INTEGRA LIFESCIENCES HOLDINGS CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

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

For the fiscal year ended December 31, 2004

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

For the transition period from to

COMMISSION FILE NO. 0-26224

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

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

311 ENTERPRISE DRIVE
PLAINSBORO, NEW JERSEY 08536
- ------------------------------- ---------------------
(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

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, 2004, the aggregate market value of the registrant's common stock
held by non-affiliates was approximately $632,254,000, 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
11, 2005 was 29,311,367.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant's definitive proxy statement relating to its
scheduled May 17, 2005 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, 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 $229.8 million, a compound annual growth rate of
40%, and we have broadened our product offerings to include more than 15,000
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 Regeneration Matrix, the DuraGen Plus(TM)
Adhesion Barrier Matrix, the NeuraGen(TM) Nerve Guide, the NeuraWrap(TM) Nerve
Protector, the INTEGRA(R) Dermal Regeneration Template, and the INTEGRA(TM)
Bilayer Matrix and INTEGRA(TM) Matrix Wound Dressings. In addition, we offer a
full range of medical devices that include 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,
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 become a leading provider of products
used in the diagnosis, monitoring and treatment of chronic diseases and acute
injuries and have become a leading provider of surgical instruments. We focus on
cranial, spinal, peripheral nervous system and small bone and joint injuries, as
well as the repair and reconstruction of soft tissue, such as dermis. We believe
that additional growth potential exists through the following:

o expanding our product portfolio and market reach through additional
acquisitions;

o increasing the penetration of our existing products into closely
related markets, such as the ear, nose, throat (ENT), maxillofacial,
extremities and spine markets;

o continuing the development and promotion of innovative new products,
such as our Dura Gen dural repair and anti-adhesion products, the
NeuraGen(TM) Nerve Guide, the NeuraWrap(TM) Nerve Protector, the
NeuroSensor(R) Cerebral Blood Flow Monitoring System and the LICOX(R)
Brain Tissue Oxygen Monitoring System; and

o expanding our sales force and product offerings focused on orthopedic
foot and ankle, podiatric and reconstructive surgeons.

ADDITIONAL STRATEGIC ACQUISITIONS. Since 1999 we have completed more than twenty
acquisitions focused primarily on our neurosurgical product lines,
reconstructive surgery, surgical instrumentation and orthopedic surgery. 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, the INTEGRA(TM) Bilayer Matrix and
INTEGRA(TM) Matrix Wound Dressings, the DuraGen(R) Dural Graft Matrix, the
DuraGen Plus(TM) Dural Regeneration Matrix, the DuraGen Plus(TM) Adhesion
Barrier Matrix, the NeuraGen(TM) Nerve Guide, the NeuraWrap(TM) Nerve Protector,
Biomend(R) and Biomend(R) Extend Absorbable Collagen Membranes 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.

PRODUCT GROUPS, MARKETING AND SALES

Our business is organized into product groups and distribution channels. Our
product groups include Monitoring Products, Implants, Instruments and Private
Label Products. Our distribution channels include two direct sales organizations
(Integra NeuroSciences and Integra 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:

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:

(1) Not available for sale in the United States

(2) No-React is a registered trademark of Shelhigh, Inc.

(3) Mayfield is a registered trademark of SM USA, Inc., a wholly owned
subsidiary of Schaerer Mayfield USA, Inc.

(4) BioPatch is a registered trademark of Johnson & Johnson

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.

We expect to introduce the NeuroSensor(R) Cerebral Blood Flow Monitoring System
in the first half of 2005. This 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 AND NEUROLOGICAL SUPPLIES. 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 are caused by the sudden change in how the cells of the brain send
electrical signals to each other. The neurosurgeon uses the electrodes in
conjunction with an electroencephalography video monitor to determine if a
patient is a viable candidate for 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 sell these products in
the United States through our Integra NeuroSciences sales force.

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.

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IMPLANTS

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 DuraGen(R) Dural Graft and DuraGen Plus(TM) Dural Regeneration Matrices are
absorbable collagen products indicated for the repair of the dura mater
surrounding the brain and spine. The worldwide market for dural repair,
including cranial and spinal applications, is estimated to be $120 million.

The DuraGen Plus(TM) Adhesion Barrier Matrix is an absorbable collagen product,
which is CE marked in the European Union as a barrier against adhesions
following spinal and cranial surgery and for restoration of the dura mater. We
estimate that the total worldwide market for treatment of spinal adhesions
exceeds $300 million. The DuraGen Plus(TM) Adhesion Barrier Matrix is not
approved for sale in the United States.

We believe that the DuraGen(R) Dural Graft and DuraGen Plus(TM) Dural
Regeneration Matrices, as well as the DuraGen Plus(TM) Adhesion Barrier Matrix,
address the shortcomings of other methods for repairing the dura mater. Clinical
trials have shown our DuraGen(R) and DuraGen Plus(TM) 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) and DuraGen Plus(TM)
Matrices and replaces them 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(R) 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.

SKIN REPLACEMENT AND ENGINEERED WOUND DRESSINGS. Our skin replacement products
address the market need created by severe burns, reconstructive surgery, trauma
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 is
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 a Section 510(k) clearance for the sale of a related product,
INTEGRA(TM) Bilayer 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) Bilayer 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) Bilayer Matrix Wound Dressing through our Reconstructive surgery
sales organization in the United States and parts of Western Europe and through
a network of distributors elsewhere.

In 2004, we received FDA approval and introduced the INTEGRA(R) Dermal
Regeneration Template - Terminally Sterilized (IDRT-TS). We also introduced the
INTEGRA(TM) Matrix Wound Dressing. IDRT-TS is a terminally sterilized version of
the INTEGRA(R) Dermal Regeneration Template. Although functionally the same as
the INTEGRA(R) Dermal Regeneration Template, IDRT-TS does not require
refrigeration and is not stored in alcohol,

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which simplifies considerably the preparation and handling of the INTEGRA
product in the operating room. The INTEGRA(TM) Matrix Wound Dressing is a single
layer version of our advanced wound care product line, which is indicated for
the management of partial and full-thickness soft tissue wounds.

REPAIR AND PROTECTION 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 worldwide
market for the repair of severed and damaged peripheral nerves to be $110
million.

The NeuraGen(TM) Nerve Guide and the NeuraWrap(TM) Nerve Protector are
absorbable collagen implants for the repair and protection of severed and
injured peripheral nerves. The NeuraGen(TM) product, used in the repair of
severed peripheral nerves, is a collagen tube designed to provide an 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. The NeuraWrap(TM)
product, designed for the treatment of injured, compressed or scarred nerves,
provides a protective environment for nerve healing, serving as an interface
between damaged nerves and surrounding tissue.

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 inside the head to
increase. Hydrocephalus often is present at birth, but may also result from
other causes, including 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 greater than 50%
of total cerebrospinal fluid shunt sales address birth-related hydrocephalus,
while the remainder 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 $150 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 negatively affected, and may
continue to negatively affect, the sales of our shunt products.

In 2004, we introduced the NPH(TM) Low Flow Hydrocephalus Valve that regulates
the flow of cerebrospinal fluid out of the brain, rather than the pressure
created by cerebrospinal fluid inside the head. Designed specifically to meet
the needs of patients with normal pressure hydrocephalus (NPH), the NPH(TM)
Valve controls cerebrospinal fluid flow at a lower rate than Integra's other
flow-control valves. 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. As
many as 10% of all patients with symptoms of dementia have NPH. While the
symptoms associated with NPH can intensify over time if the condition is left
untreated, the dementia associated with NPH can be reversed if treated properly.
While shunting is the preferred treatment method for patients diagnosed with
NPH, only approximately 5% of those with NPH are currently treated with a
surgically implanted shunt. Based on these current treatment statistics, we
estimate that the market opportunity for shunt systems designed to treat NPH is
approximately $35 million. Certain reports estimate that approximately 20% of
total cerebrospinal fluid shunt sales address normal pressure hydrocephalus.
Based on the NPH population as a whole, the potential market opportunity exceeds
$500 million.

SMALL BONE AND JOINT FIXATION DEVICES AND INSTRUMENTS. Our line of Newdeal foot
and ankle surgery devices address the reconstructive and fracture repair portion
of the orthopedic market. The Newdeal line of implants include a wide range of
products for the forefoot, the mid-foot and the hind foot, including the Bold(R)
Screw, the

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Uniclip(R) Compression Staple, the Hallu-Fix(R) plate system and the HINTEGRA(R)
total ankle prosthesis. These implants and the instruments used to implant them
are specifically designed for foot and ankle surgery. We estimate that the
current Newdeal products address an approximately $500 million worldwide market.

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 alone. Our
Selector(R) Integra Ultrasonic Aspirator, Dissectron(R) Ultrasonic Surgical
Aspirator and Sonotom(R) Ultrasonic Surgical Aspirator systems address surgeons'
needs for the surgical fragmentation and removal of malignant and non-malignant
tumors and other tissue on a worldwide basis.

The Selector(R) Integra Ultrasonic Aspirator, Dissectron(R) Ultrasonic Surgical
Aspirator and Sonotom(R) Ultrasonic Surgical Aspirator systems use very high
frequency sound waves to ablate 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. The Selector(R) product is indicated for use in general,
gynecological, urological, plastic and reconstructive, orthopedic, thoracic and
thorascopic surgery procedures. We offer the Dissectron(R) and Sonotom(R)
products only outside the United States.

The Elektrotom(R), offered only outside the United States, is an electrosurgery
system used to cut and coagulate selected tissue, automatically regulating and
adapting the power required for the target tissue. The system is available with
both monopolar and bipolar handpieces and accessories.

CRANIAL STABILIZATION AND BRAIN RETRACTION SYSTEMS. The MAYFIELD(R) Headrest
System is a market leader in cranial stabilization equipment. We work closely
with surgeons and other health care providers throughout the world to develop
unique cranial stabilization products.

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
and customer service.

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 R&B Redmond(TM) 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 under the Padgett Instruments(TM) brand
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 Padgett 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.

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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) 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(TM) Lumbar Tapered
Fusion Device and the INTER FIX and INTER FIX Threaded Fusion Devices, the
InFUSE(TM) Bone Graft is indicated to treat certain types of spinal degenerative
disc disease, a common cause of low back pain. InFUSE received a new PMA
Approval from the FDA in 2004 for the treatment of open, acute tibial shaft
fractures.

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 Holdings, Inc.

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 and a wide range of absorbable collagen products
for hemostasis.

DISTRIBUTION CHANNELS

We sell our products through various direct sales forces and 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, Ventrix and Neurosensor monitoring lines, cranial access kits, external
ventricular and lumbar monitoring and drainage products and epilepsy
electrodes), our neurosurgical operating room products (including the
DuraGen(R), DuraGen Plus(TM), EnDura(TM) and NeuraGen(TM) products, the NPH(TM)
Low Flow Hydrocephalus Valve and the Selector Integra 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(TM) sales
and marketing infrastructure in the United States and in parts of Europe and our
distribution network elsewhere.

RECONSTRUCTIVE SURGERY. Our reconstructive surgery sales and marketing
organization in the United States and Europe consists of approximately 50
professionals, including direct salespeople, sales management, clinical
educators and marketing managers. This sales and marketing organization sells
the Newdeal line of orthopedic implants, devices and instruments, the INTEGRA(R)
Dermal Regeneration Template, the INTEGRA(TM) Bilayer Matrix Wound Dressing, the
NeuraGen(TM) Nerve Guide, the NeuraWrap(TM) Nerve Protector, Padgett dermatomes
and meshers, and a wide variety of high quality surgical instruments and
implants to orthopedic surgeons, podiatric surgeons, trauma 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 a 20-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

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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.

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 $14.1 million,
$12.8 million and $11.5 million in 2004, 2003 and 2002, respectively, on
research and development activities. The 2004 amount includes a $1.4 million
milestone payment relating to the completion of certain development activities
for an advanced neuromonitoring system and a $0.5 licensing fee paid for the
development of a data acquisition system to support the integration of our
advanced monitoring products. The 2003 and 2002 amounts include $400,000 and
$2.3 million, respectively, of acquired in-process research and development
charges 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 and $3.5 million in 2003 and
2002, 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, the NeuraWrap(TM) Nerve Protector, the DuraGen
Plus(TM) Dural Regeneration Matrix, the DuraGen Plus(TM) Adhesion Barrier Matrix
(CE Approved), the INTEGRA(R) Dermal Regeneration Template - TS and the
INTEGRA(TM) Matrix Wound Dressing.

We regularly review our research and development programs to ensure that they
remain consistent with and supportive of our growth strategies.

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 a 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.

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

9

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, certain supplemental PMA applications and other types of
FDA submissions. 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 245 Premarket Notification 510(k)
clearances, five approved PMA applications and 57 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 and ISO 13485 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 our
facilities annually to verify our compliance with these standards. In 2004, 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 currently export medical devices manufactured in the
United States that have not been approved by the FDA.

OTHER UNITED STATES REGULATORY REQUIREMENTS

In addition to the regulatory framework for product approvals, we are and may be
subject to regulation under federal

10

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), Bold(R), BUDDE(R), CALCANEA(R), Camino(R),
CollaCote(R), CollaPlug(R), CollaStat(TM), CollaTape(R), Dissectron(R),
DuraGen(R), DuraGen Plus(TM), Elektrotom(R), EquiFlow(R), Hallu-Fix(R),
Helistat(R), Helitene(R), Heyer-Schulte(R), HINTEGRA(R), INTEGRA(TM),
INTEGRA(TM) Bilayer Matrix Wound Dressing, INTEGRA(R) Dermal Regeneration
Template, Integra NeuroSciences(TM), Integra NeuroSupplies(TM), Integra
Supplies(TM), JARIT(R), LICOX(R), LPV(R), Moni-Torr(R), NeuraGen(TM),
NeuraWrap(TM), Neurosensor(R), Orbis-Sigma(R), Osteoject(R), Padgett
Instruments, Inc(R), Pudenz(TM), Redmond(TM), Ruggles(TM), Selector(R),
Sonotom(R), Spetzler(R), Spin(R), Spinal Specialties(R), Sundt(TM), Uniclip(R),
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 reconstructive surgery are Smith and Nephew plc,
LifeCell Corporation, Organogenesis Inc., Wright Medical Group, Inc., the DePuy
division of Johnson & Johnson and Synthes, Inc.

We believe that we are the second largest re-usable surgical instrument company
in the United States. The largest re-usable instrument company is V. Mueller, a
division of Cardinal Healthcare. In addition, the Codman division of Johnson &
Johnson and many smaller instrument companies compete with both re-usable and
disposable 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, the NeuraGen(TM) Nerve
Guide and NeuraWrap(TM) Nerve Protector). Depending on the product line, we
compete on the basis of our products' features, strength of our sales

11

force or marketing partner, sophistication of our technology and cost
effectiveness of our solution to the customer's medical requirements.

EMPLOYEES

At December 31, 2004, we had approximately 922 full-time employees and 214
temporary 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
facilities in Belgium, France and Germany, 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

We are 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 us including, among other things:

o general economic and business conditions, both nationally and in our
international markets;

o our expectations and estimates concerning future financial performance,
financing plans and the impact of competition;

o anticipated trends in our business;

o existing and future regulations affecting our business;

o our ability to obtain additional debt and equity financing to fund
capital expenditures and working capital requirements and acquisitions;

o physicians' willingness to adopt our recently launched and planned
products and our ability to secure regulatory approval for products in
development;

o our ability to protect our intellectual property, including trade
secrets;

o our ability to complete acquisitions, integrate operations
post-acquisition and maintain relationships with customers of acquired
entities;

o work stoppages at our facilities; and

o 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.

12

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.

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:

o the impact of acquisitions;

o the timing of significant customer orders;

o market acceptance of our existing products, as well as products in
development;

o the timing of regulatory approvals;

o the timing of payments received and the recognition of those payments
as revenue under collaborative arrangements and other alliances;

o changes in the rate of exchange between the U.S. dollar, the euro and
the British pound;

o expenses incurred and business lost in connection with product field
corrections or recalls;

o our ability to manufacture our products efficiently; and

o the timing of our research and development expenditures.

NON-CASH COMPENSATION CHARGES MAY AFFECT OUR FUTURE EARNINGS.

In December 2004, the Financial Accounting Standards Board issued Statement No.
123 (revised 2004), "Share-Based Payment," which is a revision of Statement No.
123, "Accounting for Stock-Based Compensation." Statement 123(R) replaces APB
Opinion No. 25, "Accounting for Stock Issued to Employees". Statement 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
value.

Statement 123(R) must be adopted no later than July 1, 2005, and we expect to
adopt Statement 123(R) on July 1, 2005. For purposes of disclosing pro forma
financial results in our financial statements as if compensation cost for our
stock option plans had been determined based on the fair value at the grant
consistent with the provisions of Statement No. 123, we historically estimated
the fair value of stock options granted prior to October 1, 2004 using the
Black-Scholes valuation model. However, we estimated the pro forma additional
compensation expense related to all options granted on or after October 1, 2004
using a binomial distribution model. Management believes that the binomial
distribution model is preferable to the Black-Scholes model because the binomial
distribution model is a more flexible model that considers the impact of
non-transferability, vesting and forfeiture provisions in the valuation of
employee stock options. Because Statement 123(R) prohibits pro forma footnote
disclosure as an alternative to financial statement recognition, management is
currently evaluating the potential impact that Statement 123(R) will have on our
future results of operations. Previous estimates of option values using the
Black-Scholes method may not be indicative of results from applying the binomial
distribution model for valuing future option grants.

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. 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

13

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, two of our largest competitors have recently
introduced an onlay dural graft matrix, and other companies may be preparing to
introduce similar products. The introduction of such products could reduce the
sales, growth in sales and profitability of our duraplasty products, including
our DuraGen(R), DuraGen Plus(TM) and EnDura(TM) product lines, which are among
our largest and fastest growing products.

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 reconstructive surgery business is small compared to its
principal competitors, which include major medical device and wound care
companies such as Smith and Nephew plc, LifeCell Corporation and Organogenesis
Inc., as well as companies focused on foot and ankle surgeons including Wright
Medical Group, Inc., the DePuy division of Johnson & Johnson and Synthes, Inc.
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 20 businesses or product lines at a
total cost of approximately $213 million.

We may be unable to continue to implement our growth strategy, and our strategy
ultimately may be 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
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, regulatory matters 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

14

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 we or a third-party manufacturer 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.

We are also subject to the regulatory requirements of countries outside of the
United States where we do business. For example, Japan is in the process of
reforming its medical device regulations. A recent amendment to Japan's
Pharmaceutical Affairs Law goes into effect on April 1, 2005. New regulations
and requirements will exist for obtaining approval of medical devices, including
new requirements governing the conduct of clinical trials, the manufacturing of
products and the distribution of products in Japan. Significant resources also
may be needed to comply with the extensive auditing of all manufacturing
facilities of our company and our vendors by the Ministry of Health, Labor and
Welfare in Japan to comply with the amendment to the Pharmaceutical Affairs Law.
These new regulations may affect our ability to obtain approvals of new products
as well as maintain the certain businesses in Japan. Sales in Japan accounted
for approximately $3.1 million of our revenues in 2004.

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 Matrix, DuraGen
Plus(TM) Dural Regeneration Matrix and DuraGen Plus(TM) Adhesion Barrier Matrix
products, the NeuraGen(TM) Nerve Guide, the NeuraWrap(TM) Nerve Protector, the
INTEGRA(R) Dermal Regeneration Template, the INTEGRA(TM) Bilayer Matrix and
INTEGRA(TM) Matrix Wound Dressing, the Helistat(R)/Helitene(R) Absorbable
Collagen Hemostatic Agents, our Absorbable Collagen Sponges, the CollaCote(R),
CollaTape(R) and CollaPlug(R) Absorbable Wound Dressings and the BioMend(R) and
BioMend(R) Extend Absorbable Collagen Membranes, contain material derived from
bovine tissue. Products that contain materials derived from animal sources,
including food as well as pharmaceuticals and 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 in cattle 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

15

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).
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
adverse effect on our current business or our ability to expand our business.

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, we purchase our tendon from the United States and have
qualified a source of tendon from New Zealand, a country which has never had a
case of BSE. If we cannot continue to qualify a source of tendon from New
Zealand or another country that has never had a case of BSE, we will not be
permitted to sell our collagen hemostatic agents and products for oral surgery
in Japan. 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
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
aspects of certain 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

16

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 usually takes from 18 to 24 months.

OUR COMPETITIVE POSITION DEPENDS, IN PART, UPON UNPATENTED TRADE SECRETS WHICH
WE MAY BE UNABLE TO PROTECT.

Our competitive position also depends 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 require 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 for the proprietary
rights involved. 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 the following products that
we manufacture:

o our collagen-based products, such as INTEGRA(R) Dermal Regeneration
Template, DuraGen(R) Dural Graft Matrix and DuraGen Plus(TM) Dural
Regeneration products, and our Absorbable Collagen Sponges;

o our products made from silicone, such as our neurosurgical shunts and
drainage systems and hemodynamic shunts; and

o products which use many different electronic parts from numerous
suppliers, such as our Camino(R), Ventrix(R) and NeuroSensor(TM) lines
of intracranial monitors and catheters.

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.

17

IF ANY OF OUR MANUFACTURING FACILITIES WERE DAMAGED AND/OR OUR MANUFACTURING OR
BUSINESS 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.

In addition, we are implementing in several stages over several years an
enterprise business system for use in all of our facilities. This system will
replace several systems on which we now rely. We have outsourced our product
distribution function in the United States and are also planning to outsource
our European product distribution function. A delay or other problem with the
system or in our implementation schedule for either of these initiatives could
have a material adverse effect on our operations.

WE MAY BE INVOLVED IN LAWSUITS TO PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY BE EXPENSIVE.

To protect or enforce our intellectual property rights, we may have to initiate
legal proceedings, such as infringement suits or interference proceedings,
against third parties. 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 and 2004, 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.
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 operating
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 also may be affected by local economic conditions,
legal, 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.

18

CHANGES IN THE HEALTH CARE INDUSTRY MAY REQUIRE US TO DECREASE THE SELLING PRICE
FOR OUR PRODUCTS OR MAY REDUCE THE SIZE OF THE MARKET FOR OUR PRODUCTS, EITHER
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:

o major third-party payors of hospital services and hospital outpatient
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;

o Medicare, Medicaid and private health care insurer cutbacks could
create downward price pressure on our products;

o 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;

o 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;

o 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;

o there is economic pressure to contain health care costs in
international markets;

o 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

o 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:

o 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

o government regulators or courts will interpret those laws or
regulations in a manner consistent with our interpretation.

In January 2004, ADVAMED, the principal U.S. trade association for the medical
device industry, put in place a model "code of conduct" that sets forth
standards by which its members should abide in the promotion of their products.
We have in place policies and procedures for compliance that we believe are at
least as stringent as 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.

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

19

bone in humans. Termination of any of our alliances would require us to develop
other means to distribute the affected products and could adversely affect our
expectations for the growth of private label products.

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.

ITEM 2. PROPERTIES

Our principal executive offices are located in Plainsboro, New Jersey. Principal
manufacturing and research facilities are located in Plainsboro, New Jersey,
Cincinnati, Ohio, San Diego, California, Anasco, Puerto Rico, Andover, England,
Biot, France, Lyon, France, Mielkendorf, Germany and Tuttlingen, Germany. Our
primary distribution centers are located in Sparkes, Nevada, Hawthorne, New
York, Andover, England, Biot, France, Vilvoorde, Belgium and Lyon, 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 Andover, England, 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.

20

In March 2000, a jury returned a unanimous verdict in our favor and awarded us
$15.0 million 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 $1.4 million, bringing the total award to
approximately $16.4 million, 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"). In
June 2003, 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. Merck KgaA
filed a writ for certiorari with the United States Supreme Court seeking review
of the Circuit Court's decision, and the Supreme Court granted the writ in
January 2005. Oral arguments are scheduled for April 2005, and we expect the
Supreme Court to render a decision before the end of the current term.

In September 2004, the Trial Court ordered Merck KgaA to pay us $6.4 million in
damages following the Circuit Court's order. Further enforcement of the Trial
Court's order has been stayed pending the decision of the Supreme Court.

We have not recorded any gain in connection with this matter, pending final
resolution and completion of the appeals process.

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 our 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. Following objection from NMT Medical, the amount claimed by the
authorities was reduced to 930,367 euros, and negotiations and other procedures
are under way, which may lead to a further reduction of the amount owed. NMT
Medical, the former owner of these entities, has agreed to indemnify us against
direct damages and liability arising from misrepresentations 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.

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

Our executive officers are elected annually and serve at the discretion of the
Board of Directors. The only family relationship between any of our executive
officers and 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.

21

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 and ADVAMED, the Advanced Medical Technology Association.

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 over 25
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. Mr. Carlozzi also serves on the Board of
Directors of Cascade Medical Corporation, a privately held company. He received
a BS degree in engineering and an MBA from Northeastern University.

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. Mr. Henneman received his A.B. from Princeton University and
his J.D. from the University of Michigan Law School.

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.

Deborah A. Leonetti joined Integra in May of 1997 as Director of Marketing, was
promoted to Vice President, Global Marketing in April 1999 and to Senior Vice
President, Marketing in May 2004. 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.

22

Donald R. Nociolo joined Integra as Director of Manufacturing in 1994, and was
promoted to Vice President, Operations in March 1997 and 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.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES

MARKET INFORMATION, HOLDERS AND DIVIDENDS

Our 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:

For purposes of calculating the aggregate market value of the shares of our
voting stock 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 ours. Further
information concerning ownership of our voting stock by executive officers,
directors and principal stockholders will be included in our definitive proxy
statement for our upcoming Annual Meeting of Stockholders 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.

23

The number of stockholders of record as of March 11, 2005 was approximately 480,
which includes stockholders whose shares were held in nominee name.

ISSUER PURCHASES OF EQUITY SECURITIES

We did not purchase any shares of our common stock during the quarter ended
December 31, 2004.

In March 2004, our Board of Directors authorized us to repurchase up to 1.5
million shares of our common stock for an aggregate purchase price not to exceed
$40 million. We were authorized to repurchase shares under this program through
December 31, 2004 either in the open market or in privately negotiated
transactions. We purchased 500,000 shares for $14.2 million under this program

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.