INTEGRA LIFESCIENCES HOLDINGS CORP - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED COMMISSION FILE NO. 0-26224
DECEMBER 31, 2003

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 51-0317849
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

311 ENTERPRISE DRIVE
PLAINSBORO, NEW JERSEY 08536
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(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (609) 275-0500

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

COMMON STOCK, PAR VALUE $.01 PER SHARE

(TITLE OF CLASS)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |_|

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|

As of June 30, 2003, the aggregate market value of the registrant's common stock
held by non-affiliates was approximately $703,166,000, based upon the closing
sales price of the registrant's common stock on NASDAQ on such date. For
purposes of this calculation only, all directors, executive officers and holders
of more than 10% of the registrant's outstanding common stock as of such date
were deemed to be "affiliates" of the registrant. The number of shares of the
registrant's Common Stock outstanding as of March 2, 2004 was 28,463,000.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant's definitive proxy statement relating to its
scheduled May 17, 2004 Annual Meeting of Stockholders are incorporated by
reference in Part III of this report.

PART I

ITEM 1. BUSINESS

The terms "we," "our," "us," "Company" and "Integra" refer to Integra
LifeSciences Holdings Corporation and its subsidiaries unless the context
suggests otherwise.

Integra develops, manufactures and markets medical devices for use in
neuro-trauma, neurosurgery, plastic and reconstructive surgery and general
surgery. Integra was founded in 1989 and over the next decade developed
technologies and products directed toward tissue regeneration. In 1999, we
entered the neurosurgery market through an acquisition and the launch of our
DuraGen(R) Dural Graft Matrix product for the repair of the dura mater. Since
1999, we have increased our revenues from $42.9 million to $185.6 million, an
average annual growth rate of 44%, and we have broadened our product offerings
to include more than 10,000 products. We have achieved this growth in our
overall business through the development and introduction of new products, the
development of our distribution channels and acquisitions.

Our product lines include innovative tissue repair products that incorporate our
proprietary absorbable implant technology, such as the DuraGen(R) Dural Graft
Matrix, the DuraGen Plus(TM) Dural Graft Matrix, the NeuraGen(TM) Nerve Guide,
the INTEGRA(R) Dermal Regeneration Template, and the INTEGRA(TM) Bi-Layer Matrix
Wound Dressing, as well as more traditional medical devices, such as monitoring
and drainage systems, surgical instruments and fixation systems.

Financial information about our geographical areas is set forth in our financial
statements under Notes to Consolidated Financial Statements, Note 14 - Segment
and Geographic Information.

STRATEGY

Our goal is to become a global leader in the development, manufacturing and
marketing of medical devices, implants and biomaterials in the neurosurgery,
plastic and reconstructive surgery and general surgery markets. Key elements of
our strategy include the following:

Expand our presence in hospitals and other health care facilities. Through
acquisitions and internal growth, we have rapidly become a leading provider of
products used in the diagnosis, monitoring and treatment of chronic diseases and
acute injuries. We focus on injuries involving the brain, the cranium, the spine
and the central nervous system, and the repair and reconstruction of soft
tissue, such as dermis. We believe that additional growth potential exists
through:

* expanding our product portfolio and market reach through additional
acquisitions;
* increasing the penetration of our existing products into closely
related markets, such as the ear, nose, throat (ENT),dental, maxillofacial
and spine markets;
* continuing the development and promotion of innovative new products, such as
the NeuraGen(TM) Nerve Guide, the Novus NeuroSensor(R) Cerebral Blood Flow
Monitoring System and the LICOX(R) Brain Tissue Oxygen Monitoring System; and
* expanding our sales force and product offerings focused on plastic and
reconstructive surgeons.

Additional Strategic Acquisitions. Since 1999 we have completed more than
fifteen acquisitions focused primarily on our neurosurgical product lines,
plastic and reconstructive surgery and surgical instrumentation. We regularly
evaluate potential acquisition candidates in this market and in other specialty
medical technology markets characterized by high margins, fragmented competition
and focused target customers.

Continue To Develop New And Innovative Medical Products. We have built a leading
proprietary absorbable implant franchise through our development of the
INTEGRA(R) Dermal Regeneration Template and INTEGRA(TM) Bi-Layer Matrix Wound
Dressing, the DuraGen(R) Dural Graft Matrix, DuraGen Plus(TM) Dural Graft Mat
and NeuraGen(TM) Nerve Guide, Biomend(R) and Biomend(R) Extend Absorbable
Collagen Membrane and biomaterials for the orthopedic implant market. We
currently are developing a variety of innovative neurosurgical and other medical
products and are seeking expanded applications for our existing products.
-2-

PRODUCT GROUPS, MARKETING AND SALES

Our business is organized into product groups and distribution channels. Our
product groups include Monitoring Products, Operating Room Products, Surgical
Instrumentation, and Private Label Products. Our distribution channels include
two direct sales organizations (Integra NeuroSciences and Integra Plastic and
Reconstructive Surgery), one distributor network managed by a direct sales
organization (JARIT), and strategic alliances. We sell the products from our
four product groups through our various distribution channels, as follows:

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PRODUCT GROUPS
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Monitoring Operating Room Instruments Private Label
------------- --------------- ------------ -------------
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C
H
A
N
N
E Integra X X X
L NeuroSciences
S
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Plastic and X X
Reconstructive
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JARIT X
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Alliances X
- -------------------------------------------------------------------------------

The following table summarizes the most important products in each of our
product groups, which we discuss in more detail in the text following the table:

PRRODUCT LINES APPLICATIONS

Monitoring Products

The Monitoring Of Brain Parameters. Neurosurgeons use intracranial monitors to
diagnose and treat cases of severe head trauma and other diseases. There are
approximately 500,000 cases of head trauma each year in the United States, and
the market for monitoring and intervention is estimated to approximate $110
million.

We sell the Camino(R) and Ventrix(R) lines of intracranial pressure and
temperature monitoring systems and the LICOX(R) Brain Tissue Oxygen Monitoring
System. Currently more than 3,000 of our intracranial monitors are installed and
in use worldwide. The Camino(R) and Ventrix(R) systems measure the intracranial
pressure and temperature in the brain and ventricles, and the LICOX(R) system
allows for continuous qualitative regional monitoring of dissolved oxygen in
cerebral tissues.
-4-

We expect to introduce the Novus NeuroSensor(R) Cerebral Blood Flow Monitoring
System in the second half of 2004. The Novus monitoring system measures both
intracranial pressure and cerebral blood flow using a single combined probe and
an electronic monitor for data display. Cerebral blood flow is considered to be
an important parameter for monitoring cerebral auto-regulation and, when
combined with the measurement of intracranial pressure, is expected to
facilitate improved patient care and clinical management with applications in
neuro-trauma, cerebrovascular disease, and post-operative neurosurgical
treatment.

Core technologies underlying the brain parameter monitoring product line include
the design and manufacture of the disposable catheters used in the monitoring
systems, pressure transducer technology, optical detection/fiber optic
transmission technology, sensor characterization and calibration technology and
monitor design.

Cranial Access And External Drainage. Neurosurgeons use cranial access kits and
external drainage systems to gain access to the cranial cavity and to drain
excess cerebrospinal fluid from the ventricles of the brain into an external
container. We manufacture and market a broad line of cranial access kits and
ventricular and lumbar external drainage systems under the Integra CSF Drainage
and Cranial Access Systems brand names.

Epilepsy Electrodes. Neurosurgeons use electrodes for the intraoperative
monitoring of epileptic seizures to determine if surgical options can be used in
the treatment of epilepsy. Seizures vary from a momentary disruption of the
senses, to short periods of unconsciousness or convulsions. Seizures signals to
each other. The neurosurgeon uses the electrodes in conjunction with an EEG
video monitor to determine if a patient is a viable candidate surgery, which
involves the removal of the damaged portion of brain tissue. The worldwide
market for intraoperative epilepsy electrodes is estimated to be $10 million. We
have recently begun to market these products in the United States through our
Integra NeuroSciences sales force.

Neurological Supplies. We distribute a wide variety of disposables and supplies,
including surface electrodes, needle electrodes recording transducers and
stimulators, and respiratory sensors, that are used in the diagnosis and
monitoring of neurological disorders. These products are designed to monitor and
perform tests of the nervous system and brain, including electromyography (EMG),
evoked potential (EP) and electroencephalography (EEG) tests, and to evaluate
sleep disorders.

We sell these products under the Integra Supplies(TM) name primarily through
catalogs and telemarketing to more than 6,000 neurologists, hospitals, sleep
clinics, and other physicians. Neurologists are the referring physicians for
Integra's existing neurosurgeon customers and participate in the decision to use
our line of epilepsy monitoring electrodes.

Operating Room Products

Repair Of The Dura Mater. The dura mater is the thick membrane that contains the
cerebrospinal fluid within the brain and the spine. The dura mater often must be
penetrated during brain surgery and is often damaged during spinal surgery. In
either case, surgeons may close or repair the dura mater with a graft. The graft
may consist of tissue taken from elsewhere in the patient's body, or it may be
one of the dural substitute products currently on the market, which are made of
collagen, synthetic materials, processed human cadaver, or bovine pericardium.
The worldwide market for dural repair, including cranial and spinal
applications, is estimated to be $110 million.

The DuraGen(R) and DuraGen Plus(TM) Dural Graft Matrices are absorbable collagen
products indicated for the repair of the dura mater surrounding the brain and
spine. We believe that the DuraGen(R) and DuraGen Plus(TM) Dural Graft products
address the shortcomings of other methods for repairing the dura mater. Clinical
trials have shown our DuraGen(R) products to be an effective means for closing
the dura mater without the need for suturing, which allows the neurosurgeon to
conclude the operation more efficiently. In addition, because the human body
ultimately absorbs the DuraGen(R) product and replaces it with new natural
tissues, the patient avoids some of the risks associated with a permanent
implant inside the cranium or spinal cavity.

EnDura(TM) No-React(R) Dural Substitute is a bovine pericardium suturable
product for the repair of the dura mater. It is treated with the proprietary
No-React process, which reduces the body's inflammatory response to the implant,
prolongs the product's durability and eliminates the need for rinsing prior to
implantation. Through the EnDura product, we address the approximately 15% of
dural repair procedures that, due to pressure existing at the dural breach
location, require a suturable graft.
-5-

Skin Replacement and Engineered Wound Dressings. Our skin replacement products
address the market need created by severe burns, reconstructive surgery, and
chronic wounds.

The INTEGRA(R) Dermal Regeneration Template is designed to enable the human body
to regenerate functional dermal tissue. The Food and Drug Administration (FDA)
initially approved the product under a Premarket Approval application (PMA) for
the post-excisional treatment of life-threatening deep or full-thickness dermal
injury where sufficient autograft is not available at the time of excision or
not desirable due to the physiological condition of the patient.

In 2002 we received FDA approval to market our skin replacement products for use
in certain procedures in which cadaver skin or an autograft would typically be
used. The FDA approved a PMA supplement to permit the marketing of the
INTEGRA(R) Dermal Regeneration Template for the repair of scar contractures in
patients who have already recovered from their initial wound. The FDA also
granted 510(k) clearance for the sale of a related product, INTEGRA(TM) Bi-Layer
Matrix Wound Dressing, for the dressing of wounds, including chronic wounds. We
estimate that the worldwide market now addressable by our skin replacement
products exceeds $1.0 billion.

Between 1999 and 2003, the ETHICON division of Johnson & Johnson was the
exclusive seller of the INTEGRA(R) Dermal Regeneration Template and the
INTEGRA(TM) Bi-Layer Matrix Wound Dressing worldwide, except in Japan where
Century Medical, Inc. has rights to distribute the INTEGRA(R) Dermal
Regeneration Template. Effective December 31, 2003, we terminated our agreement
with ETHICON and again assumed the sales and marketing responsibility for both
products. We now distribute the INTEGRA(R) Dermal Regeneration Template and the
INTEGRA(TM) Bi-Layer Matrix Wound Dressing through our plastic and
reconstructive surgery sales organization in the United States and parts of
Western Europe and through a network of distributors elsewhere.

Repair Of Peripheral Nerves. Peripheral nerves may become severed or damaged
through traumatic accidents or surgical injuries, often resulting in the
permanent loss of motor and sensory function. Although severed peripheral nerves
regenerate spontaneously, they do not establish functional connections unless
the nerve stumps are surgically reconnected. We estimate the market for the
repair of severed peripheral nerves to be $40 million.

The NeuraGen(TM) Nerve Guide is an absorbable implant for the repair of severed
peripheral nerves. The NeuraGen(TM) product is a collagen tube designed to
provide a protective environment for the regenerating nerve and to provide a
conduit through which regenerating nerves can bridge the gap caused by the
injury. The NeuraGen(TM) Nerve Guide offers a rapid method for rejoining severed
peripheral nerves.

Hydrocephalus Management. Hydrocephalus is an incurable condition resulting from
an imbalance between the amount of cerebrospinal fluid produced by the brain and
the rate at which the body absorbs cerebrospinal fluid. This condition causes
the ventricles of the brain to enlarge and the pressure nside the head to
increase. Hydrocephalus often is present at birth, but may also result from head
trauma, spina bifida, intraventricular hemorrhage, intracranial tumors and
cysts. Hydrocephalus is most commonly treated by inserting a shunt into the
ventricular system of the brain to divert the flow of cerebrospinal fluid out of
the brain and using a pressure valve to maintain a normal level of cerebrospinal
fluid within the ventricles.

According to the Hydrocephalus Association, hydrocephalus affects approximately
one in 500 children born in the United States. We estimate that approximately
80% of total cerebrospinal fluid shunt sales address birth-related
hydrocephalus, and the remaining 20% address surgical procedures involving
excess cerebrospinal fluid due to head trauma and adult onset normal pressure
hydrocephalus. Based on industry sources, we believe that the total United
States market for hydrocephalus management, including monitoring, shunting and
drainage, is approximately $140 million. Of that amount, it is estimated that a
little more than half consists of sales of monitoring products, and the balance
consists of sales of shunts and drains for the management of hydrocephalus.

In recent years, neurosurgeons have increased their use of programmable valves,
which allow the neurosurgeon to adjust the pressure settings of the shunt while
it is implanted in the patient. Shunts that do not incorporate programmable
valve technology must be removed from the patient for subsequent pressure
adjustments, a process that requires an additional surgical procedure. We do not
market hydrocephalus management shunts with programmable valves and believe that
the increasing use of programmable valves has, and may continue to, negatively
affect the sales of our shunt products.
-6-

Later this year, we plan to introduce a low-flow hydrocephalus shunt that will
regulate the flow of cerebrospinal fluid out of the brain, rather than the
pressure created by cerebrospinal fluid inside the head. This shunt regulates
the flow of cerebrospinal fluid to a range of 8-15 milliliters per hour, which,
according to studies, is the preferred range of flow for patients with normal
pressure hydrocephalus. Normal pressure hydrocephalus is a syndrome that occurs
in both adults who have previously experienced birth-related hydrocephalus, and
those who have not. It is characterized by dementia, gait disturbance and
urinary incontinence in patients that are typically over 65 years of age.
Certain reports estimate that approximately 20% of total cerebrospinal fluid
shunt sales address normal pressure hydrocephalus.

Hemodynamic Shunts. Our Sundt(TM) and other carotid shunts are used to divert
blood to vital organs, such as the brain, during surgical procedures involving
blood vessels.

Instruments

Neurosurgical Systems For Tissue Ablation. More than 145,000 primary and
metastatic brain tumors are diagnosed annually in the United States. Our
Selector(R) Integra Ultrasonic Aspirator and Dissectron(R) Ultrasonic Surgical
Aspirator systems address the market for the surgical fragmentation and removal
of malignant and non-malignant tumors and other tissue.

The Selector(R) Integra Ultrasonic Aspirator and Dissectron(R) Ultrasonic
Surgical Aspirator use very high frequency sound waves to pulverize cancer
tumors and allow the surgeon to remove the damaged tumor tissue by aspiration.
Unlike other surgical techniques, ultrasonic surgery selectively dissects and
fragments soft tissue leaving fibrous tissues such as nerves and blood vessels
intact. Ultrasonic aspiration facilitates the removal of unwanted tissue
adjacent or attached to vital structures. In September 2002, we received FDA
510(k) clearance to market the Selector(R) product for use in general,
gynecological, urological, plastic and reconstructive, orthopedic, thoracic and
thorascopic surgery procedures. We offer the Dissectron(R) product only outside
the United States. Later this year, we plan to introduce a next generation
Selector(R) Integra Ultrasonic Aspirator, which will be more efficient and offer
a broader selection of handpieces and tips than is currently available in
ultrasonic technology.

JARIT(R) Surgical Instruments. For more than 30 years, JARIT has marketed a wide
variety of high quality, reusable surgical instruments to virtually all surgical
disciplines. With more than 5,000 instrument patterns and a 98% order fill rate,
the JARIT brand has a strong reputation for high-quality surgical instruments.

Neurosurgical And Spinal Instrumentation. We provide neurosurgeons and spine
surgeons with a full line of specialty hand-held spinal and neurosurgical
instruments. We sell instruments under the Redmond/R&B name primarily for spinal
procedures (including neuro-spine), and instruments under the Ruggles(TM) brand
name primarily for cranial surgery.

Plastic and Reconstructive Instruments. We market a wide variety of high
quality, reusable surgical instruments to plastic and reconstructive surgeons,
burn surgeons, ENT surgeons, hospitals, surgery centers, and other physicians.

Dermatomes and Meshers. We sell a range of manual, air- and electric-powered
dermatomes and related disposables for harvesting skin grafts. In 2003 we
launched our new Dermatome-S, which is lighter, more ergonomic and more powerful
than the other dermatomes in our line. Our variable skin mesher is designed to
expand skin grafts prior to implantation to provide for greater coverage.

Spinal Specialties. Spinal Specialties' products include the OsteoJect(TM) Bone
Cement Delivery System and the ACCU-DISC(TM) Pressure Monitoring System.
Physicians use these products in a variety of spinal, orthopedic and pain
management procedures. The OsteoJect product allows precise delivery of bone
cement to a surgical site under active fluoroscopy by a surgeon whose hands
remain outside the fluoroscopy field. The ACCU-DISC, which is used to interpret
discography results, offers the accurate delivery of fluids to the body and the
ability to monitor the fluids in discography interpretation.

Private Label Products

Orthopedic Biomaterials. Since 1994, we have supplied Wyeth BioPharma with
Absorbable Collagen Sponges for use in developing bone regeneration implants,
including use with Wyeth BioPharma's recombinant human bone morphogenetic
protein-2 (rhBMP-2), which Wyeth BioPharma is developing for clinical evaluation
in several areas of bone repair and augmentation, including orthopedic, oral and
maxillofacial surgery applications. We sell Absorbable Collagen Sponges for
spinal applications through a related collaboration with Medtronic Sofamor Danek
in North America. The FDA has approved Medtronic Sofamor Danek's InFUSE(TM)
-7-

Bone Graft used with the LT-CAGE(TM) Lumbar Tapered Fusion Device and
the INTER FIX and INTER FIX Threaded Fusion Devices, for use in spinal fusion
procedures. The InFUSE Bone Graft uses rhBMP-2 applied to our Absorbable
Collagen Sponge in place of a painful secondary procedure to harvest small
pieces of bone from the patient's own hip (autograft). When used with the
LT-CAGE Lumbar Tapered Fusion Device, and the INTER FIX and INTER FIX Threaded
Fusion Devices, the InFUSE Bone Graft is indicated to treat certain types of
spinal degenerative disc disease, a common cause of low back pain.

Guided Tissue Regeneration In Periodontal Surgery. Our BioMend(R) Absorbable
Collagen Membrane is used for guided tissue regeneration in periodontal surgery.
The BioMend(R) membrane is inserted between the gum and the tooth after surgical
treatment of periodontal disease, preventing the gum tissue from interfering
with the regeneration of the periodontal ligament that holds the tooth in place.
The body absorbs the BioMend(R) product after approximately four to seven weeks,
avoiding the requirement for additional surgical procedures to remove a
non-absorbable membrane. The BioMend(R) Extend product has the same indication
for use as the BioMend(R) product, except that it absorbs in approximately 16
weeks. The BioMend(R) and BioMend(R) Extend Absorbable Collagen Membranes are
sold through Zimmer.

Other Private Label Products. Our current private label products also include
the VitaCuff(R) catheter access infection control device, the BioPatch(R)
anti-microbial wound dressing, a wide range of absorbable collagen products for
hemostasis for use in dental surgery sold under the names CollaCote(R),
CollaTape(R) and CollaPlug(R), the Instat(R) Absorbable Collagen Hemostat, and
cranial fixation devices for use in craniomaxillofacial surgery.

Distribution Channels

We sell our products directly through various sales forces and through a variety
of other distribution channels. Our direct sales forces include the following:

Integra NeuroSciences(TM). Integra NeuroSciences' direct marketing effort in the
United States and Europe currently involves more than 130 professionals,
including direct salespeople (called neurospecialists in the United States),
sales management, and clinical educators who educate and train both our
salespeople and customers in the use of our products. Our Integra
NeuroSciences(TM) sales force sells our monitoring products (including Camino,
LICOX and Ventrix monitoring lines, cranial access kits, external ventricular
and lumbar monitoring and drainage products and epilepsy electrodes), our
neurosurgical operating room products (including the DuraGen, EnDura and
NeuraGen products and the Selector Ultrasonic Aspirator) and the Ruggles line of
neurosurgical instruments. These salespeople call primarily on neurosurgeons and
intensive care units that are capable of managing neuro-trauma cases. We believe
that we effectively address this focused group of hospital-based practitioners
through our direct Integra NeuroSciences sales and marketing infrastructure in
the United States and Europe and our distribution network elsewhere.

Plastic and Reconstructive Surgery. Our plastic and reconstructive surgery sales
and marketing organization consists of 18 professionals, including direct
salespeople, sales management, clinical educators, marketing management and
product managers, as well as distributors outside of the United States. This
sales and marketing organization sells INTEGRA Dermal Regeneration Template,
INTEGRA Bi-Layer Matrix Wound Dressing, the NeuraGen Nerve Guide, Padgett
dermatomes and meshers, and a wide variety of high quality surgical instruments
and implants to plastic and reconstructive surgeons, burn surgeons, hospitals,
surgery centers, and other physicians.

JARIT Surgical Instruments. Our JARIT organization sells its products to more
than 5,200 hospitals and surgery centers worldwide. In the United States, JARIT
employs an 18-person sales management force that works with over 100 distributor
sales representatives. The JARIT organization sells the JARIT line of general
and specialty instruments for open and endoscopic surgery, and a line of
specialty instruments for spinal and neurosurgery.

Private Label. We market our private label products through strategic partners
or original equipment manufacturer customers. Our private label products address
large, diverse markets, and we believe that we can develop and promote these
products more cost-effectively through leveraging the product development and
distribution systems of our strategic partners than through developing the
products ourselves or selling them through our own direct sales infrastructure.
We have partnered with market leaders, such as Johnson & Johnson, Medtronic,
Wyeth, and Zimmer, for the development and marketing efforts related to many of
these products.
-8-

We have established a reputation as a value-added and dependable development and
manufacturing partner. Many of our current private label products are built on
our expertise in absorbable collagen products. In addition, we have expertise in
the development, manufacture and supply of a variety of absorbable materials and
can provide experienced personnel to support product quality and regulatory
review efforts.

RESEARCH AND DEVELOPMENT STRATEGY

Our research and development programs focus on developing new products based on
our materials and collagen engineering technologies and our expertise in fiber
optics, ultrasonic technology and surgical fixation. We spent $12.8 million,
$11.5 million and $8.9 million in 2003, 2002, and 2001, respectively, on
research and development activities. The 2003 and 2002 amounts include $400,000
and $2.3 million of acquired in-process research and development charges,
respectively, recorded in connection with acquisitions. In addition to internal
research and development activities, we may continue to use our capital
resources to acquire businesses that include research and development programs,
which could result in additional in-process research and development charges in
the future. We also receive contract development revenues and government grant
funding which support a portion of our research and development activities.
Research and development activities funded by contract development and
government grant revenues amounted to $4.5 million, $3.5 million and $3.9
million in 2003, 2002, and 2001, respectively.

We have either acquired or secured the proprietary rights to several important
technological and scientific platforms, including collagen matrix, intracranial
monitoring, ultrasonic tissue ablation, and implantable fixation technologies.
These technologies provide support for our critical applications in neurosurgery
and tissue regeneration with additional opportunities for generating near-term
and long-term revenues from medical applications. We have been able to identify
and bring together critical platform technology components from which we work to
develop products for both tissue regeneration and neurosurgical applications.
These efforts have led to the successful development of new products, such as
the NeuraGen(TM) Nerve Guide and DuraGen(R) Dural Graft Matrix.

We regularly review our research and development programs to ensure that they
remain consistent with and supportive of our growth strategies. To that end, in
2003 we expanded our product development staff to increase the focus on our
neurosurgical product development efforts and consolidated our San Diego
research facility with our other facilities.

GOVERNMENT REGULATION

As a manufacturer of medical devices, we are subject to extensive regulation by
the FDA and, in some jurisdictions, by state and foreign governmental
authorities. These regulations govern the introduction of new medical devices,
the observance of certain standards with respect to the design, manufacture,
testing, labeling and promotion of the devices, the maintenance of certain
records, the ability to track devices, the reporting of potential product
defects, the export of devices and other matters. We believe that we are in
substantial compliance with these governmental regulations.

From time to time, we have recalled certain of our products. We have recalled
defective components or devices supplied by other vendors, kits assembled by us
that included incorrect combinations of products and defective devices
manufactured by us. None of these recalls resulted in material direct expense to
us or a long-term disruption of an important customer or supplier relationship.
However, a future voluntary or involuntary recall of one of our major products,
particularly if it involved a potential or actual risk to patients, could have
an adverse financial impact on us as a result both of direct expenses and
disrupted customer relationships.
-9-

The FDA requires, as a condition of marketing a medical device in the United
States, that we secure a Premarket Notification clearance pursuant to Section
510(k) of the Federal Food, Drug and Cosmetic Act, an approved PMA application
or a supplemental PMA application. Alternatively, we may seek United States
market clearance through a Product Development Protocol approved by the FDA.
Establishing and completing a Product Development Protocol, or obtaining a PMA
application or supplemental PMA application, can take up to several years and
can involve preclinical studies and clinical testing. To perform clinical
testing in the United States on an unapproved product, we are also required to
obtain an Investigational Device Exemption from the FDA. In addition to
requiring clearance for new products, FDA rules may require a filing and FDA
approval, usually through a PMA application supplement or a 510(k) Premarket
Notification clearance, prior to marketing products that are modifications of
existing products or new indications for existing products. The FDA Medical
Device User Fee and Modernization Act of 2002 (MDUFMA) imposes user fees payable
to FDA for submission of Premarket Notifications, PMA applications, Product
Development Protocols, and certain supplemental PMA applications. The regulatory
process of obtaining product approvals/clearances can be onerous and costly.

We may not receive the necessary regulatory approvals, including approval for
product improvements and new products, on a timely basis, if at all. Delays in
receipt of, or failure to receive, regulatory approvals could have a material
adverse effect on our business. Moreover, after clearance is given, if the
product is shown to be hazardous or defective, the FDA and foreign regulatory
agencies have the power to withdraw the clearance or require us to change the
device, its manufacturing process or its labeling, to supply additional proof of
its safety and effectiveness or to recall, repair, replace or refund the cost of
the medical device. In addition, federal, state and foreign regulations
regarding the manufacture and sale of medical devices are subject to future
changes. We cannot predict what impact, if any, these changes might have. These
changes, however, could have a material impact on our business.

We have received or acquired more than 200 Premarket Notification 510(k)
clearances, five approved PMA applications and 56 supplemental PMA applications.
We expect to file new applications during the next year to cover new products
and variations on existing products.

We are also required to register with the FDA as a device manufacturer. As such,
we are subject to periodic inspection by the FDA for compliance with the FDA's
Quality Systems Regulations. These regulations require that we manufacture our
products and maintain our documents in a prescribed manner with respect to
design, manufacturing, testing and control activities. Further, we are required
to comply with various FDA requirements for labeling and promotion. The Medical
Device Reporting regulations require that we provide information to the FDA
whenever there is evidence to reasonably suggest that one of our devices may
have caused or contributed to a death or serious injury or, if a malfunction
were to recur, could cause or contribute to a death or serious injury. In
addition, the FDA prohibits us from promoting a medical device before marketing
clearance has been received or promoting an approved device for unapproved
indications. Under FDA regulations, we are required to submit reports of certain
voluntary recalls and corrections to FDA. If the FDA believes that a company is
not in compliance with applicable regulations, it can institute proceedings to
detain or seize products, issue a warning letter, issue a recall order, impose
operating restrictions, enjoin future violations and assess civil penalties
against that company, its officers or its employees and can recommend criminal
prosecution to the Department of Justice. These actions could have a material
impact on our business. Other regulatory agencies may have similar powers.

Medical Device Regulations also are in effect in many of the countries outside
the United States in which we do business. These laws range from comprehensive
device approval and quality system requirements for some or all of our medical
device products to simpler requests for product data or certifications. The
number and scope of these requirements are increasing. In June 1998, the
European Union Medical Device Directive became effective, and all medical
devices must meet the Medical Device Directive standards and receive CE Mark
certification. CE Mark certification requires a comprehensive Quality System
program, and submission of data on a product to the Notified Body in Europe. The
Medical Device Directive, ISO 9000 series, ISO 13485 and EN46001 are recognized
international quality standards that are designed to ensure that we develop and
manufacture quality medical devices. A recognized Notified Body (an organization
designated by the national governments of the European Union member states to
make independent judgments about whether or not a product complies with the
protection requirements established by each CE marking directive) audits each of
our facilities annually to verify our compliance with these standards. In 2002,
each of our certified facilities was audited, and we have maintained our
certification to these standards.

In addition, we are required to notify the FDA if we export specified medical
devices manufactured in the United States that have not been approved by the FDA
for distribution in the United States. We are also required to maintain certain
records relating to exports and make the records available to the FDA for
inspection, if required. We do not currently export medical devices manufactured
in the United States that have not been approved by the FDA, although we have in
the past.
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OTHER UNITED STATES REGULATORY REQUIREMENTS

In addition to the regulatory framework for product approvals, we are and may be
subject to regulation under federal and state laws, including requirements
regarding occupational health and safety; laboratory practices; the maintenance
of personal health information; sales and marketing practices, including product
discounting practices; and the use, handling and disposal of toxic or hazardous
substances. We may also be subject to other present and possible future local,
state, federal and foreign regulations.

Our research, development and manufacturing processes involve the controlled use
of certain hazardous materials. We are subject to federal, state and local laws
and regulations governing the use, manufacture, storage, handling and disposal
of these materials and certain waste products. Although we believe that our
safety procedures for handling and disposing of these materials comply with the
standards prescribed by the controlling laws and regulations, the risk of
accidental contamination or injury from these materials cannot be eliminated. In
the event of this type of an accident, we could be held liable for any damages
that result and any liability could exceed our resources. Although we believe
that we are in compliance in all material respects with applicable environmental
laws and regulations, we could incur significant costs to comply with
environmental laws and regulations in the future, and our operations, business
or assets could be materially adversely affected by current or future
environmental laws or regulations.

PATENTS AND INTELLECTUAL PROPERTY

We seek patent protection of our key technology, products and product
improvements both in the United States and in selected foreign countries. When
determined appropriate, we have enforced and plan to continue to enforce and
defend our patent rights. In general, however, we do not rely on our patent
estate to provide us with any significant competitive advantages as it relates
to our existing product lines. We rely upon trade secrets and continuing
technological innovations to develop and maintain our competitive position. In
an effort to protect our trade secrets, we have a policy of requiring our
employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with us. These agreements provide that all confidential
information developed or made known to the individual during the course of their
relationship with us must be kept confidential, except in specified
circumstances.

ACCU-DISC(TM), BioMend(R), Camino(R), CollaCote(R), CollaPlug(R), CollaStat(TM),
CollaTape(R), Dissectron(R), DuraGen(R), DuraGen Plus(TM), EquiFlow(R),
Helistat(R), Helitene(R), Heyer-Schulte(R), INTEGRA(R) Dermal Regeneration
Template, INTEGRA(TM) Bi-Layer Matrix Wound Dressing, Integra NeuroSciences(TM),
Integra NeuroSupplies(TM), Integra Supplies(TM), JARIT(R), LICOX(R),
NeuraGen(TM), Novus(R), LPV(R), Orbis-Sigma(R), Osteoject(R), NeuroSensor(R),
Padgett Instruments, Inc(R), Pudenz(TM), Redmond(TM), Ruggles(TM), Selector(R),
Spetzler(R), Spinal Specialties(R), Sundt(TM), Ventrix(R), VitaCuff(R) are some
of the trademarks of Integra and its subsidiaries. All other brand names,
trademarks and service marks appearing in this report are the property of their
respective holders.

COMPETITION

Our largest competitors in the neurosurgery markets are the Medtronic
Neurotechnologies division of Medtronic, Inc., the Codman division of Johnson &
Johnson, the Aesculap division of B. Braun and the Valleylab division of Tyco
International Ltd. In addition, many of our neurosurgery product lines compete
with smaller specialized companies or larger companies that do not otherwise
focus on neurosurgery.

Our largest competitors in plastic and reconstructive surgery are LifeCell
Corporation, Inamed Corporation, Mentor Corporation, Zimmer Holdings, Inc. and
Brennen Medical, Inc.

We believe that we are the third largest surgical instrument company in the
United States. The two larger companies are the Codman division of Johnson &
Johnson, and the V. Mueller division of Cardinal Healthcare. In addition, there
are many smaller instrument companies that compete with many of our specialty
instruments. We rely on the depth and breadth of our sales and marketing
organization to maintain our competitive position in surgical instruments.

Our private label products face diverse and broad competition, depending on the
market addressed by the product.

Finally, in certain cases our products compete primarily against medical
practices that treat a condition without using a medical device, rather than any
particular product (such as autograft tissue as a substitute for the INTEGRA(R)
Dermal Regeneration Template, our duraplasty products, and the NeuraGen(TM)
Nerve Guide). Depending on the product line, we compete on the basis of our
products' features, strength of our sales force or marketing partner,
sophistication of our technology, and cost effectiveness of our solution to the
customer's medical requirements.
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EMPLOYEES

At December 31, 2003, we had approximately 880 regular employees engaged in
production and production support (including warehouse, engineering, and
facilities personnel), quality assurance/quality control, research and
development, regulatory and clinical affairs, sales, marketing, administration
and finance. Except for certain employees at our Biot, France facility, none of
our current employees are subject to a collective bargaining agreement.

Many of our employees, including those holding senior positions in our
regulatory, operations, research and development, and sales and marketing
departments, were recruited from large pharmaceutical or medical technology
companies. Our sales representatives and regional sales managers attend in-depth
product training meetings throughout the year, and our clinical development team
consists of medical professionals who specialize in specific therapeutic areas
that our products serve. We believe that our clinical development team
differentiates us from our competition, as their knowledge and experience as
medical professionals allows them to more effectively educate and train both our
sales force and the customers who use our products. This team is especially
valuable in communicating the clinical benefits of new products.

AVAILABLE INFORMATION

Integra is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended, which we refer to as the "Exchange Act". In accordance
with the Exchange Act, we file annual, quarterly and special reports, proxy
statements and other information with the Securities and Exchange Commission.
You may view our financial information, including the information contained in
this report, and other reports we file with the Securities and Exchange
Commission, on the Internet, without charge as soon as reasonably practicable
after we file them with the Securities and Exchange Commission, in the "SEC
Filings" page of the Investor Relations section of our website at
www.Integra-LS.com. You may also obtain a copy of any of these reports, without
charge, from our investor relations department, 311 Enterprise Drive,
Plainsboro, NJ 08536. Alternatively, you may view or obtain reports filed with
the Securities and Exchange Commission at the SEC Public Reference Room at 450
Fifth Street, N.W. in Washington, D.C. 20549, or at the SEC's Internet site at
www.sec.gov. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of the public reference
facilities.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements in this report, including statements under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," that constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to a number
of risks, uncertainties and assumptions about Integra, including, among other
things:

* general economic and business conditions, both nationally and in our
international markets;
* our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;
* anticipated trends in our business;
* existing and future regulations affecting our business;
* our ability to obtain additional debt and equity financing to fund capital
expenditures and working capital requirements and acquisitions;
* our ability to complete acquisitions and integrate operations
post-acquisition; and
* other risk factors described in the section entitled "Factors That May
Affect Our Future Performance" in this report.

You can identify these forward-looking statements by forward-looking words such
as believe, may, could, will, estimate, continue, anticipate, intend, seek,
plan, expect, should, would and similar expressions in this report.

We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks and uncertainties, the forward-looking events and
circumstances discussed in this report may not occur and actual results could
differ materially from those anticipated or implied in the forward-looking
statements.
-12-

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE

Our Operating Results May Fluctuate.

Our operating results, including components of operating results, such as gross
margin on product sales, may fluctuate from time to time, which could affect our
stock price. Our operating results have fluctuated in the past and can be
expected to fluctuate from time to time in the future. Some of the factors that
may cause these fluctuations include:

* the impact of acquisitions;
* the timing of significant customer orders;
* market acceptance of our existing products, as well as products in
development;
* the timing of regulatory approvals;
* the timing of payments received and the recognition of those payments
as revenue under collaborative arrangements and other alliances;
* changes in the rate of exchange between the U.S. dollar, the euro and
the British pound;
* expenses incurred and business lost in connection with product field
corrections or recalls;
* our ability to manufacture our products efficiently; and
* the timing of our research and development expenditures.

The Industry And Market Segments in Which We Operate Are Highly Competitive,
And We May Be Unable to Compete Effectively with Other Companies.

In general, the medical technology industry is characterized by intense
competition. We compete with established medical technology and pharmaceutical
companies. Competition also comes from early stage companies that have
alternative technological solutions for our primary clinical targets, as well as
universities, research institutions and other non-profit entities. Many of our
competitors have access to greater financial, technical, research and
development, marketing, manufacturing, sales, distribution services and other
resources than we do. Further, our competitors may be more effective at
implementing their technologies to develop commercial products.

Our competitive position will depend on our ability to achieve market
acceptance for our products, develop new products, implement production and
marketing plans, secure regulatory approval for products under development, and
obtain patent protection. We may need to develop new applications for our
products to remain competitive. Technological advances by one or more of our
current or future competitors could render our present or future products
obsolete or uneconomical. Our future success will depend upon our ability to
compete effectively against current technology as well as to respond
effectively to technological advances. Competitive pressures could adversely
affect our profitability. For example, the introduction of a competitively
priced onlay dural graft matrix could reduce the sales, or growth in sales, of
our DuraGen(R) Dural Graft products. We expect that one or more other companies
will introduce such a product within the next two years.

Our largest competitors in the neurosurgery markets are the Medtronic
Neurotechnologies division of Medtronic, Inc., the Codman division of Johnson &
Johnson, the Aesculap division of B. Braun, and the Valleylab division of Tyco
International Ltd. In addition, many of our product lines compete with smaller
specialized companies or larger companies that do not otherwise focus on
neurosurgery. Our plastic and reconstructive surgery business is small compared
to its principal competitors, which include major medical device and wound care
companies such as the ETHICON division of Johnson & Johnson, Smith and Nephew,
Inamed, Mentor, and Zimmer. Our private label products face diverse and broad
competition, depending on the market addressed by the product. Finally, in
certain cases our products compete primarily against medical practices that
treat a condition without using a device, rather than any particular product,
such as autograft tissue as an alternative for the INTEGRA(R) Dermal
Regeneration Template, our duraplasty products, and the NeuraGen(TM) Nerve
Guide.

Our Current Strategy Involves Growth Through Acquisitions, Which Requires Us To
Incur Substantial Costs And Potential Liabilities For Which We May Never Realize
The Anticipated Benefits.

In addition to internal growth, our current strategy involves growth through
acquisitions. Since 1999, we have acquired 17 businesses or product lines at a
total cost of approximately $118 million.

We may be unable to continue to implement our growth strategy, and our strategy
may be ultimately unsuccessful. A significant portion of our growth in revenues
has resulted from, and is expected to continue to result from, the acquisition
of businesses complementary to our own. We engage in evaluations of potential
acquisitions and are in various stages of discussion regarding possible
acquisitions, certain of which, if consummated, could be significant to us. Any
potential acquisitions may result in material transaction expenses, increased
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interest and amortization expense, increased depreciation expense and increased
operating expense, any of which could have a material adverse effect on our
operating results. As we grow by acquisitions, we must integrate and manage the
new businesses to realize economies of scale and control costs. In addition,
acquisitions involve other risks, including diversion of management resources
otherwise available for ongoing development of our business and risks associated
with entering new markets with which our marketing and sales force has limited
experience or where experienced distribution alliances are not available. Our
future profitability will depend in part upon our ability to develop further our
resources to adapt to these new products or business areas and to identify and
enter into satisfactory distribution networks. We may not be able to identify
suitable acquisition candidates in the future, obtain acceptable financing or
consummate any future acquisitions. If we cannot integrate acquired operations,
manage the cost of providing our products or price our products appropriately,
our profitability could suffer. In addition, as a result of our acquisitions of
other healthcare businesses, we may be subject to the risk of unanticipated
business uncertainties or legal liabilities relating to those acquired
businesses for which the sellers of the acquired businesses may not indemnify
us. Future acquisitions may also result in potentially dilutive issuances of
securities.

To Market Our Products under Development We Will First Need To Obtain Regulatory
Approval. Further, If We Fail To Comply With The Extensive Governmental
Regulations That Affect Our Business, We Could Be Subject To Penalties And Could
Be Precluded From Marketing Our Products.

Our research and development activities and the manufacturing, labeling,
distribution and marketing of our existing and future products are subject to
regulation by numerous governmental agencies in the United States and in other
countries. The Food and Drug Administration (FDA) and comparable agencies in
other countries impose mandatory procedures and standards for the conduct of
clinical trials and the production and marketing of products for diagnostic and
human therapeutic use.

Our products under development are subject to FDA approval or clearance prior to
marketing for commercial use. The process of obtaining necessary FDA approvals
or clearances can take years and is expensive and full of uncertainties. Our
inability to obtain required regulatory approval on a timely or acceptable basis
could harm our business. Further, approval or clearance may place substantial
restrictions on the indications for which the product may be marketed or to whom
it may be marketed. Further studies, including clinical trials and FDA
approvals, may be required to gain approval for the use of a product for
clinical indications other than those for which the product was initially
approved or cleared or for significant changes to the product. In addition, for
products with an approved PMA, the FDA requires annual reports and may require
post-approval surveillance programs to monitor the products' safety and
effectiveness. Results of post-approval programs may limit or expand the further
marketing of the product.

Another risk of application to the FDA relates to the regulatory classification
of new products or proposed new uses for existing products. In the filing of
each application, we make a legal judgment about the appropriate form and
content of the application. If the FDA disagrees with our judgment in any
particular case and, for example, requires us to file a PMA application rather
than allowing us to market for approved uses while we seek broader approvals or
requires extensive additional clinical data, the time and expense required to
obtain the required approval might be significantly increased or approval might
not be granted.

Approved products are subject to continuing FDA requirements relating to quality
control and quality assurance, maintenance of records, reporting of adverse
events and product recalls, documentation, and labeling and promotion of medical
devices.

The FDA and foreign regulatory authorities require that our products be
manufactured according to rigorous standards. These regulatory requirements may
significantly increase our production or purchasing costs and may even prevent
us from making or obtaining our products in amounts sufficient to meet market
demand. If a third-party manufacturer or we change our approved manufacturing
process, the FDA may require a new approval before that process may be used.
Failure to develop our manufacturing capability may mean that even if we develop
promising new products, we may not be able to produce them profitably, as a
result of delays and additional capital investment costs. Manufacturing
facilities, both international and domestic, are also subject to inspections by
or under the authority of the FDA. In addition, failure to comply with
applicable regulatory requirements could subject us to enforcement action,
including product seizures, recalls, withdrawal of clearances or approvals,
restrictions on or injunctions against marketing our product or products based
on our technology, and civil and criminal penalties. See
"Business--Regulation--Government Regulation".

Certain Of Our Products Contain Materials Derived From Animal Sources And May
Become Subject To Additional Regulation.

Certain of our products, including the DuraGen(R) Dural Graft products, the
NeuraGen(TM) Nerve Guide, and the INTEGRA(R) Dermal Regeneration Template,
contain material derived from bovine tissue. Products that contain materials
derived from animal sources, including food as well as pharmaceuticals and
-14-

medical devices, are increasingly subject to scrutiny in the press and by
regulatory authorities. Regulatory authorities are concerned about the potential
for the transmission of disease from animals to humans via those materials. This
public scrutiny has been particularly acute in Japan and Western Europe with
respect to products derived from cattle, because of concern that materials
infected with the agent that causes bovine spongiform encephalopathy, otherwise
known as BSE or mad cow disease, may, if ingested or implanted, cause a variant
of the human Creutzfeldt-Jakob Disease, an ultimately fatal disease with no
known cure. Recent cases of BSE discovered in Canada and the United States have
increased awareness of the issue in North America.

We take great care to provide that our products are safe and free of agents that
can cause disease. In particular, the collagen used in the manufacture of our
products is derived only from the deep flexor tendon of cattle from the United
States that are less than 24 months old. The World Health Organization
classifies different types of cattle tissue for relative risk of BSE
transmission. Deep flexor tendon, the sole source of our collagen, is in the
lowest risk category for BSE transmission (the same category as milk, for
example), and is therefore considered to have a negligible risk of containing
the agent that causes BSE (an improperly folded protein known as a prion).
Additionally, we use processes in the manufacturing of our products that are
believed to inactivate prions. Nevertheless, products that contain materials
derived from animals, including our products, may become subject to additional
regulation, or even be banned in certain countries, because of concern over the
potential for prion transmission. Significant new regulation, or a ban of our
products, could have a material effect on our current business or our ability to
expand our business.

The European Union has recently announced that new medical devices containing
tissues of animal origin will have to conform to new requirements, and existing
medical devices containing animal tissue must be re-assessed between April 1,
2004 and September 30, 2004. If the required documentation is not submitted,
received and approved, by September 30, 2004, existing EC Certificates will
become invalid. We plan to submit all documents required for a re-assessment of
our products within the schedule required by the European Union.

In addition, we have been notified that Japan has issued new regulations
regarding medical devices that contain tissue of animal origin. Among other
regulations, Japan may require that the tendon used in the manufacture of
medical devices sold in Japan originate in a country that has never had a case
of BSE. Currently, all of our tendon is sourced from the United States. If we
cannot secure and qualify a source of tendon from a country that has never had a
case of BSE, we may not be permitted to sell our collagen hemostatic agents and
products for oral surgery in Japan after September 2004. We do not currently
sell our dural or skin repair products in Japan.

Lack Of Market Acceptance For Our Products Or Market Preference For Technologies
That Compete With Our Products Could Reduce Our Revenues And Profitability.

We cannot be certain that our current products or any other products that we may
develop or market will achieve or maintain market acceptance. Certain of the
medical indications that can be treated by our devices can also be treated by
other medical devices or by medical practices that do not include a device. The
medical community widely accepts many alternative treatments, and certain of
these other treatments have a long history of use. For example, the use of
autograft tissue is a well-established means for repairing the dermis, and it
competes for acceptance in the market with the INTEGRA(R) Dermal Regeneration
Template.

We cannot be certain that our devices and procedures will be able to replace
those established treatments or that either physicians or the medical community
in general will accept and utilize our devices or any other medical products
that we may develop. For example, we cannot be certain that the medical
community will accept the NeuraGen(TM) Nerve Guide over conventional
microsurgical techniques for connecting severed peripheral nerves.

In addition, our future success depends, in part, on our ability to develop
additional products. Even if we determine that a product candidate has medical
benefits, the cost of commercializing that product candidate may be too high to
justify development. Competitors may develop products that are more effective,
cost less, or are ready for commercial introduction before our products. For
example, our sales of shunt products could decline if neurosurgeons increase
their use of programmable valves and we fail to introduce a competitive product,
or our sales of certain catheters may be adversely affected by the recent
introduction by other companies of catheters that contain anti-microbial agents
intended to reduce the incidence of infection after implantation. If we are
unable to develop additional commercially viable products, our future prospects
could be adversely affected.

Market acceptance of our products depends on many factors, including our ability
to convince prospective collaborators and customers that our technology is an
attractive alternative to other technologies, to manufacture products in
sufficient quantities and at acceptable costs, and to supply and service
sufficient quantities of our products directly or through our distribution
alliances. In addition, limited funding available for product and technology
-15-

acquisitions by our customers, as well as internal obstacles to customer
approvals of purchases of our products, could harm acceptance of our products.
The industry is subject to rapid and continuous change arising from, among other
things, consolidation and technological improvements. One or more of these
factors may vary unpredictably, which could materially adversely affect our
competitive position. We may not be able to adjust our contemplated plan of
development to meet changing market demands.

Our Intellectual Property Rights May Not Provide Meaningful Commercial
Protection For Our Products, Which Could Enable Third Parties To Use Our
Technology Or Very Similar Technology And Could Reduce Our Ability To Compete In
The Market.

Our ability to compete effectively depends in part, on our ability to maintain
the proprietary nature of our technologies and manufacturing processes, which
includes the ability to obtain, protect and enforce patents on our technology
and to protect our trade secrets. We own or have licensed patents that cover
significant aspects of many of our product lines. However, you should not rely
on our patents to provide us with any significant competitive advantage. Others
may challenge our patents and, as a result, our patents could be narrowed,
invalidated or rendered unenforceable. Competitors may develop products similar
to ours that our patents do not cover. In addition, our current and future
patent applications may not result in the issuance of patents in the United
States or foreign countries. Further, there is a substantial backlog of patent
applications at the U.S. Patent and Trademark Office, and the approval or
rejection of patent applications may take several years.

Our Competitive Position Depends, In Part, Upon Unpatented Trade Secrets Which
We May Be Unable To Protect.

Our competitive position is also dependent upon unpatented trade secrets. Trade
secrets are difficult to protect. We cannot assure you that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, that our trade secrets
will not be disclosed, or that we can effectively protect our rights to
unpatented trade secrets.

In an effort to protect our trade secrets, we have a policy of requiring our
employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with us. These agreements provide that, except in specified
circumstances, all confidential information developed or made known to the
individual during the course of their relationship with us must be kept
confidential. We cannot assure you, however, that these agreements will provide
meaningful protection for our trade secrets or other proprietary information in
the event of the unauthorized use or disclosure of confidential information.

Our Success Will Depend Partly On Our Ability To Operate Without Infringing Or
Misappropriating The Proprietary Rights Of Others.

We may be sued for infringing the intellectual property rights of others. In
addition, we may find it necessary, if threatened, to initiate a lawsuit seeking
a declaration from a court that we do not infringe the proprietary rights of
others or that their rights are invalid or unenforceable. If we do not prevail
in any litigation, in addition to any damages we might have to pay, we would be
required to stop the infringing activity or obtain a license. Any required
license may be unavailable to us on acceptable terms, or at all. In addition,
some licenses may be nonexclusive, and allow our competitors to access the same
technology we license. If we fail to obtain a required license or are unable to
design our product so as not to infringe on the proprietary rights of others, we
may be unable to sell some of our products, which could have a material adverse
effect on our revenues and profitability.

It May Be Difficult To Replace Some Of Our Suppliers.

Outside vendors, some of whom are sole-source suppliers, provide key components
and raw materials used in the manufacture of our products. Although we believe
that alternative sources for many of these components and raw materials are
available, any supply interruption in a limited or sole source component or raw
material could harm our ability to manufacture our products until a new source
of supply is identified and qualified. In addition, an uncorrected defect or
supplier's variation in a component or raw material, either unknown to us or
incompatible with our manufacturing process, could harm our ability to
manufacture products. We may not be able to find a sufficient alternative
supplier in a reasonable time period, or on commercially reasonable terms, if at
all, and our ability to produce and supply our products could be impaired. We
believe that these factors are most likely to affect our Camino(R) and
Ventrix(R) lines of intracranial pressure monitors and catheters, which we
assemble using many different electronic parts from numerous suppliers. While we
-16-

are not dependent on sole-source suppliers, if we were suddenly unable to
purchase products from one or more of these companies, we could need a
significant period of time to qualify a replacement, and the production of any
affected products could be disrupted. While it is our policy to maintain
sufficient inventory of components so that our production will not be
significantly disrupted even if a particular component or material is not
available for a period of time, we remain at risk that we will not be able to
qualify new components or materials quickly enough to prevent a disruption if
one or more of our suppliers ceases production of important components or
materials.

If Any Of Our Manufacturing Facilities Were Damaged And/Or Our Manufacturing
Processes Interrupted, We Could Experience Lost Revenues And Our Business Could
Be Seriously Harmed.

We manufacture our products in a limited number of facilities. Damage to our
manufacturing, development or research facilities due to fire, natural disaster,
power loss, communications failure, unauthorized entry or other events could
cause us to cease development and manufacturing of some or all of our products.
In particular, our San Diego, California facility that manufactures our
Camino(R) and Ventrix(R) product line is as susceptible to earthquake damage,
wildfire damage, and power losses from electrical shortages as are other
businesses in the Southern California area. Our silicone manufacturing plant in
Anasco, Puerto Rico is vulnerable to hurricane damage. Although we maintain
property damage and business interruption insurance coverage on these
facilities, we may not be able to renew or obtain such insurance in the future
on acceptable terms with adequate coverage or at reasonable costs.

We May Be Involved In Lawsuits To Protect Or Enforce Our Intellectual Property
Rights, Which May Be Expensive.

In order to protect or enforce our intellectual property rights, we may have to
initiate legal proceedings against third parties, such as infringement suits or
interference proceedings. Intellectual property litigation is costly, and, even
if we prevail, the cost of that litigation could affect our profitability. In
addition, litigation is time consuming and could divert management attention and
resources away from our business. We may also provoke these third parties to
assert claims against us.

We Are Exposed To A Variety Of Risks Relating To Our International Sales And
Operations, Including Fluctuations In Exchange Rates, Local Economic Conditions,
And Delays In Collection Of Accounts Receivable.

We generate significant revenues outside the United States in euros, British
pounds and in U.S. dollar-denominated transactions conducted with customers who
generate revenue in currencies other than the U.S. dollar. For those foreign
customers who purchase our products in U.S. dollars, currency fluctuations
between the U.S. dollar and the currencies in which those customers do business
may have an impact on the demand for our products in foreign countries where the
U.S. dollar has increased in value compared to the local currency.

Because we have operations based in Europe and we generate revenues and incur
operating expenses in euros and British pounds, we experience currency exchange
risk with respect to those foreign currency-denominated revenues and expenses.
In 2003, the cost of products we manufactured in our European facilities or
purchased in foreign currencies exceeded our foreign currency-denominated
revenues. We expect this imbalance to continue into 2004. We currently do not
hedge our exposure to foreign currency risk. Accordingly, a further weakening of
the dollar against the euro and British pound could negatively affect future
gross margins and operating margins.

Currently, we do not use derivative financial instruments to manage foreign
currency risk. As the volume of our business transacted in foreign currencies
increases, we will continue to assess the potential effects that changes in
foreign currency exchange rates could have on our business. If we believe that
this potential impact presents a significant risk to our business, we may enter
into derivative financial instruments to mitigate this risk.

In general, we cannot predict the consolidated effects of exchange rate
fluctuations upon our future operating results because of the number of
currencies involved, the variability of currency exposure and the potential
volatility of currency exchange rates.

Our sales to foreign markets may be affected by local economic conditions,
regulatory or political considerations, the effectiveness of our sales
representatives and distributors, local competition, and changes in local
medical practice. Relationships with customers and effective terms of sale
frequently vary by country, often with longer-term receivables than are typical
in the United States.
-17-

Changes In The Health Care Industry May Require Us To Decrease The Selling Price
For Our Products Or Could Result In A Reduction In The Size Of The Market For
Our Products, Each Of Which Could Have A Negative Impact On Our Financial
Performance.

Trends toward managed care, health care cost containment, and other changes in
government and private sector initiatives in the United States and other
countries in which we do business are placing increased emphasis on the delivery
of more cost-effective medical therapies that could adversely affect the sale
and/or the prices of our products. For example:

* major third-party payors of hospital services, including Medicare,
Medicaid and private health care insurers, have substantially revised
their payment methodologies, which has resulted in stricter standards
for reimbursement of hospital charges for certain medical procedures;
* Medicare, Medicaid and private health care insurer cutbacks could create
downward price pressure on our products;
* numerous legislative proposals have been considered that would result in
major reforms in the U.S. health care system that could have an adverse
effect on our business;
* there has been a consolidation among health care facilities and
purchasers of medical devices in the United States who prefer to limit
the number of suppliers from whom they purchase medical products, and
these entities may decide to stop purchasing our products or demand
discounts on our prices;
* we are party to contracts with group purchasing organizations that
require us to discount our prices for certain of our products and limit
our ability to raise prices for certain of our products, particularly
surgical instruments;
* there is economic pressure to contain health care costs in international
markets;
* there are proposed and existing laws, regulations and industry policies
in domestic and international markets regulating the sales and
marketing practices and the pricing and profitability of companies in
the health care industry; and
* there have been initiatives by third-party payors to challenge the prices
charged for medical products that could affect our ability to sell products
on a competitive basis.

Both the pressures to reduce prices for our products in response to these trends
and the decrease in the size of the market as a result of these trends could
adversely affect our levels of revenues and profitability of sales.

Regulatory Oversight of the Medical Device Industry Might Affect The Manner in
Which We May Sell Medical Devices

There are laws and regulations that regulate the means by which companies in the
health care industry may market their products to health care professionals and
may compete by discounting the prices of their products. Although we exercise
care in structuring our sales and marketing practices and customer discount
arrangements to comply with those laws and regulations, we cannot assure you
that:

* government officials charged with responsibility for enforcing those
laws will not assert that our sales and marketing practices or customer
discount arrangements are in violation of those laws or regulations; or
* government regulators or courts will interpret those laws or regulations
in a manner consistent with our interpretation.

In October 2003 ADVAMED, the principal U.S. trade association for the medical
device industry, promulgated a model "code of conduct" that sets forth standards
by which its members should abide in the promotion of their products. The
ADVAMED Code became effective as of January 1, 2004. In addition, we have in
place policies and procedures for compliance that we believe are as stringent
as, or more stringent than, those set forth in the ADVAMED Code, and we provide
routine training to our sales and marketing personnel on our policies regarding
sales and marketing practices. Nevertheless, we believe that the sales and
marketing practices of our industry will be subject to increased scrutiny from
government agencies.

Our Private Label Business Depends Significantly On Key Relationships With Third
Parties, Which We May Be Unable To Establish And Maintain.
-18-

Our private label business depends in part on our entering into and maintaining
collaborative or alliance agreements with third parties concerning product
marketing, as well as research and development programs. Our most important
alliance is our agreement with the Wyeth BioPharma division of Wyeth for the
development of collagen matrices to be used in conjunction with Wyeth
BioPharma's recombinant bone protein, a protein that stimulates the growth of
bone in humans. Termination of any of our alliances would require us to develop
other means to distribute the affected products affected and could adversely
affect our expectations for the growth of private label products.

Our ability to enter into agreements with collaborators depends in part on
convincing them that our technology can help them achieve their goals and
execute their strategies. This may require substantial time, effort and expense
on our part with no guarantee that a relationship will result. We may not be
able to establish or maintain these relationships on commercially acceptable
terms. Our future agreements may not ultimately be successful. Even if we enter
into collaborative or alliance agreements, our collaborators could terminate
these agreements, or these agreements could expire before meaningful
developmental milestones are reached. The termination or expiration of any of
these relationships could have a material adverse effect on our business.

Much of the revenue that we may receive under these collaborations will depend
upon our collaborators' ability to successfully introduce, market and sell new
products derived from our products. Our success depends in part upon the
performance by these collaborators of their responsibilities under these
agreements. Some collaborators may not perform their obligations when and as we
expect. Thus revenues to be derived from collaborations may vary significantly
over time and be difficult to forecast. Some of the companies we currently have
alliances with or are targeting as potential allies offer products competitive
with our products or may develop competitive production technologies or
competitive products outside of their collaborations with us that could have a
material adverse effect on our competitive position.

In addition, our role in the collaborations is mostly limited to the production
aspects. As a result, we may also be dependent on collaborators for other
aspects of the development, preclinical and clinical testing, regulatory
approval, sales, marketing and distribution of our products. If our current or
future collaborators fail to market our products effectively or to develop
additional products based on our technology, our sales and other revenues could
significantly be reduced.

Finally, we have received and may continue to receive payments from
collaborators that may not be immediately recognized as revenue and therefore
may not contribute to reported profits until further conditions are satisfied.

We May Have Significant Product Liability Exposure And Our Insurance May Not
Cover All Potential Claims.

We are exposed to product liability and other claims in the event that our
technologies or products are alleged to have caused harm. We may not be able to
obtain insurance for the potential liability on acceptable terms with adequate
coverage or at reasonable costs. Any potential product liability claims could
exceed the amount of our insurance coverage or may be excluded from coverage
under the terms of the policy. Our insurance may not be renewed at a cost and
level of coverage comparable to that then in effect.

We Are Subject To Other Regulatory Requirements Relating To Occupational Health
And Safety And The Use Of Hazardous Substances Which May Impose Significant
Compliance Costs On Us.

We are subject to regulation under federal and state laws regarding occupational
health and safety, laboratory practices, and the use, handling and disposal of
toxic or hazardous substances. Our research, development and manufacturing
processes involve the controlled use of certain hazardous materials. Although we
believe that our safety procedures for handling and disposing of those materials
comply with the standards prescribed by the applicable laws and regulations, the
risk of accidental contamination or injury from these materials cannot be
eliminated. In the event of such an accident, we could be held liable for any
damages that result and any related liability could exceed the limits or fall
outside the coverage of our insurance and could exceed our resources. We may not
be able to maintain insurance on acceptable terms or at all. We may incur
significant costs to comply with environmental laws and regulations in the
future. We may also be subject to other present and possible future local,
state, federal and foreign regulations.

The Loss Of Key Personnel Could Harm Our Business.

We believe our success depends on the contributions of a number of our key
personnel, including Stuart M. Essig, our President and Chief Executive
Officer. If we lose the services of key personnel, those losses could
materially harm our business. We maintain key person life insurance on Mr.
Essig.
-19-

ITEM 2. PROPERTIES

Our principal executive offices are located in Plainsboro, New Jersey. Principal
manufacturing and research facilities are located in Plainsboro, New Jersey,
Biot, France, Pembroke, Massachusetts, San Diego, California, Anasco, Puerto
Rico, Andover, England and Mielkendorf, Germany. Our primary distribution
centers are located in Cranbury, New Jersey, Hawthorne, New York, San Antonio,
Texas, Andover, England and Biot, France. In addition, we lease several smaller
facilities to support additional administrative, assembly, and distribution
operations. We lease all of our facilities other than our facilities in Biot,
France and Tuttlingen, Germany, which we own.

All of our manufacturing and distribution facilities are registered with the
FDA. Our facilities are subject to FDA inspection to assure compliance with
Quality System Regulations. We believe that our manufacturing facilities are in
substantial compliance with Quality System Regulations, suitable for their
intended purposes and have capacities adequate for current and projected needs
for existing products. Some capacity of the plants is being converted, with any
needed modification, to meet the current and projected requirements of existing
and future products.

ITEM 3. LEGAL PROCEEDINGS

In July 1996, we filed a patent infringement lawsuit in the United States
District Court for the Southern District of California (the "Trial Court")
against Merck KGaA, a German corporation, Scripps Research Institute, a
California nonprofit corporation, and David A. Cheresh, Ph.D., a research
scientist with Scripps, seeking damages and injunctive relief. The complaint
charged, among other things, that the defendant Merck KGaA willfully and
deliberately induced, and continues willfully and deliberately to induce,
defendants Scripps Research Institute and Dr. Cheresh to infringe certain of our
patents. These patents are part of a group of patents granted to The Burnham
Institute and licensed by us that are based on the interaction between a family
of cell surface proteins called integrins and the arginine-glycine-aspartic acid
("RGD") peptide sequence found in many extracellular matrix proteins. The
defendants filed a countersuit asking for an award of defendants' reasonable
attorney fees.

In March 2000, a jury returned a unanimous verdict in our favor and awarded us
$15,000,000 in damages, finding that Merck KGaA had willfully infringed and
induced the infringement of our patents. The Trial Court dismissed Scripps and
Dr. Cheresh from the case.

In October 2000, the Trial Court entered judgment in our favor and against Merck
KGaA in the case. In entering the judgment, the Trial Court also granted to us
pre-judgment interest of approximately $1,350,000, bringing the total award to
approximately $16,350,000, plus post-judgment interest. Merck KGaA filed various
post-trial motions requesting a judgment as a matter of law notwithstanding the
verdict or a new trial, in each case regarding infringement, invalidity and
damages. In September 2001, the Trial Court entered orders in favor of us and
against Merck KGaA on the final post-judgment motions in the case, and denied
Merck KGaA's motions for judgment as a matter of law and for a new trial.

Merck KGaA and we each appealed various decisions of the Trial Court to the
United States Court of Appeals for the Federal Circuit (the "Circuit Court").
The Circuit Court affirmed the Trial Court's finding that Merck KGaA had
infringed our patents. The Circuit Court also held that the basis of the jury's
calculation of damages was not clear from the trial record, and remanded the
case to the Trial Court for further factual development and a new calculation of
damages consistent with the Circuit Court's decision. We expect the Trial Court
to begin new hearings on damages in the summer of 2004. We have not recorded any
gain in connection with this matter.

In addition to the Merck KGaA matter, we are subject to various claims, lawsuits
and proceedings in the ordinary course of our business, including claims by
current or former employees and distributors and with respect to our products.
In the opinion of management, such claims are either adequately covered by
insurance or otherwise indemnified, or are not expected, individually or in the
aggregate, to result in a material adverse effect on our financial condition.
However, it is possible that our results of operations, financial position and
cash flows in a particular period could be materially affected by these
contingencies.

Three of the Company's French subsidiaries that were acquired from the
neurosciences division of NMT Medical, Inc. received a tax reassessment notice
from the French tax authorities seeking in excess of 1.7 million euros in back
taxes, interest and penalties. NMT Medical, Inc., the former owner of these
entities, has agreed to specifically indemnify Integra against any liability in
connection with these tax claims. In addition, NMT Medical, Inc. has agreed to
provide the French tax authorities with payment of the tax liabilities on behalf
of each of these subsidiaries.
-20-

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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.

ADDITIONAL INFORMATION:

The following information is furnished in this Part I pursuant to Instruction 3
to Item 401(b) of Regulation S-K.

Executive Officers of the Company

The executive officers of Integra are elected annually and serve at the
discretion of the Board of Directors. The only family relationship between any
of the executive officers and our Board of Directors is that Mr. Holtz is the
nephew of Richard E. Caruso, Ph.D., the Chairman of the Board of Directors. The
following information indicates the position and age of our executive officers
as of the date of this report and their previous business experience.

NAME AGE POSITION

Stuart M. Essig has served as President and Chief Executive Officer and a
director of Integra since December 1997. Before joining Integra, Mr. Essig
supervised the medical technology practice at Goldman, Sachs & Co. as a
managing director. Mr. Essig had ten years of broad health care experience
at Goldman Sachs serving as a senior merger and acquisitions advisor to a
broad range of domestic and international medical technology, pharmaceutical
and biotechnology clients. Mr. Essig received an A.B. degree from the
Woodrow Wilson School of Public and International Affairs at Princeton
University and an MBA and a Ph.D. degree in Financial Economics from the
University of Chicago, Graduate School of Business. Mr. Essig also serves on
the Board of Directors of St. Jude Medical Corporation.

Gerard S. Carlozzi is Integra's Executive Vice President and Chief Operating
Officer, and is responsible for the company's marketing, sales, manufacturing,
distribution and research and development functions. Mr. Carlozzi joined Integra
in September 2003, after serving as a consultant to the Company from March 2003
to September 2003. Prior to joining Integra, Mr. Carlozzi had spent 20 years in
the medical device industry. From 1999 to 2003, he was President, Chief
Executive Officer and a director of Bionx Implants, a company focused on the
development of novel biomaterial devices for various surgical specialties. Prior
to 1999, he held various management positions with Synthes USA, Acufex
microsurgical and Infusaid Corporation. He received a BS degree in engineering
and an MBA from Northeastern University. Mr. Carlozzi also serves on the Board
of Directors of Cascade Medical Corporation.

John B. Henneman, III is Integra's Executive Vice President, Chief
Administrative Officer and Secretary, and is responsible for the law department,
regulatory affairs, corporate quality systems, clinical affairs, business
development, human resources, information management and investor relations. Mr.
Henneman was our General Counsel from September 1998 until September 2000 and
our Senior Vice President, Chief Administrative Officer and Secretary from
September 2000 until February 2003. Prior to joining Integra in August 1998, Mr.
Henneman served Neuromedical Systems, Inc., a public company developer and
manufacturer of in vitro diagnostic equipment, in various capacities for more
than four years. From 1994 until June 1997, Mr. Henneman was Vice President of
Corporate Development, General Counsel and Secretary. From June 1997 through
November 1997, he served in the additional capacity of interim Co-Chief
Executive Officer and from December 1997 to August 1998 Mr. Henneman was
Executive Vice President, US Operations, and Chief Legal Officer. Mr. Henneman
received his A.B. from Princeton University and his J.D. from the University of
Michigan Law School.
-21-

David B. Holtz joined Integra as Controller in 1993, served as Vice President,
Finance and Treasurer from March 1997 to January 2001, and was promoted to
Senior Vice President, Finance and Treasurer in February 2001. From August 2002
through October 2003, Mr. Holtz was given responsibility for managing Integra's
European operations to support the transition of our acquisitions in Europe. His
current responsibilities include managing all financial reporting and accounting
functions. Before joining Integra, Mr. Holtz was an associate with Coopers &
Lybrand, L.L.P. in Philadelphia and Cono Leasing Corporation, a private leasing
company. He received a BS degree in Business Administration from Susquehanna
University and has been certified as a public accountant.

Donald R. Nociolo joined Integra as Director of Manufacturing in 1994, served as
Vice President, Operations since March 1997, and was promoted to Senior Vice
President of Operations in May 2000. He is responsible for managing Integra's
worldwide manufacturing and distribution operations. Mr. Nociolo has over
sixteen years experience working in engineering and manufacturing management in
the medical device industry. Six of those years were spent working at ETHICON,
Inc., a division of Johnson & Johnson. Mr. Nociolo received a BS degree in
Industrial Engineering from Rutgers University and an MBA in Industrial
Management from Fairleigh Dickinson University.

Judith E. O'Grady has served as Senior Vice President of Regulatory Affairs,
Quality Assurance and Clinical Affairs, since 1985. Ms. O'Grady has worked in
the areas of medical devices and collagen technology for over 20 years. Prior to
joining Integra, Ms. O'Grady worked for Colla-Tec, Inc., a Marion Merrell Dow
Company. During her career she has held positions with Surgikos, a Johnson &
Johnson Company, and was on the faculty of Boston University College of Nursing
and Medical School. Ms. O'Grady led the team that obtained the FDA approval for
INTEGRA(R) Dermal Regeneration Template, the first regenerative product approved
by the FDA, and has led teams responsible for more than 500 FDA and
international submissions. She received her BS degree from Marquette University
and MSN in Nursing from Boston University.

Robert D. Paltridge joined Integra as National Sales Director in February 1995
and was appointed Vice President, North American Sales in September 1997. He was
promoted to Vice President, Global Sales in October 2002 and Senior Vice
President, Global Sales in January 2003. His responsibilities include managing
the worldwide sales activities of Integra's three sales organizations and
third-party distributors. Mr. Paltridge has 21 years of sales and sales
management experience in the medical device industry. Before joining Integra, he
was National Sales Manager at Strato Medical, a division of Pfizer, Inc. He
received a BS degree in Business Administration from Rutgers University.

Deborah A. Leonetti joined Integra in May of 1997 as Director of Marketing and
was promoted to Vice President, Global Marketing in April 1999. Her
responsibilities include worldwide strategic marketing for all Integra products.
From September 1989 through May 1997, Ms. Leonetti worked for Cabot Medical,
which was later acquired by Circon Corporation, and held positions in sales,
sales training, and marketing. Prior to her experience at Cabot-Circon, Ms.
Leonetti completed fifteen years of clinical practice as a registered nurse at
St. Christopher's Hospital for Children in Philadelphia. She received her
nursing degree from St. Joseph's Hospital School of Nursing and La Salle
University.

PART II

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

Integra's Common Stock trades on The NASDAQ National Market under the symbol
IART. The following table lists the high and low sales prices for our Common
Stock for each quarter for the last two years:

HIGH LOW
2003

Fourth Quarter $ 34.99 $ 27.23
Third Quarter $ 30.65 $ 23.39
Second Quarter $ 29.94 $ 22.49
First Quarter $ 23.72 $ 15.66

2002

Fourth Quarter $ 18.99 $ 12.06
Third Quarter $ 21.80 $ 14.30
Second Quarter $ 29.00 $ 17.35
First Quarter $ 33.50 $ 24.61

-22-

For purposes of calculating the aggregate market value of the shares of voting
stock of Integra held by non-affiliates, as shown on the cover page of this
report, we have assumed that all outstanding shares not held by our directors
and executive officers and stockholders owning 10% or more of outstanding shares
were held by non-affiliates. However, this should not be deemed to constitute an
admission that any such persons are, in fact, affiliates of Integra. Further
information concerning ownership of the Integra's voting stock by executive
officers, directors and principal stockholders will be included in our
definitive proxy statement to be filed with the Securities and Exchange
Commission.

We have not paid any cash dividends on our common stock since our formation. Any
future determinations to pay cash dividends on the common stock will be at the
discretion of our Board of Directors and will depend upon our results of
operations and financial condition and other factors deemed relevant by the
Board of Directors.

The number of stockholders of record as of March 2, 2004 was approximately 600,
which includes stockholders whose shares were held in nominee name. The number
of beneficial stockholders at that date was over 5,000.

ITEM 6. SELECTED FINANCIAL DATA

The information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and related notes included elsewhere in
this report. We have acquired numerous businesses and product lines during the
previous five years. As a result of these acquisitions, the consolidated
financial results and balance sheet data for certain of the periods presented
below may not be directly comparable.

-23-

(1) In 2003, we recorded $11.0 million of other revenue related to the
acceleration of the recognition of unused minimum purchase payments and
unamortized license fee revenue from ETHICON following the termination of
the supply distribution and collaboration agreement in December 2003. We
also recorded a $2.0 million gain in other income associated with a related
termination payment received from ETHICON.
(2) We recorded the following significant special items in operating expenses:
$1.1 million of expenses related to the closure of our San Diego research
center, $0.4 million of acquired in-process research and development and a
$2.0 million donation to the Integra Foundation in 2003; $2.3 million of
acquired in-process research and development charges recorded in connection
with acquisitions in 2002; a $13.5 million stock-based compensation charge
incurred in connection with the extension of the employment of our
President and Chief Executive Officer in 2000; and $2.5 million in fair
value inventory charges and $1.0 million in severance costs related to
acquisitions in 1999.
(3) In 2002 and 2001, respectively, Integra recognized a $20.4 million and
$11.5 million deferred income tax benefit primarily related to the
reduction of a portion of the valuation allowance recorded against its
deferred tax assets. In 1999, Integra recognized a $1.8 million deferred
income tax benefit from the reduction of the deferred tax liability
recorded in the NeuroCare acquisition to the extent that consolidated
deferred tax assets were generated subsequent to the acquisition.
(4) In August 2001, we issued 4,747,500 shares of common stock at $25.50 per
share in a follow-on public offering. The net proceeds generated by the
offering, after expenses, were $113.4 million. We subsequently used a
portion of these proceeds to repay outstanding indebtedness totaling $9.3
million, for which we recorded a $256,000 loss on the early retirement of
debt.
(5) As the result of the adoption of SEC Staff Accounting Bulletin No. 101
"Revenue Recognition" (SAB 101), we recorded a $470,000 cumulative effect
of an accounting change to defer a portion of a nonrefundable, up-front fee
received and recorded in other revenue in 1998. The cumulative effect of
this accounting change was measured as of January 1, 2000. As a result of
this accounting change, other revenue in 2003, 2002, 2001 and 2000 includes
$112,000 of amortization of the amount deferred as of January 1, 2000. Pro
forma data reflects the amounts that would have been reported if SAB 101
had been retroactively applied.
(6) In 2003, we issued $120.0 million of 2.5% contingent convertible
subordinated notes due 2008. The net proceeds generated by the notes, after
expenses, were $115.9 million. The notes are convertible into approximately
3.5 million shares.

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

The following discussion and analysis of our financial condition and results of
operations should be read together with the selected consolidated financial data
and our financial statements and the related notes appearing elsewhere in this
report. This discussion and analysis contains forward-looking statements that
involve risks, uncertainties and assumptions. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including but not limited to those under the heading
"Factors That May Affect Our Future Performance".

Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and other
provisions of the Securities Exchange Act of 1934, as amended, define and
prescribe the conditions for the use of certain non-GAAP financial information.
In Management's Discussion and Analysis of Financial Condition and Results of
Operations, we provide information regarding growth in product revenues
excluding recently acquired product lines, which is a non-GAAP financial
measure. A reconciliation of this non-GAAP financial measure to the most
comparable GAAP measure is provided in this annual report.

This non-GAAP financial measure should not be relied upon to the exclusion of
GAAP financial measures. Management believes that this non-GAAP financial
measure constitutes important supplemental information to investors which
reflects an additional way of viewing aspects of our operations that, when
viewed with our GAAP results and the accompanying reconciliations, provides a
more complete understanding of factors and trends affecting our ongoing business
and operations. Management strongly encourages investors to review our financial
statements and publicly-filed reports in their entirely and to not rely on any
single financial measure. Because non-GAAP financial measures are not
standardized, it may not be possible to compare these financial measures with
other companies' non-GAAP financial measures having the same or similar names.

GENERAL

Integra develops, manufactures, and markets medical devices for use in
neuro-trauma, neurosurgery, plastic and reconstructive surgery, and general
surgery. Our business is organized into product groups and distribution
channels. Our product groups include implants and other devices for use in the
operating room, monitoring systems for the measurement of various parameters in
tissue (such as pressure, temperature, and oxygen), hand-held and ultrasonic
surgical instruments, and private label products that we manufacture for other
medical device companies.
-24-

Our distribution channels include a sales organization that we employ to call on
neurosurgeons, another employed sales force to call on plastic and
reconstructive surgeons, and networks of third-party distributors that we
manage. We invest substantial resources and management effort to develop our
sales organizations, and we believe that we compete very effectively in this
aspect of our business.

We manufacture most of the operating room, monitoring and private label products
that we sell in various plants located in the United States, Puerto Rico,
France, the United Kingdom and Germany. We also manufacture the ultrasonic
surgical instruments that we sell, but we source most of our hand-held surgical
instruments through specialized third-party vendors.

We believe that we have a particular advantage in the development, manufacture
and sale of specialty tissue repair products derived from bovine collagen. We
develop and build these products in our manufacturing facility in Plainsboro,
New Jersey. Taken together, these products accounted for approximately 27%, 32%
and 32% of product revenues in the years ended December 31, 2003, 2002 and 2001,
respectively.

We manage these multiple product groups and distribution channels on a
centralized basis. Accordingly, we report our financial results under a single
operating segment - the development, manufacturing, and distribution of medical
devices.

Our objective is to build a customer-focused and profitable medical device
company by developing or acquiring innovative medical devices and other products
to sell through our sales channels. Our strategy therefore entails substantial
growth in product revenues both through internal means - through launching new
and innovative products and selling existing products more intensively - and by
acquiring existing businesses or already successful product lines.

We aim to achieve this growth in revenues while maintaining strong financial
results. While we pay attention to any meaningful trend in our financial
results, we pay particular attention to measurements that tend to support the
view that our profitability can grow for a period of years. These measurements
include revenue growth from products developed internally or acquired more than
a year before the reporting period in question, gross margins on products
revenues, which we hope to increase to more than 65% over a period of several
years, operating margins for the entire company, which we hope to increase
substantially from the level we reported in 2003, and earnings per fully diluted
share of common stock.

ACQUISITIONS

Our strategy for growing our business includes the acquisition of complementary
product lines and companies. Our recent acquisitions of businesses, assets and
product lines may make our financial results for the year ended December 31,
2003 not directly comparable to those of the corresponding prior year periods.
Since the beginning of 2001, we have acquired the following businesses, assets
and product lines:

In December 2003, we acquired the assets of Reconstructive Technologies, Inc.
for $400,000 in cash and an agreement to make future payments based on product
sales. Reconstructive Technologies is the developer of the Automated Cyclic
Expansion System (ACE System(TM)), a tissue expansion device. As the ACE system
is not yet approved, we recorded an in-process research and development charge
in connection with this acquisition. Once approved, we plan to market the system
through our plastic and reconstructive sales force.

In November 2003, we acquired all of the outstanding capital stock of Spinal
Specialties, Inc. from I-Flow Corporation for approximately $6.0 million in
cash, subject to a working capital adjustment. Spinal Specialties assembles and
sells custom kits and products for chronic pain management, including the
OsteoJect(TM) Bone Cement Delivery System and the ACCU-DISC(TM) Pressure
Monitoring System. Spinal Specialties markets its products to anesthesiologists
and interventional radiologists through an in-house telemarketing team and a
network of distributors. We report sales of Spinal Specialties products as
instrument revenues.

In August 2003, we acquired the assets of Tissue Technologies, Inc., the
manufacturer and distributor of the UltraSoft(TM) line of facial implants for
soft tissue augmentation of the facial area. We market the UltraSoft products
directly to cosmetic and reconstructive surgeons through our plastic and
reconstructive surgery sales force.

In March 2003, we