Years ended December 31, 1999 and 1998

     Net sales for the year ended December 31, 1999, totaled $10.5 million, an increase of $9.7
million from the $0.8 million for the year ended December 31, 1998. The increase in net sales
primarily reflected the initial shipments of instrument kits to surgeons subsequent to their
completion of training in the Intacs placement procedure. Each kit includes two sets of
proprietary instruments to perform the Intacs placement procedure and a supply of 18 Intacs. The
predominant portion of the revenues received from the sale of the kits was attributable to the
proprietary instruments. Significant growth and maintenance of our net sales will be dependent
upon our ability to sell Intacs in increasing volumes. In 1999, approximately 91% of net sales
were to U.S. customers and the balance of the sales were in Canada and Europe. In 1998,
approximately 51% of the Company's sales were generated from the limited product launch into the
Canadian market, and the balance of the sales were in Europe.

     Cost of sales and manufacturing expenses totaled $9.9 million in 1999 as compared to $4.4
million in 1998. The increase in cost of sales and manufacturing expenses reflected higher fixed
costs associated with the establishment of our manufacturing operations and higher variable
costs as a result of higher net sales.

     Research and development expenses, which include clinical and regulatory expenses, for the
year ended December 31, 1999 were $8.8 million compared to $11.4 million incurred in the prior
year. The decrease in research and development expenses from 1998 to 1999 was primarily due to
reduced clinical trial costs as a result of the completion of various studies, in addition to
reduced expenses related to patents.

     Selling, general and administrative expenses in 1999 were $19.5 million, an increase of
$9.8 million from 1998. The increase is due primarily to increased staffing and marketing
efforts related to market development in the U.S. and Canada. The Company expects sales and
marketing expenses to continue to increase as further investments in marketing our product in
the United States are incurred.

     The Company recorded $1.4 million in interest income for the year ended December 31, 1999,
as compared to $0.7 million for the previous year. Interest income increased due to the
short-term investment of proceeds from the secondary offering completed on August 17,
1999. Interest expense increased from $0.1 million in 1998 to $0.9 million in 1999. The increase
was primarily due to the increase in average short- term debt balances. The net loss per share
applicable to common stockholders was $1.88 as compared to $2.16 for the same period from the
previous year. In 1999, this per share calculation includes the effect of dividends of $1.5
million to the holders of series B redeemable convertible preferred stock. In 1998 the per share
calculation includes the effect of a deemed dividend of $2.5 million, in addition to the effect
of a dividend of $846,000 to preferred stockholders as part of the series B redeemable
convertible preferred stock financing. The Company believes that its net loss could
significantly increase in future periods, dependent on product acceptance in the market place.