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, 2004

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 4, 2004 THE REGISTRANT HAD OUTSTANDING 28,768,934 SHARES OF
COMMON STOCK, $.01 PAR VALUE.

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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,
2004 2003
------------ ------------

Commitments and contingencies

4

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

5

INTEGRA LIFESCIENCES HOLDINGS CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF PRESENTATION

General

In the opinion of management, the June 30, 2004 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 and cash flows 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, 2003 included in the Company's Annual Report on Form 10-K.
Operating results for the three and six month periods ended June 30, 2004 are
not necessarily indicative of the results to be expected for the entire year.

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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, and loss
contingencies. 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.

Recently Issued Accounting Standards

In March 2004, the FASB Emerging Issues Task Force (EITF) reached a consensus on
Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments". Issue 03-01 provides guidance regarding recognition and
measurement of unrealized losses on available-for-sale debt and equity
securities accounted for under Statement of Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity Securities". The
recognition and measurement provisions of Issue 03-01 are to be applied to
other-than-temporary impairment evaluations in reporting periods beginning after
June 15, 2004. The Company does not expect the adoption of Issue 03-01 to have a
material impact on its financial position, cash flows or results of operations.

In March 2004, the EITF reached a consensus on Issue 03-6, "Participating
Securities and the Two-Class Method Under FASB Statement No. 128". Issue 03-6
expanded the notion of participation rights in calculating earnings per share
from previous practice. Issue 03-6 does not focus on a security holder's
contractual rights to ultimately receive the undistributed earnings and net
assets of the company upon redemption or liquidation. Instead, it defines
participation rights based solely on whether the holder would be entitled to
receive any dividends declared during the period, even if the company would not
declare any dividends during the period due to economic or practical concerns or
legal or contractual limitations on the company's ability to pay dividends.

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Under Issue 03-6, all securities that meet the definition of a participating
security, regardless of whether the securities are convertible, non-convertible,
or potential common stock securities, will be considered for inclusion in the
computation of basic earnings per share using the two-class method. The
application of the two-class method may also have an impact on the diluted
earnings per share calculation due to the need to consider each type of
potential common shares in the proper sequence to arrive at maximum dilution.

Integra adopted the provisions of Issue 03-6 during the second quarter ended
June 30, 2004. The transition provisions of Issue 03-6 require prior period
earnings per share amounts to be restated to conform to the new standard,
including the impact relating to securities that have been extinguished but were
outstanding for a portion of some prior period that is presented for comparative
purposes. Accordingly, in the future, Integra will restate its earnings per
share calculations for the year ended December 31, 2001 to conform to the
two-class method required by Issue 03-6 as it relates to the dividend
participation rights included in the Series B and Series C Convertible Preferred
Stock that were outstanding during that period. The adoption of Issue 03-6 will
reduce previously reported basic earnings per share by $0.05 to $1.03 and
diluted earnings per share by $0.02 to $0.92 in 2001. The adoption of Issue 03-6
will not change the previously reported basic or diluted earnings per share for
any other year.

Equity-Based Compensation

The Company recognizes employee stock based compensation 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 option 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:

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 the Black-Scholes
model.

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On March 31, 2004, the FASB issued an Exposure Draft "Share-Based Payment - An
Amendment of FASB Statements No. 123 and 95." The Exposure Draft addresses the
accounting for transactions in which a company receives employee services in
exchange for (a) equity instruments of the company or (b) liabilities that are
based on the fair value of the company's equity instruments or that may be
settled by the issuance of such equity instruments. The proposed Statement would
eliminate the ability to account for share-based compensation transactions using
APB Opinion No. 25, and generally would require instead that such transactions
be accounted for using a fair-value based method. The Exposure Draft proposes
that the cost of all forms of equity-based compensation granted to employees,
excluding employee stock ownership plans, be recognized in a company's income
statement and that such cost be measured at the fair value of the stock options.
As proposed, the new rules would be applied on a modified prospective basis as
defined in the Exposure Draft, and would be effective for fiscal years beginning
after December 15, 2004. The Company is currently evaluating option valuation
methodologies and assumptions in light of the evolving accounting standards
related to employee stock options. Current estimates of option values using the
Black-Scholes method (as shown above) may not be indicative of results from
valuation methodologies ultimately adopted in the final rules.

2. BUSINESS ACQUISITIONS

In May 2004, the Company acquired the MAYFIELD(R) Cranial Stabilization and
Positioning Systems and the BUDDE(R) Halo Retractor System business from
Schaerer Mayfield USA, Inc. (formerly Ohio Medical Instrument Company) for $20.0
million in cash paid at closing and a $0.3 million working capital adjustment.
The MAYFIELD and BUDDE lines include skull clamps, headrests, reusable and
disposable skull pins, blades, retractor systems, and spinal implants. MAYFIELD
systems are the market leader in the United States and have been used by
neurosurgeons for over thirty years. The products are sold in the United States
through the Integra NeuroSciences direct sales organization and through
distributors in international markets.

The acquired business includes a facility located in Cincinnati, Ohio that
manufactures, packages and distributes MAYFIELD and BUDDE stabilization
products, as well as a broad line of related instruments and disposables used in
many neurosurgical and spinal procedures. In addition, as part of the
acquisition, Integra entered into a long-term license with SM USA, Inc., a
wholly owned subsidiary of Schaerer Mayfield USA, Inc., for the use of the
MAYFIELD name in connection with the acquired business.

In connection with this acquisition, the Company preliminarily recorded $8.2
million of goodwill and $8.0 million of intangible assets, consisting of a
non-compete agreement, trade name, and technology, which are being amortized on
a straight-line basis over lives ranging from 5 to 30 years. The following table
summarizes the preliminary fair value of the assets acquired and liabilities
assumed in this acquisition (in thousands):

In May 2004, the Company acquired all of the capital stock of Berchtold
Medizin-Elektronik GmbH, now named Integra ME, from Berchtold Holding GmbH for
$5.0 million in cash, subject to a working capital adjustment. Integra ME
manufactures and markets the ELEKTROTOM(R) line of electrosurgery generators and
the SONOTOM(R) ultrasonic surgical aspirator, as well as a broad line of related
handpieces, instruments and disposables used in many surgical procedures,
including neurosurgery. Integra ME markets and sells its products to hospitals
and physicians primarily through a network of distributors.

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The acquired business includes a facility located in Tuttlingen, Germany that
manufactures, packages and distributes the ELEKTROTOM and SONOTOM products. This
acquisition provided Integra with additional devices for the European and
international markets and an existing infrastructure through which it can sell
certain of its other products directly into Germany.

In connection with this acquisition, the Company preliminarily recorded $1.8
million of goodwill and $1.3 million of intangible assets, consisting primarily
of trade name, technology, and customer relationships, which are being amortized
on a straight-line basis over lives ranging from 3 to 10 years.

In January 2004, the Company acquired the R&B instrument business from R&B
Surgical Solutions, LLC for approximately $2.0 million in cash. The R&B
instrument line is a complete line of high-quality handheld surgical instruments
used in neuro- and spinal surgery. The Company markets these products through
its JARIT sales organization. In connection with this acquisition, the Company
recorded approximately $1.5 million of intangible assets and goodwill. The
acquired intangible assets are being amortized on a straight-line basis over
lives ranging from 5 to 20 years. If the Company had consummated this
acquisition as of the beginning of 2003, its operating results would not have
been materially different from those herein.

In January 2004, the Company acquired the Sparta disposable critical care
devices and surgical instruments business from Fleetwood Medical, Inc. for
approximately $1.6 million in cash. The Sparta product line includes products
used in plastic and reconstructive, ear, nose and throat (ENT), neuro,
ophthalmic and general surgery. The Company sells the Sparta products through a
direct marketing organization and an existing distributor network. In connection
with this acquisition, the Company recorded approximately $1.5 million of
intangible assets and goodwill. The acquired intangible assets are being
amortized on a straight-line basis over 5 years. If the Company had consummated
this acquisition as of the beginning of 2003, its operating results would not
have been materially different from those herein.

The goodwill acquired in the MAYFIELD/BUDDE, R&B, and Sparta transactions is
expected to be deductible for tax purposes.

In November 2003, the Company acquired all of the outstanding capital stock of
Spinal Specialties, Inc. for $6.4 million in cash. Spinal Specialties markets
its products primarily to anesthesiologists and interventional radiologists
through an in-house telemarketing team and a network of distributors.

In August 2003, the Company acquired substantially all of the assets of Tissue
Technologies, Inc. The Company paid $0.6 million in cash and is obligated to pay
the seller up to an additional $1.5 million in contingent consideration based
upon a multiple of the Company's sales of the UltraSoft(TM) product in the third
year following the acquisition. If the Company had consummated this acquisition
as of the beginning of 2003, its operating results would not have been
materially different from those herein.

In March 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 $43.5 million in cash. In the United States, JARIT
sells through a twenty-person sales management force that works with over 100
distributor sales representatives.

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

The following unaudited pro forma financial information assumes that the
Mayfield, Integra ME, Spinal Specialties and JARIT acquisitions had occurred as
of the beginning of 2003 (in thousands, except per share data):

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,
2004, were as follows:

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

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Annual amortization expense is expected to approximate $4.3 million in 2004,
$4.6 million in 2005, $4.6 million in 2006, $4.3 million in 2007, and $3.7
million in 2008. Identifiable intangible assets are initially recorded at fair
market value at the time of acquisition generally using an income or cost
approach.

5. COMPREHENSIVE INCOME

6. NET INCOME PER SHARE

Options and warrants outstanding at June 30, 2004 and 2003, respectively, to
purchase 29,000 and 659,000 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, 2004 and 2003 because their exercise price exceeded the average
market price of the Company's common stock during the period.

Notes payable outstanding at June 30, 2004 and 2003 that were convertible into
3.5 million 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, 2004 and

11

2003, respectively, because the conditions required to convert the notes were
not met. Holders have the right to convert their notes into shares of the
Company's common stock at any time prior to their maturity, if any of the
following conditions is met:
- - the last sale price of the Company's common stock on the trading day
prior to the conversion date was 110% or more of the conversion price
on such trading day;
- - the Company distributes to holders of its common stock certain rights
entitling them to purchase common stock at less than the last sale
price of our common stock on the day preceding the declaration for such
distribution;
- - the Company distributes to holders of its common stock assets, debt,
securities or certain rights to purchase its securities, which
distribution has a per share value exceeding 10% of the last sale price
of the Company's common stock on the day preceding the declaration of
such distribution; or
- - the Company becomes a party to a consolidation, merger or sale of all
or substantially all of its assets or a change in control occurs
pursuant to which the Company's common stock would be converted into
cash, stock or other property that is not common equity interests
traded on a national securities exchange or quoted on the Nasdaq
National Market;

Holders may also convert their notes into shares of the Company's common stock
as follows:

- - at any time prior to March 15, 2006 after any 5 consecutive trading-day
period in which the average trading prices for the notes for that 5
trading-day period was less than 103% of the average conversion value
for the notes during that period; or
- - at any time on or after March 15, 2006 and prior to maturity after any
5 consecutive trading-day period in which the average trading prices
for the notes for that 5 trading-day period was less than 97% of the
average conversion value for the notes during that period (however,
holders may not convert their notes on or after March 15, 2006 if, at
the time of the calculation, the closing sale price of shares of the
Company's common stock is between the then current conversion price on
the notes and 110% of the then current conversion price on the notes.)

7. PRODUCT REVENUE AND GEOGRAPHIC INFORMATION

Integra develops, manufactures, and markets medical devices for use primarily in
neuro-trauma and neurosurgery, plastic and reconstructive surgery, and general
surgery. The Company's product lines include monitoring and drainage systems,
surgical instruments, fixation systems, and innovative tissue repair products
that incorporate the Company's proprietary absorbable implant technology. The
Company reports its financial results under a single operating segment - the
development, manufacturing, and distribution of medical devices.

Product revenues are segregated into the following categories:

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Beginning in 2004, the Company has included the sales of INTEGRA(R) Dermal
Regeneration Template in operating room product revenues. In the prior year
period, these product sales were included in private label product revenues.

Certain of the Company's products, including the DuraGen(R) Dural Graft
products, NeuraGen(TM) Nerve Guide, INTEGRA(R) Dermal Regeneration Template,
INTEGRA(TM) Bilayer Matrix Wound Dressing, and BioMend(R) Absorbable Collagen
Membrane, 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 from the press and
regulatory authorities. These products comprised approximately 32% and 29% of
product revenues in the six month periods ended June 30, 2004 and June 30, 2003,
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 material adverse effect on the
Company's current business or its ability to expand its business.

Product revenues by major geographic area are summarized below:

8. COMMITMENTS AND CONTINGENCIES

As consideration for certain technology, manufacturing, distribution and selling
rights and licenses granted to Integra, the Company has agreed to pay royalties
on the sales of products that use the granted rights and licenses. Royalty
payments under these agreements by the Company 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, Integra filed a patent infringement lawsuit in the United States
District Court for the Southern District of California (the "Trial Court")
against Merck KGaA, a German corporation, Scripps Research Institute, a
California nonprofit corporation, and David A. Cheresh, Ph.D., a research
scientist with Scripps, seeking damages and injunctive relief. The complaint
charged, among other things, that the defendant Merck KGaA willfully and
deliberately induced, and continues willfully and deliberately to induce,
defendants Scripps Research Institute and Dr. Cheresh to infringe certain of the
Company's patents. These patents are part of a group of patents granted to The
Burnham Institute and licensed by Integra 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 the Company's favor and
awarded Integra $15.0 million in damages, finding that Merck KGaA had willfully
infringed and induced the infringement of Integra's patents. The Trial Court
dismissed Scripps and Dr. Cheresh from the case.

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In October 2000, the Trial Court entered judgment in Integra's favor and against
Merck KGaA in the case. In entering the judgment, the Trial Court also granted
to the Company pre-judgment interest of approximately $1.4 million, bringing the
total award to approximately $16.4 million, plus post-judgment interest. Merck
KGaA filed various post-trial motions requesting a judgment as a matter of law
notwithstanding the verdict or a new trial, in each case regarding infringement,
invalidity and damages. In September 2001, the Trial Court entered orders in
favor of Integra 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 the Company each appealed various decisions of the Trial Court to
the United States Court of Appeals for the Federal Circuit (the "Circuit
Court"). In June 2003, the Circuit Court affirmed the Trial Court's finding that
Merck KGaA had infringed Integra's patents. The Circuit Court also held that the
basis of the jury's calculation of damages was not clear from the trial record,
and remanded the case to the Trial Court for further factual development and a
new calculation of damages consistent with the Circuit Court's decision.

The Trial Court has scheduled oral argument on damages on August 27, 2004.
Integra has not recorded any gain in connection with this matter.

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

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

9. SUBSEQUENT EVENT

In July 2004, Stuart M. Essig, the Company's President and Chief Executive
Officer, renewed his employment agreement with the Company through December 31,
2009. In connection with the renewal of the agreement, Mr. Essig received a
grant of fair market value options to acquire up to 250,000 shares of Integra
common stock and a fully vested contract stock unit award providing for the
payment of 750,000 shares of Integra common stock which shall generally be
delivered to Mr. Essig upon a change of control, following his termination of
employment or retirement after December 31, 2009, or later under certain
circumstances. The Company expects to record an after-tax non-cash compensation
charge of approximately $14.9 million in the third quarter of 2004 for the
deferred payment related to the fully-vested contract stock unit grant.

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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, 2003
included in our Annual Report on Form 10-K.

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."

GENERAL

Integra develops, manufactures, and markets medical devices for use primarily in
neuro-trauma, neurosurgery, plastic and reconstructive surgery, and general
surgery. Our product lines include monitoring and drainage systems, surgical
instruments, fixation systems and innovative tissue repair products that
incorporate our proprietary absorbable implant technology.

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

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

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

We believe that we have a particular advantage in the development, manufacture
and sale of specialty tissue repair products derived from bovine collagen. We
develop and build these products in our manufacturing facility in Plainsboro,
New Jersey. Taken together, these products accounted for approximately 32% and
29% of product revenues in the six months ended June 30, 2004 and June 30, 2003,
respectively.

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

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

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

ACQUISITIONS

Our strategy for growing our business includes the acquisition of complementary
product lines, technologies, and companies. Recent acquisitions (as discussed in
Note 2 to our unaudited consolidated financial statements), may make our
financial results for the three and six month periods ended June 30, 2004 not
directly comparable to those of the corresponding prior year period.

RESULTS OF OPERATIONS

Our revenues for the periods were as follows:

QUARTER ENDED JUNE 30, 2004 COMPARED TO QUARTER ENDED JUNE 30, 2003

Total Revenues And Gross Margin On Product Revenues:

For the quarter ended June 30, 2004, total revenues were $56.4 million, an
increase of $13.7 million, or 32%, over the quarter ended June 30, 2003. This
increase was primarily attributable to an increase in product revenues of $15.2
million, or 37%, over the prior-year period. Other revenue decreased by $1.5
million primarily due to the termination of the ETHICON distribution and
development agreement in December 2003. The increase in product revenues
generated by our selling the INTEGRA(R) Dermal Regeneration product directly to
end customers has more than offset this decrease.

Revenues from product lines acquired since the second quarter of 2003 accounted
for $4.2 million of the $13.7 million increase in total revenues over the prior
year period. Changes in foreign currency exchange rates contributed $515,000 to
the increase in total revenues. Domestic product revenues increased $11.9
million in the second quarter of 2004 to $45.0 million, or 80% of product
revenues, the same percentage reported for the second quarter ended June 30,
2003.

Revenues from our monitoring product lines increased $1.3 million, or 12%, over
the prior-year period, primarily as a result of increased sales of our
intracranial monitoring products and drainage systems. Our operating room
product line revenues increased over the prior-year period by $6.6 million, or
51%. This increase is largely the result of growth in sales of our DuraGen(R)

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and DuraGen Plus(TM) Dural Graft Matrix products and the inclusion of INTEGRA(R)
Dermal Regeneration Template sales in the operating room category. Prior to
resuming the direct sale and marketing of the INTEGRA product on January 1,
2004, we reported sales of the INTEGRA product to ETHICON, Inc. in the private
label category.

Revenues from our instrument product lines increased by $6.6 million, or 54%,
over the prior-year period and included $4.2 million of revenues from product
lines acquired since the second quarter of 2003. The remaining $2.4 million
increase was led by growth in the JARIT surgical instrument line. We also
experienced growth over the prior year period in each of our existing instrument
product lines. Our private label product revenue increased by $711,000, or 13%,
over the prior year period as increased revenues from the Absorbable Collagen
Sponge we supply for use in Medtronic's INFUSE bone graft product offset the
removal of INTEGRA Dermal Regeneration Template revenues from this category.
Although sales of certain private label products vary highly from quarter to
quarter depending on the timing and size of orders placed by our marketing
partners, we do not believe that the variability is as significant on an annual
basis.

We have generated our product revenue growth through acquisitions, new product
launches and increased direct sales and marketing efforts both domestically and
in Europe. We expect that our expanded domestic sales forces, the continued
implementation of our direct sales strategy in Europe, enhancements to existing
products, and internally developed and acquired products will drive our future
revenue growth. We also intend to continue to acquire businesses that complement
our existing businesses and products.

Our gross margin on product revenues was 62% in the quarter ended June 30, 2004,
as compared to 59% in the prior-year period. The current quarter's gross margin
benefited from strong sales growth of our higher margin products during the
quarter, the resumption of direct sales of INTEGRA Dermal Regeneration Template,
and the decrease in fair value purchase accounting adjustments for acquired
inventory. Our reported gross margins for the second quarter of 2004 and 2003
included $70,000 and $514,000, respectively, of fair value purchase accounting
adjustments for acquired inventory sold during the quarter.

Other Operating Expenses:

The following is a summary of other operating expenses as a percent of product
revenues:

Total other operating expenses, which exclude cost of product revenue but
include amortization, increased 34% to $23.2 million in the second quarter of
2004, compared to $17.4 million in the second quarter of 2003.

Research and development expenses decreased $138,000 to $2.6 million in the
second quarter of 2004. Increased clinical studies and new product development
activities in neurosurgical and plastic and reconstructive applications largely
offset the savings that resulted from the closing of our San Diego research
center in the fourth quarter of 2003.

17

The continuing decline in research and development expenses as a percentage of
product revenues in recent quarters is partially related to the significant
increase in hand-held instrument product revenues as a proportion of our total
revenues. By their nature, our hand-held instrument product lines require less
research and development and depend more on sales and marketing efforts to
support growth.

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.

Sales and marketing expenses increased 45% over the prior-year period to $13.2
million as a result of the continued expansion of our domestic direct sales and
marketing organizations, increased spending to support our plastic and
reconstructive surgery product lines, and the recently acquired MAYFIELD, BUDDE,
ELEKTROTOM and SONOTOM product lines. Sales and marketing expenses were 23% and
22% of product revenues in the three months ended June 30, 2004 and June 30,
2003, respectively.

General and administrative expenses increased $1.6 million to $6.3 million in
the second quarter of 2004, largely as a result of increased professional fees
related to Sarbanes-Oxley internal control initiatives, the implementation of
our new global enterprise resource management system, and our litigation with
Merck KGaA. General and administrative expenses were 11% of product revenues in
the three months ended June 30, 2004 and June 30, 2003. We expect general and
administrative expenses as a percentage of product revenues to remain consistent
with these levels through the remainder of 2004 and into 2005.

Amortization expense increased $287,000 to $1.0 million in the second quarter of
2004 as a result of amortization of intangible assets from recent acquisitions.

In the second half of 2004, we expect to incur approximately $1.5 million of
operating charges related to the MAYFIELD acquisition, including inventory fair
value purchase accounting costs, facilities consolidation expenses, and
distributor termination payments, and our planned relocation of our National
Distribution Center from Plainsboro, New Jersey to Reno, Nevada in the fourth
quarter. Additionally, in July 2004, Stuart M. Essig, our President and Chief
Executive Officer, renewed his employment agreement with Integra to extend the
term of his employment through December 31, 2009. In connection with the renewal
of the agreement, Mr. Essig received a grant of fair market value options to
acquire up to 250,000 shares of Integra common stock and a fully vested contract
stock unit award providing for the payment of 750,000 shares of Integra common
stock which shall generally be delivered to Mr. Essig following his termination
of employment or retirement, but not before December 31, 2009, or later under
certain circumstances, or upon a change of control. In the third quarter of
2004, we expect to record an after-tax non-cash compensation operating charge of
approximately $14.9 million for the deferred payment related to the fully-vested
contract stock unit grant.

Non-Operating Income And Expenses

In the second quarter of 2004, we recorded $823,000 in net interest expense
associated with the $120 million of contingent convertible subordinated notes we
issued in 2003 and a related interest rate swap agreement. The $201,000 decrease
as compared to the second quarter of 2003 reflects the benefits we received from
an interest rate swap executed in August 2003.

Our reported interest expense includes $205,000 of non-cash amortization of debt
issuance costs. Debt issuance costs totaled $4.1 million and are being amortized
using the straight-line method over the five-year term of the notes.

18

We will pay additional interest ("Contingent Interest") on our convertible notes
under certain conditions. 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. In the second quarter of 2004 and 2003, the
change in the estimated fair value of the Contingent Interest obligation was not
significant.

In August 2003, we entered into an interest rate swap agreement with a $50.0
million notional amount to hedge the risk of changes in fair value attributable
to interest rate risk with respect to a portion of our fixed rate convertible
notes. The interest rate swap agreement qualifies as a fair value hedge under
SFAS No. 133, as amended "Accounting for Derivative Instruments and Hedging
Activities". The net amount to be paid or received under the interest rate swap
agreement is recorded as a component of interest expense. Included in interest
expense for the three months ended June 30, 2004 is a $216,000 reduction in
interest expense associated with the interest rate swap.

The net fair value of the interest rate swap at March 31, 2004 was $563,000. At
June 30, 2004, the net fair value of the interest rate swap increased $1.4
million to $2.0 million, and this amount is included in other liabilities. In
connection with this fair value hedge transaction, during the second quarter of
2004, we recorded a $1.4 million net decrease in the carrying value of our
convertible notes. The net difference between changes in the fair value of the
interest rate swap and the contingent convertible notes represents the
ineffective portion of the hedging relationship, and is recorded in other
income.

Our net other income/expense decreased by $316,000 from $451,000 of income in
the second quarter of 2003 to $135,000 of income in the second quarter of 2004.
In the second quarter of 2003, we recorded $279,000 of gains realized on the
sale of marketable securities.

Income tax expense was approximately 36.8% and 36.6% of income before income
taxes for the second quarters of 2004 and 2003, respectively. Included in income
tax expense for the second quarters of 2004 and 2003 was a deferred income tax
provision of $3.6 million and $2.4 million, respectively. The increase in the
effective income tax rate in 2004 resulted primarily from a change in the
geographic mix of projected taxable income for 2004.

For the second quarter of 2004, we reported net income of $7.5 million, or $0.24
per diluted share, as compared to net income of $5.4 million, or $0.18 diluted
per share, for the prior year quarter.

In periods when the holders of our contingent convertible notes are permitted to
exercise their conversion rights, the "if-converted" method will be used to
determine the dilutive effect on earnings per share of the notes, which are
convertible into approximately 3.5 million shares of common stock.

At its July 1, 2004 meeting, the FASB Emerging Issue Task Force (EITF) reached a
tentative consensus on Issue 04-08 that would require issuers of contingent
convertible securities to account for these securities on an "if-converted"
basis pursuant to Statement of Financial Accounting Standards No. 128 "Earnings
Per Share", in computing their diluted earnings per share whether or not the
issuer's stock is above the contingent conversion price. The provisions of Issue
04-08 would be applied retroactively, with no grandfathering provision for
existing contingent convertible securities.

The FASB has published a draft abstract of Issue 04-08 and the EITF will review
comments on this proposal at its September 2004 meeting. If the tentative
consensus reached in Issue 04-08 is ratified by the FASB, we expect that it
would reduce our previously reported diluted earnings per share results by $0.01
for both the six months ended June 30, 2004 and the year ended December 31,
2003. Issue 04-08 is also expected to have a dilutive effect on our future
earnings per share estimates.

19

SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

For the six months ended June 30, 2004, total revenues increased by $29.4
million, or 37%, over the six months ended June 30, 2003 to $108.9 million.
Product revenues increased by $31.5 million, or 41%, over the prior year period.
Other revenue decreased by $2.1 million primarily due to the termination of the
ETHICON distribution and development agreement in December 2003.

Revenues from products acquired since the beginning of 2003 accounted for $14.4
million of the $29.4 million increase in total revenues over the prior year
period. Changes in foreign currency exchange rates contributed $1.5 million to
the increase in total revenues. Domestic product revenues increased $25.0
million during 2004 to $85.4 million, or 79% of product revenues, the same
percentage reported for the six months ended June 30, 2003.

Revenues from our monitoring product lines increased $1.9 million, or 9%, over
the prior-year period primarily as a result of increased sales of our
intracranial monitoring products and drainage systems. Our operating room
product line revenues increased over the prior year period by $12.3 million, or
48%. This increase is largely the result of growth in sales of our DuraGen(R)
and DuraGen Plus(TM) Dural Graft Matrix products and the inclusion of INTEGRA(R)
Dermal Regeneration Template sales in the operating room category.

Revenues from our instrument product lines increased by $16.4 million, or 88%,
over the prior-year period. This increase resulted from the impact of recently
acquired product lines and strong sales growth in each of our existing
instrument product lines. Our private label product revenue increased by
$811,000, or 7%, over the prior-year period, as increased revenues from the
Absorbable Collagen Sponge we supply for use in Medtronic's INFUSE bone graft
product offset the removal of INTEGRA Dermal Regeneration Template revenues from
this category.

Our gross margin on product revenues for the six months ended June 30, 2004 was
61%, as compared to 60% for the prior-year period. The benefit of strong growth
in sales of our higher margin products, the resumption of direct sales of
INTEGRA Dermal Regeneration Template in 2004, and a reduction in fair value
purchase accounting adjustments more than offset the impact of the lower margins
associated with recently acquired instrument product lines. Our reported gross
margins for the six months ended June 30, 2004 and June 30, 2003 included
$70,000 and $860,000, respectively, of fair value purchase accounting
adjustments for acquired inventory sold during the periods.

20

Other Operating Expenses:

The following is a summary of other operating expenses as a percent of product
revenues:

Total other operating expenses, which exclude cost of product revenue but
include amortization, increased 33% to $43.9 million in the six months ended
June 30, 2004, compared to $33.0 million in the prior-year period.

Research and development expenses increased $35,000 to $5.5 million in the six
months ended June 30, 2004. Increased clinical studies and new product
development activities in neurosurgical and plastic and reconstructive
applications offset the savings that resulted from closing our San Diego
research center. Research and development expenses on products other than our
traditional hand-held instruments was 7% of product revenues in 2004, as
compared to 9% in the prior year period.

Sales and marketing expenses increased 46% over the prior year period to $24.3
million as a result of the continued expansion of our domestic direct sales and
marketing organizations, increased spending to support our plastic and
reconstructive surgery product lines, and sales and marketing expenses of
recently acquired businesses. Sales and marketing expenses were 23% and 22% of
product revenues in the six months ended June 30, 2004 and June 30, 2003,
respectively.

General and administrative expenses increased $2.6 million to $12.2 million in
the six months ended June 30, 2004, largely as a result of increased
professional fees related to Sarbanes-Oxley internal control initiatives, the
implementation of our new global enterprise resource management system, and our
litigation with Merck KGaA.

Amortization expense increased $593,000 to $1.9 million in 2004 as a result of
amortization of intangible assets from recent acquisitions.

Non-Operating Income and Expenses

We recorded net interest income of $217,000 in the six months ended June 30,
2004, as compared to net interest income of $578,000 in the prior-year period.
This decrease resulted from the six months of interest expense recorded in 2004
associated with the $120 million of contingent convertible subordinated notes we
issued in March and April of 2003, offset by the benefits we received from the
interest rate swap.

Our reported interest expense in 2004 and 2003, respectively, includes $410,000
and $215,000 of non-cash amortization of debt issuance costs. The change in the
estimated fair value of the Contingent Interest obligation increased interest
expense by $163,000 and $44,000 in 2004 and 2003, respectively. Included in
interest expense for the six months ended June 30, 2004 is a $426,000 reduction
in interest expense associated with the interest rate swap.

The net fair value of the interest rate swap at December 31, 2003 was $1.1
million. At June 30, 2004, the net fair value of the interest rate swap

21

increased $882,000 to $2.0 million, and this amount is included in other
liabilities. In connection with this fair value hedge transaction, during the
six months ended June 30, 2004, we recorded a $957,000 net decrease in the
carrying value of our convertible notes. The net difference between changes in
the fair value of the interest rate swap and the contingent convertible notes
represents the ineffective portion of the hedging relationship, and this amount
is recorded in other income (expense), net.

Our net other income/expense decreased by $682,000 from $800,000 of income in
2003 to $118,000 of income in 2004. In 2003, we recorded $500,000 of gains
realized on the sale of marketable securities.

Income tax expense was approximately 36.8% and 36.5% of income before income
taxes for 2004 and 2003, respectively. Included in income tax expense in 2004
and 2003 was a deferred income tax provision of $6.8 million and $5.0 million,
respectively. The increase in the effective income tax rate in 2004 resulted
primarily from a change in the geographic mix of projected taxable income for
2004.

For the six months ended June 30, we reported net income of $15.0 million, or
$0.48 per diluted share, as compared to net income of $10.9 million, or $0.36
diluted per share, for the prior year period.

International Product Revenues and Operations

Because we have operations based in Europe and we generate revenues and incur
operating expenses in euros and British pounds, we have currency exchange risk
with respect to foreign currency denominated revenues or expenses.

In the six-month period ended June 30, 2004, the cost of products we
manufactured in our European facilities or purchased in foreign currencies
exceeded our foreign currency-denominated revenues. We expect this imbalance to
continue. We currently do not hedge our exposure to foreign currency risk.
Accordingly, a weakening of the dollar against the euro and British pound could
negatively affect future gross margins and operating margins. We will continue
to assess the potential effects that changes in foreign currency exchange rates
could have on our business. If we believe this potential impact presents a
significant risk to our business, we may enter into derivative financial
instruments to mitigate this risk.

Additionally, we generate significant revenues outside the United States, a
portion of which are U.S. dollar-denominated transactions conducted with
customers who generate revenue in currencies other than the U.S. dollar. As a
result, 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.

Our sales to foreign markets may be affected by local economic conditions,
regulatory or political considerations, the effectiveness of our sales
representatives and distributors, local competition, and changes in local
medical practice.

Relationships with customers and effective terms of sale frequently vary by
country, often with longer-term receivables than are typical in the United
States.

22

Product revenues by major geographic area are summarized below:

In the six months ending June 30, 2004, product revenues from customers outside
the United States totaled $22.5 million, or 21% of consolidated product
revenues, of which approximately 66% were to European customers. Of this amount,
$16.5 million was generated in foreign currencies.

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 by our subsidiaries in Europe.

LIQUIDITY AND CAPITAL RESOURCES

Cash and Marketable Securities

At June 30, 2004, we had cash, cash equivalents and current and non-current
investments totaling approximately $194.3 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.

Cash Flows

Cash provided by operations has recently been and is expected to continue to be
our primary means of funding existing operations and capital expenditures. We
generated positive operating cash flows of $32.0 million in 2002, $34.8 million
in 2003, and $20.9 million in the six months ending June 30, 2004. Operating
cash flows for the six months ending June 30, 2003, were $23.1 million.
Operating cash flows for the six months ended June 30, 2004 declined as compared
to the prior year because of additional investments in inventory to support our
growth in product revenues and higher accounts receivable balances related to
increased sales.

Our principal uses of funds during the six month period ended June 30, 2004 were
$28.9 million for acquisition consideration, $27.1 million for purchases of
investments, net of maturities and sales, and $4.8 million for purchases of
property and equipment. In 2004, we have increased cash outlays for capital
expenditures as compared to 2003, primarily because of an estimated $4 million
of expenditures associated with planned information system upgrades. In addition
to the $20.9 million in operating cash flows, we received $3.5 million from the
issuance of common stock through the exercise of stock options during the
period.

23

Working Capital

At June 30, 2004 and December 31, 2003, working capital was $141.0 million and
$167.3 million, respectively. The decrease in working capital was primarily due
to cash invested in marketable debt securities during the period, offset by
additional investments in inventory to support our growth in product revenues
and higher accounts receivable balances related to increased sales.

Convertible Debt and Related Hedging Activities

We have outstanding $120.0 million of 2 1/2% contingent convertible subordinated
notes due 2008. We are obligated to pay $3.0 million of interest per year on the
notes and to repay their principal amount on March 15, 2008, if the notes are
not converted into common stock before that date. 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, subject to certain conditions.

We also have outstanding 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 convertible notes. We
receive a 2 1/2% fixed rate from the counterparty, payable on a semi-annual
basis, and 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.

Share Repurchase Plans

In March 2004, our Board of Directors authorized us to repurchase up to 1.5
million shares of our common stock for an aggregate purchase price not to exceed
$40.0 million. We may repurchase shares under this program through March 2005
either in the open market or in privately negotiated transactions. We did not
repurchase any shares of common stock during the first six months of 2004 under
this program or under the previous program which expired in February 2004.

Dividend Policy

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

Requirements and Capital Resources

We believe that our cash and marketable securities are sufficient to finance our
operations and capital expenditures in the near term. In 2004, we have increased
cash outlays for capital expenditures as compared to 2003, primarily because of
an estimated $4 million of expenditures associated with planned information
system upgrades.

Given the significant level of liquid assets and our objective to grow by
acquisition and alliances, our financial position could change significantly if
we were to complete a business acquisition by utilizing a significant portion of
our liquid assets.

Currently, we do not have any existing borrowing capacity or other credit
facilities in place to raise significant amounts of capital if such a need
arises.

24

Contractual Obligations and Commitments

Under certain agreements, we are required to make payments based on sales levels
of certain products or if specific development milestones are achieved.

RECENTLY ISSUED ACCOUNTING STANDARDS

In March 2004, the FASB Emerging Issues Task Force (EITF) reached a consensus on
Issue 03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments". Issue 03-01 provides guidance regarding recognition and
measurement of unrealized losses on available-for-sale debt and equity
securities accounted for under Statement of Financial Accounting Standard No.
115, "Accounting for Certain Investments in Debt and Equity Securities". The
recognition and measurement provisions of Issue 03-01 are to be applied to
other-than-temporary impairment evaluations in reporting periods beginning after
June 15, 2004. The Company does not expect the adoption of Issue 03-01 to have a
material impact on its financial position, cash flows or results of operations.

In March 2004, the EITF reached a consensus on Issue 03-6, "Participating
Securities and the Two-Class Method Under FASB Statement No. 128". Issue 03-6
expanded the notion of participation rights in calculating earnings per share
from previous practice. Issue 03-6 does not focus on a security holder's
contractual rights to ultimately receive the undistributed earnings and net
assets of the company upon redemption or liquidation. Instead, it defines
participation rights based solely on whether the holder would be entitled to
receive any dividends declared during the period, even if the company would not
declare any dividends during the period due to economic or practical concerns or
legal or contractual limitations on it's the company's ability to pay dividends.

Under Issue 03-6, all securities that meet the definition of a participating
security, regardless of whether the securities are convertible, non-convertible,
or potential common stock securities, will be considered for inclusion in the
computation of basic earnings per share using the two-class method. The
application of the two-class method may also have an impact on the diluted
earnings per share calculation due to the need to consider each type of
potential common shares in the proper sequence to arrive at maximum dilution.

Integra adopted the provisions of Issue 03-6 during the second quarter ended
June 30, 2004. The transition provisions of Issue 03-6 require prior period
earnings per share amounts to be restated to conform to the new standard,
including the impact relating to securities that have been extinguished but were
outstanding for a portion of some prior period that is presented for comparative
purposes. Accordingly, in the future, Integra will restate its earnings per
share calculations for the year ended December 31, 2001 to conform to the
two-class method required by Issue 03-6 as it relates to the dividend
participation rights included in the Series B and Series C Convertible Preferred
Stock that were outstanding during that period. The adoption of Issue 03-6 will
reduce previously reported basic earnings per share by $0.05 to $1.03 and
diluted earnings per share by $0.02 to $0.92 in 2001. The adoption of Issue 03-6
will not change the previously reported basic or diluted earnings per share for
any other year.

25

FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE

Our Operating Results May Fluctuate.

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

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

Non-Cash Compensation Charges May Affect Our Future Earnings

On March 31, 2004, the FASB issued an Exposure Draft "Share-Based Payment - An
Amendment of FASB Statements No. 123 and 95." The Exposure Draft addresses the
accounting for transactions in which a company receives employee services in
exchange for (a) equity instruments of the company or (b) liabilities that are
based on the fair value of the company's equity instruments or that may be
settled by the issuance of such equity instruments. The proposed Statement would
eliminate the ability to account for share-based compensation transactions using
APB Opinion No. 25, and generally would require instead that such transactions
be accounted for using a fair-value based method. The Exposure Draft proposes
that the cost of all forms of equity-based compensation granted to employees,
excluding employee stock ownership plans, be recognized in a company's income
statement and that such cost be measured at the fair value of the stock options.
As proposed, the new rules would be applied on a modified prospective basis as
defined in the Exposure Draft, and would be effective for fiscal years beginning
after December 15, 2004. We are currently evaluating option valuation
methodologies and assumptions in light of the evolving accounting standards
related to employee stock options. Current estimates of option values using the
Black-Scholes method, as disclosed in Note 1 to the unaudited consolidated
financial statements in our calculation of pro forma net income as required by
FASB 123, may not be indicative of results from valuation methodologies
ultimately adopted in the final rules.

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.

26

Our competitive position will depend on our ability to achieve market acceptance
for our products, develop new products, implement production and marketing
plans, secure regulatory approval for products under development, and obtain
patent protection. We may need to develop new applications for our products to
remain competitive. Technological advances by one or more of our current or
future competitors could render our present or future products obsolete or
uneconomical. Our future success will depend upon our ability to compete
effectively against current technology as well as to respond effectively to
technological advances. Competitive pressures could adversely affect our
profitability. For example, we believe that two or more of our large competitors
are in the process of introducing an onlay dural graft matrix. The introduction
of such products could reduce the sales, growth in sales, and the profitability
of our duraplasty products, including our DuraGen(R), DuraGen Plus(TM), and
Endura(TM) product lines, which are among our largest and fastest growing
products.

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

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

In addition to internal growth, our current strategy involves growth through
acquisitions. Since 1999, we have acquired 19 businesses or product lines at a
total cost of approximately $160 million.

We may be unable to continue to implement our growth strategy, and our strategy
may be ultimately unsuccessful. A significant portion of our growth in revenues
has resulted from, and is expected to continue to result from, the acquisition
of businesses complementary to our own. We engage in evaluations of potential
acquisitions and are in various stages of discussion regarding possible
acquisitions, certain of which, if consummated, could be significant to us. Any
potential acquisitions may result in material transaction expenses, increased
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

27

consummate any future acquisitions. If we cannot integrate acquired operations,
manage the cost of providing our products or price our products appropriately,
our profitability could suffer. In addition, as a result of our acquisitions of
other healthcare businesses, we may be subject to the risk of unanticipated
business uncertainties or legal liabilities relating to those acquired
businesses for which the sellers of the acquired businesses may not indemnify
us. Future acquisitions may also result in potentially dilutive issuances of
securities.

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

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

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

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

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

The FDA and foreign regulatory authorities require that our products be
manufactured according to rigorous standards. These regulatory requirements may
significantly increase our production or purchasing costs and may even prevent
us from making or obtaining our products in amounts sufficient to meet market
demand. If we or a third-party manufacturer change our approved manufacturing
process, the FDA may require a new approval before that process may be used.
Failure to develop our manufacturing capability may mean that even if we develop
promising new products, we may not be able to produce them profitably, as a
result of delays and additional capital investment costs. Manufacturing
facilities, both international and domestic, are also subject to inspections by
or under the authority of the FDA. In addition, failure to comply with

28

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.

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

Certain of our products, including the DuraGen(R) Dural Graft Matrix products,
the NeuraGen(TM) Nerve Guide, and the INTEGRA(R) Dermal Regeneration Template,
contain material derived from bovine tissue. Products that contain materials
derived from animal sources, including food as well as pharmaceuticals and
medical devices, are increasingly subject to scrutiny in the press and by
regulatory authorities. Regulatory authorities are concerned about the potential
for the transmission of disease from animals to humans via those materials. This
public scrutiny has been particularly acute in Japan and Western Europe with
respect to products derived from cattle, because of concern that materials
infected with the agent that causes bovine spongiform encephalopathy, otherwise
known as BSE or mad cow disease, may, if ingested or implanted, cause a variant
of the human Creutzfeldt-Jakob Disease, an ultimately fatal disease with no
known cure. Recent cases of BSE in cattle discovered in Canada and the United
States have increased awareness of the issue in North America.

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

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

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

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

29

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

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

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

Market acceptance of our products depends on many factors, including our ability
to convince prospective collaborators and customers that our technology is an
attractive alternative to other technologies, to manufacture products in
sufficient quantities and at acceptable costs, and to supply and service
sufficient quantities of our products directly or through our distribution
alliances. In addition, limited funding available for product and technology
acquisitions by our customers, as well as internal obstacles to customer
approvals of purchases of our products, could harm acceptance of our products.
The industry is subject to rapid and continuous change arising from, among other
things, consolidation and technological improvements. One or more of these
factors may vary unpredictably, which could materially adversely affect our
competitive position. We may not be able to adjust our contemplated plan of
development to meet changing market demands.

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

Our ability to compete effectively depends in part, on our ability to maintain
the proprietary nature of our technologies and manufacturing processes, which
includes the ability to obtain, protect and enforce patents on our technology
and to protect our trade secrets. We own or have licensed patents that cover
certain 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.

30

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

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

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

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

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

It May Be Difficult To Replace Some Of Our Suppliers.

Outside vendors, some of whom are sole-source suppliers, provide key components
and raw materials used in the manufacture of our products. Although we believe
that alternative sources for many of these components and raw materials are
available, any supply interruption in a limited or sole source component or raw
material could harm our ability to manufacture our products until a new source
of supply is identified and qualified. In addition, an uncorrected defect or
supplier's variation in a component or raw material, either unknown to us or
incompatible with our manufacturing process, could harm our ability to
manufacture products. We may not be able to find a sufficient alternative
supplier in a reasonable time period, or on commercially reasonable terms, if at
all, and our ability to produce and supply our products could be impaired. We
believe that these factors are most likely to affect the following products that
we manufacture:
- - our collagen-based products, such as INTEGRA(R) Dermal Regeneration
Template, DuraGen(R) and DuraGen Plus(TM) Dural Graft Matrix products,
and our Absorbable Collagen Sponges;
- - our products made from silicone, such as our neurosurgical shunts and
drainage systems and hemodynamic shunts; and
- - products which use many different electronic parts from numerous
suppliers, such as our Camino(R) and Ventrix(R)lines of intracranial
pressure monitors and catheters.

31

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 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
Or Business Processes Interrupted, We Could Experience Lost Revenues And Our
Business Could Be Seriously Harmed.

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

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

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

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

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

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

Because we have operations based in Europe and we generate revenues and incur
operating expenses in euros and British pounds, we experience currency exchange
risk with respect to those foreign currency-denominated revenues and expenses.

32

In 2003 and early 2004, the cost of products we manufactured in our European
facilities or purchased in foreign currencies exceeded our foreign
currency-denominated revenues. We expect this imbalance to continue. We
currently do not hedge our exposure to foreign currency risk. Accordingly, a
further weakening of the dollar against the euro and British pound could
negatively affect future gross margins and operating margins.

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

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

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

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

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

|X| 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;
|X| Medicare, Medicaid and private health care insurer cutbacks could
create downward price pressure on our products;
|X| 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;
|X| 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;
|X| we are party to contracts with group purchasing organizations that
require us to discount our prices for certain of our products and limit
our ability to raise prices for certain of our products, particularly
surgical instruments;
|X| there is economic pressure to contain health care costs in
international markets;
|X| there are proposed and existing laws, regulations and industry policies
in domestic and international markets regulating the sales and
marketing practices and the pricing and profitability of companies in
the health care industry; and
|X| 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.

33

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

Regulatory Oversight Of The Medical Device Industry Might Affect The Manner In
Which We May Sell Medical Devices

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

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

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

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

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

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

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

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

34

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

The Loss Of Key Personnel Could Harm Our Business.

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

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 "Factors that
May Affect Our Future Performance" in the Company's Annual Report on Form 10-K
for the year ended December 31, 2003 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.

35

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, including changes in foreign currency
exchange rates and interest rates that could adversely impact our results of
operations and financial condition. To manage the volatility relating to these
typical business exposures, we may enter into various derivative transactions
when appropriate. We do not hold or issue derivative instruments for trading or
other speculative purposes.

Foreign Currency Exchange Rate Risk

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 Risk - Marketable Securities

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. 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, 2004 would
increase or decrease interest income by approximately $1.9 million on an annual
basis. We are not subject to material foreign currency exchange risk with
respect to these investments.

Interest Rate Risk - Long Term Debt and Related Hedging Instruments

We are exposed to the risk of interest rate fluctuations on the net interest
received or paid under the terms of an interest rate swap. At June 30, 2004, we
had outstanding a $50.0 million notional amount interest rate swap used to hedge
the risk of changes in fair value attributable to interest rate risk with
respect to a portion of our $120.0 million principal amount fixed rate 2 1/2%
contingent convertible subordinated notes due March 2008.

Our interest rate swap agreement qualifies as a fair value hedge under SFAS No.
133, as amended, "Accounting for Derivative Instruments and Hedging Activities".
At June 30, 2004, the net fair value of the interest rate swap approximated $2.0
million and is included in other liabilities. The net fair value of the interest
rate swap represents the estimated receipts or payments that would be made to
terminate the agreement. A hypothetical 100 basis point movement in interest
rates applicable to the interest rate swap would increase or decrease interest
expense by approximately $500,000 on an annual 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.

36

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.

During the second quarter of 2004, the Company's management notified the
Company's Audit Committee and PricewaterhouseCoopers, LLP, the Company's
independent auditors, that they had identified a significant deficiency
regarding the Company's internal controls over financial reporting. The
significant deficiency, which was not considered a material weakness, related to
the internal controls associated with cut-off for inter-plant inventory
transfers between two specific Company locations. The internal controls did not
adequately ensure that inventory received at one of the Company's distribution
facilities was relieved from an in-transit inventory account on a timely basis
when the items were entered into the detailed inventory subsidiary ledger and
recorded in an on-hand inventory account. The Company modified the internal
control procedures for these inter-plant transfers and has added an additional
layer of review to the cut-off procedures. The Company believes that these
actions adequately address the significant deficiency.

No other changes in the Company's internal controls over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during
the second quarter ended June 30, 2004, that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.

37

PART II. OTHER INFORMATION

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

The Company's Annual Meeting of Stockholders was held on May 17, 2004 and in
connection therewith, management solicited proxies pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended. An aggregate of
23,284,456 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 2005 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 Amendment to the Company's 1998 Employee Stock Purchase Plan. The
Amendment to the Company's 1998 Employee Stock Purchase Plan was approved. The
tabulation of votes was as follows:

For Against Abstentions
---------- --------- -----------
22,149,793 1,119,383 15,280

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
---------- --------- -----------
23,161,243 116,414 6,799

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

38

(b) Reports on Form 8-K

On April 27, 2004 we filed a Report on Form 8-K under items 7 and 12 regarding
our earnings for the quarter ended March 31, 2004.

39

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 9, 2004 /s/ Stuart M. Essig
-------------------
Stuart M. Essig
President and Chief Executive Officer

Date: August 9, 2004 /s/ David B. Holtz
-------------------
David B. Holtz
Senior Vice President,
Finance and Treasurer

40

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

41

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 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 report;

3. Based on my knowledge, the financial statements, and other
financial information included in this 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 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 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 9, 2004

/s/ Stuart M. Essig

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

42

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 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 report;

3. Based on my knowledge, the financial statements, and other
financial information included in this 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 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 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 9, 2004

/s/ David B. Holtz

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

43

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
period ending June 30, 2004 (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 9, 2004

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
period ending June 30, 2004 (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 9, 2004

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

44