
operations. The loss of such distributors or the inability of the Company to
develop and maintain an alternative foreign distribution network could have a
material adverse impact on the Company's international sales. The Company will
depend in part on its international distributors' ability to obtain and maintain
regulatory approval for the sale of the Company's products in overseas markets.
The failure of its international distributors to obtain or maintain the
necessary regulatory approvals could have a material adverse effect on the
Company's business, financial condition, and results of operations. See
"Business -- Sales and Marketing."

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

RAPID TECHNOLOGICAL CHANGE AND NEW PRODUCT INNOVATION

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

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10

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

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

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

FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING

The Company may require additional financing to fund its operations,
including its ongoing research and development programs. The Company's future
capital requirements will depend on many factors, including the progress of the
Company's research and development, the scope and results of preclinical studies
and clinical trials, the cost, timing and outcome of regulatory reviews, the
rate of technological advances, the market acceptance of the Company's products,
administrative and legal expenses, competitive products, and manufacturing and
marketing arrangements. There can be no assurance that additional equity or debt
financing will not be required prior to the time, if ever, the Company achieves
and sustains sufficient profitability to fund operations and growth. Any
additional equity financing would result in dilution to the Company's
stockholders. There can be no assurance that funds will be available on
favorable terms, if at all. If adequate funds are not available, the Company may
be required to cut back or discontinue one or more of its product development
programs, or obtain funds through strategic alliances that may require the
Company to relinquish rights to certain of its technologies or products. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

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

The Company's success will depend in part upon its ability to preserve its
trade secrets, obtain and maintain patent protection for its technologies,
products and processes, and operate without infringing the proprietary rights of
other parties. As of April 30, 1998, the Company owned six issued United States
patents, four pending United States patent applications, and nine pending
foreign patent applications covering various aspects of its devices, one
federally registered trademark and three pending federal trademark applications.
The Company intends to file additional patent applications in the future. The
patent positions of medical device companies, including the Company, are
generally uncertain and involve complex legal and factual questions. There can
be no assurance that patents will issue from any patent applications owned by or
licensed to the Company, and, if patents do issue, that the claims allowed will
be sufficiently broad to protect the Company's technology, or that any patents
issued to the Company (including existing patents) will not be

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circumvented or invalidated. Failure to obtain or maintain patent and trade
secret protection, for any reason, could have a material adverse effect on the
Company's business, financial condition and results of operations.

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

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

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

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

RISKS THAT THE COMPANY WILL BE UNABLE TO MANAGE GROWTH

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

RISKS OF POTENTIAL ACQUISITIONS

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

BROAD DISCRETION OF MANAGEMENT WITH REGARD TO USE OF PROCEEDS

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

REGULATORY RISKS

Clinical testing, manufacture, and sale of the Company's products are
subject to regulation by numerous governmental authorities, primarily the FDA
and corresponding state and foreign regulatory agencies. FDA regulates
preclinical and clinical testing, manufacturing, labeling, distribution and
promotion of devices. Noncompliance with applicable requirements can result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, failure of the government
to grant premarket clearance or premarket approval for devices, withdrawal of
marketing clearances or approvals and criminal prosecution. The FDA also has the
authority to request repair, replacement or refund of the cost of any device
manufactured or distributed by the Company.

Before a new device can be introduced in the market, the Company must
generally obtain FDA clearance or approval through either the 510(k) clearance
process or the costlier, lengthier and less certain Premarket

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

For any of the Company's devices that are cleared through the 510(k)
process, modifications or enhancements that could significantly affect the
safety or effectiveness of the device or that constitute a major change to the
intended use of the device will require a new 510(k) submission. The Company has
made certain modifications to its devices which the Company believes do not
require the submission of new 510(k) notices. There can be no assurance,
however, that the FDA would agree with any of the Company's determinations not
to submit a new 510(k) notice for any changes made to the device. If the FDA
requires the Company to submit a new 510(k) notice for any device modification,
the Company may be prohibited from marketing the modified device until the
510(k) notice is cleared by the FDA.

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

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

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

UNCERTAINTIES RELATING TO STRATEGIC PARTNERS

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

On June 22, 1998, Mentor was sued for alleged patent infringement by Boston
Scientific Corporation ("Boston Scientific") arising out of the marketing and
distribution of Mentor's bladder neck suspension anchor system, which uses the
Company's suture anchors. The complaint alleges that Mentor's marketing
techniques include the teaching of a surgical procedure that is subject to a
patent owned by Boston Scientific, and that Mentor's product infringes a patent
that covers a suture anchor assembly. The complaint seeks to enjoin Mentor from
continuing to sell its bladder neck suspension system, as well as treble
damages. A hearing on a preliminary injunction motion has been tentatively
scheduled for July 1998. The Company is not a party to the lawsuit. Further,
Mentor has advised the Company that it intends to defend the suit, and to
continue to market the products subject to the lawsuit. There can be no
assurance, however, that the lawsuit will not adversely affect sales of Mentor's
products, that Mentor will be successful in the suit, that the Company will not
be added as a party at a later date, or that the Company will not be requested
to defend and/or indemnify Mentor in respect of this action. Any of these events
or other matters that may arise out of the lawsuit could have a material adverse
effect on the Company's business, financial condition, or results of operations.

PRODUCT LIABILITY RISK

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

POSSIBLE LIMITATIONS ON THIRD-PARTY REIMBURSEMENT; HEALTHCARE REFORM

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

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

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

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

DEPENDENCE ON KEY PERSONNEL

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

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

RISKS ASSOCIATED WITH INTERNATIONAL SALES; CURRENCY FLUCTUATIONS

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

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

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

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

POTENTIAL ADVERSE EFFECTS OF ANTI-TAKEOVER PROVISIONS

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

CONCENTRATION OF OWNERSHIP

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

LIMITED LIABILITY OF DIRECTORS

The Company's Amended and Restated Articles of Incorporation provide, with
certain exceptions, that the Company's directors will not be personally liable
for monetary damages for breach of the directors' fiduciary duty of care to the
Company or its shareholders. Accordingly, even if a director were found liable
for a breach, the Articles would preclude a monetary remedy arising from the
breach. This provision does not eliminate the duty of care, and, in appropriate
circumstances, equitable remedies such as an injunction or other forms of
nonmonetary relief would remain available under Arizona law. This provision also
does not

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affect a director's responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws. See "Description of
Capital Stock -- Limitation of Liability and Indemnification of Directors and
Officers."

LACK OF DIVIDENDS

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

DILUTION

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

YEAR 2000 COMPLIANCE

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

SHARES ELIGIBLE FOR FUTURE SALE

Sales of a substantial number of shares of the Common Stock in the public
market following this offering or the prospect of such sales could adversely
affect the market price of the Common Stock. Upon completion of this Offering,
the Company will have outstanding shares of Common Stock (assuming no
exercise of the Underwriter's over-allotment option). Of these shares, the
shares of Common Stock offered hereby are immediately eligible for
sale in the public market without restriction, except for shares purchased at
any time by any "affiliate" of the Company, as such term is defined in Rule 144
under the Securities Act of 1933, as amended (the "Securities Act"). Directors,
officers and certain shareholders of the Company owning a total of 4,144,000
shares of Common Stock and outstanding options and warrants to purchase 819,000
shares of Common Stock have signed lock-up agreements under which such holders
will agree not to offer, sell, or otherwise dispose of any of their shares of
Common Stock that might otherwise be eligible for sale for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Representatives. Upon the expiration of the lock-up agreements, these securities
will become eligible for sale in the public market, subject to the provisions of
Rule 144. In addition, the Company intends to file registration statements under
the Securities Act, after the date of this Prospectus, covering the sale of
shares to be issued pursuant to certain currently outstanding options. See
"Shares Eligible for Future Sale."

In addition, upon the consummation of this Offering, the Company will sell
to the Representatives for nominal consideration the Representatives' Warrants
to purchase up to shares of Common Stock. The Representatives'
Warrants will be exercisable for a period of five years commencing one year
after the effective date of this Offering, at an exercise price per share of
120% of the price per share of the Common Stock sold in this Offering. For the
term of the Representatives' Warrants, the holders thereof will have, at nominal
cost, the opportunity to profit from a rise in the market price of the Common
Stock without assuming the risk of ownership, with a resulting dilution in the
interest of other shareholders. As long as the

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Representatives' Warrants remain unexercised, the Company's ability to obtain
additional capital might be adversely affected. Moreover, the Representative may
be expected to exercise the Representatives' Warrants at a time when the Company
would, in all likelihood, be able to obtain any needed capital through a new
offering of its securities on terms more favorable than those provided by the
Representatives' Warrants. See "Underwriting."

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

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

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19

USE OF PROCEEDS

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

The Company anticipates that such net proceeds will be used substantially
as follows: (i) approximately million to increase research and development
efforts; (ii) approximately million to increase marketing efforts; (iii)
approximately million to fund future acquisitions; (iv) approximately
million to re-pay indebtedness to certain related parties; (v) approximately
million for capital expenditures; and (vi) the balance, approximately
million, for working capital and general corporate purposes. There are no
present agreements or arrangements for any such potential or future
acquisitions.

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

The Company intends to use approximately $1.1 million of the estimated net
proceeds of the Offering to pay in full the outstanding balance of related party
indebtedness of $861,000 and $1,061,000 as of March 31, 1998 and June 26, 1998,
respectively. In December 1997 and January 1998, the Company borrowed $900,000
from certain officers, directors and shareholders of the Company. The loans bear
interest at the prime rate of interest plus two percent and are due on December
31, 1998. In connection with the loans, the Company issued warrants to purchase
an aggregate amount of 450,000 shares of the Common Stock. In May 1998, the
Company borrowed an additional $200,000 from the Company's Chairman. This loan
bears interest at the prime rate of interest plus four percent and is due April
30, 1999. See "Certain Relationships and Related Transactions."

DIVIDEND POLICY

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

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20

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1998: (i) on an actual basis; (ii) on a pro forma basis giving effect
to the conversion of 872,300 shares of Preferred Stock into 872,300 shares of
Common Stock; and (iii) on a pro forma as adjusted basis to reflect the sale of
the shares of Common Stock offered hereby, after deducting the
underwriting discount and estimated offering expenses, at an assumed initial
public offering price of per share, and the initial application of the
estimated net proceeds therefrom. See "Use of Proceeds." The table should be
read in conjunction with the Company's Financial Statements and the related
Notes included elsewhere in this Prospectus.

MARCH 31, 1998
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)

Debt:
Short-term debt to related parties, net of discount of
$39,000............................................... $ 861 $ 861 $ --
Long-term debt, including current portion................ 23 23 23
------- ------- -------
Total debt............................................... 884 884 23
Shareholders' equity:
Class A Convertible Preferred Stock, no par value;
3,000,000 shares authorized; 872,300 shares issued and
outstanding, actual; no shares issued and outstanding
pro forma and pro forma as adjusted(1)................ 1,713 --
Common Stock, no par value; 12,000,000 shares authorized;
4,362,692 shares issued and outstanding, actual;
5,234,992 shares issued and outstanding, pro forma;
and shares issued and outstanding, pro forma
as adjusted(1)(2)..................................... 1,575 3,288
Additional paid-in capital............................... 89 89
Accumulated deficit...................................... (2,752) (2,752)
Unearned compensation.................................... (8) (8)
------- ------- -------
Total shareholders' equity............................... 617 617
------- ------- -------
Total short term debt and capitalization......... $ 1,501 $ 1,501
======= ======= =======

- ---------------
(1) Upon the consummation of the Offering, the Company anticipates filing an
Amended and Restated Articles of Incorporation increasing its authorized
capital stock to 25,000,000 shares, of which 20,000,000 shares will be
Common Stock, no par value, and 5,000,000 shares will be Preferred Stock, no
par value.

(2) Excludes up to 1,226,500 shares of Common Stock issuable upon exercise of
stock options and warrants outstanding at March 31, 1998. See "Management"
and "Description of Capital Stock."

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21

DILUTION

The pro forma net tangible book value of the Company as of March 31, 1998,
was approximately $418,000, or $0.08 per share of Common Stock. Pro forma net
tangible book value per common share represents the net book value of the
Company's tangible assets less total liabilities divided by the number of shares
of Common Stock outstanding, after giving effect to the conversion of 872,300
shares of Preferred Stock into Common Stock upon completion of this Offering,
but without giving effect to the possible exercise of outstanding stock options
and warrants.

Without taking into account any changes in such pro forma net tangible book
value subsequent to March 31, 1998, other than to give effect to the sale by the
Company of shares of Common Stock offered hereby at an assumed initial
public offering price of $ per share (after deducting the underwriting
discounts and commission and other estimated Offering expenses) and the
application of the estimated net proceeds thereof, the as adjusted pro forma net
tangible book value of the Company as of March 31, 1998 would have been $
million, or $ per share. This represents an immediate increase in pro forma
net tangible book value of $ per share to existing stockholders and the
immediate dilution of $ per share to new investors purchasing Common Stock
pursuant to this Offering. Dilution per share to new investors represents the
difference between the amount per share paid by purchasers of Common Stock of
the Company pursuant to this Offering and the as adjusted pro forma net tangible
book value per share of Common Stock immediately after completion of this
Offering. The following table illustrates the per share effect of this dilution
on an investor's purchase of shares:

Assumed initial public offering price per common share...... $
Pro forma net tangible book value per common share as of
March 31, 1998......................................... $0.08
Increase in pro forma net tangible book value per common
share attributable to new investors.................... $
-----
As adjusted pro forma net tangible book value per common
share after Offering...................................... $
-----
Dilution per common share to new investors.................. $
=====

The following table summarizes, on a pro forma as adjusted basis as of
March 31, 1998, the number of shares of Common Stock purchased from the Company,
the total price paid, and the average price per share paid by existing
stockholders and by new investors purchasing shares of Common Stock offered
hereby:

SHARES PURCHASED TOTAL CONSIDERATION PAID AVERAGE
-------------------- ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ------------ -------- ---------

Existing stockholders.......... 5,234,992 % $ 3,376,986 % $0.65
New investors..................
--------- ----- ----------- -----
Total................ 100.0% $ 100.0%
========= ===== =========== =====

The foregoing tables excludes up to shares of Common Stock that may be
sold by the Company upon the exercise of the Underwriters' over-allotment option
and after giving effect to the conversion of all outstanding shares of Preferred
Stock into 872,300 shares of Common Stock upon completion of this Offering. The
tables also exclude 1,226,500 shares of Common Stock issuable upon exercise of
options and warrants outstanding at March 31, 1998. Further dilution may
result from the exercise of such options and warrants. See "Description of
Capital Stock," "Underwriting" and "Management."

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22

SELECTED FINANCIAL DATA

The following selected financial data for the year ended December 31, 1996
are derived from financial statements of the Company which have been audited by
Coopers & Lybrand, L.L.P., independent auditors. The selected financial data for
the year ended December 31, 1997 are derived from the financial statements of
the Company which have been audited by Ernst & Young LLP, independent auditors.
Ernst & Young LLP's report on the financial statements for the year ended
December 31, 1997, which appears elsewhere herein, includes an explanatory
paragraph which describes an uncertainty about the Company's ability to continue
as a going concern. The financial data for the three months periods ended March
31, 1997 and 1998 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and the results of operations for these periods. Operating
results for the three months ended March 31, 1998 are not necessarily indicative
of the results that may be expected for the entire year ending December 31,
1998. The following data is qualified in its entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements of the Company and
related Notes thereto included elsewhere in this Prospectus.

YEARS ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
----------------- ------------------
1996 1997 1997 1998
------ ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

SELECTED STATEMENT OF OPERATIONS DATA:
Net revenues......................................... $ 783 $ 1,482 $ 350 $ 440
Cost of revenues..................................... 486 825 180 188
------ ------- ------ ------
Gross profit...................................... 297 657 170 252
Research and development expenses.................... 152 273 36 89
General and administrative expenses.................. 376 821 124 346
Sales and marketing expenses......................... 264 979 176 226
------ ------- ------ ------
Operating loss.................................... (495) (1,416) (166) (409)
Other income (expense), net.......................... 277 30 (5) (33)
------ ------- ------ ------
Net loss............................................. $ (218) $(1,386) $ (171) $ (442)
====== ======= ====== ======
Basic and diluted net loss per share................. $(0.05) $ (0.33) $(0.04) $(0.10)
Shares used in computation........................... 4,091 4,204 4,123 4,363

MARCH 31, 1998
------------------------
DECEMBER 31, PRO FORMA
1997 ACTUAL AS ADJUSTED(1)
------------ ------ --------------

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

(1) Adjusted to reflect the sale by the Company of shares of Common
Stock in this Offering at an assumed initial offering price of per
share and the application of the net proceeds therefrom, including the
application of $900,000 of the proceeds for repayment of related party
indebtedness of $861,000, net of discount, of the Company. See "Use of
Proceeds," "Capitalization," and Notes to Financial Statements.

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23

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

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

OVERVIEW

The Company was incorporated in 1994 to design, develop and market
innovative medical devices for use in orthopaedic surgery, including sports
medicine and minimally invasive arthroscopic procedures. The Company's current
product offerings consist of suture anchors and related insertion instruments,
manual arthroscopic instrumentation, and a complete system of surgical screws.
In previous periods, the Company's focus has been on the development and sale of
its proprietary PeBA suture anchors, and more recently, the OBL RC5, a
pre-loaded suture anchor with a disposable insertion device. For the year ended
December 31, 1997, and the three months ended March 31, 1998, sales of suture
anchors and related instruments accounted for approximately 85.5% and 79.5%,
respectively, of net revenues. The Company intends to expand its line of suture
anchors and related instruments and expects that these products will continue to
represent a significant portion of its future revenues.

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

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

As of March 31, 1998, the Company had operating loss carryovers of
approximately $2.4 million, the income tax benefit of which has been offset
fully by a valuation allowance. Ownership changes, as defined in the Internal
Revenue Code, including those resulting from the issuance of Common Stock in
connection with this Offering, may limit the amount of net operating loss and
tax credit carryforwards that can be utilized to offset future taxable income
and reduce its tax liability.

23
24

RESULTS OF OPERATIONS

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

YEARS ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
--------------- ----------------
1996 1997 1997 1998
----- ----- ----- ------

Net revenues........................ 100.0% 100.0% 100.0% 100.0%
Gross profit........................ 37.9 44.3 48.7 57.3
Research and development expenses... 19.4 18.4 10.3 20.3
General and administrative
expenses.......................... 48.0 55.4 35.4 78.5
Sales and marketing expenses........ 33.7 66.1 50.3 51.3
----- ----- ----- ------
Operating loss...................... (63.2) (95.6) (47.3) (92.8)
Other income/(expense), net......... 35.4 2.1 (1.5) (7.6)
----- ----- ----- ------
Net loss............................ (27.8)% (93.5)% (48.8)% (100.4)%
===== ===== ===== ======

Three Months Ended March 31, 1998 and 1997

Net revenues increased $90,000, or 25.7%, to $440,000 for the three months
ended March 31, 1998 from $350,000 for the three months ended March 31, 1997.
The increase in revenues reflects increased sales of suture anchors and related
instruments resulting from the expansion of the Company's distribution network
as well as sales of manual arthroscopic instrumentation.

Gross profit increased $82,000, or 47.9%, to $252,000 for the three months
ended March 31, 1998 from $171,000 for the three months ended March 31, 1997,
representing gross margins of 57.3% and 48.7%, respectively. The increases in
gross profit and gross margins were primarily attributable to improved vendor
pricing and an increase in the sale of suture anchors which carry higher margins
than the Company's other products.

Research and development expenses consist primarily of compensation and
consulting fees, prototype development and sample inventory, and lab testing.
Research and development expenses increased $53,000, or 147.5%, to $89,000 for
the three months ended March 31, 1998 from $36,000 for the three months ended
March 31, 1997. Research and development expenses as a percentage of net revenue
increased to 20.3% from 10.3% during the respective periods. These increases
were primarily attributable to the development of products including the OBL RC5
pre-loaded suture anchor, the SB anchor, and the DRYKnot.

General and administrative expenses consist primarily of compensation,
regulatory certification costs, and general corporate overhead including rent,
insurance, and other operating expenses. General and administrative expenses
increased $222,000, or 178.7%, to $346,000 for the three months ended March 31,
1998 from $124,000 for the three months ended March 31, 1997. As a percentage of
net revenues, general and administrative expenses increased to 78.5% for the
three months ended March 31, 1998 from 35.4% for the three months ended March
31, 1997. These increases were primarily attributable to an increase in salaries
associated with hiring key management personnel, consulting fees incurred
related to ISO 9001 certification, and increased operating expenses incurred as
result of the Company's growth.

Sales and marketing expenses consist primarily of compensation, sales
workshops and seminars, international consulting fees, and other related
expenses. Sales and marketing expenses increased $50,000, or 28.2%, to $226,000
for the three months ended March 31, 1998 from $176,000 for the three months
ended March 31, 1997. Sales and marketing expenses as a percentage of net
revenues increased to 51.3% from 50.3% during these respective periods. These
increases resulted from workshops held by the Company for key surgeons as well
as members of its scientific advisory board, increased participation in industry
meetings, and the hiring of additional sales and marketing personnel.

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25

Net other expense increased $28,000 to $33,000 for the three months ended
March 31, 1998 from $5,000 for the three months ended March 31, 1997. This
increase was primarily attributable to interest expense incurred on related
party borrowings incurred in the fourth quarter of 1997 to fund the Company's
operations.

Net loss increased $271,000 or 158.9% to $442,000 for the three months
ended March 31, 1998 from $171,000 for the three months ended March 31, 1997 as
a result of the factors discussed above.

Years Ended December 31, 1997 and 1996

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

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

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations primarily from the private sale of
equity securities, from which it has raised $3.3 million since inception. The
Company has also financed its operations through borrowings from related
parties, and, at March 31, 1998, had borrowings outstanding of approximately
$861,000, net of discount. As a result of the operating losses incurred by the
Company since inception, the accumulated deficit was approximately $2.8 million
at March 31, 1998. The Company's financial statements for the year ended
December 31, 1997, include an explanatory paragraph which describes an
uncertainty about the Company's

25
26

ability to continue as a going concern. Upon consummation of the Offering, the
Company expects that the uncertainty will be eliminated.

As of March 31, 1998, the Company had cash of $142,000 as compared to
$741,000 on December 31, 1997. Operating activities required approximately
$525,000 and $1,966,000, respectively, during the three months ended March 31,
1998 and the year ended December 31, 1997. The changes in cash used in
operations were due primarily to the impact of increased revenues offset by
higher expenses associated with the expanded sales and marketing organization.
Such amounts were greater than the loss incurred during each of the respective
periods primarily due to increases in accounts receivable and inventory relating
to the Company's increased operating levels. Investment activities required
approximately $122,000 and $267,000, respectively, during the three months ended
March 31, 1998 and the year ended December 31, 1997. Investment activities
included computer and other equipment and instrumentation required by the
Company in its research and development and operations activities. The Company
does not expect a material increase in the rate of capital expenditures for the
balance of 1998. Financing activities contributed approximately $48,000 and
$2,576,000, respectively, during the three months ended March 31, 1998 and the
year ended December 31, 1997.

The Company intends to establish a bank credit facility and may attempt to
establish an equipment leasing facility to finance a portion of its working
capital requirements and capital expenditures. The Company does not have any
commitments or understandings pertaining to any lease facilities at this time.
The bank credit facility would provide for a line of credit up to $300,000
collateralized by substantially all of the Company's assets. The line would bear
interest at the prime rate plus 2 1/2% and would require the Company to satisfy
ongoing financial covenants including specified working capital and
debt-to-equity ratios and would restrict the Company's ability to pay dividends.

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

BACKLOG

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

YEAR 2000 COMPLIANCE

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

CHANGE IN AUDITOR

The Board of Directors of the Company on December 2, 1997, terminated the
Company's relationship with Coopers & Lybrand, L.L.P. and engaged Ernst & Young
LLP as its new independent auditors to audit the Company's financial statements.
The report of Coopers & Lybrand, L.L.P. on the Company's financial statements
for the year ended December 31, 1996 did not contain an adverse opinion or a
disclaimer of
26
27

opinion nor was it qualified or modified as to uncertainty, audit scope or
accounting principles. During this period and thereafter there were no
disagreements between the Company and Coopers & Lybrand, L.L.P. on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Coopers & Lybrand, L.L.P., would have caused it to make reference to the subject
matter of the disagreements in connection with its report. The Company has
authorized Coopers & Lybrand, L.L.P. to respond fully to inquiries from Ernst &
Young LLP concerning all matters relating to prior audits conducted by Coopers &
Lybrand, L.L.P.

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

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

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

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

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

27
28

BUSINESS

OVERVIEW

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

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

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

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INDUSTRY BACKGROUND AND MARKET DATA

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

Common Tissue Injuries

Methods of Treatment

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

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

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

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THE OBL SOLUTION

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

BUSINESS STRATEGY

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

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

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

Develop New Technologies and Materials. The Company is continuing to
pursue the development of new technologies and products that address specific
surgical needs. In this regard, the Company is currently pursuing the
development of (i) a knot substitute that could eliminate the difficult and
time-consuming task of remote surgical knot-tying, (ii) bio-absorbable suture
anchors which would gradually degrade and absorb into surrounding tissue causing
the surrounding bone to be stronger than bones with more permanent anchors,
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(iii) a comprehensive line of knee products including a meniscal repair device
and an interference screw for ACL reconstruction which will utilize the
Company's proprietary high/low thread design, and (iv) the "next-generation" of
fixation products that would be designed to facilitate the re-attachment of soft
tissue to other soft tissue. The Company anticipates developing additional
technologies through its internal resources as well as through licensing and
acquisitions.

Leverage Strategic Alliances. The Company will continue to pursue
strategic alliances as a means to leverage its internal resources. In this
regard, the Company intends to identify key foreign distributors to promote the
Company's products in international markets. For instance, the Company recently
signed a distribution arrangement with Mizuho, a leading medical device company
serving the Japanese market. In addition, the Company plans to develop alliances
that will facilitate new product introductions such as the Company's
distribution arrangement with T.A.G. Medical Products, Ltd. The Company also
intends to commercialize applications of its technology outside of sports
medicine/arthroscopy through arrangements such as with Mentor and Imcor.

PRODUCTS AND TECHNOLOGY

The Company's current product offerings are described below and consist of
a variety of suture anchors, an array of arthroscopic instruments and a system
of surgical screws, all of which are designed for specific orthopaedic surgical
applications. Each of the following products have received FDA 510(k) clearance
or have been exempted by the FDA from the 510(k) clearance process. See
"Business -- Government Regulation."

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PRODUCT DESCRIPTION
- ------- -----------

PRE-LOADED SUTURE ANCHORS
OBL RC5 Pre-Loaded Suture Anchor Pre-loaded RC5 anchor in a disposable
inserter with two braided polyester sutures.
Reduces amount of handling time needed to
prepare the anchor for implantation. Used
for rotator cuff reattachment.
2.8 mm Pre-Loaded Suture Anchor Pre-loaded PeBA S anchor in a disposable
inserter with one braided polyester suture.
Reduces amount of handling time needed to
prepare the anchor for implantation. Used
for repairs of the shoulder and for ulnar
ligament reattachments.
INDIVIDUAL SUTURE ANCHORS
5.0 mm RC5 Anchor Used for rotator cuff reattachment.
2.8 mm PeBA S Anchor Small profile is ideal for small, dense
bones. Use includes repairs of the shoulder
and ulnar ligament reattachments.
4.0 mm PeBA C Anchor Primary fastener for soft bone. Use includes
repairs in the shoulder, elbow, knee and
foot. Also sold through an OEM arrangement
with Mentor for use in female urinary stress
incontinence.
6.5 mm PeBA C Anchor Use includes shoulder, elbow, knee and foot.
INSTRUMENTS
Manual Arthroscopic Instruments Manufactured by T.A.G. Medical Products and
distributed in the United States exclusively
by OBL. Used in all types of arthroscopic
procedures.
Instrumentation Systems A selection of arthroscopic instruments used
to facilitate implantation of the Company's
anchor products; offered in a variety of
configurations; components include
inserters, bone drills, drill guides, and
sterilization trays.
SURGICAL SCREWS
Facet Screw System Designed for reconstructive surgery of small
bones, primarily in foot and ankle. Includes
a range of screws from 1.8 mm to 6.8 mm in
diameter.
Forefoot Reconstructive Screw System A system of cannulated cortical and
cancellous screws ranging in size from 2.7
mm to 3.5 mm in diameter.

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

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

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

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

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

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

Instrumentation

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

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

Screw Systems

The Facet Screw System is a system of self-drilling cannulated screws which
are offered in varying sizes, from 6.8 mm, 5.5 mm, and 4.3 mm in diameter, and
in various lengths. The Forefoot Reconstructive Screw System is a system of
cannulated and non-cannulated cortical and cancellous screws which are offered
in varying sizes, from 1.8 mm to 3.5 mm. These screws are designed to be used
for reconstructive surgery of smaller bones. The intended surgical audience is
foot and ankle orthopaedists and podiatrists. The unique feature of these screw
systems is the proprietary facet head of the screw which is designed to allow
maximum bone contact with minimal soft tissue irritation.

PRODUCTS UNDER DEVELOPMENT

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

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SB Titanium Suture Anchor

The SB Anchor is a toggle type anchor that is for use in osteoporotic bone
where the bone density cannot support a traditional threaded anchor. Inserted
either in a pre-drilled hole or by direct impact, the SB Anchor works by
rotating in the cancellous bone or medullary void. The Company's scientific
advisory board is currently considering the use of the SB Anchor for knee, hip
and trauma applications. The Company has received FDA 510(k) clearance for its
SB Anchor and anticipates that the anchor will be commercially released in the
fourth quarter of 1998.

SB Non-Metallic Suture Anchor

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

Interference Screw

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

Complete Instrument System -- Shoulder and Knee

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

DRYKnot

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

SALES AND MARKETING

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

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

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Internationally, the Company is represented by approximately 14 dealers who
employ over 80 sales representatives. The Company currently has distribution
arrangements covering parts of Europe, Canada, Israel, New Zealand, and Japan
where the Company recently signed an agreement with Mizuho, a leading medical
device company. The Company is also currently pursuing further global
distribution in Australia, India and certain Asian countries. Under the
Company's contractual arrangements with foreign distributors, the distributor is
granted the exclusive right to market the Company's products in the specified
territory, but must meet sales quotas to maintain its relationship with the
Company. Foreign distributors typically purchase product inventory from the
Company for their use in marketing and filling customer orders.

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

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

The Company uses print advertising for its products in arthroscopic
journals to support its suture anchors and manual arthroscopic instruments.

STRATEGIC RELATIONSHIPS

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

The Company also has an exclusive licensing agreement with Imcor for use of
its suture anchors in connection with dental implants. The Company will receive
royalties beginning in 1999 from Imcor based on sales of products. The term of
the agreement is for the duration of the relevant patent. In addition, the
Company has a marketing and distribution agreement with T.A.G. Medical Products
whereby the Company serves as the exclusive distributor in the U.S. for T.A.G.
manual arthroscopic instruments. The term of the agreement is four years with an
additional five year option to extend the term. The Company is required to meet
certain mutually agreed upon purchase targets. The agreement is subject to
termination for failure to meet the minimum purchase targets.

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

MANUFACTURING AND QUALITY CONTROL

The manufacture of the Company's devices and instruments consists of
design, inspection, testing and packaging of components that have been molded,
machined or manufactured to the Company's specifications by a variety of outside
contractors. Most purchased components are available from more than one vendor.
Manufactured product is received, inspected, and warehoused in the Company's
headquarters in Scottsdale, Arizona. There can be no assurance that the
Company's suppliers will be able to satisfy the Company's existing or future
component requirements.
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In order to maintain compliance with the FDA's Quality Systems Regulation
("QSR"), ISO 9001 and the requirements of foreign regulatory agencies, the
Company has established a quality control system. Under this system, samples
from each lot of finished goods are inspected to ensure that they comply with
the Company's specifications.

Although the Company believes that its subcontractors and component
suppliers are in material compliance with applicable regulations, there can be
no assurance that the FDA, or a state, local or international regulator, will
not take action against a subcontractor or a component supplier found to be
violating such regulations or that the Company will be able to continue to
secure products in a timely manner from its suppliers, or replace any supplier
in a timely manner as necessary.

RESEARCH AND DEVELOPMENT

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

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

PATENTS AND PROPRIETARY RIGHTS

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

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their various rights to technologies developed by the parties. There can be no
assurance that, notwithstanding these agreements with its employees,
consultants, and strategic partners, disputes will not arise as to ownership of
these proprietary rights or that the Company will not be required to defend and
indemnify strategic partners for the alleged infringement of the Company's
products. See "Risk Factors -- Uncertainties Relating to Strategic Partners."
Further, the extent to which efforts by others will result in patents and the
effect on the Company of the issuance of such patents is unknown.

GOVERNMENT REGULATION

United States. Clinical testing, manufacture and sale of the Company's
products are subject to regulation by numerous governmental authorities,
principally the FDA and corresponding state and foreign regulatory agencies.
Pursuant to the Federal Food, Drug, and Cosmetic Act, and the regulations
promulgated thereunder, the FDA regulates the preclinical and clinical testing,
manufacture, labeling, distribution and promotion of medical devices.
Noncompliance with applicable requirements can result in, among other things,
fines, injunctions, civil penalties, recall or seizure of products, total or
partial suspension of production, failure of the government to grant premarket
clearance or premarket approval for devices, withdrawal of marketing clearances
or approvals and criminal prosecution. The FDA also has the authority to
request, repair, replacement or refund of the cost of any device manufactured or
distributed by the Company.

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

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

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

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marketing. Modifications to a device that is the subject of an approved PMA, its
labeling, or manufacturing process may require approval by the FDA of PMA
supplements of new PMAs.

If human clinical trials of a device are required for a 510(k) or a PMA and
the device presents a "significant risk," the sponsor of the trial (usually the
manufacturer or the distributor of the device) will have to file an IDE
application prior to commencing human clinical trials. The IDE application must
be supported by data, typically including the results of animal and laboratory
testing. If the IDE application is approved by the FDA and one or more
appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs without the need for FDA approval.
Submission of an IDE does not give assurance that FDA will approve the IDE and,
if it is approved, there can be no assurance that FDA will determine that the
data derived from these studies support the safety and efficacy of this device
or warrant continuation of clinical studies.

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

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

There can be no assurance that the Company will be able to obtain necessary
regulatory approvals or clearances on a timely basis, if at all, and delays in
receipt of or failure to receive such approvals or clearances, the loss of
previously received approvals or clearances, limitations on intended use imposed
as a condition of such approvals or clearances, or failure to comply with
existing or future regulatory requirements could have a material adverse effect
on the Company's business, financial condition and results of operation.

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

Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Manufacturers of medical devices for
marketing in the United States are required to adhere to applicable regulations
setting forth detailed Quality System Regulation ("QSR") requirements, which
include testing, control and documentation requirements. Manufacturers must also
comply with Medical Devices Reporting ("MDR") requirements that a firm report to
the FDA any incident in which its product may have caused or contributed to a
death or serious injury, or in which its product malfunctioned and, if the
malfunction were to recur, it would be likely to cause or contribute to a death
or serious injury. Labeling and promotional activities are subject to scrutiny
by the FDA and, in certain circumstances, by the Federal Trade Commission.
Current FDA enforcement policy prohibits the marketing of approved or cleared
medical devices for unapproved uses.

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

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

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

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

COMPETITION

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

Overall, the Company believes that the primary competitive factors in the
markets for its products are design, material, sizing options, pull-out
strength, revision options, quality and reliability, customer service, and
pricing. The Company believes that it competes favorably with respect to these
factors, although there can be no assurance that it will continue to do so.

PRODUCT LIABILITY AND INSURANCE

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

EMPLOYEES

As of March 31, 1998, the Company had 19 employees of which two are engaged
in research and development activities, six are engaged in sales and marketing
activities, one is engaged in regulatory affairs and quality assurance and ten
are engaged in administration and accounting. The Company considers its employee
relations to be good. None of the Company's employees are represented by unions.

The Company is dependent upon a number of key management and technical
personnel. The loss of the services of one or more key employees or consultants
could have a material adverse effect on the Company. The Company's success will
also depend on its ability to attract and retain additional highly qualified
management and technical personnel. The Company faces intense competition for
qualified personnel, many of whom are often subject to competing employment
offers, and there can be no assurance that the Company will be able to attract
and retain such personnel. Furthermore, the Company's scientific advisory board
members all are otherwise employed on a full-time basis. As a result, the
advisory board members are not available to devote their full time or attention
to the Company's affairs.

FACILITIES

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

LEGAL PROCEEDINGS

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

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

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

NAME AGE POSITION
- ---- --- --------

D. Ronald Yagoda.......................... 53 Chairman, Chief Executive Officer and
Treasurer
James W. Hart............................. 39 President and Chief Operating Officer
Gary R. Scheel............................ 50 Vice President, Sales & Marketing
Jeffry B. Skiba........................... 44 Vice President, Engineering &
Manufacturing
Jennifer L. Guelich....................... 26 Vice President and Chief Financial Officer
Steven P. Davis........................... 60 Secretary and Director
Michael D. Greenbaum...................... 55 Director
Robert F. Lusch, Ph.D..................... 48 Director
Leslie S. Matthews, M.D................... 46 Director
Gary A. Peterson.......................... 49 Director
Richard Previte........................... 63 Director
Kerry Zang, D.P.M......................... 55 Director

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

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

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

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

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

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

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

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

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

Mr. Peterson has served as a Director of the Company since May 1997. Mr.
Peterson has also served since 1996 as President and Chief Executive Officer of
BATON Development Inc., a virtual incubator for medical products, and since 1993
as a general partner PSF Health Care Fund L.P., a venture capital fund. From
1991 to 1995, Mr. Peterson served as the President and Chief Executive Officer
of Peterson-Spencer-Fansler Investment, Inc., a capital sourcing and operational
consulting firm, and from 1986 to 1994, served as President of Genesis Venture
Development, Inc., a venture capital fund management company. Mr. Peterson
received a B.A. in biology and psychology from Gustavus Adolphus College and is
a registered broker dealer and a registered investment advisor.

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

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

INVOLVEMENT OF MANAGEMENT IN CERTAIN LEGAL PROCEEDINGS

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

SCIENTIFIC ADVISORY BOARD

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

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rather than employees and have substantial constraints on the amount of time
they can devote to the Company.

Each member of the Scientific Advisory Board has entered into a consulting
agreement with the Company that contains confidentiality and nondisclosure
provisions that prohibit the disclosure of confidential information to anyone
outside the Company. These agreements contain exclusivity provisions restricting
the clinical advisors from providing services to or investing in any competitor
of the Company without the Company's consent.

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

ADVISOR INSTITUTION
- ------- -----------

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

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SUMMARY OF EXECUTIVE COMPENSATION

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

LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION
- --------------------------- -------- ------- --------------- ------------ ------------

D. Ronald Yagoda............... $ 60,000 -- $6,000(2) -- --
Chief Executive Officer
Gary R. Scheel................. $120,000 $ 5,000 -- -- --
Vice President Sales &
Marketing
Jeffry B. Skiba................ $101,667 $10,000 -- -- --
Vice President Engineering &
Manufacturing

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

OPTION GRANTS IN LAST FISCAL YEAR

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

FISCAL YEAR-END OPTION VALUES

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

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
FISCAL YEAR-END FISCAL YEAR-END(1)
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------

D. Ronald Yagoda........................... -- -- -- --
Gary R. Scheel............................. 25,000 --
Jeffry B. Skiba............................ 80,000 20,000

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

1998 STOCK INCENTIVE PLAN

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

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

An aggregate of 500,000 shares of the Company's Common Stock are available
for grant under the Incentive Plan, subject to a proportionate increase or
decrease in the event of a stock split, reverse stock split, stock dividend, or
other adjustment to the Company's shares of Common Stock. Under the Incentive
Plan, the maximum number of shares of Common Stock that may be subject to one or
more options to a single participant during any fiscal year is 300,000. As of
June 26, 1998, the Company had granted options to purchase 241,000 shares of
Common Stock under the Incentive Plan.

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

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

401(k)

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

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

COMMITTEES OF THE BOARD OF DIRECTORS

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

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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

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

EMPLOYMENT AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS

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

James W. Hart, the Company's President and Chief Operating Officer, is
employed under an agreement that expires July 1, 1999. Pursuant to the
agreement, Mr. Hart receives minimum annual compensation of $140,000 and is
entitled to participate in all of the Company's benefit plans generally made
available to other employees. In addition, Mr. Hart is entitled to receive an
incentive based cash bonus of up to $22,500, an automobile allowance of $400 per
month, and a temporary living allowance of $370 per week for up to 26 weeks from
the initial date of his employment. In the event that Mr. Hart is terminated by
the Company without cause (as defined therein), voluntarily terminates his
employment, or is not offered employment following a change of control of the
Company, Mr. Hart will receive an amount equal to his annual base salary
(currently $140,000) for a period of one year following termination. Pursuant to
the agreement, Mr. Hart was also granted options to purchase 150,000 shares of
Common Stock at an exercise price of $2.00 per share. The options vest at a rate
of 25% per year beginning January 1, 1999. Mr. Hart's outstanding options which
have not yet vested will accelerate upon a merger or sale of substantially all
of the Common Stock or assets of the Company. The agreement also contains
confidentiality and non-compete covenants.

Gary R. Scheel, the Company's Executive Vice President, Sales and
Marketing, is employed under an agreement which may be terminated by the Company
upon 10 days notice. Under the agreement, Mr. Scheel is entitled to salary
determined by the Board of Directors, a cash bonus based upon Company revenues,
and is entitled to participate in all of the Company's benefit plans generally
made available to other employees. Mr. Scheel's current annual salary is
$120,000. Pursuant to the agreement, Mr. Scheel was also granted options to
purchase 25,000 shares of Common Stock at an exercise price of $2.00 per share.
The options are fully vested. In addition, Mr. Scheel may be granted options to
purchase additional shares of Common Stock one month after the years ended 1998
and 1999 with the amount of such grants to be determined based upon the
Company's revenues. Mr. Scheel's outstanding options which have not yet vested
will accelerate upon a merger or sale of substantially all of the Common Stock
or assets of the Company. The agreement also contains confidentiality and
non-complete covenants.

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

DIRECTOR COMPENSATION

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

1998 Director Option Plan. In June 1998, the Company's Board of Directors
and shareholders adopted the Orthopaedic Biosystems Ltd., Inc. 1998 Director
Option Plan (the "Director Plan") to attract and retain

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qualified independent directors. The Director Plan is administered by a
committee appointed by the Board and provides for automatic grants of
non-qualified stock options to all non-employee directors of the Company.

Pursuant to the Director Plan, each person who first becomes a non-employee
director of the Company on or after the effective date of the Director Plan will
automatically be granted 5,000 shares of Common Stock as of the date they become
a director. Additionally, each individual who is a non-employee director on the
third business day following the public release of the Company's year-end
earnings information will automatically be granted an option to purchase 1,500
shares of Common Stock. The option price for each of the grants is the fair
market value of the Common Stock per share on the relevant grant date. Each
option granted is fully vested and exercisable immediately and each option is
scheduled to expire on the tenth anniversary of the date of its grant, unless
the option is earlier terminated, forfeited, or surrendered as discussed below.
If a director granted options under the Director Plan ceases to be a director
for any reason, the options previously granted will remain exercisable for one
year after the director ceases to be a director, or until its scheduled
expiration date, whichever is earlier.

The total number of shares of Common Stock available for grants under the
Director Plan is 100,000, subject to a proportionate increase or decrease in the
event of a stock split, reverse stock split, stock dividend, or other adjustment
to the Company's shares of Common Stock. As of June 26, 1998, no options had
been granted under the Director Plan.

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PRINCIPAL STOCKHOLDERS

The following table sets forth, as of June 26, 1998, the number and
percentage of outstanding shares of Common and Preferred Stock beneficially
owned by: (i) each director of the Company; (ii) the Named Executive Officers of
the Company; (iii) all directors and executive officers of the Company as a
group; and (iv) each beneficial owner of more than 5% of the outstanding Common
and Stock. To the knowledge of the Company, all persons listed below have sole
voting and investment power with respect to their shares, except to the extent
that authority is shared by their respective spouses under applicable law.

PERCENT OF TOTAL(1)
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(2) BENEFICIALLY OWNED(1) OFFERING OFFERING
- --------------------------------------- --------------------- -------- --------

Kerry Zang, D.P.M.(3).................................. 1,737,500 32.81%
D. Ronald Yagoda(4).................................... 1,681,250 31.60
Joan Yagoda(5)......................................... 1,581,250 30.15
Michael D. Greenbaum(6)................................ 445,000 8.27
Vertical Fund Associates, L.P.(7)...................... 325,000 6.11
Gary Peterson(8)....................................... 310,000 5.79
Steven P. Davis(9)..................................... 161,250 3.05
Jeffry B. Skiba(10).................................... 90,000 1.69
Robert F. Lusch(11).................................... 50,000 *
Richard Previte(12).................................... 35,000 *
Leslie Matthews, M.D.(13).............................. 32,000 *
Gary R. Scheel(14)..................................... 25,000 *
All directors and executive officers as a group (12
persons)............................................. 4,192,000 70.44%

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

(1) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date set forth above through the exercise
of any option, warrant, right, or conversion privilege. Shares of Common
Stock subject to options, warrants, rights, or conversion privileges which
are currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage of the person holding such
options, warrants, rights, or conversion privileges, but are not deemed
outstanding for computing the percentage of any other person. Shares and
percentages beneficially owned are based upon 5,244,992 shares of Common
Stock outstanding before the Offering, assuming conversion of all Preferred
Stock, which will be automatically converted into 872,300 shares of Common
Stock upon the completion of the Offering. Accordingly, shares and
percentages beneficially owned after the Offering are based upon
shares of Common Stock.

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

(3) The total number of shares beneficially owned by Mr. Zang includes: (i)
375,000 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mr.
Zang may be deemed a beneficial owner; and (ii) 50,000 shares of Common
Stock issuable upon the exercise of warrants.

(4) The total number of shares beneficially owned by Mr. Yagoda includes: (i)
375,000 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mr.
Yagoda may be deemed a beneficial owner; (ii) 75,000 shares of Common Stock
issuable upon the exercise of warrants; and (iii) 1,206,250 shares of
Common Stock owned with Joan Yagoda.

(5) The total number of shares beneficially owned by Mrs. Yagoda include: (i)
375,000 shares of Common Stock owned by Yagoda & Zang, Inc., of which Mrs.
Yagoda may be deemed a beneficial owner; and (ii) 1,206,250 shares of
Common Stock owned with D. Ronald Yagoda.

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(6) The total number of shares beneficially owned by Mr. Greenbaum includes:
(i) 310,000 shares of Common Stock owned by the Greenbaum Family Trust of
which Mr. Greenbaum is trustee; (ii) 10,000 shares of Common Stock issuable
upon the exercise of options owned by the Greenbaum Family Trust; and (iii)
125,000 shares of Common Stock issuable upon the exercise of warrants owned
by the Greenbaum Family Trust.

(7) The total number of shares beneficially owned by Vertical Fund Associates,
L.P. includes 75,000 shares of Common Stock issuable upon the exercise of
warrants. The address of Vertical Fund Associates, L.P. is 18 Bank Street,
Summit, New Jersey 07901.

(8) The total number of shares beneficially owned by Mr. Peterson, includes (i)
10,000 shares of Common Stock issuable upon the exercise of options; (ii)
200,000 shares of Common Stock owned by Affinity Ventures of which Mr.
Peterson is a general partner, (iii) 50,000 shares of Common Stock issuable
upon the exercise of warrants owned by Affinity Ventures; and (iv) 50,000
shares of Common Stock issuable upon the exercise of warrants owned by
Peterson Spencer-Fensler Health Care Fund of which Mr. Peterson is a
general partner.

(9) The total number of shares beneficially owned by Mr. Davis includes 50,000
shares of Common Stock issuable upon the exercise of options. Also includes
56,250 shares of Common Stock owned by the Lisa D. Yagoda Irrevocable Trust
of which Mr. Davis is the trustee.

(10) The total number of shares beneficially owned by Mr. Skiba includes 90,000
shares of Common Stock issuable upon exercise of the options.

(11) The total number of shares beneficially owned by Mr. Lusch includes 50,000
shares of Common Stock issuable upon exercise of options.

(12) The total number of shares beneficially owned by Mr. Previte includes
35,000 shares of Common Stock issuable upon exercise of options.

(13) The total number of shares beneficially owned by Dr. Matthews includes
32,000 shares of Common Stock issuable upon exercise of options.

(14) The total number of shares beneficially owned by Mr. Scheel includes 25,000
shares of Common Stock issuable upon exercise of options.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In November and December 1997, and January 1998, the Company sold for cash
$900,000 principal amount of subordinated promissory notes (the "Series B
Notes") to certain investors. Each Series B Note bears interest at a rate equal
to 2% per annum in excess of the prime rate adjusted quarterly. The Series B
Notes mature on December 31, 1998. In addition, the Company issued to the
holders of the Series B Notes, warrants to purchase, in the aggregate, 450,000
shares of Preferred Stock at an exercise price per share equal to the lesser of
$2.00 or the lowest price at which the Company offers its capital stock of any
series or class in any private placement during calendar year 1998. Purchasers
of the Series B Notes and related warrants included: (i) Vertical Fund
Associates, L.P., a principal shareholder of the Company; ($150,000 principal
amount of the Series B Notes and warrants to purchase 75,000 shares); (ii) the
Greenbaum Family Trust, of which Michael D. Greenbaum, a Director of the
Company, is trustee ($250,000 principal amount of the Series B Notes and
warrants to purchase 125,000 shares); (iii) Affinity Venture II, L.L.C., of
which Gary A. Peterson, a Director of the Company, is a general partner
($100,000 principal amount of the Series B Notes and warrants to purchase 50,000
shares); (iv) PSF Healthcare Fund, L.P., of which Mr. Peterson is a general
partner ($100,000 principal amount of the Series B Notes and warrants to
purchase 50,000 shares); (v) D. Ronald Yagoda, the Company's Chairman and Chief
Executive Officer ($150,000 principal amount of the Series B Notes and warrants
to purchase 75,000 shares); (vi) the Kerry Zang and Virginia Zang Revocable
Trust, of which Kerry Zang, a Director of the Company, is trustee ($75,000
principal amount of the Series B Notes and warrants to purchase 37,500 shares);
and (vii) The Podiatric Physicians Profit Sharing Money Market Account, of which
Kerry Zang, a Director of the Company, has an interest ($25,000 principal amount
of the Series B Notes and warrants to purchase 12,500 shares).

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

In May 1997, the Company issued for cash 872,300 shares of Preferred Stock
to 14 investors at a price of $2.00 per share. The Preferred Stock is
convertible into an equal number of shares of Common Stock. Purchasers of
615,000 of the shares of the Preferred Stock consisted of: (i) Gary A. Peterson,
a Director of the Company who is deemed beneficial owner of stock held by
Affinity Ventures, L.L.C. (200,000 shares); (ii) Michael D. Greenbaum, a
Director of the Company who is deemed beneficial owner of stock held by The
Greenbaum Family Trust (140,000 shares); (iii) Vertical Fund Associates, L.P., a
principal shareholder of the Company (250,000 shares); and (iv) D. Ronald
Yagoda, the Company's Chairman and Chief Executive Officer (25,000 shares). All
of the Preferred Stock will convert into an equal number of shares of Common
Stock simultaneously with the payment to the Company of the purchase price of
the Common Stock sold in this Offering.

In March 1996, the Company sold for cash $90,000 principal amount of
14 1/2% subordinated promissory notes (the "Series A Notes") to three investors.
In addition, the Company issued to the holders of the Series A Notes warrants to
purchase, in the aggregate, 15,000 shares of the Company's Common Stock at an
exercise price of $1.00 per share. The purchasers of the Series A Notes and
holders of the related warrants included Mr. Greenbaum, a director of the
Company ($30,000 principal amount of the Series A Notes and warrants to purchase
5,000 shares). In addition, during March 1996, the Company sold for cash a
$50,000 principal amount subordinated promissory note with terms equivalent to
the Series A Notes to Mr. Yagoda, the Company's Chairman and Chief Executive
Officer. Mr. Yagoda was not issued warrants in connection with such transaction.
The Company paid in full all amounts outstanding under these notes on March 31,
1997.

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

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

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DESCRIPTION OF CAPITAL STOCK

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

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

COMMON STOCK

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

Holders of Common Stock have no preemptive, conversion, or redemption
rights and are not subject to further calls or assessments by the Company. All
of the outstanding shares of Common Stock are, and the shares offered by the
Company hereby will be, if issued, validly issued, fully paid, and
nonassessable. As of the date of this Prospectus, there are 4,372,692 shares of
Common Stock issued and outstanding.

PREFERRED STOCK

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

WARRANTS AND STOCK OPTIONS

As of June 26, 1998, the Company had outstanding warrants to purchase an
aggregate of 450,000 shares of its Preferred Stock with an exercise price of
$2.00. The warrants will be converted into warrants to purchase an equal number
of shares of Common Stock upon the closing of the Offering. In addition, the
Company had outstanding options to purchase an aggregate of 815,000 shares of
its Common Stock with exercise prices ranging from $0.70 to $2.00. See
"Management" and "Certain Relationships and Related Transactions."

REGISTRATION RIGHTS

The holders of the Preferred Stock have been granted certain rights with
respect to the registration under the Securities Act of the shares of Common
Stock issued upon exercise of the Preferred Stock. Beginning 180 days after
completion of this offering, the Company must, within 90 days of receipt of
requests for registration from holders of at least 50% of the Preferred Stock,
use its best efforts to effect the registration under the Securities Act of such
securities. In addition, holders of the Preferred Stock have been granted

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"piggy-back" rights to register their shares of converted Common Stock, subject
to certain limitations, in connection with a registration initiated by the
Company.

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

LIMITATION OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

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

CERTAIN CHARTER AND BYLAW PROVISIONS

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

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

TRANSFER AGENT AND REGISTRAR

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

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SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this Offering, the Company will have outstanding
shares of Common Stock (assuming the Underwriter's over-allotment is
not exercised). These shares exclude 1,226,500 shares of Common Stock issuable
upon exercise of currently outstanding options and warrants. The Company has an
additional 359,000 shares of Common Stock available for grant under its existing
option plans. Of the outstanding shares, the shares of Common Stock
sold in the Offering, plus any additional shares sold upon exercise of the
Underwriters' over-allotment option, will be freely tradeable without
restriction under the Securities Act (except for any shares purchased by an
"affiliate" of the Company as that term is defined in the Securities Act, which
will be subject to the limitations of Rule 144 adopted under the Securities
Act). Commencing 90 days following the date of this Prospectus, 5,106,992 shares
of Common Stock held by existing stockholders will become eligible for sale
under Rule 144, subject to compliance with the requirements of such rule.
However, directors, officers and certain shareholders of the Company owning a
total of 4,144,000 shares of Common Stock and outstanding warrants to purchase
819,000 shares of Common Stock have agreed with the Underwriters that, except in
certain circumstances, they will not issue, offer to sell, sell, contract to
sell, or otherwise dispose of any shares of Common Stock or other securities of
the Company for a period of 180 days after the date of this Prospectus without
the prior written consent of the Representative. Upon the expiration of such
180-day period, these securities will become eligible for sale under Rule 144,
subject to compliance with the volume limitations and other requirements of Rule
144.

In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted" shares for
at least one year, including persons who may be deemed "affiliates" of the
Company, as that term is defined under Rule 144, would be entitled to sell (in
accordance with the provisions specified in the rule) within any three-month
period a number of shares that does not exceed the greater of (i) one percent of
the then outstanding shares of the Company's Common Stock (approximately 77,450
shares immediately following the offering assuming no exercise of the
Underwriters' over-allotment option) or (ii) the average weekly trading volume
of the Common Stock during the four calendar weeks preceding the date on which
notice of the sale is filed with the Commission. Sales pursuant to Rule 144 are
subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. An "affiliate" of
the Company may sell securities that are not "restricted" without regard to the
period of beneficial ownership but subject to the volume limitations described
above and other conditions of Rule 144. A person (or persons whose shares are
aggregated) who is not deemed an "affiliate" of the Company (and has not been at
any time during the three months immediately preceding the sale) and who has
beneficially owned his or her shares for at least two years would be entitled to
sell such shares under Rule 144(k) without regard to the volume limitations
described above, manner of sale provisions, notice requirements, or availability
of public information.

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

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UNDERWRITING

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

UNDERWRITER PARTICIPATION
----------- -------------

Cruttenden Roth Incorporated................................
Josephthal & Co., Inc.......................................
---------
Total.............................................
=========

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

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

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

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

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

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

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

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

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

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

LEGAL MATTERS

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

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EXPERTS

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

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

ADDITIONAL INFORMATION

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

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

56
57

INDEX TO FINANCIAL STATEMENTS

ORTHOPAEDIC BIOSYSTEMS LTD. INC.

Report of Ernst & Young LLP, Independent Auditors........... F-2
Report of Coopers & Lybrand L.L.P., Independent
Accountants............................................... F-3

Financial Statements

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

F-1
58

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

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

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

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

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

ERNST & YOUNG LLP

Phoenix, Arizona
April 22, 1998

F-2
59

REPORT OF INDEPENDENT ACCOUNTANTS

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

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

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

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

COOPERS & LYBRAND L.L.P.

Phoenix, Arizona
May 21, 1997

F-3
60

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

BALANCE SHEETS

DECEMBER 31 MARCH 31
1997 1998
----------- -----------
(UNAUDITED)

ASSETS
Current assets:
Cash...................................................... $ 740,715 $ 141,934
Accounts receivable, net of allowance for bad debts and
sales returns of $103,000 in 1997 and $90,000 in
1998................................................... 368,856 369,534
Inventories, net of inventory valuation allowance of
$300,000 in 1997 and $297,000 in 1998.................. 657,912 810,001
Prepaid expenses and deposits............................. 38,605 117,970
----------- -----------
Total current assets................................... 1,806,088 1,439,439
Property and equipment, net................................. 250,206 350,107
Patent rights, net.......................................... 196,316 199,030
Deposits and other assets................................... 30,961 29,321
----------- -----------
Total assets...................................... $ 2,283,571 $ 2,017,897
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 236,857 $ 268,687
Accrued expenses.......................................... 72,664 128,023
Advance payments from customer............................ 95,500 120,500
Related party notes, net of discount of $49,000 in 1997
and $39,000 in 1998.................................... 801,000 861,000
Current portion of capital lease obligation............... 10,554 11,010
----------- -----------
Total current liabilities.............................. 1,216,575 1,389,220
Capital lease obligation.................................... 13,638 11,521
----------- -----------
Total liabilities................................. 1,230,213 1,400,741
Shareholders' equity:
Class A convertible preferred stock -- no par value;
3,000,000 shares authorized; 872,300 issued and
outstanding............................................ 1,713,464 1,713,464
Common stock, no par value; 12,000,000 shares authorized;
4,362,692 issued and outstanding....................... 1,574,632 1,574,632
Additional paid-in capital................................ 82,590 88,890
Accumulated deficit....................................... (2,309,486) (2,751,553)
Unearned compensation..................................... (7,842) (8,277)
----------- -----------
Total shareholders' equity............................. 1,053,358 617,156
----------- -----------
Total liabilities and shareholders' equity........ $ 2,283,571 $ 2,017,897
=========== ===========

See accompanying notes.
F-4
61

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

STATEMENTS OF OPERATIONS

YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
------------------------ ----------------------
1996 1997 1997 1998
--------- ----------- --------- ---------
(UNAUDITED)

Net revenues.............................. $ 782,835 $ 1,482,320 $ 350,276 $ 440,277
Cost of revenues.......................... 486,325 824,715 179,659 187,876
--------- ----------- --------- ---------
Gross profit............................ 296,510 657,605 170,617 252,401
Operating expenses:
Research and development expenses....... 152,005 272,960 36,158 89,491
General and administrative expenses..... 375,918 820,892 124,015 345,629
Sales and marketing expenses............ 263,685 979,675 176,147 225,869
--------- ----------- --------- ---------
Total operating expenses............. 791,608 2,073,527 336,320 660,989
--------- ----------- --------- ---------
Operating loss....................... (495,098) (1,415,922) (165,703) (408,588)
Other income (expenses)
Interest expense........................ (23,385) (14,745) (5,552) (37,277)
Interest income......................... -- 17,929 482 3,798
Other................................... 300,565 27,199 -- --
--------- ----------- --------- ---------
Other income (expense) net................ 277,180 30,383 (5,070) (33,479)
--------- ----------- --------- ---------
Net loss.................................. $(217,918) $(1,385,539) $(170,773) $(442,067)
========= =========== ========= =========
Basic and diluted net loss per share...... $ (0.05) $ (0.33) $ (0.04) $ (0.10)
========= =========== ========= =========
Weighted average shares outstanding....... 4,091,239 4,203,851 4,122,814 4,362,692
========= =========== ========= =========

See accompanying notes.
F-5
62

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

CLASS A CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- --------------------- PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
------- ---------- --------- ---------- ---------- ----------- ------------ -----------

BALANCE, DECEMBER 31,
1995...................... -- $ -- 4,088,000 $1,240,267 $ -- $ (706,029) $ -- $ 534,238
Fair value of options
granted for consulting
services................ -- -- -- -- 18,800 -- (6,020) 12,780
Stock issued for product
design work, $1.25 per
share................... -- -- 6,692 8,365 -- -- -- 8,365
Stock issued for
employment agency fees,
$2.00 per share......... -- -- 15,000 30,000 -- -- -- 30,000
Net loss.................. -- -- -- -- -- (217,918) -- (217,918)
------- ---------- --------- ---------- ------- ----------- ------- -----------
BALANCE, DECEMBER 31,
1996...................... -- -- 4,109,692 1,278,632 18,800 (923,947) (6,020) 367,465
Fair value of options
granted for consulting
services................ -- -- -- -- 12,790 -- (7,842) 4,948
Amortization of
compensation............ -- -- -- -- -- -- 6,020 6,020
Fair value of warrants
issued in connection
with related party
notes................... -- -- -- -- 51,000 -- -- 51,000
Issuance of common stock
upon exercise of stock
options................. -- -- 45,000 37,000 -- -- -- 37,000
Issuance of common stock
upon exercise of
warrants................ -- -- 208,000 259,000 -- -- -- 259,000
Preferred stock issuances,
less $31,136 expenses... 872,300 1,713,464 -- -- -- -- -- 1,713,464
Net loss.................. -- -- -- -- -- (1,385,539) -- (1,385,539)
------- ---------- --------- ---------- ------- ----------- ------- -----------
BALANCE, DECEMBER 31,
1997...................... 872,300 1,713,464 4,362,692 1,574,632 82,590 (2,309,486) (7,842) 1,053,358
Fair value of options
granted for consulting
services (unaudited).... -- -- -- -- 3,300 -- (2,000) 1,300
Fair value of warrants
issued in connection
with related party notes
(unaudited)............. -- -- -- -- 3,000 -- -- 3,000
Amortization of
compensation
(unaudited)............. -- -- -- -- -- -- 1,565 1,565
Net loss (unaudited)...... -- -- -- -- -- (442,067) -- (442,067)
------- ---------- --------- ---------- ------- ----------- ------- -----------
BALANCE, MARCH 31, 1998
(UNAUDITED)............... 872,300 $1,713,464 4,362,692 $1,574,632 $88,890 $(2,751,553) $(8,277) $ 617,156
======= ========== ========= ========== ======= =========== ======= ===========

See accompanying notes.
F-6
63

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- ---------------------
1996 1997 1997 1998
--------- ----------- --------- ---------
(UNAUDITED)

OPERATING ACTIVITIES
Net loss...................................... $(217,918) $(1,385,539) $(170,773) $(442,067)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization............... 33,358 62,450 8,366 20,975
Accretion of debt discount.................. -- 2,000 -- 13,000
Services exchanged for common stock......... 38,365 -- -- --
Services exchanged for common stock
options.................................. 12,780 4,948 1,200 1,300
Inventory valuation allowance............... 125,000 217,812 54,453 --
Provision for bad debts and sales returns... 22,000 62,788 15,697 12,938
Amortization of unearned compensation....... -- 6,020 -- 1,565
Changes in operating assets and liabilities,
net:
Accounts receivable...................... (14,647) (319,685) (121,785) (13,615)
Inventories.............................. (86,465) (419,312) (79,928) (152,089)
Prepaid expenses......................... (18,508) (12,475) (31,183) (79,365)
Deposits................................. -- (23,890) (656) --
Accounts payable......................... 125,211 (105,161) (91,637) 31,830
Accrued expenses......................... 17,798 48,867 21,413 55,359
Advance payments from customer........... 200,000 (104,500) (63,143) 25,000
--------- ----------- --------- ---------
Net cash provided by (used in) operating
activities.................................. 236,974 (1,965,677) (457,976) (525,169)
CASH FLOWS FROM INVESTING ACTIVITIES
Equipment and leasehold improvements
purchased................................... (4,991) (228,728) (21,268) (115,074)
Investment in patent rights................... (45,497) (38,389) (4,376) (6,877)
--------- ----------- --------- ---------
Net cash used in investing activities......... (50,488) (267,117) (25,644) (121,951)
FINANCING ACTIVITIES
Borrowings on bank line of credit............. 65,000 -- -- --
Payments on bank line of credit............... -- (135,000) (135,000) --
Proceeds from related party notes............. 140,000 850,000 -- 50,000
Payments on related party notes............... -- (140,000) (140,000) --
Payments on capital lease obligations......... -- (8,686) (1,862) (1,661)
Net proceeds from issuance of preferred
stock....................................... -- 1,713,464 350,000 --
Net proceeds from issuance of common stock.... -- 296,000 33,250 --
--------- ----------- --------- ---------
Net cash provided by financing activities..... 205,000 2,575,778 106,388 48,339
--------- ----------- --------- ---------
Net increase (decrease) in cash............... 391,486 342,984 (377,232) (598,781)
Cash, beginning of period..................... 6,245 397,731 397,731 740,715
--------- ----------- --------- ---------
Cash, end of period........................... $ 397,731 $ 740,715 $ 20,499 $ 141,934
========= =========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest...................... $ 7,338 $ 25,406 $ -- $ --
Noncash financing activities:
Services exchanged for common stock...... 38,365 -- -- --
Services exchanged for common stock
options................................ 12,780 4,948 1,200 1,300
Capital lease obligation entered into.... -- 32,878 32,878 --
Warrants issued for related party
notes.................................. -- 51,000 -- 3,000

See accompanying notes.
F-7
64

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(THE INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS
UNAUDITED)

1. DESCRIPTION OF BUSINESS

Orthopaedic Biosystems Ltd., Inc. (the "Company") was incorporated on
February 1, 1994, and at that date the net assets of Orthopaedic Biosystems Ltd.
(the "Partnership") were transferred to the Company in exchange for 3,000,000
shares of common stock. The Company designs, develops, and manufactures
innovative medical devices that are primarily used in orthopaedic surgery for
sports medicine and arthroscopy. The principal markets for these devices are
medical equipment distributors and hospitals located within the United States.
The Company contracts its manufacturing with various independent entities.

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

2. SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

Interim Financial Information

The financial statements for the three months ended March 31, 1997 and 1998
are unaudited but include all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of
financial position, results of operations and cash flows. Operating results for
the three months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for any future periods.

Cash

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

Inventories

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

F-8
65
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

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

Property and Equipment

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

Intangible Assets

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

Revenue Recognition

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

Research and Development

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

Income Taxes

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

Stock Based Compensation

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

Advertising Costs

All advertising costs are expensed when incurred. Advertising expenses were
$2,529, $12,027, $-0-, and $5,619 for the years ended December 31, 1996 and 1997
and the three months ended March 31, 1997 and 1998, respectively.

Net Loss Per Share

The Company computes net loss per share in accordance with Financial
Accounting Standards No. 128, "Earnings Per Share." Basic net loss per share
excludes any dilutive effects of options, warrants and convertible securities
and common shares outstanding during each period. Dilutive net loss per share
includes the dilutive effects of common share equivalents outstanding during the
year. Common share equivalents

F-9
66
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

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

which were antidilutive were not included in the computation of net loss per
share. For the periods presented, because the Company had operated at a loss,
basic and diluted net loss per share are identical.

The Company had options to purchase 598,500, 579,000, 593,500 and 766,500
shares of common stock outstanding at December 31, 1996 and 1997 and March 31,
1997 and 1998, and warrants to purchase 235,000 435,000, 214,000 and 460,000
shares of common stock outstanding at December 31, 1996 and 1997 and March 31,
1997 and 1998, respectively. While such options and warrants could potentially
dilute future earnings per share, none represented dilutive securities for the
periods presented given that the Company had net losses. Preferred shares
convertible to 872,300 shares of common stock outstanding at December 31, 1997
and March 31, 1998 were not included in the computation of diluted earnings per
share because their inclusion would be antidilutive.

Impact of Recently Issued Accounting Standards

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

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

Reclassification

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

3. CONCENTRATIONS OF CREDIT RISK

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

The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for estimated credit losses. Its accounts receivable balances are
primarily domestic. In 1996, no single customer accounted for 10 percent or more
of total revenue. During the year ended December 31, 1997 and the three months
ended March 31, 1998, one customer accounted for 20.9% and 17.6% of revenues,
respectively.

F-10
67
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

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

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

DECEMBER 31, MARCH 31,
1997 1998
------------ ---------

Computers and equipment.............................. $107,158 $119,318
Instrumentation...................................... 75,521 146,242
Furniture............................................ 45,748 46,938
Leasehold improvements............................... 63,158 63,158
Equipment under capital lease........................ 32,878 32,878
Purchased software................................... 7,862 34,641
Other................................................ 6,841 11,066
-------- --------
339,166 454,241
Less accumulated depreciation........................ 88,960 104,134
-------- --------
$250,206 $350,107
======== ========

5. PATENT RIGHTS

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

DECEMBER 31, MARCH 31,
1997 1998
------------ ---------

Cost of patents and systems.......................... $249,720 $256,596
Less amortization.................................... 53,404 57,566
-------- --------
$196,316 $199,030
======== ========

6. DEBT

Related Party Notes

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

During 1997, the Company received loans totaling $850,000 from three
directors/shareholders, and two additional shareholders, including the Company's
chief executive officer. Principal and interest at prime plus two percent are
due and payable on December 31, 1998. At December 31, 1997, the interest rate
was 10.5%. Warrants were issued to purchase 425,000 shares of the Company's
Class A Convertible Preferred Stock at an exercise price of $2.00 per share in
conjunction with the notes (see Note 10). The warrants expire on December 31,
2002. Interest expense related to these notes was $5,385 for the year ended
December 31, 1997.

On January 20, 1998, the Company received a loan in the amount of $50,000
from a shareholder. Principal and interest at prime plus two percent are due and
payable on December 31, 1998. At December 31, 1997, the interest rate was 10.5%.
Warrants were issued to purchase 25,000 shares of the Company's Class A

F-11
68
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

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

Convertible Preferred Stock at an exercise price of $2.00 per share in
conjunction with the note. The warrants expire on December 31, 2002.

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

Bank Line of Credit

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

7. OTHER INCOME

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

Also under terms of the agreement, Mentor has agreed to purchase, as a
condition of preserving its exclusive distribution rights under the agreement, a
contractually defined number of anchors during each specified computational
period. Mentor paid the Company $200,000 in December 1996 for advance purchases
of inventory. The entire amount was carried as an advanced payment from customer
at December 31, 1996 and recognized as revenue during 1997. The $95,500 and
$120,500 in advance payments from customer at December 31, 1997 and March 31,
1998, respectively, are related to another customer of the Company whereby the
Company received $100,000 and $25,000 advances against future purchases,
respectively.

8. CAPITAL LEASES

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

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

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

F-12
69
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

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

Interest expense on the outstanding obligations under such leases was
$4,031 for the year ended December 31, 1997, and $995 for the three months ended
March 31, 1998.

9. STOCK OPTION PLAN

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

Option activity during the years ended December 31, 1996 and 1997 and the
three months ended March 31, 1998 is as follows:

NUMBER OF PRICE
SHARES RANGE
--------- ------------------

Outstanding at January 1, 1996............................ 473,500 $0.70 - $1.25
Granted, employees...................................... 145,000 1.25 - 2.00
Granted, advisory board................................. 60,000 1.25 - 2.00
Forfeited............................................... (80,000) 1.25
--------- ------------------
Outstanding at December 31, 1996.......................... 598,500 0.70 - 2.00
Granted, employees...................................... 52,500 2.00
Granted, directors...................................... 50,000 2.00
Granted, advisory board................................. 107,000 2.00
Exercised............................................... (45,000) 0.70 - 1.25
Forfeited............................................... (184,000) 0.70 - 1.25
--------- ------------------
Outstanding at December 31, 1997.......................... 579,000 0.70 - 2.00
Granted, advisory board................................. 37,500 2.00
--------- ------------------
Outstanding at March 31, 1998............................. 616,500 $ .70 - $2.00
========= ==================
Exercisable at December 31, 1997.......................... 448,500
=========
Exercisable at March 31, 1998............................. 470,500
=========
Weighted average exercise price of options outstanding.... $ 1.48
=========
Weighted average remaining life of options outstanding in
years................................................... 3.05
=========

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

F-13
70
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

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

Option activity under the 1998 Incentive Stock Option Plan during the three
months ended March 31, 1998 is as follows:

NUMBER OF PRICE
SHARES RANGE
--------- -----

Granted, employees.......................................... 150,000 $2.00
-------- -----
Outstanding at March 31, 1998............................... 150,000 $2.00
======== =====
Exercisable at March 31, 1998............................... --
========
Weighted average exercise price of options outstanding...... $ 2.00
========
Weighted average remaining life of options outstanding in
years..................................................... 9.75
========

The Company has adopted the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" (SFAS No. 123) for its transactions with
non-employees. Accordingly, compensation cost has been recognized for the
options granted to non-employees in exchange for consulting and advisory
services. During 1996, 1997 and the three months ended March 31, 1998, the
Company granted to non-employees options on 60,000, 107,000 and 37,500 shares,
respectively. The weighted average grant date estimated fair value of these
options was $18,800, $12,790, and $3,300 in 1996, 1997 and 1998, respectively.

The Company has adopted the disclosure-only provisions of SFAS No. 123 for
its transactions with employees. Accordingly, no compensation cost has been
recognized for the options granted to employees under the stock option plan. Had
the Company elected to adopt the recognition provision of SFAS No. 123, net loss
would have been increased by $2,250, $35,000, $7,000, and $2,000 for the years
ended December 31, 1996, and 1997, and during the three months ended March 31,
1997 and 1998, respectively. The Company further believes that, based on the
models required to be used by SFAS No. 123, pro forma amounts derived under such
methodologies would not be representative, if material, since such models are
not designed for use on stock options of the type issued by the Company.

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

10. CAPITAL SHARES

In June 1997, the Company completed a private placement of Series A
Convertible Preferred Stock. The Company issued 872,300 shares at a price of
$2.00 per share and received net proceeds of $1,713,464. There are no specified
dividends on Series A Convertible Preferred Stock; however, holders are entitled
to dividends declared on common stock on an as-converted basis. In the event of
liquidation, the holders of Series A Convertible Preferred Stock shall be
entitled to receive, prior and in preference to holders of common stock, an
amount per share equal to $2.00 for each outstanding share.

Each share of Series A Convertible Preferred Stock shall convert,
automatically and without any action on the part of the holder, into that number
of common shares simultaneously with the closing of the Company's first
underwritten public offering yielding proceeds of $10.0 million at a price per
share of at least $4.00. Holders of the Series A Convertible Preferred Stock
may, at their option, convert any or all of the their preferred shares into
common shares.

F-14
71
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

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

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

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

In connection with loans made by shareholders and the Company's chief
executive officer in 1996, the Company issued warrants to purchase 15,000 common
shares at $1.00 per share. The warrants expire on June 30, 1998. The warrants
were determined to have an immaterial value, and accordingly, no discount of
debt was recorded.

In connection with the Company's 1995 stock offering, warrants to purchase
220,000 common shares were issued. The warrants allow the holder the right to
purchase shares at a price of $1.25 per share. Unexercised warrants to purchase
12,000 common shares were forfeited at December 31, 1997.

Warrant activity during the years 1996 and 1997 and the three months ended
March 31, 1998 is as follows:

CLASS A CONVERTIBLE
PREFERRED STOCK COMMON STOCK
-------------------- --------------------------
NUMBER OF PRICE NUMBER OF PRICE
SHARES RANGE SHARES RANGE
---------- ------ --------- -------------

Outstanding at January 1, 1996........ -- -- 220,000 $1.25
Granted............................. -- -- 15,000 1.00
------- ----- -------- -------------
Outstanding at December 31, 1996...... -- -- 235,000 1.00 - 1.25
Granted............................. 425,000 $2.00 -- --
Exercised........................... -- -- (208,000) 1.00 - 1.25
Forfeited........................... -- -- (17,000) 1.25
------- ----- -------- -------------
Outstanding at December 31, 1997...... 425,000 2.00 10,000 1.00
Granted............................. 25,000 2.00 --
------- ----- -------- -------------
Outstanding at March 31, 1998......... 450,000 $2.00 10,000 $1.00
======= ========
Exercisable at December 31, 1997...... 425,000 10,000
======= ========
Exercisable at March 31, 1998......... 450,000 10,000
======= ========

11. 401(k)

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

F-15
72
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

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

12. INCOME TAXES

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

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

DECEMBER 31, MARCH 31,
1997 1998
------------ -----------

Current deferred tax assets:
Accounts receivable allowance........................... $ 41,000 $ 36,000
Inventory allowance..................................... 120,000 120,000
--------- -----------
161,000 156,000
Noncurrent deferred tax assets:
Net operating tax loss carryover........................ 768,000 954,000
--------- -----------
Total deferred tax assets................................. 929,000 1,110,000
Valuation allowance for deferred tax assets............... (914,000) (1,088,000)
--------- -----------
Net deferred assets....................................... 15,000 22,000
Noncurrent deferred tax liability:
Depreciation............................................ 15,000 22,000
--------- -----------
15,000 22,000
--------- -----------
Net deferred tax.......................................... $ -- $ --
========= ===========

13. COMMITMENTS AND CONTINGENCIES

Operating Leases

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

1998.................................................... $ 89,629
1999.................................................... 89,629
2000.................................................... 90,806
2001.................................................... 93,160
2002.................................................... 49,471
Thereafter.............................................. --
--------
$412,695
========

Rent expense for the years ended December 31, 1996 and 1997 and the three
months ended March 31, 1998 was $33,680, $62,483, and $22,420, respectively.

F-16
73
ORTHOPAEDIC BIOSYSTEMS LTD., INC.

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

Employment Agreement

The Company has entered into employment agreements with certain key
employees. One such employment agreement provides for bonus payments or stock
option grants upon the attainment of certain criteria, primarily related to
sales. No bonuses were paid in 1997 under the agreement and the minimum sales
threshold under which a bonus will be paid for 1998 is $6 million at which level
bonuses start at 1/2 percent of sales and can be up to 1 1/2 percent of sales.
Stock option grants under the agreement are at $2.00 per share and the number of
shares, if any, to be granted are subject to minimum sales levels. In accordance
with APB 25, the Company will record expense for the excess of the fair market
value at the date of grant and $2.00 when the number of shares to be granted are
known. Options on up to 225,000 shares could be granted through 2000 under the
agreement.

14. SUBSEQUENT EVENTS

Capital Structure

The Company is in the process of obtaining shareholder approval to file the
Company's amended and restated articles of incorporation. The amendment, if
approved, will authorize the Company to issue 25,000,000 shares, of which
20,000,000 shares shall be common stock, no par value, and 5,000,000 shares
shall be preferred stock, no par value.

Stock Option Plans

The Company is in the process of obtaining shareholder approval to adopt
amendments to the 1998 Incentive Stock Option Plan and to adopt the 1998
Directors' Plan. The 1998 Incentive Stock Option Plan, as amended, would
authorize up to 500,000 options to purchase shares of common stock and
incorporates the options previously granted under the 1998 Incentive Stock
Option Plan. The 1998 Directors' Plan would authorize up to 100,000 options to
purchase shares of common stock to be granted.

F-17
74

======================================================

NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS, OR ANY OTHER
PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL.
------------------------------

TABLE OF CONTENTS

PAGE
----

Prospectus Summary........................ 4
Risk Factors.............................. 7
Use of Proceeds........................... 19
Dividend Policy........................... 19
Capitalization............................ 20
Dilution.................................. 21
Selected Financial Data................... 22
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 23
Business.................................. 28
Management................................ 41
Principal Stockholders.................... 48
Certain Relationships and Related
Transactions............................ 50
Description of Capital Stock.............. 51
Shares Eligible for Future Sale........... 53
Underwriting.............................. 54
Legal Matters............................. 55
Experts................................... 56
Additional Information.................... 56
Index to Financial Statements............. F-1
Report of Independent Auditors............ F-2
Financial Statements...................... F-4

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

[ORTHOPAEDIC BIOSYSTEMS LTD, INC. LOGO]

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

JOSEPHTHAL & CO. INC.
, 1998
======================================================
75

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

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

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

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

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

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

ITEM AMOUNT
- ------------------------------------------------------------ ----------

SEC Registration Fee....................................... $ 5,937
*AMEX Filing Fee............................................ $ 37,500
*Blue Sky Fees and Expenses (including legal fees).......... $ 15,000
*Accounting Fees and Expenses............................... $ 100,000
*Legal Fees and Expenses.................................... $ 215,000
*Printing and Engraving..................................... $ 115,000
*Registrar and Transfer Agent's Fees........................ $ 5,000
*Underwriters' Non-Accountable Expense Allowance............ $
*Miscellaneous Expenses..................................... $
Total............................................. $
==========

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

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

During the preceding three years, the Company sold to accredited or
sophisticated investors Common Stock for cash at the price and during the
periods given: during the third quarter of 1996, 6,692 shares at an aggregate
offering price of $8,365; and during the fourth quarter of 1996, 15,000 shares
at an aggregate

II-1
76

offering price of $30,000 during the first quarter of 1997, 31,000 shares at an
aggregate offering price of $33,500; during the second quarter of 1997, 104,000
shares at an aggregate offering price of $115,000; during the fourth quarter of
1997, 128,000 shares at an aggregate offering price of $160,000; and during May
1998, 10,000 shares at an aggregate offering price of $10,000

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

During the period July 1995 through June 1998, the Company granted to
directors, executive officers, employees, advisors, and consultants 748,000
options to purchase Common Stock for an aggregate offering price of $1,368,500.

In March 1996, the Company sold for cash $90,000 principal amount of
14 1/2% subordinated promissory notes (the "Series A Notes") to three accredited
or sophisticated investors. In addition, the Company issued to the holders of
the Series A Notes warrants to purchase, in the aggregate, 15,000 shares of the
Company's Common Stock at an exercise price of $1.00 per share 5,000 of which
were exercised during the second quarter of 1997 and 10,000 of which were
exercised during the second quarter of 1998.

In November 1997, December 1997, and January 1998, the Company sold for
cash $900,000 principal amount of subordinated promissory notes (the "Series B
Notes") to eight accredited or sophisticated investors. Each note bears an
interest rate equal to 2% per annum in excess of the prime commercial lending
rate adjusted quarterly. The Notes mature on December 31, 1998. In addition, the
Company issued to the holders of the Series B Notes, warrants to purchase, in
the aggregate, 450,000 shares of Preferred Stock at an exercise price per share
equal to the lesser of (i) $2.00 or (ii) the lowest price at which the Company
offers its capital stock of any series or class in any private placement during
calendar year 1998.

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

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

ITEM 27. EXHIBITS.

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------

II-2
77

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------

10.7 *Employment Agreement by and between the Company and Gary
Scheel
10.8 *Employment Agreement by and between the Company and Jeffry
Skiba
10.9 *1998 Stock Incentive Plan
10.10 *1998 Director Option Plan
10.11 *Agreement dated as of January 1, 1998, by and between the
Company and Imcor, Inc.
16 *Letter on change in certifying accountant
23.1 Consent of Coopers & Lybrand, L.L.P., independent
accountants
23.2 Consent of Ernst & Young LLP, independent auditors
23.3 *Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
24 Power of Attorney (see signature page included in
Registration Statement)
27 Financial data schedule
27.1 Financial data schedule

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

ITEM 28. UNDERTAKINGS.

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

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

The undersigned Registrant hereby undertakes that:

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

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

II-3
78

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Phoenix, State of Arizona, on July 1, 1998.

ORTHOPAEDIC BIOSYSTEMS LTD., INC.

By: /s/ D. RONALD YAGODA

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

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

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

NAME AND SIGNATURE TITLE DATE
------------------ ----- ----

/s/ D. RONALD YAGODA Chairman, Chief Executive Officer July 1, 1998
- ------------------------------------------------ (Principal executive officer)
D. Ronald Yagoda

/s/ JENNIFER L. GUELICH Vice President and Chief Financial July 1, 1998
- ------------------------------------------------ Officer (Principal financial and
Jennifer L. Guelich accounting officer)

/s/ STEVEN P. DAVIS Director July 1, 1998
- ------------------------------------------------
Steven P. Davis

/s/ MICHAEL D. GREENBAUM Director July 1, 1998
- ------------------------------------------------
Michael D. Greenbaum

/s/ ROBERT F. LUSCH, PH.D. Director July 1, 1998
- ------------------------------------------------
Robert F. Lusch, Ph.D.

/s/ LESLIE S. MATTHEWS, M.D. Director July 1, 1998
- ------------------------------------------------
Leslie S. Matthews, M.D.

/s/ GARY A. PETERSON Director July 1, 1998
- ------------------------------------------------
Gary A. Peterson

/s/ RICHARD PREVITE Director July 1, 1998
- ------------------------------------------------
Richard Previte

/s/ KERRY ZANG, D.P.M. Director July 1, 1998
- ------------------------------------------------
Kerry Zang, D.P.M.

II-4
79

EXHIBIT INDEX

EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------

1 *Form of Underwriting Agreement by and between Cruttenden
Roth Inc. and the Company
3.1 *Amended and Restated Articles of Incorporation of the
Company
3.2 *Amended and Restated Bylaws of the Company
4.1 *Amended and Restated Articles of Incorporation of the
Company (filed as Exhibit 3.1)
4.2 *Form of Common Stock certificate
4.3 *Form of Stock Purchase Warrant Certificate
4.4 *Agreement, dated as of May 5, 1997, by and among the
Company and certain investors in the Company regarding
Registrations Rights
5 *Opinion of Snell & Wilmer L.L.P. regarding the legality of
the common stock being registered
10.1 *Exclusive Marketing and Distribution Agreement, dated as of
August 1, 1996, by and between the Company and Mentor
Urology Corporation
10.2 *International Distribution Agreement, dated as of August 4,
1997, between the Company and Mizuho Medical Co., Ltd.
10.3 *Form of Series B Promissory Note
10.4 *Series B Promissory Note, dated May 4, 1998, by and between
the Company and D. Ronald Yagoda
10.5 *Employment Agreement by and between the Company and James
W. Hart
10.6 *Employment Agreement by and between the Company and D.
Ronald Yagoda
10.7 *Employment Agreement by and between the Company and Gary
Scheel
10.8 *Employment Agreement by and between the Company and Jeffry
Skiba
10.9 *1998 Stock Incentive Plan
10.10 *1998 Director Option Plan
10.11 *Agreement dated as of January 1, 1998, by and between the
Company and Imcor, Inc.
16 *Letter on change in certifying accountant
23.1 Consent of Coopers & Lybrand, L.L.P., independent
accountants
23.2 Consent of Ernst & Young LLP, independent auditors
23.3 *Consent of Snell & Wilmer L.L.P. (included in Exhibit 5)
24 Power of Attorney (see signature page included in
Registration Statement)
27 Financial data schedule
27.1 Financial data schedule

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

II-5