2006 ANNUAL REPORT

ANNUAL REPORT 2006

About Artimplant

Artimplant is a biomaterials company focused on solutions to problems in orthopedic and oral surgery. We restore health through the development, production, and marketing of degradable implants that regenerate body functions and improve quality of life.

Our products, made from Artelon ^® , meet unmet clinical needs and are marketed in a growing number of therapy areas.

Artimplant produces implants for treatment of osteoarthritis in hands and feet, for shoulder and other soft tissue injuries as well as oral applications.

Artimplant is listed on the Nordic Exchange in the small cap

segment and in the healthcare sector.

 Artimplant Annual Report 2006

• Net revenue of 5.5 MSEK (8.2)*

• Net loss of 56.0 MSEK (36.2)

• Net loss of 38.9 MSEK (36.2) if one time write-downs of capitalized R&D costs without cash effect are excluded

• Earnings per share of -0.95 SEK ( -0.73 SEK)

• Strong sales increase for Artelon

CMC Spacer - about 1,050 (200) units sold to end customers during the fourth quarter

• More than 3,000 patients have been treated with Artelon

devices through to 2006

• FDA clearance to market Artelon

Tissue

Reinforcement for reinforcement of rotator cuff tears

• Four new Spacers received CE mark

• Hans Rosén was employed as CEO

* Numbers within brackets relate to the corresponding period last year

2006 IN BRIEF

Annual meeting of stockholders

The annual meeting is being held on May 3 2007, at 5 p.m., at the company offices. The premises will be opened for registration at 4 p.m.

Shareholders who wish to participate shall no later then April 25 2007 register his participation to the Company in one of the following ways:

• By email to agm2007@artimplant.se

• By fax on +46 31-746 56 60,

• By telephone +46 31-746 56 00,

• By writing to Artimplant AB, Annual meeting 2007, Hulda Mellgrens gata 5, 421 32 Västra Frölunda, Sweden

Notification should include details of name, PID number or corporate registration number, address, phone number and holding of stock as recorded on April 26, 2007. To be entitled to attend and vote, stockholders’ names must be recorded in the register maintained by VPC AB. Stockholders whose shares are recorded in the names of nominees through a bank or similar institution must request to have their holdings temporarily re-registered in their own names in the register by April 26, 2007, in order to be entitled to participate at the meeting.

Such notification should take place well before that date. The Company will publish its annual report on its website no later than April 17, 2007, and copies will be available at its office. The Board proposes that no dividend be paid for 2006.

For further information contact

Lars-Johan Cederbrant, Chief Financial Officer, Tel. +46 31 746 5654, +46 703 016 854, lars-johan.cederbrant@artimplant.com Upcoming information events

Three months report May 3 2007 Six months report August 8 2007 Nine months report November 8 2007 Annual accounts February 22 2008

Financial reports are available at www.artimplant.com simultaneously as distributed to the media.

About Artimplant 2

2006 in Brief 3

Statement by the CEO 4

Business Overview 6

Shares and Ownership 9 Five-Year Overview 10

Key Ratios 11

Board of Directors’ Report 12

Income Statement 15

Allocation of Net Sales 15

Balance Sheet 16

Changes in Equity 18

Cash Flow Analysis 19

Notes 20

Auditors’ Report 27

Corporate Governance 28 Board of Directors 29

Senior Management 30

History 31

N.B. This is a translation from Swedish.

The Swedish version shall always take precedence.

When I accepted the offer to take over as CEO of Artimplant, two fac- tors were crucial to my decision: 1) There is a good product estimate and 2) Artimplant’s implants are sold to normal clinics on the vital US market.

In the light of the importance of this it feels natural for me to highlight 2006 as a successful year for Artimplant:

• Artelon

CMC Spacer had its market breakthrough

• Artelon

Tissue Reinforcement, Artimplant’s other key product concept, was cleared for marketing by the FDA.

The following is my summary of Artimplant’s history and my reflec- tions on the basis for our future.

The Company was founded in 1990 in response to a medical need at the time to replace damaged ante- rior cruciate ligaments (ACL) in the knee joint. Now, in 2006, Artelon

is becoming commercially established as an implant material within osteo- arthritis and tissue reinforcement.

What happened to the ACL implant?

More than nine years have passed

since the first patients were operated on successfully although during this time surgical techniques and expe- rience of using autologous mate- rial have improved and a functioning form of treatment has been estab- lished. Artimplant’s conclusion was that the medical added value of using ACL reinforcement is limited for the vast majority of patients and thus of no interest from a commercialization point of view.

“The idea behind our Spacer concept is as simple as it is ingenious: stabilizing the arthritic joint and creating conditions for generating a new joint surface.”

Even during the formation of Artimplant there were thoughts re- garding a number of conceivable uses where Artelon

could create conditions for the body to heal it- self. Thumb base osteoarthritis was such an area and the product is now Artelon

CMC Spacer. The idea be- hind our Spacer concept is as simple as it is ingenious: stabilizing the ar- thritic joint and creating conditions for generating a new joint surface. In

doing so, the patient becomes free of pain and regains a functioning joint.

Artimplant has many years of clinical experience of the Spacer concept and our licensee Small Bone Innovations, SBI, is now in an initial commercial- ization phase. During 2006, approxi- mately 2,750 Artelon

CMC Spacers were sold to customers, compared with around 350 in 2005.

At the request of our licensee SBI, Artimplant developed Spacer prod- ucts for a further three joints during 2006. SBI is now awaiting market clearance by the American registra- tion authority FDA before the launch can take place. Artimplant is plan- ning to commence market studies for two of the products during 2007.

At the request of SBI, Artimplant also developed a CMC Spacer for keyhole surgery during 2006. As I see it, there is considerable future potential in broadening the Spacer family for new joints in the hands and feet.

Artelon

Tissue Reinforcement (ATR) can in the first instance be compared with giving surgeons access to a patch in addition to a needle and thread.

Apart from long-term reinforcement of the tissue, ATR offers the oppor- tunity for the ingrowth of new tissue and blood supply, thus promoting the healing process. The elastic features of the material also contribute to sup- porting the body’s own healing pro- cess. ATR was granted FDA clearance in 2006 for the shoulder’s rotator cuff.

Sales are increasing gradually for our licensee Biomet Sports Medicine. In Europe, the product has broader mar- keting clearance for general tissue reinforcement. During the year, data was presented where ATR is used for arch stabilization in the foot and ex- perience from using ATR for Achilles tendon rupture has been communi- cated. These are the first two of sev- eral future areas of use for ATR.

During 2005, Artelon

Scaffold was developed and it can be likened most closely to a sponge or a porous ma- trix structure and it comprises only

STATEMENT BY THE CEO

In 2007, Artimplant celebrates 10 years as a listed company. As CEO and

new shareholder, I see Artimplant as a very exciting company with unique

technology and good potential for establishing an interesting position on

the implant market.

 Artimplant Annual Report 2006

around 10% Artelon

, the remain- ing volume being air. An exciting area of use for this porous matrix is soft tissue augmentation within oral surgery. The medical need ex- ists in patients who have lost teeth and where the underlying bone has been resorbed. The patient is cur- rently treated using soft tissue taken from the gums and transplanted to the front of the upper jaw. The prod- uct, which is planned to be called Artelon

Cosmetic, has attracted a great deal of attention within the dental community in Sweden.

The fact that Artelon

in different tex- tile versions is integrated with bone has been well documented. Artelon

Bone Scaffold is a porous matrix for bone regeneration. The idea is to provide the body with a scaffold for cells and in doing so the opportu- nity to build new bone suitable for the anchoring of dental implants.

The results from the first patients treated, however, showed that the product has still not yet fully achieved its objective. Artimplant is planning to commence clinical evaluation of a further development of the design during 2007.

In 2004, Artelon

Surgical Suture, the first Artelon

product, was given clearance by the FDA to be marketed in the USA. Strategically, this was a very important event for Artimplant.

The product satisfies the demands for dimension and pull-strength ac- cording to the United States Pharma- copeia (USP) although sales of the product have been negligible as the market has become used to a consid- erably greater pull-strength relation to size than what has been defined by the USP. Artimplant decided dur- ing the year not to develop the prod- uct further to meet the demands for a commercial breakthrough.

Artimplant’s prioritized development projects during 2007 are based on the Company’s three product variants (restoration concepts):

• Spacer (resurfacing):

Commencement of the development of some new products within hand and foot surgery.

• Tissue Reinforcement (reinforcement):

FDA application for extended indication is planned and new sizes are being developed.

• Scaffold (replenish):

Verify Artelon

Cosmetic in market studies and develop a new Artelon

Bone Scaffold design.

What is required, apart from the ac- tual implant, for a treatment concept to be successful? I would like to ad- dress this in three ways:

• Indication – working with a correctly defined patient group which has the prerequisites for responding to the treatment

• Surgical procedure – the implant is applied correctly

• Rehabilitation instruction – that immobilization of the joint/tissue during the initial healing phase is sufficient for new tissue to grow into the implant

If any of these important parts of the

‘treatment chain’ were to go wrong, the treatment could fail and by ex- tension could lead to setbacks and a delay in the product launch. A vi- tal component is that the products are documented in market studies.

The results from these studies form an important basis for marketing and sales. The present license agreements include responsibility for the clinical documentation at our licensees. This has not always proved effective.

To market the Company’s products, Artimplant has to date signed exclu- sive global licensing agreements with established players on the market and

these form an important base for the Company’s operations. Artimplant is developing the rest of its operations in order to document, market and verify future product concepts on domestic markets. This gives Artimplant a bet- ter negotiating position in dealings with different players on the market at the same time that future distribu- tion channels and direct sales can be evaluated in parallel. Artimplant’s prerequisites for increasing the profit margin and in the long-term reinforc- ing the Company’s market position are thus improved.

”It is a privilege to meet people who have regained function and quality of life as a result of Artimplant’s products.”

It is a privilege to meet people who have regained function and quality of life as a result of Artimplant’s prod- ucts. At Artimplant we work accord- ing to a vision where the Company’s unique treatment of different condi- tions restores the health of millions of people. We have definitely embarked on the journey towards the realisation of this vision.

I would like to thank all shareholders and colleagues who make this journey possible.

Hans Rosén, CEO

STATEMENT BY THE CEO

BUSINESS OVERVIEW

ARTIMPLANT IN BRIEF

Artimplant is a biomaterials company focused on solutions to problems in orthopedic and oral surgery. We restore health through the develop- ment, production, and marketing of degradable implants that regenerate body functions and improve quality of life. Our products, made from Artelon

, meet unmet clinical needs and are marketed in a growing number of therapy areas. Artimplant produces implants for treatment of osteoarthritis in hands and feet, for shoulder and other soft tissue in- juries as well as oral applications. Artimplant is a public company listed on the Nordic Exchange in the small cap segment and in the healthcare sector.

Artimplant’s mission is to restore the health of patients by offering medi- cal professionals degradable implants that help the body to heal.

Artimplant’s vision is to improve the quality of life for millions of people by helping their bodies to heal.

BUsINEss MOdEL

Artimplant’s business model and future revenue flows are based on the exploitation and development of the technology platform Artelon

, from which different medical devices are being developed within orthopedics and odontology. Product development and production are conducted by Artimplant. For the marketing of the Company’s products, Artimplant has to date signed exclusive global licensing agreements with differ- ent players on the market. These agreements form an important base for the Company’s business operations. Artimplant develops operations aimed at marketing and verifying future product concepts on domestic markets. This puts Artimplant in a better position when negotiating with different players on the market at the same time that the distribution channels and direct sales can be evaluated in parallel. Artimplant’s po- tential to increase its profit margin and in the long term reinforce the Company’s market position is thus improved.

Sales take place through

• Licensing via exclusive global agreements, at present with Small Bone Innovations (SBI) and Biomet

• OEM agreements (private label), non-exclusive and global

• Regional or local distribution agreements

• Direct sales of products

PROdUCT PORTFOLIO Orthopedics

Artelon

CMC spacer is a product for a tissue-preserving treatment of thumb base osteoarthritis. Thumb base osteoarthritis is a common con- dition, which is often extremely painful and leads to impaired function. In surgical procedures with Artelon

CMC Spacer only a small part of the arthritic bone is removed. This is what we call a tissue-preserving ap- proach. The Spacer offers a scaffold for tissue to grow into at the same time that it forms a new surface against the arthritic bone. The opera- tion can be performed under local anesthetic and takes less time than conventional surgical methods. The product is intended primarily for the early phases of thumb base osteoarthritis, which means the patient can be treated earlier in the course of the disease than what would normally be the case today.

At the annual meeting of the Swedish Medical Association in November a one-year follow-up of the Artelon

CMC Spacer multicenter study was presented. This data concurs with the five-year pilot study conducted by Artimplant, thus verifying the value of this method of treatment. The study also confirms the importance of using recommended surgical techniques and rehabilitation instructions to achieve the desired treat- ment result. The product is foremost marketed in the USA, in the EU and on international markets.

Artelon

sTT spacer is a new Spacer for another thumb base joint, the STT joint. An alternative form of treatment for patients with osteoarthritis in both the CMC and STT is to carry out tendon arthroplasty where the patient’s anatomy is changed by the trapezium being removed and the thumb shortened. The product is marketed in the EU and is awaiting clearance in the USA.

Artelon

CMC spacer Arthro has been developed for keyhole surgery and patients with early-stage osteoarthritis. This increases the probabil- ity of achieving good treatment results and saving the patient from un- necessary suffering. The product is marketed in the EU and is awaiting clearance in the USA.

Artelon

dRU spacer is a Spacer for the treatment of osteoarthritis in the wrist. Wrist fractures often lead to complications and there could be osteoarthritis in the surface between the distal radius and the ulna (DRU). Osteoarthritis in the DRU often leads to wrist pain, restriction of forearm rotation and reduced grip strength, limiting the patient’s daily activities. With Artelon

DRU Spacer the forearm can function natu- rally. The product is marketed in the EU and is awaiting clearance in the USA.

Artelon

MTP spacer is a Spacer for the treatment of osteoarthritis in the joint in the base of the big toe. Hallux Rigidus or osteoarthritis of the big toe is a very common disease. Mobility in the MTP joint in the big toe, the metaphalangeal joint, in most cases decreases and is accompanied by increased pain. Ultimately, joint mobility is lost entirely. Pain and dif- ficulty exerting pressure on the foot often lead to a serious handicap for the person afflicted. Results using surgical methods available to date are regarded as being less than successful and surgery is therefore often undertaken after a long period of medical treatment with analgesics and anti-inflammatory drugs. The product is marketed in the EU and is awaiting clearance in the USA.

The above Spacer products are licensed to SBI, which has the global sales rights. Artimplant, however, has retained the sales rights in the Nordic countries.

Artelon

Tissue Reinforcement (ATR) is a new generation of synthetic products for the repair of the shoulder rotator cuff. The rotator cuff helps to lift and rotate the arm and stabilize the shoulder. Injury to the rotator cuff is a common cause of shoulder pain and disability. With reinforce- ment using Artelon

the risk of tissue irritation caused by biomaterial of human or animal origin is eliminated. ATR provides long-lasting re- inforcement in conjunction with the treatment of rotator cuff injuries.

The product also works as a scaffold into which the patient’s own tissue grows and is vascularized, which benefits the healing process. In this way there is a reduction in the risk of reruptures, which would require repeated surgery.

The product is foremost marketed in the USA, in the EU and on interna- tional markets. The product is licensed to Biomet, which has global sales rights for the shoulder’s rotator cuff. Artimplant, however, has sales rights for rotator cuff products in the Nordic countries and global rights for all other indications.

Odontology

It is well documented that Artelon

in different textile versions works well and integrates with bone. In 2005, Artelon

Scaffold was devel- oped, which in terms of structure can be likened to a sponge or porous matrix and only comprises around 10% Artelon

(the remaining volume is air). Artelon

Bone Scaffold gives the body scaffolding and thus the opportunity to build bone suitable for anchoring dental implants. The first application was evaluated in conjunction with a so-called sinus lift in the upper jaw. The results from the first patients who underwent treat- ment indicated that an early stage for bone was formed, so-called os- teoid tissue, but not mineralized bone. Together with leading clinics the Company has concluded that the problem is that the “sponge structure”

has pores which are too small to permit mineralization of the new tissue.

Artimplant is planning to commence a clinical evaluation of Artelon

Bone Scaffold with a larger pore structure during 2007.

Another exciting indication for the porous matrix is as soft tissue aug- mentation. The medical need exists in patients who have lost teeth.

When bone around the root of the tooth is not needed to support the

tooth it is resorbed. In order to fit dentures or bridges and/or support

the upper lip, soft tissue is currently taken from the patient’s gums and

transplanted to the front of the upper jaw. For dental implants there is an

interesting market for customers where the bone has been resorbed on

the front edge of the titanium screw and the screw can be seen through

the gums. In addition, the gums sink and the titanium screw is visible

in something which is called black triangular disease. Artelon

, for the

 Artimplant Annual Report 2006

augmentation of soft tissue in oral applications, is currently being docu- mented in close cooperation with, among others, the Brånemark Clinic in Gothenburg and the Faculty of Odontology at Göteborg University.

The first patients show good results. Artimplant is planning two market studies for 2007. This Artelon

product is planned to be called Artelon

Cosmetic.

THE MARKET FOR ARTIMPLANT’s PROdUCTs

The implant market is at present one of the largest and most rapidly growing markets in medical technology. The growth in the market is be- ing fuelled by two main trends: demographic changes and the fact that doctors are looking for new solutions to medical problems. Demand is continuing to increase due to the aging population. Better financial cir- cumstances and greater demands for quality of life over a long and ac- tive period are other reasons. The market is also being fuelled by techno- logical achievements and a better understanding of the functions of the body. The rapid growth for implants is related, apart from demographic and ecological aspects, to health-related financial potential created by the biomaterials with improved quality of life for the patient. Degradable implants, which function as support during the time the body heals itself, are expected to take market shares from traditional “spare parts” which replace joints or other body parts.

Artimplant works mainly within the orthopedic segment with the treat- ment of osteoarthritis and soft tissue injuries as well as odontology.

Orthopedics

Musculoskeletal disorders are one of the most frequent reasons for dis- ability or invalidity. Musculoskeletal disorders include injuries and dis- eases in the muscles, nerves, tendons, ligaments, joints, cartilage and spinal disks. In 2000 the cost of musculoskeletal disorders was estimat- ed by the WHO at USD 250 billion per year in the USA.

An Artelon

implant is used in a number of medical areas in applications where there is a considerable clinical need. One of these areas is the treatment of osteoarthritis in hand and foot joints.

Arthritis

Arthritis is one of the primary causes of disability or invalidity. In 2005, 46 million people in the USA were estimated to be afflicted by arthri- tis. According to the Arthritis Foundation, arthritis and related disorders cost the American economy almost USD 128 billion each year. Estimates show that by around 2030 almost 67 million Americans, 25% of the pop- ulation, will be suffering from arthritis.

Many people talk about arthritis as if it were just one disease. In reality it is a collective name for a group of more than 100 different medical con- ditions. The common denominator for these 100 conditions is that they all affect the musculoskeletal system and more specifically the joints where two or more bones meet. Arthritis-related joint problems include pain, stiffness, inflammation and damage to the joint cartilage and sur- rounding structures. Injuries such as these could lead to a weakening of the joints, instability and deformation. Depending on which joint or joints are affected, arthritis could have an impact on the potential to perform daily activities such as walking, climbing stairs, using a keyboard, play- ing an instrument, opening a can or brushing one’s teeth.

Two of the most common forms of arthritis are osteoarthritis and rheu- matoid arthritis, where osteoarthritis is the most common. Osteoarthritis mainly affects joints which support the weight of the body, such as the hip, knees and lower back. It also affects the neck, the thumb base, which is the indication for which Artelon

CMC Spacer is intended, big toe and small finger joints.

Treatment of thumb base osteoarthritis

Thumb base osteoarthritis is a common condition which is often very painful and also leads to reduced function. It mainly affects women over the age of 55 years. However, it is not an uncommon condition at a younger age or in men.

During the initial stage of the disease patients are treated with, for example, cortisone. After that the most common surgical procedures are tendon arthroplasty or arthrodesis, methods which entail a change in the anatomy of the hand. At present there is no implant treatment equivalent to Artelon

CMC Spacer.

Artimplant estimates that in the case of osteoarthritis in the CMC joint of the thumb, the current indication for Artelon

CMC Spacer, more than 2,000 operations are performed each year in Sweden. It is estimated that 20% of all women and 7% of all men over the age of 55 years have thumb base osteoarthritis, which means that each year almost 15,000 new Swedes are diagnosed with thumb base osteoarthritis. The number of operations in the world today within the area of use for Artelon

CMC Spacer is estimated at approximately 100,000 per year. The number of patients with thumb baseosteoarthritis is in practice many times more.

Osteoarthritis in the sTT joint in the hand

The STT joint is a joint adjacent to the CMC joint and is also often af- fected by osteoarthritis. Our estimate is that about 25% of the patients who seek help for thumb base osteoarthritis also have osteoarthritis in the STT joint.

The most common method of treatment are, just as for osteoarthritis in the CMC joint, conservative medical treatment such as pain reduction using, for example, cortisone. The most common surgical procedure is tendon arthroplasty, a method which entails a change in the anatomy of the hand.

Osteoarthritis in the dRU joint in the wrist

Fractures in the wrist region often lead to complications. One such com- plication could be osteoarthritis in the joint surface between the distal radius and the ulna (DRU) in the forearm, next to the wrist. Osteoarthritis in the DRU joint often leads to pain in the wrist, limitation in rotation of the forearm and reduced grip strength, which limits the potential to per- form day-to-day activities such as pouring water into a glass or opening a door.

Common methods of treatment for osteoarthritis in the DRU joint in the wrist are to remove part of the ulnar head or by performing an arthrod- esis, which reduces the functionality of the arm. The number of opera- tions performed on a global basis within the area of use of Artelon

DRU Spacer is estimated by Artimplant at approximately 3,000 per year.

Osteoarthritis in the MTP joint in the foot

Osteoarthritis in the base joint of the big toe, Hallux Rigidus (a rigid MTP joint), is a very common condition. Mobility in the MTP joint in the big toe, the metaphalangeal joint, decreases in most cases, accompa- nied by increased pain, and ultimately the joint stiffens completely. Pain and difficulty exerting pressure on the foot is often a serious disability for the person afflicted. Balance, for which the big toe is vital, is often affected. Osteorthritis in the MTP joint is more common among men than women. Patients are treated primarily with analgesics and anti- inflammatory drugs. In Sweden it is estimated that around 1,500 people undergo surgery each year. The results using the present operating methods are regarded as being less than successful. Examples of estab- lished operating methods are cheilectomy, a method where part of the articular head is removed, arthrodesis or replacement of the joint with a prosthesis.

Reinforcement of the rotator cuff in the shoulder

Injuries to tendons are very common. An estimate from the American market in 2003 shows that approximately 781,000 tendon and ligament ruptures were repaired by sutures or replaced using tissue from the pa- tient. Some 80% of the market is within the shoulder, hip and knee. The remainder is made up of the hand, wrist, foot and ankle. The rotator cuff helps to lift and rotate the arm and to stabilize the shoulder. Damage to the rotator cuff is a common cause of shoulder pain and disability. It is a problem that occurs in both young and old. The risk of rotator cuff injury increases with age as the rotator cuff muscle and tendon tissue lose some of their elasticity and blood supply and in doing so become more prone to injury. Rotator cuff injuries are common among people who pursue sports and among people with physically demanding jobs.

Approximately 300,000 rotator cuff operations are performed each year in the USA. This is a growing market segment within both primary and follow-up treatment. About 20% of all patients who have undergone a rotator cuff repair require further treatment because of rerupture. By using Artelon

Tissue Reinforcement many of these repeat operations could probably be avoided.

BUSINESS OVERVIEW

The Artimplant product, synthetic Artelon

Tissue Reinforcement, to- day competes mainly with five other products, all manufactured from collagen of animal or human origin. These competing products are a GraftJacket from Wright Medical Technology, Restore from DePuy Orthopaedics, CuffPatch from Biomet, TissueMend from Stryker and Permacol from Zimmer.

Odontology

Apart from an ageing population, there are now changes in lifestyle which place a greater focus on esthetics and quality of life. There has been a dramatic increase in the demand for cosmetic surgery in many areas and also within esthetic oral surgery and dental implants.

Bone regeneration in the upper jaw

A prerequisite for anchoring a dental implant into the jaw is that there is sufficient bone volume. Bone replacement material allows stable an- choring of the dental implant even in areas where the bone volume has been reduced. The number of patients who lack sufficient bone of their own is increasing as the average life expectancy increases.

The market for bone replacement material in an oral environment is governed by the demand for dental implants and fixed prostheses. The implant market is growing steadily by 20% per year. In Sweden it is esti- mated that approximately 120,000 dental implants will be fitted in 2007.

It is estimated that some form of bone tissue replacement is used in 20-30% of the dental implant cases with the aim of regenerating bone.

The target indication for Artelon

Bone Scaffold, increase of bone vol- ume, in a so-called sinus lift in the upper jaw, is estimated to represent approximately one-tenth of this market.

Oral cosmetic surgery

Many patients suffer from unsuitable concavities or a lack of papillae in conjunction with implants, gaps or congenital soft tissue defects.

To rectify this, the patient undergoes an operation where soft tissue is taken from the gum and this is then used to augment the contours of the dental arch. This requires two surgical procedures and is painful for the patient. Nor do all patients have sufficient tissue for transplantation.

The Company knows from contact with clinicians that there is consid- erable interest in the indications for which Artelon

Cosmetic are in- tended. The Company is not aware of any other implant for soft tissue plastic surgery in an oral environment.

sALEs

Surgeons in both the USA and Scandinavia are showing increased in- terest in treating thumb base osteoarthritis using Artelon

CMC Spacer (licensed exclusively to SBI with the exception of the Nordic countries).

The investment made to date in clinical trials and sales work is produc- ing a greater return. At the end of the fourth quarter over 500 customers in the USA had purchased Artelon

CMC Spacer. The customer base is paving the way for the effective launch of Artimplant’s new Spacer products in conjunction with FDA clearance. Artelon

CMC Spacer is the commercial validation of Artimplant’s degradable implant and is an important reference for Artelon

in new product applications and future product launches.

The sale of Artelon

Tissue Reinforcement commenced at the end of September (sold exclusively by Biomet Sports Medicine as SportMesh™

for the rotator cuff application). Marketing is now taking place in Europe and the USA. The market for the rotator cuff application is estimated to be greater than for Artelon

CMC Spacer. Over 50 patients at some 40 clinics were treated with Artelon

Tissue Reinforcement during the fourth quarter. The response from the patients who have been followed up to date has been positive. When Artelon

Tissue Reinforcement is used to treat injuries the treating doctor and the patient receive relatively rapid feedback of treatment results (less than 12 months). This pro- vides the scope for more rapid market acceptance and increase in sales compared with Artelon

CMC Spacer. To further support sales, Biomet will during spring 2007 commence market studies for Artelon

Tissue Reinforcement in Europe and the USA. At present, a retrospective case study is being conducted in Europe.

PROdUCT dEVELOPMENT

Artimplant does not conduct basic research but instead focuses on applied product development in project form based on the biomate- rial platform Artelon

. Development takes place on behalf of the Com- pany and also within the framework of cooperation agreements with licensees. Artimplant concluded the development of four new Spacer products during 2006. These were Artelon

DRU Spacer, Artelon

MTP Spacer, Artelon

STT Spacer and Artelon

CMC Spacer Arthro. The de- velopment of new sizes for Artelon

Tissue Reinforcement commenced during the year, among other things for the treatment of Achilles’ tendon ruptures. Artimplant has commenced development on its own behalf of a new design for Artelon

Bone Scaffold.

Artimplant’s prioritized development projects during 2007 are based on the Company’s three product variants (restoration concepts):

• Spacer (resurfacing): Commencement of the development of a number of new products within hand and foot surgery.

• Tissue Reinforcement (reinforcement): FDA application for extended indication is planned and new sizes are being developed.

• Scaffold (replenish): Verify Artelon

Cosmetic in market studies and develop a new Artelon

Bone Scaffold design.

PATENTs ANd TRAdEMARKs

Artimplant’s patent portfolio provides good patent protection for prod- ucts and commercially promising product candidates on the Company’s primary markets. Artimplant has continued to optimize patent protection in relation to cost. The following are patents for which Artimplant has secured approval:

• Linear block polymer (the basic patents for Artelon

)

• Ligaments

• Porous films

• Porous material

• Spacer

• Linear block polymer II

The patent regarding linear block polymer has been acquired from Poly- rand AB (founder Professor Per Flodin) against future payment in the form of royalties on Artimplant’s license revenue from product sales.

Artelon

is a trademark protected on all key markets.

Artimplant

is a trademark protected on a number of key markets.

PROdUCTION

All manufacturing takes place at Artimplant’s own production facilities.

The facilities and machinery are adapted and built up for the production of Artelon

. Manufacturing is conducted according to Good Manufac- turing Practice (GMP) in a clean, controlled environment. Production premises and clean rooms maintain a high standard and are well adapt- ed to operations. The clean room facility is classed according to the ISO standard for clean rooms.

During the year investments were made mainly in the polymerization processes for the manufacturing of Artelon

but also in the textile pro- cesses. The investments are aimed at improving capacity and productiv- ity. At the end of the year the capacity and the polymerization process had more than quadrupled. Existing equipment for the production of Artelon

fibers has improved in key areas, which has led to increased productivity. In the textile machines, investments have been made in, among other things, thread preparation equipment and supplementing the warp-knit process. Investments have been made in the post-pro- cessing stage in the form of a more effective and rational cutting pro- cess. Some processes in the production chain, such as final packaging and sterilization, are outsourced to subcontractors to free up resources for the production units’ core operations, i.e. the manufacturing of Artimplant’s implants.

BUSINESS OVERVIEW

 Artimplant Annual Report 2006

Date No of options No of outstanding

options Dec 31-06 Strike price* Strike period No of new series B

units on 100% strike Increase in stock

on 100% strike Increase in equity on 100% strike

Dec-02 666,670 241,411 16.10 dec 2007-apr 2008 241,411 0.4% 3,886,717

May-05 800,000 415,982 7.20 jun 2010-okt 2010 415,982 0.7% 2,995,073

May-06 450,000 446,445 8.80 jun 2009-apr 2011 446,445 0.8% 3,928,716

Totals 1,16,60 1,10, - - 1,10, 1.% 10,10,06

SHARES AND OWNERSHIP

Name Series A Series B % of

capital % of votes CITIGROUP GLOBAL MARKETS (J&C Arnold) 207,000 3,234,899 5.81 8.21

BANCO FONDER (through three funds) 0 3,166,885 5.35 4,90

LIVFÖRSÄKRINGS AB SKANDIA 45,000 1,813,611 3.14 3.50

CEDRONIUS, ANDERS (incl. family) 99,000 1,200,700 2.19 3.39

ANDRA AP-FONDEN 0 1,983,252 3.35 3.07

JP MORGAN BANK 0 1,371,750 2.32 2.12

PETERSON, LARS (incl. family and company) 37,500 729,530 1.29 1.71

KAHM, RICHARD (incl. family) 53,000 553,000 1.02 1.68

GÅLÖSTIFTELSEN /PRINS CARLS 0 870,680 1.47 1.35

NORDNET PENSIONSFÖRSÄKRING AB 0 557,545 0.94 0.86

ANDREASSON, GUNNAR 43,500 119,900 0.28 0.86

CREDIT SUISSE L & P 0 532,000 0.90 0.82

SEB PRIVATE BANK S.A., NQI 0 384,050 0.65 0.59

SOMMER, LESSLY 0 358,000 0.60 0.55

SUNDQVIST, LARS-ERIK 0 350,000 0.59 0.54

NORDNET SA 0 295,294 0.50 0.46

BENGTSSON, MIKAEL 0 288,000 0.49 0.45

BERTILSSON, HANS 18,750 95,000 0.19 0.44

EDBERG, BENGT GUNNAR TORSTEN 18,750 88,000 0.18 0.43

BERGSRÅDET KONSULT&FÖRVALTNING, AB 25,000 20,000 0.08 0.42

DFA-INTL SML CAP VAL PORT 0 255,000 0.43 0.39

BRODIN, TORSTEN 0 250,000 0.42 0.39

ÅKERBLOM, ULF 0 225,000 0.38 0.35

PETERSON, BO 18,750 37,500 0.09 0.35

LAZARD CAPITAL MARKETS LLC 0 204,513 0.35 0.32

Others, ( 8,698) 27,500 39,666,931 66.99 61.85

Totals

STOCKHOLDERS AT DEC 31 2006, SOURCE: VPC AB DEVELOPMENT OF STOCK PRICE, SOURCE VPC AB, OMX GROUP

Stocktype No of units No of votes % of capital % of votes

Series A units 593,750 5,937,500 1.0 9.2

Series B units 58,651,040 58,651,040 99.0 90.8

Totals ,2,0 6,,0 100 100

EMPLOYEE STOCK OPTIONS

Year Transaction Price in SEK Change in no of stock units Total no of stock units Increase in stock in SEK Total stock in SEK

1990 Company formation 1,000 1,000 100,000 100,000

1995 Directed new issue 2,050 2,000 3,000 200,000 300,000

1996 Directed new issue 5,500 1,000 4,000 100,000 400,000

1997 Stock dividend 1 for 4 1,000 5,000 100,000 500,000

1997 Split 1000 for 1 4,995,000 5,000,000 500,000

1997 New issue 45 1,500,000 6,500,000 150,000 650,000

1999 Warrant strike 16 1,750,000 8,250,000 175,000 825,000

2000 Directed new issue 143 1,000,000 9,250,000 100,000 925,000

2002 Directed new issue 3 10,000,000 19,250,000 1,000,000 1,925,000

2003 Rights issue 3 4,681,018 23,931,018 468,102 2,393,102

2003 Rights issue 4 11,965,509 35,896,527 1,196,551 3,589,653

2004 Directed issue 4 3,600,000 39,496,527 360,000 3,949,653

2005 Rights issue 4.50 19,748,263 59,244,790 1,974,826 5,924,479

STOCK HISTORY

* Strike prices for Dec-02 and May-05 have been recalculated according to share issues. The original strike prices were SEK 10.00, 20.00 and 7.33.

Artimplant’s Class B shares are listed on the Nordic Exchange in the small cap segment and in the healthcare sector. Market price at the close of the last day of business for 2006 was SEK 3.66. Class A shares are not listed on the stock exchange, but can be converted into Class B shares. 91,750 Class A shares were converted into Class B shares in 2006. Class A and Class B shares carry equal rights to the Company’s assets and profits.

Class A shares carry 10 votes and Class B shares carry 1 vote.

Artimplant’s market capitalization on December 31, 2006, was about SEK 217 million. Total number of shares is 59,244,790, including 593,750 Class A shares and 58,651,040 Class B sha- res. The par value of each share is SEK 0.10. Artimplant does not plan to pay any dividend or buy back any stock over the next two years. On December 31, 2006 the Company had 8,733 stockholders. The biggest stockholders are presented in the table below.

18,000

16,000

14,000 12,000

10,000 8,000

6,000 4,000

2,000 0 14

12

10

8

6

4

2

Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Volume, thousands per day Arti B (SEK) OMX Stockholm PI OMX Stockholm Healthcare PI

2006** 200 200* 200 2002 CAsH-FLOW ANALYsIs

Cash utilized by current operations -33,190 -28,393 -27,416 -28,328 -48,851

Cash utilized/generated by investment operations -2,292 -3,301 -3,907 5,810 -12,774

Cash utilized/generated by financial operations - 84,603 14,650 59,040 25,909

Cash flow for the year -35,482 52,909 -16,673 36,522 -35,716

Liquid assets at Jan 1 104,186 51,277 67,950 31,428 67,144

Liquid assets at Dec 31 68,704 104,186 51,277 67,950 31,428

2006** 200 200* 200 2002

INCOME sTATEMENT

Net sales 5,536 8,229 4,804 1,225 211

Cost of goods & services sold*** -616 -6,535 -4,748 -1,225 -211

Gross profit/loss ,20 1,6 6 0 0

Research and development costs (1,2) -43,177 -20,906 -28,500 -13,878 -30,518

Selling costs -12,090 -9,608 -8,276 -7,637 -13,618

Administrative costs -7,183 -8,613 -6,847 -6,417 -16,561

Share in profit/loss of subsidiaries - - - 775 -1,589

Operating loss -,0 -, -,6 -2,1 -62,26

Interest income and other financial income 1,841 1,211 1,228 771 1,261

Interest expenses and other financial expenses -330 -22 -33 -40 -68

Share of profit on disposal of operations - - - 9,966 -

Write-down of participations in subsidiaries - - - -13,739 -

Net financial items 1,11 1,1 1,1 -,02 1,1

Loss after financial items -6,01 -6,2 -2,2 -0,1 -61,0

Taxes - - - - -

Loss for the period -6,01 -6,2 -2,2 -0,1 -61,0

2006** 200 200* 200 2002

BALANCE sHEET

Total fixed assets 10,214 32,314 37,936 53,254 67,515

Total current assets 72,863 107,702 54,068 70,922 36,201

of which cash in hand and at the bank 68,704 104,186 51,277 67,950 31,428

Total assets ,0 10,016 2,00 12,16 10,16

Total restricted equity 132,966 168,542 126,020 141,569 143,622

Total retained loss -55,352 -35,696 -42,081 -30,199 -61,093

Total equity ,61 12,6 , 111,0 2,2

Total provisions and long-term liabilities 353 245 - - -

Total short-term liabilities 5,110 6,925 8,065 12,806 21,187

Total equity and liabilities ,0 10,016 2,00 12,16 10,16

FIVE-YEAR OVERVIEW Amounts in SEK thousands

* As of 2004 IFRS is applied.

** Consolidated accounts, incl. Artimplant USA, Inc., which was founded Jan 1 2006. 2003-2005 is only parent company.

*** One time write-down of capitalized product development costs, SEK 17,118 thousand in 2006.

The depreciation of capitalized product development costs is as of 2006 accounted for as research and development cost.

11 Artimplant Annual Report 2006

KEY RATIOS Amounts in SEK thousands

DEFINITIONS

2006 200 200* 200 2002

Equity per stock unit, SEK 1.31 2.24 2.13 3.10 4.29

Equity per stock unit after dilution in full, SEK 1.31 2.24 2.13 3.10 4.29

Loss per stock unit, SEK -0.95 -0.73 -1.12 -1.21 -6.06

Loss per stock unit after dilution in full, SEK -0.95 -0.73 -1.12 -1.21 -6.06

No of stock units in issue at year-end 59,244,790 59,244,790 39,496,527 35,896,527 19,250,000 Average no of stock units in issue during year 59,244,790 49,370,659 37,696,527 24,928,144 10,083,333 No of stock units in issue after dilution in full 60,348,628 61,107,012 40,829,867 37,229,867 20,583,340

Cash flow per stock unit, SEK -0.60 0.89 -0.42 1.02 -1.86

Dividend per stock unit, SEK

- - - - -

Market price, highest, SEK 9.80 9.15 15.40 8.83 49.00

Market price, lowest, SEK 2.79 4.29 3.67 2.11 4.20

Market price at Jan 1, SEK 8.45 6.50 7.60 3.77 48.50

Market price at Dec 31, SEK 3.66 8.45 6.50 7.60 4.95

Return on equity, % neg neg neg neg neg

Return on capital employed, % neg neg neg neg neg

Equity/assets ratio, % 93 95 91 90 80

Proportion of risk capital, % 93 95 91 90 80

Interest bearing liabilities None None None None None

Interest coverage ratio, times - - - - -

Financial net assets 68,704 104,186 51,277 67,950 31,428

Capital expenditure:

Research and development

480 1,587 2,889 4,440 9,393

Patents 646 574 367 1,456 3,054

Machinery, equipment and fixed assets under construction 1,165 1,141 651 61 328

No of employees at Dec 31 28 27 26 24 36

The effects of dilution have not been reported in those cases where they would have resulted in an improvement in key ratios.

* As of 2004 IFRS is applied.

1)

For 2006 the figure refers to the proposal of the board of directors.

2)

Investment in product development according to IAS 38.

stockholders’ equity per share

Stockholders’ equity divided by number of outstanding shares.

stockholders’ equity per share after full dilution As above, but recalculated to reflect full exercise of options.

Earnings per share

Profit or loss for the year divided by average number of outstanding shares during the period.

Earnings per share after full dilution

As above, but recalculated to reflect full exercise of call options.

Cash flow per share

Cash flow for the year divided by number of outstanding shares.

Return on equity

Profit or loss before extraordinary items, expressed as a percentage of average adjusted equity.

Return on capital employed

Loss after net financial items plus financial expenses, expressed as a percentage of average capital employed. Capital employed refers to the balance sheet total less non-interest bearing liabilities including deferred tax on untaxed reserves.

Equity/assets ratio

Equity expressed as a percentage of balance sheet total.

share of risk-bearing capital

Equity plus untaxed reserves expressed as a percentage of balance sheet total.

Interest coverage ratio

Profit or loss after net financial items plus financial expenses, expressed as a percentage of financial expenses.

Financial net assets

Cash and bank balances less interest bearing liabilities.

BOARD OF DIRECTORS’ REPORT

COMPANY INFORMATION

This Annual Report covers the financial year January-Decem- ber 2006 for the Artimplant Group with the parent company Artimplant AB (publ), registration number 556404-8394, hereinafter called Artimplant or the Company, with its regis- tered office in the county of Västra Götaland, Municipality of Gothenburg. The Group comprises the aforementioned parent company and Artimplant USA, Inc., a company registered in Delaware and with his head office in Radnor, PA, USA. With ef- fect from January 2006, Artimplant files consolidated accounts for Artimplant AB (Parent Company) and Artimplant USA, Inc.

Operations which are now being carried on at Artimplant USA, Inc. were previously included in the Parent Company in such a way that the consolidated accounts for 2006 are essentially compatible with the Parent Company’s financial statements for 2005. The Parent Company is listed on the Nordic Stock Ex- change in the small cap segment and in the healthcare sector.

sALEs

Net sales amounted to SEK 5.5 million (8.2) and consisted mainly of revenue from product sales with associated license revenues (77%). The sales increase for Artelon

CMC Spacer is good and sales to end-customers increased by almost 2,750 (370) sold units during the year. For the fourth quarter, sales were around 1,050 (200) units sold, an increase of 40% on the previous quarter. Since the launch more than 3,000 implants have been sold to end-customers.

Two factors make comparison of net sales for 2006 and 2005 difficult. During the third and fourth quarters Artimplant did not receive any license revenue from SBI for 800 sold units.

The explanation for this is that SBI purchased a larger stock of Artelon

CMC Spacers at the end of 2005. Payment, including license revenue for these units, was received and booked in 2005 in accordance with the Company’s accounting principles.

All 800 units have now been finally accounted for. As of Janu- ary 2006 accrued license revenue for one quarter is accounted for during the following quarter. Consequently, only license revenue for the three first quarters is reported on the sales for 2006.

APROVALs ANd PROdUCT LAUNCHEs

During 2006, four new Spacer products were CE-certified.

These products were Artelon

DRU Spacer, Artelon

MTP Spacer, Artelon

STT Spacer and Artelon

CMC Spacer Arthro.

The products will be marketed together with the Artelon

CMC Spacer. Test sales were initiated in Europe during the fourth quarter. Artimplant and SBI are awaiting clearance from the FDA before a full launch takes place. When the products re- ceive clearance for marketing, they have the potential to double the market of Artimplant’s Spacer products.

Artelon

Tissue Reinforcement for the reinforcement of rotator cuff ruptures (supraspinatus) was granted FDA clearance for marketing in January 2006.

Artelon

Bone Scaffold for bone augmentation in the upper jaw – sinus lift – was recalled during the fourth quarter. Early case study data showed that the necessary bone ingrowth could not be attained. The result showed that osteoid tissue, the starting phase for bone formation, was integrated in Artelon

but miner- alized bone was not formed. Artimplant’s analysis, which is sup- ported by the judgement of leading clinicians, is that the pores in the product are too small. Artimplant is now developing a new design which is expected to better meet the functional demands.

A clinical evaluation is planned to start during 2007.

ARTIMPLANT’s FINANCIAL REsULTs 2006

The operating loss was SEK 57.5 million (37.4), including depre- ciation and non-recurring amortization of capitalized product development costs of SEK 22.0 million (6.1). The capitalized product development costs of the projects Reinforcement Bands, Artelon

Surgical Suture and Artelon

Augmentation Device ACL were written off completely. In total, non-recurring amortization amounted to SEK 17.1 million (-). These non-re- curring amortizations have no cash effect.

Net loss for the period amounted to SEK 56.0 million (36.2) or 38.9 million (36.2) if non-recurring write-offs of the capitalized development costs are excluded. Earnings per share were SEK -0.95 (-0.73) or SEK -0.66 (-0.73) if non-recurring write-offs of capitalized development costs are excluded. The net result was affected negatively by exchange rate differences of SEK 331 thousand.

The overall fixed cost level, excluding write-downs and depre- ciation, increased slightly in the second half of the year in con- junction with the change of CEO and subsequent double costs, but is not expected to increase significantly during 2007.

Investments during the period amounted to SEK 2.3 million (3.3), of which SEK 1.1 (2.2) referred to intangible fixed assets.

Artimplant’s production capacity has been upscaled in order to meet the increasingly higher demand for Artimplant’s products in 2007. At the end of the period liquid funds amounted to SEK 68.7 million (104.2).

0 200 400 800 1000

600 1200

No of Artelon

CMC spacer sold to end-customers

2005 Q1 Q2

2005 Q3

2005 Q4 2005 Q1

2006 Q2

2006 Q3

2006 Q4

2006

1 Artimplant Annual Report 2006

MANAGEMENT TEAM CEO

Finance and

Administration Medical Affairs Product Development Production Sales &

Marketing Gender distr. all

employees Gender distr. senior

management Gender distr.

board of directors Level of education distribution by age

Men: 15 Women: 13 Men: 4 Women: 2 Men: 3 Women: 1

University: 23

Senior high school: 2

Ph.D: 3 <30: 5 >50: 4

41-50: 6

31-40: 13

BOARD OF DIRECTORS’ REPORT

ENVIRONMENT

The Company’s activities have only had negligible impact on the environment. The Company complies with legislation and guidelines for those chemicals that are part of operations.

Environmental permits have been secured for the use of or- ganic solvents. The Company is also affiliated to the REPA Register and this satisfies the requirements regarding recyc- ling of packaging materials.

MERGER ANd dEREGIsTRATION OF sUBsIdIARY The dormant subsidiary Artimplant Ortopedisk Klinik AB was merged with Artimplant AB during the fourth quarter. The mer- ger generated a merger profit of SEK 44 thousand which has been entered under retained loss. The dormant subsidiary KB Artimplant Ortopedisk Klinik has been deregistered.

TRAdING IN OWN sHAREs

The Company has not held any of its own shares during 2006.

RELATEd PARTY dIsCLOsURE

The Company has not been involved in any transactions with related parties other than the remuneration and other benefits re- ceived by Directors and senior management reported in Note 2.

LEAsE AGREEMENT

The Company has one major operational lease with Platzer for office, production premises and laboratory in Västra Frölunda at Hulda Mellgrens gata 5. The agreement is valid until June 30 2010 and is renewed automatically for five years if notice of termination is not given within 12 months of cessation of the lease. The rent is adjusted according to the Swedish Consumer Prices Index. At the year ended the Company had the following commitments pursuant to this agreement.

– The cost of premises which falls due for payment within one year is KSEK 2,883

– The cost of premises which falls due for payment later than one year but within five years is KSEK 7,208

EVENTs AFTER THE PERIOd

Promising results for Artelon

Tissue Reinforcement foot app- lications were presented at the annual meeting of the Swedish Foot Surgeons’ Association. Artimplant’s products attracted a great deal of attention at the world’s largest orthopedics con- gress AAOS.

sIGNIFICANT FUTURE RIsKs

Over 3,000 Artelon

products have been implanted in and form a functional basis for indicating that both the material and the ORGANIZATION ANd HUMAN REsOURCEs

Artimplant is a knowledge-intensive company. It is therefore essential to retain in-house specialist skills and nurture exter- nal contacts in specializations necessary for the Company’s growth. Artimplant is CE-certified according to ISO standard 13485 for medical device products and works systematically to improve quality is such a way that it exceeds the custom- ers’ expectations. Human resource development takes place through regular appraisal discussions, in-house exchange of know-how, the development of skills and expertise as well as preventive health care. In the first instance, Artimplant’s ob-

jective is to support and stimulate the employees to improve their expertise in order to assume greater responsibility within the Company. The Company works continuously to improve the working environment and fire protection and has not had any occupational injuries or incidents during the year. The number of employees as of December 31, 2006 was 28 (27), of whom 13 were women and 15 men. The staff turnover in 2005 was 4.5% (5.8). Of the total number of hours absent due to illness, 14% referred to absenteeism due to illness longer than 60 days.

Further information is available under Note 2.

product concept work. The Company’s total risk level has thus fallen in relation to previous years. A future strong growth in sales, however, presupposes that the significant increase in sales in 2006 is accompanied by training of SBI customers to ensure good medical results. In addition to normal operating and financial risks, Artimplant has not identified any specific risks of a material nature. The Company has not been involved in any disputes. Foreign exchange risks are dealt with separa- tely in Note 1, Accounting principles.

EsTIMATEs ANd AssUMPTIONs

When preparing the annual accounts, the Board of Directors and senior management made several estimates and assump- tions that affect the disclosed amounts in the balance sheet and the revenues and expenses in the income statement. The- se assumptions have been deemed reasonable under the cur- rent circumstances although the actual outcome may deviate if other assumptions are made or if other conditions are present.

The following values are considered particularly sensitive to as- sumptions:

• Capitalized product development costs are checked by calculating the current value of expected future cash flows from each product. These calculations are based on a number of assumptions about factors such as the

competitive situation, acceptance of the product in the market, and the discount rate. If conditions change substantially the calculations could lead to other values.

In 2006, the conditions were changed for Reinforcement Bands, Artelon

Surgical Suture and Artelon

Augmentation Device ACL, whose capitalized product development costs were written down by SEK 17.1 million to 0. With effect from 2007 the Company does not intend to capitalize any product development costs.

• Calculated costs for the employee stock option programs described under the heading Employee Remuneration.

Assumptions about the remaining number of employees at the time of redemption, estimated volatility and risk-free interest have a considerable impact on calculated costs.

WORK OF THE BOARd OF dIRECTORs

At the Annual Meeting on May 3, 2006, former director Ingemar Kihlström was elected as Chairman. Directors Lennart Ribohn and Birgit Stattin-Norinder were re-elected. Rickard Söderberg was elected as director and Anna Malm Bernsten was elected as deputy. Former Chairman of the Board Akbar Seddigh and director Svante Rasmuson declined re-election prior to the 2006 Annual Meeting. The work of the Board is based on the rules of procedure for the Board of Directors, which are adopted at a statutory board meeting held in conjunction with the AGM.

The rules of procedure regulate matters such as the number of board meetings, the issues to be addressed and the inter- nal allocation of responsibility of the directors. The Board held 11 meetings during 2006. Attendance at these meetings was good. In addition, Ingemar Kihlström was working Chairman of the Board during the period May-August when the Company recruited a new president. Apart from the customary budget and development issues the work of the Board was characte- rized during the year by the recruitment of the new CEO, the withdrawal of Artelon

Bone Scaffold and the Company’s stra- tegy for commercialization of new products.

OUTLOOK FOR THE FUTURE

The Company will not present any sales or profit forecast as the majority of the Company’s products have been recently launched.

PROPOsEd dIsTRIBUTION OF UNAPPROPRIATEd EARNINGs

Losses brought forward from previous years have been cove- red by a reduction in the stock premium reserve, following re- solutions passed at Annual Meetings. The Company’s income statement and balance sheet will be presented for adoption at the Annual Meeting on May 3, 2007. The Board of Directors proposes that the stock premium reserve be reduced by SEK 55,263,000 to cover the retained loss for the year. The Board proposes that no dividend be paid for 2006.

Gothenburg February 20, 2007

Ingemar Kihlström Chairman of the Board

Hans Rosén

President Rickard söderberg

Lennart Ribohn Birgit stattin-Norinder

BOARD OF DIRECTORS’ REPORT

1 Artimplant Annual Report 2006

INCOME STATEMENT Amounts in SEK thousands

ALLOCATION OF NET SALES* Amounts in SEK thousands

Note Group** Parent

1 2006 2006 200 200*

Net sales 5,536 5,536 8,229 4,804

Cost of goods & services sold 3,5 -616 -616 -6,535 -4,748

Gross profit/loss ,20 ,20 1,6 6

Research and development costs 2,3,6,7 -43,177 -43,231 -20,906 -28,500

Selling costs 2,3,6,7 -12,090 -10,537 -9,608 -8,276

Administrative costs 2,3,6,7 -7,183 -7,192 -8,613 -6,847

Operating loss -,0 -6,00 -, -,6

Interest income and other financial income 4 1,841 1,841 1,211 1,228

Interest expenses and other financial expenses 4 -330 -330 -22 -33

Impairment of receivables subsidiaries - -1 411 - -

Net financial items 1,11 100 1,1 1,1

Loss after financial items -6,01 -,0 -6,2 -2,2

Appropriations - 76 - -

Taxes 12 - - - -

Loss for the period -6,01 -,6 -6,2 -2,2

Earnings per share, SEK -0.95 -0.94 -0.73 -1.12

Earnings per share after full dilution SEK -0.95 -0.94 -0.73 -1.12

* 2004 recalculated according to IFRS.

** Consolidated accounts of 2006 are in all material aspects comparable with the parent company’s accounts of 2005.

2006 200 200

source of revenue

Licensing of product applications 1,031 1,841 3,351

Product sales 3,273 1,529 453

Milestone payments for product development projects 1,231 4,859 1,000

Totals ,6 ,22 ,0

Geographic areas

Scandinavia 717 350 1,283

USA 4,819 7,879 3,521

Totals ,6 ,22 ,0

* Only the parent has had external sales. Artimplant USA, Inc.

has during 2006 invoiced the parent 140,000 USD.

Note Group** Parent

AssETs 1 2006 2006 200 200*

Capitalized product development 5 7,193 7,193 27,949 32,414

Patents 6 1,131 1,131 1,264 2,016

Total intangible fixed assets ,2 ,2 2,21 ,0

Machinery and equipment 7 1,890 1,879 1,394 1,699

Total tangible fixed assets 1,0 1, 1, 1,6

Stock and participation in subsidiaries* 8 0 10 1,707 1,807

Total financial fixed assets 0 10 1,0 1,0

Total fixed assets 10,21 10,21 2,1 ,6

Raw materials, semimanufactures and finished goods 903 903 944 292

Total inventories etc 0 0  22

Accounts receivable 417 417 204 414

Other receivables 1,570 1,563 1,093 792

Prepaid expenses and accrued income 9 1,270 1,259 1,275 1,293

Total short-term receivables ,26 ,2 2,2 2,

Cash and bank accounts 68,704 68,628 104,186 51,277

Total current assets 2,6 2,6 10,02 ,06

TOTAL AssETs ,0 2,2 10,016 2,00

* Only for dormant companies, not Artimplant USA

** Consolidated accounts of 2006 are in all material aspects comparable with the parent company’s accounts of 2005.

BALANCE SHEET Amounts in SEK thousands

1 Artimplant Annual Report 2006

Note Group** Parent

sHAREHOLdERs’ EQUITY & LIABILITIEs 1 2006 2006 200 200*

Share capital 10 5,924 5,924 5,924 3,950

Other capital reserves/Premium reserve 127,042 126,922 162,618 122,070

Total restricted equity 12,66 12,6 16,2 126,020

Retained earnings 557 601 548 291

Translation difference 110 - - -

Loss for the period -56,019 -55,864 -36,244 -42,372

Total retained loss -,2 -,26 -,66 -2,01

Total equity ,61 , 12,6 ,

Provisions   2 -

Accounts payable 1,212 1,196 919 2,007

Liabilities, subsidiaries* - - 1,822 1,793

Other current liabilities 951 903 718 731

Accrued expenses and prepaid income 11 2,947 2,947 3,466 3,534

Total current liabilities ,110 ,06 6,2 ,06

TOTAL sHAREHOLdERs’ EQUITY & LIABILITIEs ,0 2,2 10,016 2,00

Pledged assets none none none none

Contingent liabilities none none none none

* 2004 recalculated according to IFRS.

** Consolidated accounts of 2006 are in all material aspects comparable with the parent company’s accounts of 2005.

BALANCE SHEET Amounts in SEK thousands