INTEGRA LIFESCIENCES HOLDINGS CORP - 10-Q Quarterly Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

COMMISSION FILE NUMBER 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 EXECUTIVE OFFICES) (ZIP CODE)

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

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.

/X/ - YES / / - NO

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER
/X/ YES / / NO

AS OF AUGUST 7, 2003 THE REGISTRANT HAD OUTSTANDING 26,714,023 SHARES OF
COMMON STOCK, $.01 PAR VALUE.

INTEGRA LIFESCIENCES HOLDINGS CORPORATION

INDEX

Page
Number

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PART I. FINANCIAL INFORMATION

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

(In thousands, except per share amounts)

3

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousands, except per share amounts

June 30, December 31,
2003 2002
------------ ------------

4

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

(In thousands)
Six Months Ended June 30,
----------------------------
2003 2002
---- ----

5

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)

6

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

General

In the opinion of management, the June 30, 2003 unaudited consolidated financial
statements contain all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations, cash flows, and changes in stockholders equity of the
Company. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in accordance with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited consolidated
financial statements should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 2002 included
in the Company's Current Report on Form 8-K dated June 27, 2003. As discussed in
that report, in 2003 the Company began to report financial results under a
single operating segment--the development, manufacturing, and distribution of
medical devices.

Operating results for the three and six month periods ended June 30, 2003 are
not necessarily indicative of the results to be expected for the entire year.

The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent liabilities, and the reported amounts of revenues and
expenses. Significant estimates affecting amounts reported or disclosed in the
consolidated financial statements include allowances for doubtful accounts
receivable and sales returns, net realizable value of inventories, estimates of
future cash flows associated with long-lived asset valuations, depreciation and
amortization periods for long-lived assets, valuation allowances recorded
against deferred tax assets, loss contingencies, and estimates of costs to
complete performance obligations associated with research, licensing, and
distribution arrangements for which revenue is accounted for using percentage of
completion accounting. These estimates are based on historical experience and on
various other assumptions that are believed to be reasonable under the current
circumstances. Actual results could differ from these estimates.

The Company has reclassified certain prior year amounts to conform with the
current year's presentation.

Recently Issued Accounting Standards

In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Instruments with Characteristics of both
Liabilities and Equity", which establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The
Company's adoption of the initial recognition and initial measurement provisions
of SFAS 150 is not expected to have a material impact on the Company's results
of operations or financial position.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003, and for hedging relationships designated after June 30,
2003. The Company will adopt SFAS 149 effective July 1, 2003, and does not
expect that the provisions of SFAS 149 will have a material impact on the
Company's results of operations or financial position.

7

In January 2003, the Emerging Issues Task Force (EITF) released EITF 00-21
"Accounting for Revenue Arrangements with Multiple Deliverables". EITF 00-21
clarifies the timing and recognition of revenue from certain transactions that
include multiple deliverables. EITF 00-21 is effective for revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company will
evaluate the impact of EITF 00-21 on revenue arrangements it may enter into in
the future, which will need to comply with EITF 00-21.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation and amends certain disclosure
requirements of SFAS No. 123 "Accounting for Stock Based Compensation". SFAS No.
148 does not require companies to expense stock options in current earnings. The
interim disclosure requirements became effective for the Company beginning with
its March 31, 2003 consolidated financial statements.

Employee stock based compensation is recognized using the intrinsic value method
prescribed by APB Opinion No. 25 "Accounting for Stock Issued to Employees" and
FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation -an interpretation of APB Opinion No. 25".

Had the compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the date of grant consistent with the
provisions of SFAS No. 123, the Company's net income and basic and diluted net
income per share would have been as follows:

Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands, except per share amounts)

As options vest over a varying number of years and awards are generally made
each year, the pro forma impacts shown above may not be representative of future
pro forma expense amounts. The pro forma additional compensation expense was
calculated based on the fair value of each option grant using a Black-Scholes
model.

In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which nullifies EITF Issue No.
94-3 "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)". FAS 146 requires that a liability for a cost associated with an
exit or disposal activity be recognized when the liability is incurred, whereas
EITF No. 94-3 had recognized the liability at the commitment date to an exit
plan. The Company will prospectively adopt the provisions of FAS 146 for exit or
disposal activities initiated after January 1, 2003.

8

2. ACQUISITIONS

On March 17, 2003, the Company acquired all of the outstanding capital stock of
J. Jamner Surgical Instruments, Inc. (doing business as JARIT(R) Surgical
Instruments) ("JARIT") for $42.7 million in cash, including expenses associated
with the acquisition and net of $2.1 million of cash acquired, and subject to a
working capital adjustment and other adjustments with respect to certain income
tax elections. The Company currently has accrued an additional $1.0 million for
the estimated amount payable to the seller under the terms of this purchase
price adjustment.

For more than 30 years, JARIT has marketed a wide variety of high quality,
reusable surgical instruments to virtually all surgical disciplines. JARIT sells
its products to more than 5,200 hospitals and surgery centers worldwide. In the
United States, JARIT sells through a 20 person sales management force that works
with over 100 distributor sales representatives.

With more than 5,000 instrument patterns and a 98% order fill rate, JARIT has
developed a strong reputation as a leading provider of high-quality surgical
instruments. JARIT manages its vendor relationships and purchases, packages and
labels its products directly from instrument manufacturers through its facility
in Germany. The acquisition of JARIT broadens Integra's existing customer base
and surgical instrument product offering and provides an opportunity to achieve
operating costs savings, including the procurement of Integra's
Redmond(TM)-Ruggles(TM) and Padgett Instruments Inc.(R) products directly from
the instrument manufacturers.

In connection with this acquisition, the Company recorded approximately $29.5
million of intangible assets, consisting primarily of trade name and customer
relationships, which are being amortized on a straight-line basis over lives
ranging from 5 to 40 years. The following table summarizes the preliminary fair
value of the assets acquired and liabilities assumed in the JARIT acquisition:

In December 2002, the Company acquired the neurosurgical shunt and epilepsy
monitoring business of the Radionics division of Tyco Healthcare Group for $3.5
million in cash, including expenses associated with the acquisition.

In October 2002, the Company acquired all of the outstanding capital stock of
Padgett Instruments, Inc., an established marketer of instruments used in
reconstructive and plastic surgery, for $9.6 million in cash, including expenses
associated with the acquisition. In March 2003, Padgett's distribution
operations were consolidated into the Company's distribution center located in
Cranbury, New Jersey.

In August 2002, the Company acquired all of the capital stock of the
neurosciences division of NMT Medical, Inc. for $5.7 million in cash, including
expenses associated with the acquisition. Through this acquisition, the Company
added a range of leading differential pressure valves and external ventricular
drainage products to its neurosurgical product line.

In July 2002, the Company acquired the assets of Signature Technologies, Inc., a
specialty manufacturer of titanium and stainless steel implants for the
neurosurgical and spinal markets, and certain other intellectual property
assets. The purchase price consisted of $2.9 million in cash (including expenses
associated with the acquisition) paid at closing, $0.5 million of deferred
consideration paid in March 2003, and royalties on future sales of products to
be developed.

9

The results of operations of these acquired businesses have been included in the
consolidated financial statements since the respective dates of acquisition.

The following unaudited pro forma financial information assumes that all
acquisitions consummated in 2003 and 2002 had occurred as of the beginning of
each period (in thousands, except per share data):

The pro forma financial results for the six months ended June 30, 2003 and 2002,
and for the three months ended June 20, 2002, respectively, include
approximately $0.1 million, $2.7 million and $1.3 million of gains associated
with foreign currency forward purchase contracts owned by JARIT. The Company
liquidated all of JARIT's foreign currency forward purchase contracts
concurrently with the closing of the acquisition.

In September 2002, the Company acquired certain assets, including the
NeuroSensor(TM) monitoring system and rights to certain intellectual property,
from Novus Monitoring Limited of the United Kingdom for $3.7 million in cash
(including expenses associated with the acquisition), an additional $1.5 million
to be paid upon Novus' achievement of a product development milestone, and up to
an additional $2.5 million payable based upon revenues from Novus' products. The
NeuroSensor(TM) system measures both intracranial pressure and cerebral blood
flow using a single combined probe and an electronic monitor for data display.
As part of the consideration paid, Novus has also agreed to conduct certain
clinical studies on the NeuroSensor(TM) system, continue development of a next
generation, advanced neuromonitoring product, and design and transfer to Integra
a validated manufacturing process for these products. The assets acquired from
Novus were accounted for as an asset purchase because the acquired assets did
not constitute a business under SFAS No. 141 "Business Combinations".

3. INVENTORIES

Inventories consisted of the following:

4. GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill for the six months ended June 30,
2003, were as follows:

10

The components of the Company's identifiable intangible assets were as follows:

Annual amortization expense is expected to approximate $2.9 million in 2003,
$3.1 million in 2004, and $2.8 million in each of the years 2005 to 2007.
Identifiable intangible assets are initially recorded at fair market value at
the time of acquisition generally using an income or cost approach.

5. DEBT

In March 2003, the Company completed a private placement of contingent
convertible subordinated notes totaling $100.0 million, due 2008. The Company
granted the initial purchasers an option to purchase up to an additional $20.0
million principal amount of notes, of which $5.0 million was exercised in March
and the remaining $15.0 million was exercised in April.

The notes bear interest at 2.5 percent per annum, payable semiannually. The
Company will pay additional interest ("Contingent Interest") if, at thirty days
prior to maturity, Integra's common stock price is greater than $37.56. The
Contingent Interest will be payable for each of the last three years the notes
remain outstanding in an amount equal to the greater of i) 0.50% of the face
amount of the notes and ii) the amount of regular cash dividends paid during
each such year on the number of shares of common stock into which each note is
convertible. The Company recorded a $365,000 liability related to the estimated
fair value of the Contingent Interest obligation at the time the notes were
issued. The fair value of the Contingent Interest obligation is marked to its
fair value at each balance sheet date, with changes in the fair value recorded
to interest expense. At June 30, 2003, the estimated fair value of the
Contingent Interest obligation was $409,000.

Debt issuance costs totaled $4.3 million and are being amortized using the
straight-line method over the five-year term of the notes.

Holders may convert their notes into shares of Integra common stock at an
initial conversion price of $34.15 per share, upon the occurrence of certain
conditions, including when the market price of Integra's common stock on the
previous trading day is more than 110% of the conversion price.

The notes are general, unsecured obligations of the Company and will be
subordinate to any future senior indebtedness of the Company. The Company cannot
redeem the notes prior to their maturity. Holders of the notes may require the
Company to repurchase the notes upon a change in control.

Concurrent with the issuance of the notes, the Company used approximately $35.3
million of the proceeds from this private placement to purchase 1.5 million
shares of its common stock.

11

6. COMPREHENSIVE INCOME

Comprehensive income was as follows:

7. NET INCOME PER SHARE

Basic and diluted net income per share were as follows:

Options and warrants outstanding at June 30, 2003 and 2002, respectively, to
purchase 659,000 and 627,000 shares of common stock were excluded from the
computation of diluted net income per share for the three and six month periods
ended June 30, 2003 and 2002 because their exercise price exceeded the average
market price of the Company's common stock during the period. Notes payable
outstanding at June 30, 2003 that are convertible into 3,514,166 shares of
common stock were excluded from the computation of diluted net income per share
for the three and six month periods ended June 30, 2003 because the conditions
required to convert the notes were not met.

12

8. PRODUCT REVENUE AND GEOGRAPHIC INFORMATION

The Company develops, manufactures, and markets medical devices for use
primarily in neuro-trauma and neurosurgery, plastic and reconstructive surgery,
general surgery, and soft tissue repair. The Company's product lines include
traditional medical devices, such as monitoring and drainage systems, surgical
instruments, and fixation systems, as well as innovative tissue repair products,
such as the DuraGen(R) Dural Graft Matrix, the NeuraGen(TM) Nerve Guide, and the
INTEGRA(R) Dermal Regeneration Template, that incorporate the Company's
proprietary absorbable implant technology.

Product revenues are segregated into the following categories:

Products, including food as well as pharmaceuticals and medical devices, that
contain materials derived from animal sources are increasingly subject to
scrutiny in the press and by regulatory authorities. Certain of the Company's
products, including DuraGen(R) Dural Graft Matrix, NeuraGen(TM) Nerve Guide,
INTEGRA(R) Dermal Regeneration Template, and BioMend(R) Absorbable Collagen
Membrane, contain material derived from bovine tissue. These products comprised
approximately 28% and 33% of product revenues in the six month periods ended
June 30, 2003 and 2002, respectively. Accordingly, widespread public controversy
concerning collagen products, new regulation, or a ban of the Company's products
containing material derived from bovine tissue, could have a significant adverse
effect on the Company's current business or its ability to expand its business.

Product revenues by major geographic area are summarized below:

United Asia Other
States Europe Pacific Foreign Total
-------- -------- -------- -------- --------
(in thousands)

9. COMMITMENTS AND CONTINGENCIES

As consideration for certain technology, manufacturing, distribution and selling
rights and licenses, the Company has agreed to pay royalties on the sales of
certain of its products. Payments under these agreements were not significant
for any of the periods presented.

Various lawsuits, claims, and proceedings are pending or have been settled by
the Company. The most significant of those are described below.

In July 1996, the Company filed a patent infringement lawsuit in the United
States District Court for the Southern District of California (the "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

13

deliberately induced, and continues to willfully and deliberately induce,
defendants Scripps Research Institute and Dr. Cheresh to infringe certain of the
Company's patents. These patents are part of a group of patents granted to The
Burnham Institute and licensed by the Company that are based on the interaction
between a family of cell surface proteins called integrins and the
arginine-glycine-aspartic acid ("RGD") peptide sequence found in many
extracellular matrix proteins. The defendants filed a countersuit asking for an
award of defendants' reasonable attorney fees.

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

In October 2000, the Court entered judgment in the Company's favor and against
Merck KGaA in the case. In entering the judgment, the Court also granted the
Company pre-judgment interest of approximately $1,350,000, bringing the total
amount to approximately $16,350,000, plus post-judgment interest. Merck KGaA
filed various post-trial motions requesting a judgment as a matter of law
notwithstanding the verdict or a new trial, in each case regarding infringement,
invalidity and damages. In September 2001, the Court entered orders in favor of
the Company 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 Integra each appealed various decisions of the Court to the
United States Court of Appeal for the Federal Circuit. In June 2003 the
appellate court affirmed the Court's finding of infringement but found that the
basis of the jury's calculation of damages was not clear from the trial record.
The appellate court remanded the case to the trial court for further factual
development and a new calculation of damages consistent with the appellate
court's decision. The new damages trial has not been scheduled. Integra has not
recorded any gain in connection with this matter.

The Company is also subject to various claims, lawsuits and proceedings in the
ordinary course of business, including claims by current or former employees and
distributors and with respect to its 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 the Company's financial condition. However, it is possible
that the Company's results of operations, financial position and cash flows in a
particular period could be materially affected by these contingencies.

In September 2001, three subsidiaries of the recently acquired neurosciences
division of NMT Medical, Inc. received a tax reassessment notice from the French
tax authorities seeking more than $1.5 million in back taxes, interest and
penalties. NMT Medical, Inc., the former owner of these entities, has agreed to
specifically indemnify Integra against any liability in connection with these
tax claims. In addition, NMT Medical, Inc. has agreed to provide the French tax
authorities with payment of the tax, if required.

10. SUBSEQUENT EVENT

On August 12, 2003, the Company entered into an interest rate swap agreement
with a $50 million notional amount to hedge the risk of changes in fair value
attributable to interest rate risk with respect to a portion of its fixed rate
contingent convertible subordinated notes. The Company will receive a 2 1/2%
fixed rate from the counterparty, payable on a semi-annual basis, and will pay
to the counterparty a floating rate based on 3 month LIBOR minus 35 basis
points, payable on a quarterly basis. The interest rate swap agreement
terminates on March 15, 2008, subject to early termination upon the occurrence
of certain events, including redemption or conversion of the contingent
convertible notes. The Company will account for the interest rate swap as a fair
value hedge in accordance with SFAS No. 133, as amended "Accounting for
Derivative Instruments and Hedging Activities".

14

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and the related notes thereto appearing elsewhere in this report and
our consolidated financial statements for the year ended December 31, 2002
included in our Current Report on Form 8-K dated June 27, 2003. As discussed in
that report, in 2003 the Company began to report financial results under a
single operating segment--the development, manufacturing, and distribution of
medical devices.

This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Our actual results may differ materially
from those anticipated in these forward-looking statements as a result of many
factors, including but not limited to those set forth below under the heading
"Factors That May Affect Our Future Performance."

Regulation G, "Conditions for Use of Non-GAAP Financial Measures," and other
provisions of the Securities Exchange Act of 1934, as amended, define and
prescribe the conditions for the use of certain non-GAAP financial information.
In Management's Discussion and Analysis of Financial Condition and Results of
Operations, we provide information regarding growth in product revenues
excluding recently acquired product lines, which is a non-GAAP financial
measure. A reconciliation of this non-GAAP financial measure to the most
comparable GAAP measure is provided in Exhibit 99.1 to this quarterly report.

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

General

Integra develops, manufactures, and markets medical devices for use primarily in
neuro-trauma and neurosurgery, plastic and reconstructive surgery, general
surgery and soft tissue repair. Our product lines include traditional medical
devices, such as monitoring and drainage systems, surgical instruments and
fixation systems, as well as innovative tissue repair products, such as the
DuraGen(R) Dural Graft Matrix, the NeuraGen(TM) Nerve Guide and the INTEGRA(R)
Dermal Regeneration Template, that incorporate our proprietary absorbable
implant technology.

15

To provide better insight into how our growth is distributed across our
products, we report revenue by the following product lines:

- - Neuromonitoring products, which include our intracranial monitoring
systems, systems for cerebrospinal fluid drainage and cranial access,
epilepsy monitoring electrodes and our Integra NeuroSupplies(TM)
business;
- - Operating Room products, which include DuraGen Dural Graft Matrix,
NeuraGen Nerve Guide, and our neurosurgical shunts, carotid shunts and
absorbable collagen hemostatic agents;
- - Instruments, which include JARIT(R) Surgical Instruments, Padgett
Instruments, Redmond(TM)-Ruggles(TM) neurosurgical and spinal
instruments, and our ultrasonic aspirators; and
- - Private Label products, which include INTEGRA Dermal Regeneration
Template, VitaCuff(R) catheter access infection control device,
BioPatch(R) Antimicrobial Wound Dressing, and our absorbable collagen
membranes and wound dressings and cranial fixation devices and custom
cranial plates.

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

- - Our Integra NeuroSciences(TM) sales force provides neurosurgeons and
critical care units with implants, devices, instruments, and systems
used in neurosurgery, neuromonitoring, neurotrauma, and related
critical care. Integra NeuroSciences' direct marketing effort in the
United States and Europe currently involves more than 100
professionals, including direct salespeople (called neurospecialists in
the United States), sales managers, and clinical educators who educate
and train both our salespeople and customers in the use of our
products. In all other markets, Integra NeuroSciences products are sold
through a network of distributors.
- - Our JARIT(R) Surgical Instruments sales force markets a wide variety of
high quality surgical instruments for use in both traditional and
minimally invasive surgery in virtually all surgical applications,
including general, plastic, neuro, ear, nose and throat (ENT),
cardiovascular, ob-gyn, and ophthalmic surgical procedures. JARIT sells
its products in the United States through a twenty-person sales
management force that works with over 100 distributor sales
representatives as well as certain original equipment manufacturer
accounts. Outside the United States, JARIT sells its products through a
network of distributors.
- - Our Integra Padgett Instruments sales force markets a wide variety of
high quality, reusable surgical instruments to plastic and
reconstructive surgeons, burn surgeons, ENT surgeons, hospitals,
surgery centers, and other physicians. Padgett markets its surgical
instruments primarily through an eight-person sales force in the United
States. Outside the United States, Padgett sells its products through a
network of distributors.
- - Integra NeuroSupplies(TM) distributes disposables and supplies used in
the diagnosis and monitoring of neurological disorders. We market these
products through an annual catalog primarily to neurologists,
hospitals, sleep clinics, and other physicians in the United States.

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

Products, including food as well as pharmaceuticals and medical devices, that
contain materials derived from animal sources are increasingly subject to
scrutiny in the press and by regulatory authorities. Certain of the Company's
products, including DuraGen(R) Dural Graft Matrix, NeuraGen(TM) Nerve Guide,

16

INTEGRA(R) Dermal Regeneration Template, and BioMend(R) Absorbable Collagen
Membrane, contain material derived from bovine tissue. These products comprised
approximately 28% and 33% of product revenues in the six month periods ended
June 30, 2003 and 2002, respectively. Accordingly, widespread public controversy
concerning collagen products, new regulation, or a ban of the Company's products
containing material derived from bovine tissue, could have a significant adverse
effect on the Company's current business or its ability to expand its business.

Acquisitions

Our strategy for growing our business includes the acquisition of complementary
product lines and companies. Our acquisitions of J. Jamner Surgical Instruments,
Inc. ("JARIT") in March 2003, the epilepsy monitoring and neurosurgical shunt
business of the Radionics division of Tyco Healthcare Group in December 2002,
Padgett Instruments, Inc. in October 2002, certain assets of Novus Monitoring
Limited in September 2002, the neurosciences division of NMT Medical, Inc. in
August 2002, and Signature Technologies, Inc. in July 2002, may make our
financial results for the three and six month periods ended June 30, 2003 not
directly comparable to those of the corresponding prior year periods.

Reported product revenues for the three and six month periods ended June 30,
2003 and 2002 included the following amounts in revenues from acquired product
lines:

Three Months Ended Six Months Ended
June 30, June 30,

------------------ ------------------
2003 2002 2003 2002
------ ------ ------ ------
(in thousands)

17

Results of Operations

Second quarter ended June 30, 2003 compared to second quarter ended June 30,
2002

For the quarter ended June 30, 2003, total revenues increased by $16.3 million,
or 62%, over the quarter ended June 30, 2002 to $42.7 million. Product revenues
increased by $16.5 million, or 66%, over the prior year period and accounted for
all of the growth in total revenues.

Revenues from product lines acquired since the second quarter of 2002 accounted
for $12.2 million of the $16.5 million increase in product revenues over the
prior year period. Excluding revenues from acquired product lines, second
quarter product revenues grew by $4.3 million, or 17%, over the prior year
quarter. Changes in foreign currency exchange rates accounted for $382,000 of
this $4.3 million increase. Domestic product revenues increased $13.0 million in
the second quarter of 2003 to $33.1 million, or 80% of product revenues, as
compared to 81% of product revenues in the second quarter ended June 30, 2002.

Each of our product lines contributed to our revenue growth over the prior year
quarter. Revenues from our neuromonitoring product lines increased $2.2 million,
or 26%, over the prior year period primarily as a result of increased sales of
both our existing drainage systems and those acquired from NMT Medical in 2002
and our intracranial monitoring products. Our operating room product line
revenues increased over the prior year period by $4.4 million, or 53%, largely
as a result of sales of neurosurgical shunt products acquired from NMT Medical
and Radionics in 2002 and continued growth in sales of our DuraGen(R) Dural
Graft Matrix and NeuraGen(TM) Nerve Guide. Revenues from our instrument product
lines increased by 236%, principally as a result of revenues from the Padgett
and JARIT surgical instrument lines we acquired in 2002 and 2003. Increased
sales of our Redmond(TM)-Ruggles(TM) instruments and Selector(R) Integra
Ultrasonic Aspirator product line also contributed to the growth in our
instrument revenues. Our private label product revenue grew by 28%, due in large
part to revenues from Integra Signature Technologies, which we acquired in 2002.
Revenues from our collagen-based private label products increased slightly from
the prior year period as a decline in revenue from the Absorbable Collagen
Sponge we supply for use in Medtronic's INFUSE(TM) bone graft product offset an
increase in revenue from our other collagen-based private label products. Sales
of the Absorbable Collagen Sponge are expected to be lower through mid 2004
while Medtronic's existing inventory is consumed.

We expect that our expanded product lines, distribution channels and domestic
sales force, continued implementation of our direct sales strategy in Europe and
introduction of internally developed and acquired products will drive our future
revenue growth. We also seek to acquire businesses that complement our existing
businesses and products.

Our revenues are subject to quarterly fluctuations, based on business conditions
and on the availability of funds for capital purchases by hospitals. Our
revenues in the fourth quarter of each calendar year typically benefit from
hospitals' utilization of funding available at the end of their fiscal years,
our tying of compensation of our sales people to meeting annual quotas, and
annual minimum purchase requirements in supply and distribution contracts with
our private label customers.

Our gross margin on product revenues in the second quarter of 2003 was 59%,
three percentage points below that of the second quarter of 2002, largely as a
result of the negative impact of $514,000 of fair value purchase accounting
adjustments for acquired inventory sold during the quarter and a change in our
product mix attributable to our acquisition of JARIT Surgical Instruments. We
expect the remaining $400,000 of inventory fair value purchase accounting
adjustments associated with acquired inventory to be charged to cost of product
revenue in the third quarter of 2003. We recorded no fair value purchase
accounting adjustments in the second quarter of 2002.

18

Future gross margins are expected to benefit from our recently completed cost
saving initiatives, which include the following:

- Increased utilization of our Biot, France manufacturing facility with
the transfer of the acquired Radionics product lines;
- the transfer of assembly operations for certain of our drainage systems
and cranial access kits from our recently shutdown Exton, Pennsylvania
assembly plant to our Plainsboro, New Jersey and Anasco, Puerto Rico
facilities;
- the transfer of assembly operations for our Camino(R) and Ventrix(R)
product line monitors from our San Diego, California facility to our
manufacturing facility based in Andover, UK; and
- sourcing our Redmond(TM)-Ruggles(TM)and Padgett instrument lines
through the JARIT procurement operations in Germany.

Other revenue, which consists primarily of development funding from development
and distribution partners and license and distribution revenues, decreased by
$169,000 from the prior year quarter to $1.5 million, as a $511,000 decrease in
licensing and distribution fees offset a $431,000 increase in product
development revenue. The decrease in licensing and distribution fees reflects
the effect of a $500,000 event payment we received from Johnson & Johnson in the
second quarter of 2002.

Total other operating expenses, which excludes cost of product revenue but
includes amortization, increased 51% to $17.4 million in the second quarter of
2003, compared to $11.5 million in the second quarter of 2002. As a percentage
of total revenue, total other operating expenses declined two percentage points
from the prior year period to 41%.

Sales and marketing expenses increased 53% over the prior year period to $9.1
million, as a result of increased sales commissions, the build out of our
marketing and sales support and management functions and recent acquisitions. As
a percentage of product revenues, sales and marketing expenses declined from 24%
in the second quarter of 2002 to 22% in the second quarter of 2003. Contributing
to this decline was the impact of JARIT, whose sales and marketing cost
structure was lower as a percentage of its product revenues than that of our
Integra NeuroSciences and Integra Padgett sales organizations. Additionally, we
incurred higher recruiting and training costs in the first half of 2002 from the
large expansion of the Integra NeuroSciences(TM) sales force. Because a large
portion of sales and marketing expenses is comprised of sales commissions, our
sales and marketing costs are expected to remain relative consistent as a
percentage of product revenues.

Research and development expenses increased 21% to $2.8 million in the second
quarter of 2003, largely as a result of research and development activity in
recently acquired businesses and the development of our next generation
ultrasonic aspirator product line, which is expected to be completed in 2004. We
recently announced our plans to consolidate many of the activities performed in
our Corporate Research Center into our San Diego manufacturing facility. We
anticipate that any potential cost savings from this initiative will be
reallocated to other areas of our research and development and not a reduction
in our overall research and development spending.

We are obligated to pay $1.5 million to the sellers of the Novus Monitoring
Limited assets upon their achievement of a product development milestone. If
such payment is made, we estimate that approximately $1.0 million will be
recorded as an in-process research and development charge. Currently, we expect
that the product development milestone will be achieved in 2004.

General and administrative expenses increased 64% to $4.7 million in the
quarter, due primarily to costs incurred in operating and integrating businesses
acquired in 2002 and 2003 and the additional facilities acquired since the prior
year period. We expect that the rate of increase of general and administrative
expenses will slow as we begin to realize the benefits of recently completed
facility consolidations and continue to rationalize other operations, including

19

our recently announced plans to consolidate our Integra NeuroSupplies
distribution operations based in Connecticut into our Integra Signature
Technologies facility in Massachusetts. Slightly offsetting these expected
benefits is an expected increase in legal fees over the next twelve months
related to the next phase of our litigation with Merck KGaA (see Note 9 to the
unaudited consolidated financial statements) and higher insurance costs.

We expect to incur severance, facility closure, and other costs associated with
the restructuring and facility consolidation activities planned for the
remainder of 2003. We currently estimate that this amount will not exceed
$400,000 and that most of these costs will be incurred in the third quarter of
2003.

Amortization expense increased $109% to $762,000 in the second quarter of 2003,
as a result of amortization of intangible assets from recent acquisitions. In
the near term, amortization expense is expected to remain consistent at
approximately $800,000 per quarter.

NON-OPERATING INCOME AND EXPENSES

We recorded net interest expense of $198,000 in the second quarter of 2003, as
compared to net interest income of $1.0 million in the prior year period,
primarily as a result of $1.0 million of interest expense recorded on the
contingent convertible subordinated notes we issued earlier this year. Of this
amount, approximately $215,000 represents non-cash amortization of debt issuance
costs. For the remainder of 2003, we expect that interest expense associated
with our contingent convertible subordinated notes will exceed the interest
income we earn on the larger cash and marketable securities balances on hand.

We will pay additional interest ("Contingent Interest") on our contingent
convertible subordinated notes if, at thirty days prior to maturity, Integra's
common stock price is greater than $37.56. The fair value of this Contingent
Interest obligation is marked to its fair value at each balance sheet date, with
changes in the fair value recorded to interest expense. At June 30, 2003, the
estimated fair value of the Contingent Interest obligation was $409,000. This
represents a $45,000 increase from the initial fair value estimate and this
increase was recorded in interest expense for the second quarter of 2003.

Debt issuance costs totaled $4.3 million and are being amortized using the
straight-line method over the five-year term of the notes.

Other income increased by $396,000 to $451,000 and included $280,000 in gains
realized on the sale of marketable securities. The remaining increase was
primarily attributable to higher foreign currency-based transaction gains driven
by the weakness in the U.S. dollar against the euro during the second quarter of
2003.

Income tax expense was approximately 36.6% and 35% of income before income taxes
for the second quarter of 2003 and 2002, respectively. Income tax expense for
the second quarter of 2003 and 2002 included a deferred income tax provision of
$2.4 million and $1.8 million, respectively. The increase in the effective
income tax rate in 2003 is based on our expectation that a greater proportion of
taxable income in 2003 will be generated in higher tax jurisdictions.

We reported net income for the second quarter of 2003 of $5.4 million, or $0.18
per diluted share, as compared to net income of $4.2 million, or $0.14 diluted
per share, for the prior year quarter.

In future periods, the "if-converted" method will be used to determine the
dilutive effect on earnings per share of our 2 1/2% contingent convertible notes
due 2008 in periods when the holders of such securities are permitted to
exercise their conversion rights. See Note 5 to the unaudited consolidated

20

financial statements appearing elsewhere in this report and "Liquidity and
Capital Resources" below for a further discussion of the notes.

Six-month period ended June 30, 2003 compared to the six-month period ended June
30, 2002

For the six months ended June 30, 2003, total revenues increased by $27.2
million, or 52%, over the six months ended June 30, 2002 to $79.5 million.
Product revenues increased by $27.1 million, or 55%, over the prior year period
and accounted for substantially all of the growth in total revenues.

Revenues of products acquired since the second quarter of 2002 accounted for
$18.4 million of the $27.1 million increase in product revenues over the prior
year period. Excluding revenues from acquired product lines, product revenues
grew by $8.7 million, or 18%, over the prior year period. Changes in foreign
currency exchange rates accounted for $807,000 of this increase. Domestic
product revenues increased $20.9 million during 2003 to $60.4 million, or 79% of
product revenues, as compared to 80% of product revenues during 2002.

Each of our product lines contributed to our revenue growth over the prior year
period. Revenues from our neuromonitoring product lines increased $4.1 million,
or 24%, over the prior year period primarily as a result of increased sales of
both our existing drainage systems and those acquired from NMT Medical in 2002
and our intracranial monitoring products. Our operating room product line
revenues increased over the prior year period by $9.2 million, or 56%, largely
as a result of sales of neurosurgical shunt products acquired from NMT Medical
and Radionics in 2002 and continued growth in sales of our DuraGen(R) Dural
Graft Matrix and NeuraGen(TM) Nerve Guide. Revenues from our instrument product
lines increased by 148%, principally as a result of revenues from the Padgett
and JARIT surgical instrument lines we acquired in 2002 and 2003. Increased
sales of our Redmond(TM)-Ruggles(TM) instruments and Selector(R) Integra
Ultrasonic Aspirator product line also contributed to the growth in our
instrument revenues. Our private label product revenue grew by 32%, due in large
part to revenues from Integra Signature, which we acquired in 2002.

Our gross margin on product revenues in 2003 was 60% as compared to 61% for the
prior year period. The decrease was largely the result of the negative effect of
approximately $860,000 of fair value purchase accounting adjustments for
acquired inventory sold in 2003 and a change in our product mix attributable to
our acquisition of JARIT Surgical Instruments. We recorded approximately $40,000
of fair value purchase accounting adjustments in the prior year period.

Other revenue increased by $84,000 from the prior year to $3.1 million, as a
$986,000 increase in product development revenue was largely offset by a
$766,000 decrease in licensing and distribution fees and a $146,000 decrease in
government grant funding. The decrease in licensing and distribution fees
reflects the effect of $750,000 in event payments we received from Johnson &
Johnson in the six months ended June 30, 2002.

Total other operating expenses, which exclude cost of product revenues but
include amortization, increased 46% to $33.0 million during 2003, compared to
$22.5 million in the prior year period. As a percentage of total revenue, total
other operating expenses declined two percentage points from the prior year
period to 41%.

Sales and marketing expenses increased 44% over the prior year period to $16.7
million, as a result of increased sales commissions, the build out of our
marketing and sales support and management functions and recent acquisitions. As
a percentage of product revenues, sales and marketing expenses declined slightly
from 24% in 2002 to 22% in the six months ending June 30, 2003. Contributing to
this decline was the impact of JARIT, whose sales and marketing cost structure

21

was lower as a percentage of its product revenues than that of our Integra
NeuroSciences and Integra Padgett sales organizations. Additionally, we incurred
higher recruiting and training costs in the first half of 2002 from the large
expansion of the Integra NeuroSciences(TM) sales force.

Research and development expenses increased 24% to $5.4 million in 2003, largely
as a result of research and development activity in businesses acquired in 2002
and the development of a next generation ultrasonic aspirator product line.

General and administrative expenses increased 63% to $9.6 million in 2003, due
primarily to costs incurred in operating and integrating businesses acquired in
2002 and 2003. We expect that the rate of increase of general and administrative
expenses will slow as we complete the integration of our acquired businesses and
consolidate certain of our existing facilities.

Amortization expense increased 88% during 2003 to $1.3 million, as a result of
amortization of intangible assets from recent acquisitions.

NON-OPERATING INCOME AND EXPENSES

We recorded net interest income of $578,000 in the six months ended June 30,
2003, as compared to net interest income of $2.0 million in the prior year
period. This $1.4 million decrease was the result of a continued decline in
interest rates earned on our invested cash and the $1.0 million of interest
expense on the contingent convertible notes we issued in 2003.

In the six month period ended June 30, 2003, we realized a $500,000 gain on the
sale of available-for-sale securities. This gain was reported in other income
(expense), net.

Income tax expense was approximately 36.5% and 35% of income before income taxes
for the six-month periods ending June 30, 2003 and 2002, respectively. Income
tax expense for the six months ending June 30, 2003 and 2002 included a deferred
income tax provision of $5.0 million and $3.6 million, respectively. The
increase in the effective income tax rate in 2003 is based on our expectation
that a greater proportion of taxable income in 2003 will be generated in higher
tax jurisdictions.

We reported net income for the six-month period ending June 30, 2003 of $10.9
million, or $0.36 per diluted share, as compared to net income of $8.3 million,
or $0.27 per diluted share, for the prior year period.

International Product Revenues and Operations

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 certain revenues and
incur certain operating expenses in British pounds and the euro, we will
experience currency exchange risk with respect to foreign currency denominated
revenues or expenses. We expect our exposure to currency exchange risk to
increase in the future because the recently acquired JARIT business purchases
substantially all of its instruments from vendors in Europe in euro-denominated
transactions, but generates the majority of its sales in U.S. dollars.
Additionally, we are substantially increasing the use of these vendors for
purchases of our remaining instrument product lines (Redmond(TM)-Ruggles(TM),

22

Padgett). Historically, we have purchased the majority of these instruments
through vendors in U.S. dollar-denominated transactions.

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

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

Our sales to foreign markets may be affected by local economic conditions.
Relationships with customers and effective terms of sale frequently vary by
country, and foreign sales often result in longer-term receivables than are
typical in the United States.

Product revenues by major geographic area are summarized below:

In the six months ending June 30, 2003, product revenues from customers outside
the United States totaled $16.0 million, or 21% of consolidated product revenue,
of which approximately 67% were to European customers. Of this amount, $8.3
million was generated in foreign currencies primarily by our foreign-based
subsidiaries in the United Kingdom, Germany and France.

In the six months ending June 30, 2002, product revenues from customers outside
the United States totaled $9.8 million, or 20% of consolidated product revenue,
of which approximately 60% were to European customers. Of this amount, $3.0
million was generated in foreign currencies by our foreign-based subsidiaries in
the United Kingdom, Germany and France.

Liquidity and Capital Resources

Cash provided by operations has recently been and is expected to continue to be
our primary means of funding existing operations and capital expenditures. Prior
to 2001, we primarily relied on funds generated from private and public
offerings of equity securities, research and collaboration funding, and
borrowings under a revolving credit line to fund existing operations and capital
expenditures. Since 2001, we have generated positive operating cash flows on an
annual basis, including $15.7 million in 2001 and $32.0 million in 2002, and we
generated $23.1 million of operating cash flows in the six months ending June
30, 2003.

Our principal uses of funds during the six month period ended June 30, 2003 were
$42.2 million for acquisition consideration, $35.3 million for the purchase of
treasury stock and $1.4 million for purchases of property and equipment.
Principal sources of funds were approximately $116.1 million from the issuance
of convertible notes, $23.1 million in operating cash flows and $7.1 million
from the issuance of common stock through the exercise of stock options.

23

In March and April 2003, we received approximately $116.1 million of net
proceeds from the sale of $120 million of our contingent convertible
subordinated notes due 2008. We will pay interest on the notes at an annual rate
of 2 1/2% each September 15th and March 15th. We will also pay contingent
interest on the notes if, at thirty days prior to maturity, Integra's common
stock price is greater than $37.56. The contingent interest will be payable for
each of the last three years the notes remain outstanding in an amount equal to
the greater of i) 0.50% of the face amount of the notes and ii) the amount of
regular cash dividends paid during each such year on the number of shares of
common stock into which each note is convertible. Holders of the notes may
convert them into shares of our common under certain circumstances, including
when the market price of our common stock on the previous trading day is more
than $37.56 per share, based on an initial conversion price of $34.15 per share.

The notes are general, unsecured obligations of Integra and will be subordinate
to any future senior indebtedness. We cannot redeem the notes prior to their
maturity and the notes' holders may compel us to repurchase the notes upon a
change of control.

On August 12, 2003, we entered into an interest rate swap agreement with a $50
million notional amount to hedge the risk of changes in fair value attributable
to interest rate risk with respect to a portion of the notes. We will receive a
2 1/2% fixed rate from the counterparty, payable on a semi-annual basis, and
will pay to the counterparty a floating rate based on 3 month LIBOR minus 35
basis points, payable on a quarterly basis. The interest rate swap agreement
terminates on March 15, 2008, subject to early termination upon the occurrence
of certain events, including redemption or conversion of the contingent
convertible notes. We will account for the interest rate swap as a fair value
hedge in accordance with SFAS No. 133, as amended "Accounting for Derivative
Instruments and Hedging Activities".

We used approximately $35.3 million of the proceeds from the notes offering to
repurchase 1.5 million shares of our common stock.

At June 30, 2003, we had cash, cash equivalents and current and non-current
investments totaling approximately $202.0 million. Our investments consist
almost entirely of highly liquid, interest bearing debt securities. We believe
that our cash and marketable securities are sufficient to finance our operations
and capital expenditures in the short term. However, given the significant level
of liquid assets and our objective to grow by acquisitions and alliances, our
financial position and future financial results could change significantly if we
were to use a significant portion of our liquid assets.

We are obligated to pay $3.0 million for interest per year on our contingent
convertible notes and to repay their principal amount of $120.0 million on March
15, 2008. We are contractually obligated to pay the following amounts under the
terms of operating lease agreements for our facilities:

2003 $2.0 million
2004 1.7 million
2005 0.9 million
2006 0.8 million
2007 0.8 million
Thereafter 2.0 million

We are obligated to pay Novus an additional $1.5 million upon Novus' achievement
of a development milestone and up to an additional $2.5 million based upon
revenues from Novus' products. Additionally, we are obligated to pay royalties
based on sales of certain of our products, including $0.2 million in future
guaranteed minimum royalty payments to the seller of a business we acquired in
2001, and fees to various group purchasing organizations based on a percentage
of sales of certain of our products. We have no other significant future
contractual obligations.

24

In February 2003, our Board of Directors authorized us to repurchase up to an
additional 1,000,000 shares of our common stock for an aggregate purchase price
not to exceed $15 million. We may repurchase shares under this program through
February 2004 either in the open market or in privately negotiated transactions.
Repurchases under this program are separate and in addition to the 1.5 million
shares of common stock repurchased concurrent with the issuance of the
contingent convertible notes in March 2003. Through June 30, 2003, we did not
repurchase any shares of our common stock under this program.

During 2002, we repurchased approximately 100,000 shares of our common stock
under a previously authorized share repurchase program.

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE

Our Operating Results May Fluctuate.

Our operating results 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 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.

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

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

25

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

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

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 12 businesses or product lines at a
total cost of approximately $107 million.

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

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

26

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

Our products under development are subject to FDA approval or clearance prior to
marketing for commercial use. The process of obtaining necessary FDA approvals
or clearances can take years and is expensive and full of uncertainties. Our
inability to obtain required regulatory approval on a timely or acceptable basis
could harm our business. Further, approval or clearance may place substantial
restrictions on the indications for which the product may be marketed or to whom
it may be marketed. Further studies, including clinical trials and FDA
approvals, may be required to gain approval for the use of a product for
clinical indications other than those for which the product was initially
approved or cleared or for significant changes to the product. In addition, for
products with an approved premarket approval application (PMA), the

FDA requires annual reports and may require post-approval surveillance programs
to monitor the products' safety and effectiveness. Results of post-approval
programs may limit or expand the further marketing of the product.

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

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

The FDA and foreign regulatory authorities require that our products be
manufactured according to rigorous standards. These regulatory requirements may
significantly increase our production or purchasing costs and may even prevent
us from making or obtaining our products in amounts sufficient to meet market
demand. If a third-party manufacturer or we change our approved manufacturing
process, the FDA may require a new approval before that process may be used.
Failure to develop our manufacturing capability may mean that even if we develop
promising new products, we may not be able to produce them profitably, as a
result of delays and additional capital investment costs. Manufacturing
facilities, both international and domestic, are also subject to inspections by
or under the authority of the FDA. In addition, failure to comply with
applicable regulatory requirements could subject us to enforcement action,
including product seizures, recalls, withdrawal of clearances or approvals,
restrictions on or injunctions against marketing our product or products based
on our technology, and civil and criminal penalties. See
"Business--Regulation--Government Regulation" in our 2002 Annual Report on Form
10-K.

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

27

Certain of our products, including the DuraGen(R) Dural Graft Matrix and the
INTEGRA(R) Dermal Regeneration Template, contain material derived from bovine
tissue. Products that contain materials derived from animal sources, including
food as well as pharmaceuticals and 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
Canada, 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. A recent case of BSE discovered
in Canada has 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 Achilles tendon of cattle from the United
States, where no cases of BSE have been reported. Scientists and regulatory
authorities classify the Achilles tendon as having a negligible risk of
containing the agent that causes BSE (an improperly folded protein known as a
prion) compared with other parts of the body. Additionally, we use processes in
the manufacturing of our products that are believed to inactivate prions.
Nevertheless, products that contain materials derived from animals, including
our products, may become subject to additional regulation, or even be banned in
certain countries, because of concern over the potential for prion transmission.
Accordingly, new regulation, or a ban of our products, could have a significant
adverse effect on our current business or our ability to expand our business.

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
may interfere with the widespread acceptance in the market for 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 of competitive products 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

28

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

Our revenue stream and our business strategy depend 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 distribution alliances are our agreement with Ethicon, Inc., a
division of Johnson & Johnson, relating to INTEGRA(R) Dermal Regeneration
Template, and our agreement with the Wyeth BioPharma division of Wyeth for the
development of collagen matrices to be used in conjunction with Wyeth
BioPharma's recombinant bone protein, a protein that stimulates the growth of
bone in humans. Termination of these 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.

Ethicon has not been successful in selling the minimum amounts of INTEGRA(R)
Dermal Regeneration Template specified in its agreement with us. In addition, we
have notified Ethicon that certain clinical and regulatory events have been
achieved under the agreement and that payments for the achievement of those
events is due to us. Ethicon has informed us that it disagrees that the clinical
and regulatory events in question have been achieved, and that it does not
intend to make the payments we have demanded. In addition, Ethicon has informed
us that if we do not agree to substantial amendments to its agreement with us,
it will consider alternatives that may include exercising its right to terminate
the agreement.

The agreement requires Ethicon to give us notice one year in advance of a
termination of the agreement, during which time Ethicon is required to continue
to comply with the terms of the contract. At the end of that period, Ethicon may
be required to pay additional amounts based on the termination provisions of the
agreement and is required to cooperate in the transfer of the business back to
Integra. Additionally, Ethicon may apply the value of any minimum payments in
excess of actual product purchases against future purchases of products for sale
on a non-exclusive basis for a specified period of time.

If Ethicon does terminate the agreement or if we determine that Ethicon is in
breach of the agreement and we terminate the agreement, there is no assurance
that we will be able to recover the money that we believe Ethicon is obligated
to pay us under the agreement. If Ethicon does give us notice that it will
terminate the agreement, it is possible that Ethicon will diminish its sales and
marketing efforts for the product during the one-year notice period and that its
sales will decline as a result. In addition, we may not be successful in
sustaining or restoring the sales of the INTEGRA(R) Dermal Regeneration Template
at current levels after the termination date. Finally, if Ethicon terminates the
agreement it is possible that we may become involved in litigation with Ethicon,
which could also impair our ability to sell products under our other agreements
with Ethicon, including the BioPatch(R) and Instat(R) products.
Our ability to enter into agreements with collaborators depends in part on
convincing them that our technology can help them achieve their goals and
execute their strategies. This may require substantial time, effort and expense
on our part with no guarantee that a relationship will result. We may not be
able to establish or maintain these relationships on commercially acceptable
terms. Our future agreements may not ultimately be successful. Even if we enter
into collaborative or alliance agreements, our collaborators could terminate
these agreements, or these agreements could expire before meaningful

29

developmental milestones are reached. The termination or expiration of any of
these relationships could have a material adverse effect on our business.

Much of the revenue that we may receive under these collaborations will depend
upon our collaborators' ability to successfully introduce, market and sell new
products derived from our products. Our success depends in part upon the
performance by these collaborators of their responsibilities under these
agreements. Some collaborators may not perform their obligations as we expect.
Some of the companies we currently have alliances with or are targeting as
potential allies offer products competitive with our products or may develop
competitive production technologies or competitive products outside of their
collaborations with us that could have a material adverse effect on our
competitive position.
In addition, our role in the collaborations is mostly limited to the production
aspects. As a result, we may also be dependent on collaborators for other
aspects of the development, preclinical and clinical testing, regulatory
approval, sales, marketing and distribution of our products. If our current or
future collaborators fail to market our products effectively or to develop
additional products based on our technology, our sales and other revenues could
significantly be reduced.

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

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

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

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

Our competitive position is also dependent upon unpatented trade secrets. Trade
secrets are difficult to protect. We cannot assure you that others will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to our trade secrets, that our trade secrets
will not be disclosed, or that we can effectively protect our rights to
unpatented trade secrets.
In an effort to protect our trade secrets, we have a policy of requiring our
employees, consultants and advisors to execute proprietary information and
invention assignment agreements upon commencement of employment or consulting
relationships with us. These agreements provide that, except in specified
circumstances, all confidential information developed or made known to the
individual during the course of their relationship with us must be kept
confidential. We cannot assure you, however, that these agreements will provide
meaningful protection for our trade secrets or other proprietary information in
the event of the unauthorized use or disclosure of confidential information.

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

30

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

It May Be Difficult To Replace Some Of Our Suppliers.

Outside vendors, some of whom are sole-source suppliers, provide key components
and raw materials used in the manufacture of our products. Although we believe
that alternative sources for many of these components and raw materials are
available, any supply interruption in a limited or sole source component or raw
material could harm our ability to manufacture our products until a new source
of supply is identified and qualified. In addition, an uncorrected defect or
supplier's variation in a component or raw material, either unknown to us or
incompatible with our manufacturing process, could harm our ability to
manufacture products. We may not be able to find a sufficient alternative
supplier in a reasonable time period, or on commercially reasonable terms, if at
all, and our ability to produce and supply our products could be impaired. We
believe that these factors are most likely to affect our Camino(R) and
Ventrix(R) lines of intracranial pressure monitors and catheters, which we
assemble using many different electronic parts from numerous suppliers. While we
are not dependent on sole-source suppliers, if we were suddenly unable to
purchase products from one or more of these companies, we could need time a
significant period of time to qualify a replacement, and the production of any
affected products could be disrupted. While it is our policy to maintain
sufficient inventory of components so that our production will not be
significantly disrupted even if a particular component or material is not
available for a period of time, we remain at risk that we will not be able to
qualify new components or materials quickly enough to prevent a disruption if
one or more of our suppliers ceases production of important components or
materials.

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

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

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

In order to protect or enforce our intellectual property rights, we may have to
initiate legal proceedings against third parties, such as infringement suits or
interference proceedings. Intellectual property litigation is costly, and, even

31

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 operating subsidiaries based in Europe and we generate certain
revenues and incur certain operating expenses in British pounds and the euro, we
experience currency exchange risk with respect to those foreign currency
denominated revenues and expenses. Since we operate major facilities in the
United Kingdom and France and purchase most of our surgical instruments in
Germany (most of which we sell in the United States), our foreign currency
denominated expenditures are expected to exceed our foreign currency denominated
revenues.

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

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

Our sales to foreign markets may be affected by local economic conditions.
Relationships with customers and effective terms of sale frequently vary by
country, often with longer-term receivables than are typical in the United
States.

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

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

o major third-party payors of hospital services, including Medicare, Medicaid
and private health care insurers, have substantially revised their payment
methodologies, which has resulted in stricter standards for reimbursement of
hospital charges for certain medical procedures;
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;

32

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 there is economic pressure to contain health care costs in international
markets;
o there are proposed and existing laws and regulations 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.

In addition, 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.

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.

33

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.

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" which
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 the Company, including those described under "Risk
Factors" in the Company's Annual Report on Form 10-K for the year ended December
31, 2002 filed with the Securities and Exchange Commission and those set forth
under the heading "Factors That May Affect our Future Performance" in this
report. 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.

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.

34

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have exposure to financial risk from changes in foreign exchange rates and
interest rates.

Foreign Currency Exchange

A discussion of foreign currency exchange risks is provided under the caption
"International Product Revenues and Operations" under "Management's Discussion
and Analysis of Financial Condition and Results of Operations".

Interest Rate and Credit Risk

We are exposed to the risk of interest rate fluctuations on the fair value and
interest income earned on our cash and cash equivalents and investments in
available-for-sale marketable debt securities and on the fair value of our
contingent convertible notes.

A hypothetical 100 basis point movement in interest rates applicable to our cash
and cash equivalents and investments in marketable debt securities outstanding
at June 30, 2003 would increase or decrease interest income by approximately
$2.0 million on an annual basis. We are not subject to material foreign currency
exchange risk with respect to these investments.

On August 12, 2003, we entered into an interest rate swap agreement with a $50
million notional amount to hedge the risk of changes in fair value attributable
to interest rate risk with respect to a portion of the contingent convertible
notes. We will receive a 2 1/2% fixed rate from the counterparty, payable on a
semi-annual basis, and will pay to the counterparty a floating rate based on 3
month LIBOR minus 35 basis points, payable on a quarterly basis.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Senior Vice President, Finance and Treasurer, as appropriate, to
allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management is required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we have carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and Senior Vice President, Finance and Treasurer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the quarter covered by this report. Based on the
foregoing, our Chief Executive Officer and Senior Vice President, Finance and
Treasurer concluded that our disclosure controls and procedures were effective
at the reasonable assurance level.

There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.

35

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

In October 2000, the Court entered judgment in our favor and against Merck KGaA
in the case. In entering the judgment, the Court also granted to us pre-judgment
interest of approximately $1,350,000, bringing the total award to approximately
$16,350,000, plus post-judgment interest. Merck KGaA filed various post-trial
motions requesting a judgment as a matter of law notwithstanding the verdict or
a new trial, in each case regarding infringement, invalidity and damages. In
September 2001, the 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 Court to the United
States Court of Appeal for the Federal Circuit. In June 2003, the appellate
court affirmed the Court's finding of infringement but found that the basis of
the jury's calculation of damages was not clear from the trial record. The
appellate court remanded the case to the trial court for further factual
development and a new calculation of damages consistent with the appellate
court's decision. The date of the new damages trial has not yet been determined.

We have not recorded any gain in connection with this matter.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On April 16, 2003, we issued and sold, in a private placement, $15.0 million
aggregate principal amount of 2 1/2% Contingent Convertible Subordinated Notes
due March 15, 2008. The notes are convertible into our common stock at a
conversion rate of 29.2847 shares of common stock per $1,000 principal amount of
notes, which is equivalent to an initial conversion price of approximately
$34.15 per share. Conversion of the notes is subject to certain conditions,
including when the market price of our common stock on the previous trading day
is more than 110% of the conversion price. In addition to fixed interest at the
rate of 2 1/2% per year, the notes also pay contingent interest under certain
circumstances. See Note 5 to our unaudited financial statements.

We sold the notes to Credit Suisse First Boston LLC, Banc of America Securities
LLC, and U.S. Bancorp Piper Jaffray Inc. in reliance upon the private placement
exemption afforded by Section 4(2) of the Securities Act of 1933, as amended.
The initial purchasers offered and sold the notes to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933, as amended. We have

36

agreed to file a registration statement under the Securities Act to permit
registered resales of the notes and of the common stock issuable upon their
conversion.

The aggregate offering price of the notes was $15.0 million, 100% of the
principal amount thereof plus accrued interest from March 31, 2003. We received
aggregate net proceeds of approximately $14.6 million, the difference between
the aggregate offering price of the notes and the initial purchasers' discount
of $450,000 million, or 3% of the principal amount of the notes.

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

The Company's Annual Meeting of Stockholders was held on May 21, 2003 and in
connection therewith, management solicited proxies pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended. An aggregate of
25,985,421 shares of the Company's common stock was outstanding and entitled to
a vote at the meeting. At the meeting the following matters (not including
ordinary procedural matters) were submitted to a vote of the holders of the
common stock, with the results indicated below:

1. Election of directors to serve until the 2004 Annual Meeting. The following
persons, all of whom were serving as directors and were management's nominees
for election, were elected. There was no solicitation in opposition to such
nominees. The tabulation of votes was as follows:

2. Approval of the Company's 2003 Equity Incentive Plan. The Company's 2003
Equity Incentive Plan was approved. The tabulation of votes was as follows:

For Against Abstentions
---------- --------- -----------
16,058,447 7,189,893 10,577

3. Ratification of independent auditors. The appointment of
PricewaterhouseCoopers LLP as the Company's independent auditors for the current
fiscal year was ratified. The tabulation of votes was as follows:

For Against Abstentions
---------- --------- -----------
22,641,026 614,936 2,955

37

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1 Certification of Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer and Principal Financial
Officer Pursuant to 18 U.S.C. Section 1350, as created
by Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Reconciliation of non-GAAP financial measures to the most comparable
GAAP measure.

(b) Reports on Form 8-K

On June 27, 2003 we filed a report on Form 8-K to update pro forma information
related to our March 17, 2003 acquisition of all of the issued and outstanding
capital stock of J. Jamner Surgical Instruments, Inc. and to report the results
of our annual meeting of stockholders.

On June 27, 2003, we filed a report on Form 8-K to update portions of our Annual
Report on Form 10-K for the year ended December 31, 2002 to reflect our change
to a single operating segment and to remove certain non-GAAP disclosures.

On June 18, 2003, we filed a report on Form 8-K regarding the ruling of the
United States Court of Appeals for the Federal Circuit in the case of Integra
LifeSciences (et. al.) vs. Merck KGaA, et. al.

On April 25, 2003 we filed a report on Form 8-K regarding our earnings for the
quarter ended March 31, 2003.

38

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

INTEGRA LIFESCIENCES HOLDINGS CORPORATION

Date: August 14, 2003 /s/ Stuart M. Essig
-------------------
Stuart M. Essig
President and Chief Executive Officer

Date: August 14, 2003 /s/ David B. Holtz
-------------------
David B. Holtz
Senior Vice President, Finance and Treasurer

39

Exhibits

31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer and Principal Financial
Officer pursuant to 18 U.S.C. Section 1350, as created
by Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Reconciliation of non-GAAP financial measures to the most comparable
GAAP measure.

40

EXHIBIT 31.1

Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Stuart M. Essig, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Integra
LifeSciences Holdings Corporation;

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the
end of the period covered by this report based on
such evaluation; and
c) disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has
materially affected, or is reasonably likely to
materially affect, the registrant's internal control
over financial reporting; and

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting,, to the registrant's
auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.

Date: August 14, 2003

/s/ Stuart M. Essig

------------------------
Stuart M. Essig
Chief Executive Officer

EXHIBIT 31.2

Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, David B. Holtz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Integra
LifeSciences Holdings Corporation;

2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;

3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the
end of the period covered by this report based on
such evaluation; and
c) disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has
materially affected, or is reasonably likely to
materially affect, the registrant's internal control
over financial reporting; and

5. The registrant's other certifying officer and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses
in the design or operation of internal control over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal control over
financial reporting.

Date: August 14, 2003

/s/ David B. Holtz

------------------------
David B. Holtz
Senior Vice President, Finance and
Treasurer

Exhibit 32.1

Certification of Principal Executive Officer
Pursuant to Section 906 of the
Sarbanes -Oxley Act of 2002

I, Stuart M. Essig, Chief Executive Officer of Integra LifeSciences
Holdings Corporation (the "Company"), hereby certify that, to my knowledge:

1. The Quarterly Report on Form 10-Q of the Company for the three
and six month periods ended June 30, 2003 (the "Report") fully
complies with the requirement of Section 13(a) or Section
15(d), as applicable, of the Securities Exchange Act of 1934,
as amended; and

2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.

Date: August 14, 2003

By: /s/ Stuart M. Essig
-----------------------
Stuart M. Essig
Chief Executive Officer

Certification of Principal Financial Officer
Pursuant to Section 906 of the
Sarbanes -Oxley Act of 2002

I, David B. Holtz, Senior Vice President, Finance and Treasurer of
Integra LifeSciences Holdings Corporation (the "Company"), hereby certify that,
to my knowledge:

1. The Quarterly Report on Form 10-Q of the Company for the three
and six month period ended June 30, 2003 (the "Report") fully
complies with the requirement of Section 13(a) or Section
15(d), as applicable, of the Securities Exchange Act of 1934,
as amended; and

2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.

Date: August 14, 2003 By: /s/ David B. Holtz
--------------------------------
David B. Holtz
Sr. Vice President, Finance and
Treasurer

Exhibit 99.1

Reconciliation of non-GAAP financial measures to the most comparable GAAP
measure:

1. In discussing increases in product revenues in the second quarter
ended June 30, 2003 vs. the second quarter ended June 30, 2002, we
state the following:

"Excluding revenues from acquired product lines, second quarter product
revenues grew by $4.3 million, or 17%, over the prior year quarter."

2. In discussing increases in product revenues for the six month period
ended June 30, 2003 vs. the six month period ended June 30, 2002, we
state the following:

"Excluding revenues from acquired product lines, product revenues grew
by $8.7 million, or 18%, over the prior year period."