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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For Fiscal Year Ended: December 31, 2003

OR

FOR THE TRANSITION PERIOD FROM             TO             .

Commission File No. 0-22958

INTERPORE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (949) 453-3200

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common stock, no par value

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.    x

Indicate by the check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2).    Yes  x    No  ¨

Based on the closing price on the Nasdaq Stock Market on June 28, 2003 (the last business day of registrant’s most recently completed second fiscal quarter) the aggregate market value of voting stock of Interpore International, Inc. held by non-affiliates was $188,079,000. For purposes of this calculation, we assume directors, officers and holders of ten percent or more of our common stock outstanding are affiliates. The number of shares of common stock outstanding as of February 27, 2004 was 17,984,212.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our Joint Proxy Statement for the 2004 Annual Meeting of Stockholders of Interpore International, Inc. are incorporated by this reference into Part III as set forth herein.

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PART I

Item 1. Business

Overview

We are a medical device company that designs, develops, manufactures and markets a complementary portfolio of products for spine, orthobiologic and minimally invasive surgery applications. Our focus is primarily on the spinal surgery market. Our product portfolio addresses what we believe are two of the fastest growing areas in the medical device industry—spinal implants and orthobiologics.

Virtually all spine fusion procedures require the use of a bone graft and a majority of these procedures also use spinal implants. We offer three distinct product lines which can be used in combination for spinal fusions: spinal implants, bone graft materials and products used to derive growth factors. Because spine surgeons are the primary customers for each of our product lines, we believe our complementary product portfolio provides substantial cross selling opportunities to our distribution network. We plan to continue to develop and commercialize new products which will allow us to offer our customers a more comprehensive solution for spine fusion procedures.

Our principal executive offices are located at 181 Technology Drive, Irvine, California 92618, and our telephone at that location is (949) 453-3200. Our Internet address is www.interpore.com. Our report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other Securities and Exchange Commission filings are available free of charge on our web-site as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC.

Recent Developments

On March 7, 2004, we entered into a definitive agreement with Biomet, Inc. under which Biomet will acquire all of our outstanding common stock for cash in an amount equal to $14.50 per share, which represents a total equity value of approximately $280 million. Although the transaction is subject to regulatory approval, approval by our stockholders and other customary closing conditions, we expect the transaction to close in the second quarter of 2004.

Spine Anatomy

The spinal column consists of 24 separate bones called vertebrae that are connected together to permit a normal range of motion. The spinal cord, the body’s central nerve column, is enclosed within the spinal column. Vertebrae are paired into what are called motion segments that move by means of three joints: two facet joints and one spinal disc. The typical spine, as it relates to spinal implants, is made up of the following four main regions beginning at the skull:

Together, the thoracic vertebrae and the lumbar vertebrae are frequently referred to as the thoraco-lumbar region of the spine.

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Spine Disorders

The following are the four major categories of spine disorders:

Spinal Implant Market Overview

The prescribed treatment for spine disorders depends on the severity and duration of the disorder and the success or failure of non-operative therapies. Non-operative therapies include bed rest, medication, lifestyle modification, exercise, physical therapy, chiropractic care and steroid injections. However, non-operative treatment options are not effective in many cases, and we estimate that over one million patients undergo spinal surgery, such as spine fusions and spinal discectomies, each year in the United States. The number of spine fusion procedures performed annually in the United States is estimated to exceed 400,000.

Advanced cases of spine disorders can require that surgeons remove all or part of a damaged disc and/or fuse two or more adjoining vertebrae together. A fusion involves the placement of bone graft material between two vertebrae and may involve the use of spinal implants to immobilize the vertebrae while they fuse together. The bone graft is intended to provide a matrix that facilitates new bone ingrowth. Complete formation of new bone may take six to eighteen months.

We estimate that product sales in the U.S. spinal implant market are divided approximately as follows: 59% in the thoraco-lumbar spine generally using posterior instrumentation systems (i.e., hooks, rods and screws), 23% in the cervical spine using anterior plates or posterior instrumentation systems, and 18% using intervertebral devices, often referred to as spine cages.

For years, spine fusion surgery has frequently been utilized in advanced cases of spine disorders. However, many spinal product companies, including us, and developing surgeons are designing artificial disc prostheses, the first of which is expected to be FDA approved in 2005. The rationale of the artificial disc replacement is to implant a device that maintains the natural spinal motions rather than fusing vertebrae together. Many physicians believe that avoidance of spinal fusion surgery in degenerative disc disease patients may prolong the health of adjacent vertebrae and discs, thereby avoiding the need to perform subsequent spinal fusion procedures. Future sales of artificial disc implants may cause the market for implants used in spinal fusion procedures to decline. We do not anticipate that our artificial disc product will receive FDA approval prior to 2008.

Our Spinal Implant Products

In the spinal implant product category, our principal product offering includes the SYNERGY^™ Spinal System, the C-TEK^® Anterior Cervical Plate system, the GEO STRUCTURE^™ vertebral body replacement device, the ALTIUS^™ Occipito-Cervico-Thoracic System and the TPS^™ Telescopic Plate Spacer. We believe our product offering is applicable to nearly all spine stabilization procedures.

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SYNERGY Spinal System. Our SYNERGY Spinal System consists of rods, hooks and screws that are attached to vertebrae adjacent to an injured or defective area of the spine. Our system is a “universal” implant system that allows surgeons to treat both the thoracic and lumbar portions of the spine. We believe our SYNERGY Spinal System offers a number of benefits, including the following:

C-TEK Anterior Cervical Plate System. Our C-TEK is a titanium plate that is attached using screws to two or more vertebrae in the cervical spine in order to facilitate spine fusion. We received FDA 510(k) clearance of the C-TEK in late 2000, and introduced it to the market in the first quarter of 2001. We believe our C-TEK System offers a number of benefits, including the following:

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GEO STRUCTURE Vertebral Body Replacement. The GEO STRUCTURE is a uniquely designed titanium spinal implant that can be manufactured in a variety of shapes and sizes. We received FDA 510(k) clearance for the oval-shaped version of this product in the third quarter of 2001 and for the rectangular-shaped version in the first quarter of 2002. The rectangular version was introduced to the market in the fourth quarter of 2002, and the oval version was introduced in the third quarter of 2003. We recently filed a FDA 510(k) for a bent-rectangular-shaped version and expect to market this version in the first half of 2004. We believe our GEO STRUCTURE offers a number of benefits, including the following:

ALTIUS Occipito-Cervico-Thoracic System. Our ALTIUS system is intended to promote fusion of the cervical spine and occipito-cervico-thoracic junction affected by degenerative conditions, deformity, trauma and tumors. We received FDA 510(k) clearance for this product in December 2002 and began selling ALTIUS in the first half of 2003. We believe our ALTIUS system offers a number of benefits, including the following:

TPS Telescopic Plate Spacer. Our TPS is an expandable titanium spacer intended to replace one or two vertebral bodies that must be removed due to tumor or trauma. This device combines the functions of an anterior plate and a vertebral column spacer and it incorporates a patented telescoping feature. We received a Humanitarian Device Exemption (HDE) from the FDA in early 2000 for the cervical spine version of the TPS. In November 2001, we received FDA 510(k) clearance for the thoraco-lumbar version, which was launched in the fourth quarter of 2002. We believe our TPS offers a number of benefits, including the following:

Orthobiologics Market Overview

Orthobiologics is a term used to describe biomaterials used in orthopedic, or bone-related, applications. Product categories classified as orthobiologics generally include:

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Our current orthobiologic products fall into the bone graft substitutes and growth factor categories.

Bone Grafts. Bone is a composite material made up of bone cells and a porous matrix. The matrix is composed of collagen and ceramic calcium phosphate crystals. Bone continuously remodels itself, thereby repairing the small imperfections formed due to everyday activity. Bone will often spontaneously repair minor fractures without surgical intervention. However, major skeletal deficiencies from trauma, spinal instability, degenerative conditions and tumor will frequently require a surgical procedure involving bone graft.

It is estimated that bone grafts are used in over 600,000 procedures annually in the United States. They are used for a wide variety of indications including spine fusions, total joint surgery, maxillofacial applications and other surgical procedures. There are two major categories of bone grafts: autograft bone and bone graft substitutes (which includes allograft and synthetic bone graft substitutes):

Growth Factors. Growth factors are specific, naturally-occurring proteins that regulate bone generation by stimulating either the formation of new bone cells or the replication of existing cells. To derive growth factors, a number of methods are under development, including recombinant DNA technology, gene therapy, extraction from cow bone and advanced filtration technologies. With recombinant DNA technology, the desired human growth protein gene is introduced into a production host, usually an animal, bacterial or yeast cell, and the host makes the human protein along with its own. These proteins are then concentrated and made into a usable form. Using filtration methods, the human growth factor proteins are removed from the patient’s own blood. These proteins can be concentrated and combined with either of the two major categories of bone graft.

Our Orthobiologic Products

Our principal orthobiologic offering includes bone graft products and AGF^® (Autologous Growth Factors^®) related products. Our PRO OSTEON^® products are implanted in a bone deficit and provide a matrix that facilitates new bone ingrowth. PRO OSTEON was the first synthetic bone graft substitute to obtain FDA approval for orthopedic applications. Our BONEPLAST^® is a resorbable bone void filler that is replaced by the patient’s own bone during the healing process. Our INTERGRO^® Osteoinductive DBM putty and paste combines allograft material with a non-toxic, lipid carrier. AGF products concentrate growth factors derived intraoperatively from platelets found in a patient’s own blood. These growth factors are known to initiate the bone healing cascade.

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Bone Graft Substitutes. Our PRO OSTEON bone graft substitute products are derived from the exoskeleton of two specific genera of coral and chemically converted into a material with porosity, architecture and chemical composition similar to that of human bone, using our proprietary manufacturing process. Due to its interconnected porous structure, the graft provides a matrix that facilitates new bone ingrowth. Our INTERGRO DBM putty and paste are off-the-shelf, moldable tissue grafts. Our BONEPLAST bone void filler is a calcium sulfate (plaster-of-paris) material that resorbs and is replaced with bone during the healing process. Our line of bone graft substitutes includes:

Our PRO OSTEON, BONEPLAST and INTERGRO DBM products compare favorably with autograft, allograft and other synthetic bone grafts used today. We believe our products:

In addition, our INTERGRO DBM putty and paste have the following beneficial properties:

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AGF (Autologous Growth Factors) and ACCESS^® System. AGF products concentrate growth factors derived from platelets in a patient’s blood which have been known to encourage more complete and rapid bone growth in bone defects. Our key AGF related product is the ACCESS system which utilizes the UltraConcentrator^® Permeability Hemodialyzer disposable. Initially cleared for marketing by the FDA in the fourth quarter of 1998, these products are used to produce a concentrated growth factor gel from platelets in the patient’s own blood. Our AGF related products were commercially launched in 1999. Our ACCESS system was cleared for marketing by the FDA in 2002 and commercially launched in the first quarter of 2003.

The original process for collecting AGF from the patient’s blood requires the use of a cell washer and involves numerous procedural steps. The ACCESS system eliminates the reliance on a cell washer, substantially simplifies the process by eliminating a significant number of processing steps, and permits the option of producing smaller quantities of AGF. We designed the ACCESS system to compete with other similar products in the market that are simpler to use than our original AGF processing system and that permit the physician to produce smaller quantities at a lower cost.

In the AGF collection process, blood from the patient is separated into different component layers. One of the layers, known as the “buffy coat,” contains platelet-rich plasma and white blood cells. The buffy coat is processed using our proprietary filtering technology which super-concentrates the platelets and fibrinogen, producing a “cocktail” of growth factors, including Platelet-Derived Growth Factor and Transforming Growth Factor Beta. With the addition of thrombin, the fibrinogen contained in AGF is converted into fibrin, giving AGF a gel-like consistency. AGF can be combined directly with a bone graft material, such as our PRO OSTEON and BONEPLAST products, as well as autograft and allograft, and placed at the bone graft site. The red cells and plasma component layers are returned to the patient, resulting in minimal blood loss.

We believe that AGF provides the surgeon with the growth factors desired for faster and more complete bone graft healing. Additionally, AGF offers the following benefits:

Minimally Invasive Surgery Market Overview

Minimally invasive surgery, or M.I.S., is the term used to describe surgical procedures that can be performed through very small surgical openings, thereby limiting the amount of damage to tissues surrounding the surgical site. There is great interest in identifying procedures within orthopedics that are conducive to minimally invasive surgery techniques. To date, arthroscopic procedures, particularly for the knee, have been the focus. However, it is believed that spine procedures offer a broad opportunity for improved technique via the use of M.I.S. procedures. Within the spine market currently, minimally invasive procedures are increasingly being used to address spine fractures caused by osteoporosis, also known as vertebral compression fractures. Osteoporosis is a systemic skeletal disease characterized by loss of bone mass and microarchitectural deterioration of the bone tissue, with a consequent increase in bone fragility and susceptibility to fracture. These fractures can result in an increased risk of death, significant pain, reduced respiratory function and impaired quality of life.

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It is estimated that there are approximately 700,000 vertebral compression fractures in the United States annually, and approximately two-thirds go undiagnosed or untreated. Of the patients who present with vertebral compression fractures, approximately 200,000 to 300,000 annually are diagnosed and are treated with marginal success using drugs, bed rest and bracing. A small but increasing portion undergo surgical procedures known as vertebroplasty, kyphoplasty or osteoplasty, in which a reinforcing material is delivered into the fractured vertebra in order to eliminate micro-motion of bone fragments for the relief of pain and to provide strengthening of the vertebra. Historically, these procedures have been performed primarily by interventional radiologists, but are increasingly being performed by orthopedic surgeons and neurosurgeons.

Our Minimally Invasive Surgery Products

Our M.I.S. products consist of systems designed to facilitate the delivery of materials into bone through small incisions, a procedure we refer to as osteoplasty. Initially, these products were used by surgeons in the treatment of vertebral compression fractures. In 2003, we introduced the Curved CDO^™ System, which has an application in other orthopaedic procedures.

Research and Development

As of February 1, 2004, our research and development department consisted of 30 full-time employees. We also engage outside consultants and academic research facilities for assistance with our new product development and will license technology from third parties under appropriate circumstances. We plan to continue to use outside resources for product research. We have agreements with prominent spine surgeons, who assisted in the development of certain of our spine systems, under which we pay royalties ranging from approximately 1% to 6% of net revenues generated from the sale of certain products. Our expenditures for research and development were $6.7 million in 2001, $7.8 million in 2002 and $8.4 million in 2003.

Additional spinal implant and orthobiologic products which we currently have under development include:

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Intellectual Property

As part of our ongoing research, development and manufacturing activities, we have a policy of seeking patent protection. Patents relating to particular products, uses or procedures, however, do not preclude other manufacturers from employing alternative processes or from successfully marketing substitute products. We believe that although patents often are necessary to protect our technology and products, the lengthy FDA approval process and certain manufacturing processes are often more significant barriers to entry. Moreover, much of the proprietary technology and manufacturing processes developed by us reside in our key scientific and technical personnel and such technology and processes are not easily transferable to other scientific and technical personnel. The loss of the services of key scientific, technical and manufacturing personnel could have a material adverse effect on our business and results of operations. In addition to our patents, we also own various trademarks protecting our corporate identity and product names.

Spinal Implant Products. We own seventeen U.S. patents related to various aspects of our spine products, including the bone anchor, the rod/anchor interface, instrumentation, transverse connectors, bone stabilization plate and three-dimensional geometric structure. We have six U.S. patents pending concerning enhancements to our current spinal implant systems and for several new products.

Orthobiologic Products. We own fifteen U.S. patents related to our orthobiologic products. Of these, ten relate to our bone graft substitute products, and five are for our growth factor technology. We have three U.S. patents pending relating to several new products.

Minimally Invasive Surgery Products. We own one U.S. patent related to the CDO system and have three patents pending related to the M.I.S. system and the Void Creator, which is currently under development.

We require our employees, consultants and advisors to execute nondisclosure agreements in connection with their employment, consulting or advisory relationships with us. We also require our employees, and some consultants and advisors, to agree to disclose and assign to us all inventions conceived during the work day, using our property or which relate to our business. Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Finally, our competitors may independently develop similar technologies.

The medical device industry is characterized by the existence of a larger number of patents and frequent litigation based on allegations of patent infringement. As the number of entrants into our market increases, the possibility of an infringement claim against us grows. While we attempt to ensure that our products do not infringe other parties’ patents and proprietary rights, our competitors may assert that our products and the methods they employ may be covered by patents held by them. We have in the past been, and are currently, involved in litigation relating to our intellectual property. For additional discussion, please see “Certain Business Considerations – We may face challenges to our patents and proprietary rights” and Item 3 – “Legal Proceedings.”

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Customers, Sales and Marketing

We estimate there are approximately 14,000 practicing orthopedic surgeons in the United States in private practice, hospitals and orthopedic treatment centers. Of the approximately 14,000 practicing orthopedic surgeons, we estimate there are over 2,000 fellowship-trained spine surgeons. Also, we estimate that there are over 1,000 neurosurgeons performing spine fusion procedures that utilize implants.

Spinal implant products are generally used by the spine surgeons and neurosurgeons that perform spine fusion procedures, and they usually make the decision as to which manufacturers’ products will be selected. The selection of an orthobiologic product is made by these same spine surgeons and neurosurgeons as well as the remaining orthopedic surgeons performing procedures requiring a bone graft. M.I.S. products that deliver materials into bone are selected by orthopedic surgeons and neurosurgeons in addition to interventional neuro-radiologists and pain-management specialists that perform vertebroplasty, kyphoplasty and osteoplasty procedures. We direct our marketing efforts to these surgeons.

Our sales organizations are headed by a Senior Vice President of Sales and Distribution. Our domestic sales organization consists of independent agencies and direct sales representatives. As of February 1, 2004, we had contracts with 36 independent agencies which employed approximately 185 sales representatives, and we had 37 direct sales representatives. The domestic sales organization is managed by two Vice Presidents of Domestic Spinal and Biologic Product sales, and a Vice President of Domestic M.I.S. products sales. We invoice hospitals directly, generally at list prices, and pay commissions to the agencies and direct sales representatives. We provide consignment inventories to our independent agencies, direct sales representatives and some hospitals. We select agency organizations and direct sales representatives for their expertise in spinal implant, orthopedic or medical device sales, their reputation within the surgeon community and their sales coverage within a geographic area. Each agency organization and direct sales representative is assigned a sales territory for some or all of our products and is subject to periodic performance reviews. In addition, each new independent sales agency and direct sales representative participates in training programs before initiating sales efforts for our products. We also require each independent agency and direct sales representative to attend periodic sales and product training.

Outside of the United States, we distribute products only through independent distributors. We have a Vice President of International Sales and three Division Managers and have established distribution arrangements with 37 distributors in 31 countries. Our international sales represented approximately 22% of product sales in 2001, 18% of product sales in 2002 and 20% of product sales in 2003. Sales to our international customers are denominated in U.S. dollars.

In the United States, there are no significant customer concentrations, as we invoice hospitals directly for product used or shipped. However, in the international markets, we have three significant distributors that on a combined basis accounted for approximately 51% of our 2003 international sales and 10% of our 2003 worldwide sales.

In order to improve shipping efficiencies and service to our international customers, we have an agreement with a contract warehouse in the Netherlands to ship bone graft products to customers in certain countries outside of North America.

We participate in over two dozen professional meetings, the most significant of which include the North American Spine Society Meeting, the American Academy of Orthopaedic Surgeons Meeting and the Congress of Neurological Surgeons. We also participate in scientific presentations and professional seminars at hospitals and provide funding for surgeon symposia from time to time.

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Third-Party Reimbursement

We expect that sales volumes and prices of our products will continue to be dependent in large part on the availability of reimbursement from third-party payors. In the United States, our products are purchased by hospitals that are reimbursed by third-party payors for the devices provided to their patients. Such payors include governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care programs. These third-party payors may deny coverage and reimbursement if they determine that a device used in a procedure was not medically necessary or was not used in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication. Also, third-party payors are increasingly challenging the prices charged for medical products and services. In international markets, reimbursement and healthcare payment systems vary significantly by country and many countries have instituted price ceilings on specific product lines. We cannot assure you that our products will be considered medically necessary or cost-effective by third-party payors, that reimbursement will be available or, if available, that the third-party payors’ reimbursement policies will not adversely affect our ability to sell our products profitably.

Particularly in the United States, third-party payors increasingly revisit their payment methodologies and have developed methodologies that result in reimbursement below the prices actually charged by providers for procedures and medical products. In addition, an increasing percentage of insured individuals are receiving their medical care through managed care programs, which monitor and often require pre-approval of the services that a member will receive. Many managed care programs are paying their providers on a capitated basis, which puts the providers at financial risk for the services provided to their patients by paying them a predetermined payment per member per month. The percentage of individuals covered by managed care programs is expected to grow in the United States over the next decade.

We believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry to reduce the costs of products and services. Some pressures are driven by legislative reform. For example, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 has mandated changes that will revise payment methodologies to providers for certain medical devices. Although there has been some liberalization for recognition of costs of new technologies in connection with inpatient hospital care, at this time we cannot predict the full impact of the legislation on our business, if any. In addition, we cannot assure you that third-party reimbursement and coverage will be available or adequate, or that future legislation, regulation, or reimbursement policies of third-party payors will not adversely affect the demand for our products in development or our ability to sell these products on a profitable basis. The unavailability or inadequacy of third-party payor coverage or reimbursement could have a material adverse effect on our business, operating results and financial condition.

Manufacturing

Spinal Implant Products. We contract with outside vendors for the manufacture of our spinal implant products, which are fabricated from medical grade stainless steel or titanium according to our specifications. Following the receipt of products at our facility, we conduct inspection, packaging and labeling operations. The majority of our current spine products are distributed in a non-sterile condition, which is the industry standard for implant systems such as our SYNERGY, C-TEK, TPS and ALTIUS products.

Our GEO STRUCTURE products are cast in titanium. We manufacture wax models of the products at our facility. The wax models are then delivered to contract vendors that cast the implants using the lost wax method, and then conduct final finishing procedures. Following the receipt of GEO STRUCTURE products at our facility, we conduct inspection, packaging and labeling operations and have the packaged implants sterilized by a contract vendor.

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Orthobiologic Products. Coral is the primary raw material used to manufacture our PRO OSTEON products. The coral used in our products is sourced from two genera located in a variety of geographic locations. Our source for coral has been the tropical areas of the Pacific and Indian Oceans. We believe we have an adequate supply of coral for the foreseeable future; however, we obtain our coral from a single source supplier and we have not identified a secondary source. Additionally, coral is covered under an international treaty entitled Convention on International Trade of Endangered Species of Wild Fauna and Flora, which regulates for approximately 140 nations around the world the import/export of raw coral and products derived therefrom. To date, the limitations imposed by this treaty have not significantly affected our ability to source raw coral. However, social and political conditions in countries controlling the export of coral have recently had a negative effect on our ability to source raw coral. We believe that our current supply of coral is sufficient to satisfy our needs for the approximately next ten years at our current rate of production. However, we cannot assure you that our current supply will be sufficient for our ongoing operations or that we will be able to locate an alternate supply source on reasonable terms or at all. Any delays in our ability to produce our orthobiologics products could have a material adverse effect on our operations. The manufacturing process for our PRO OSTEON line of bone graft substitute products involves coral qualification and cutting, hydrothermal conversion, testing, packaging and sterilization of the product, all of which, with the exception of sterilization, are performed at our facilities.

Our INTERGRO DBM putty and paste is manufactured using a proprietary formula which involves combining demineralized bone matrix (DBM), which is available from third party allograft tissue processors, with a biocompatible, non-soluble lipid carrier. While we have been able to obtain adequate quantities of the DBM to meet our requirements to date, only limited quantities of cadaver tissue are generally available, and therefore we cannot assure you that sufficient quantities will be available to meet our future requirements.

Some of the products and materials supplied by our vendors are currently sole-sourced, but we believe that we could locate alternate vendors for supply of these components. However, the specialized filter material contained in our UltraConcentrator was sole-sourced from a vendor that no longer supplies the material. Although we have not identified any alternate vendors, we have a several year supply of the material in inventory and we believe there are suppliers that could supply alternate materials which may have equivalent function. In the event that a re-engineering of the product were necessary due to conversion to an alternate material, delays in product availability could occur and significant costs could be incurred, either of which could have a material adverse effect on our operations.

Minimally Invasive Surgery Products. We contract with outside vendors for the manufacture of components of our M.I.S. products. Following the receipt of products at our facility, we conduct inspection, packaging and labeling operations. For products distributed in a sterile package, sterilization is performed by contract vendors.

Competition

Spinal Implant Market. Many companies compete in the spinal implant market and the competition is intense. We believe that our largest competitors in the United States offering spinal implants are Medtronic Sofamor Danek USA, DePuy Spine, Inc., a Johnson & Johnson company, and Synthes-Stratec, Inc., each of which has substantially greater sales and financial resources than we do. Medtronic Sofamor Danek, in particular, has a broader spinal implant line. Other companies have developed and are marketing products based on technologies that are different from ours, including spinal implants designed to be used with minimally invasive or laparoscopic surgery, and allograft bone dowels.

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Bone Graft Substitute Market. Our bone graft substitute products compete principally with autograft, considered the physician’s “gold standard,” with allograft bone obtained from cadavers and with other synthetic bone products. Competitive bone substitute products include: DBX^® demineralized bone matrix from the Musculoskeletal Transplant Foundation, Grafton^® demineralized bone matrix products from Osteotech, demineralized bone matrix products from ISOTIS OrthoBiologics, demineralized bone matrix products from Regeneration Technologies, AlloMatrix^™ demineralized bone matrix from Wright Medical Technology, Vitoss^™ from Orthovita, as well as other bone substitute products. Several other companies are pursuing additional synthetic bone graft materials for orthopedic applications which could ultimately compete with our synthetic bone graft products in the United States.

Growth Factors. Several companies are marketing platelet concentrator systems that are competitive with our AGF related products. Although we believe the ultimate output of these systems is inferior to AGF, their ease of use has allowed them to negatively impact sales of our AGF related products, leading to our decision to develop and launch our ACCESS system.

Medronic Sofamor Danek has introduced InFUSE^™, their recombinant human bone morphogenetic protein (rhBMP-2), which has rapidly penetrated the market for growth factors, despite its high cost per application. Stryker Corporation has rights to a recombinant human bone morphogenetic protein called OP-1 for which the FDA granted Humanitarian Device Exemption status as an alternative to autograft for long-bone non-union fractrues. Orthologic, Inc. is developing a synthetic protein called Chrysalin^™. Each of these products competes or will compete directly with our AFG related products.

Minimally Invasive Surgery Products. Several products compete with our M.I.S products including competitive offerings by Kyphon, Inc. and Parallax Medical, Incorporated as well as the traditional large gauge needle surgical technique.

We compete in all of our markets primarily on the basis of product performance, price and ease of use, as well as customer loyalty and service. Many of our competitors have greater resources for product development, sales and marketing and patent litigation than we do. Accordingly, they could substantially increase the resources they devote to the development and marketing of products that are competitive with ours. Many of our potential customers have existing relationships with our competitors that could make it difficult for us to continue to penetrate the markets for our products. Additionally, several of our competitors have broader product lines than we do. Moreover, our competitors may develop and successfully commercialize medical devices that directly or indirectly accomplish what our products are designed to accomplish in a superior and less expensive manner. If our competitors’ products prove to be more successful than ours, our products could be rendered obsolete. If we fail to compete successfully against our existing or potential competitors, our operating results may be adversely affected.

Government Regulation

Overview

Our products and operations are subject to extensive and rigorous regulation by the FDA under the Federal Food, Drug, and Cosmetic Act, or FFDCA, and its implementing regulations, guidances, and standards. The FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, promotion, distribution, and production of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. The FDA also regulates the export of medical devices manufactured in the United States to international markets. Any violations of these laws and regulations could result in a material adverse effect on our business, financial condition and results of operations. In addition, if there is a change in law, regulation or judicial interpretation, we may have to change our business practices, which could have a material adverse effect on our business, financial condition and results of operations.

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Under the FFDCA, medical devices are classified into one of three classes — Class I, Class II or Class III — depending on the degree of risk associated with each medical device and the extent of control needed to ensure safety and effectiveness. Our current products include medical devices in all three classes.

Class I devices are those for which safety and effectiveness can be assured by adherence to FDA’s general regulatory controls for medical devices, which include compliance with the applicable portions of the FDA’s Quality System Regulation, or QSR, facility registration and product listing, reporting of adverse medical events, and appropriate, truthful and non-misleading labeling, advertising, and promotional materials. Some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below.

Class II devices are subject to FDA’s general controls, and any other special controls as deemed necessary by FDA to ensure the safety and effectiveness of the device. Premarket review and clearance by the FDA for Class II devices is accomplished through the 510(k) premarket notification procedure. Pursuant to the recently enacted Medical Device User Fee and Modernization Act of 2002, as of October, 2002, unless a specific exemption applies, 510(k) premarket notification submissions are subject to user fees. Certain Class II devices are exempt from this premarket review process. When a 510(k) is required, the manufacturer must submit to the FDA a premarket notification submission demonstrating that the device is substantially equivalent to a device that was legally marketed prior to May 28, 1976 or to a device that has already been approved through the 510(k) process.

If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device. By regulation, the FDA is required to clear a 510(k) within 90-days of submission of the application. As a practical matter, clearance often takes longer. The FDA may require further information, including clinical data, to make a determination regarding substantial equivalence. After a device receives 510(k) clearance, any modification that could significantly affect its safety and effectiveness, or that would constitute a major change in its intended use, requires a new 510(k) clearance or premarket approval. We have made modifications to some of our devices which we believe do not require the submission of new 510(k) notifications. If the FDA requires us to submit a new 510(k) notification for any device modification, we may be prohibited from marketing the modified device until the 510(k) is cleared by the FDA.

A Class III product is a product which has a new intended use or uses advanced technology that is not substantially equivalent to that of a legally marketed device. The safety and effectiveness of Class III devices cannot be assured solely by the FDA’a general controls and the other requirements described above. These devices almost always require formal clinical studies to demonstrate safety and effectiveness.

Submission and FDA approval of a premarket approval application, or PMA, is required before marketing of a Class III product can proceed. As with 510(k) submissions, unless subject to an exemption, PMA submissions are subject to user fees. The PMA process is much more demanding than the 510(k) premarket notification process. A PMA application, which is intended to demonstrate that the device is safe and effective, must be supported by extensive data, including data from preclinical studies and human clinical trials. The PMA must also contain a full description of the device and its components, a full description of the methods, facilities, and controls used for manufacturing, and proposed labeling. Following receipt of a PMA application, once the FDA determines that the application is sufficiently complete to permit a substantive review, the FDA will accept the application for review. The FDA, by statute and by regulation, has 180 days to review an accepted PMA application, although the review of an application more often occurs over a significantly longer period of time, and can take up to several years. In approving a PMA application or clearing a 510(k) application, the FDA may also require some form of post-market surveillance when necessary to protect the public health or to provide additional safety and effectiveness data for the device. In such cases, the manufacturer might be required to follow certain patient groups for a number of years and make periodic reports to the FDA on the clinical status of those patients.

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Human clinical studies are generally required in connection with a Class III device, and may be required for Class I and Class II devices. If the device presents a significant risk, as defined by the FDA, to human health, the device sponsor is required to file an investigational device exemption, or IDE, application with the FDA and obtain IDE approval prior to commencing the human clinical trial. If the device is considered a “non-significant” risk, IDE submission to FDA is not required. Instead, only approval from the Institutional Review Board overseeing the clinical trial is required. The FDA, and the Institutional Review Board at each institution at which a clinical trial is being performed, may suspend a clinical trial at any time for various reasons, including a belief that the subjects are being exposed to an unacceptable health risk.

Spinal Implant Products

Our SYNERGY Spinal System received 510(k) marketing clearance from the FDA. We received 510(k) clearance from the FDA to market the anterior portion of the SYNERGY Spinal System in October 1994 and for the posterior portion of the system in July 1995. In September 1996, we developed a titanium version of the SYNERGY Spinal System for international distribution. We received FDA marketing clearance for the anterior portion of the titanium version in October 1995 and the posterior portion in January 1997.

In March 2000, the FDA approved a Humanitarian Device Exemption (HDE) for the cervical version of our corpectomy cage, the TPS Telescopic Plate Spacer. An HDE is designed to encourage the discovery and use of devices intended to benefit patients in the treatment or diagnosis of diseases or conditions that affect or are manifested in fewer than 4,000 individuals in the United States per year. In the case of the TPS, the approved indication is for the replacement of normal body structures following a vertebrectomy or corpectomy of the spine for metastatic disease in the cervical or cervical-thoracic spine. We received FDA 510(k) clearance to market the Telescopic Plate Spacer Thoracolumbar (TPS-TL) in November 2001.

In October 2000, we received FDA 510(k) clearance to market our C-TEK Anterior Cervical Plate System.

In August 2001, we received FDA 510(k) clearance to market our oval configuration GEO STRUCTURE spinal implant. An FDA 510(k) clearance for the rectangular configuration was received in February 2002.

In December 2002, we received FDA 510(k) clearance to market our ALTIUS Occipito-Cervico-Thoracic System.

Orthobiologic Products

In October 1992, we received FDA PMA approval to market PRO OSTEON 500 for certain defects in the wide part of long bones. We subsequently received FDA PMA approval to market it in granular forms and a wide variety of block configurations up to 30 cc’s in total volume, and for additional indications including the treatment of cysts and tumors in long bones. Our PRO OSTEON 200 and Interpore 200 were cleared for marketing for certain kinds of oral surgery, periodontal defects, and craniofacial and orthognathic indications through 510(k) premarket notifications.

In July 1997, the FDA cleared the use of a competitive synthetic bone graft substitute product with a 510(k). Prior to clearance of this device, companies were required to obtain marketing approval from the FDA for bone graft substitutes via the Premarket Approval process. Other bone graft substitute products have since been obtained through the less burdensome 510(k) premarket notification process, which has increased competition. In September 1998, we received 510(k) clearance from the FDA for our PRO OSTEON 500R resorbable bone graft substitute product. The approved indications include use in bony voids or gaps of the skeletal system, such as the extremities, spine and pelvis. In December 2000, we received 510(k) clearance from the FDA for our PRO OSTEON 200R resorbable bone graft substitute product.

In September 1999, we received FDA 510(k) clearance for our BONEPLAST bone void filler for use in the extremities, spine and pelvis.

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In December 1998, we received FDA 510(k) clearances for the two key products in the AGF system, the UltraConcentrator Permeability Hemodialyzer and the Automated Processor. In August 2002, we received 510(k) clearance for our ACCESS system.

In May 2003, we received FDA 510(k) clearance for our BIOPLEX as a cement restrictor.

Minimally Invasive Surgery Products

Our M.I.S. products fall within the Class I category of medical devices as determined by the FDA. No premarket approval was required for our M.I.S. products.

We cannot assure you that we will be able to secure 510(k) approvals or PMA approvals for any new products that we may develop in the future. We also cannot assure you that the FDA will not suspend, modify, or revoke existing clearances and approvals for products currently being marketed by us. Any delay in our ability to obtain necessary approvals or clearances or any suspension or revocation of existing approvals or clearances, could have a material adverse effect on our business, financial condition, and results of operations.

Continuing FDA Regulation

After the FDA permits a device to enter commercial distribution, numerous regulatory requirements apply. These include:

The FDA has broad post-market and regulatory and enforcement powers. Failure to comply with the applicable U.S. medical device regulatory requirements could result in, among other things, warning letters, fines, inj