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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

          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.

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

          Indicate by the check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12-b-2). 

          Based on the closing price on the Nasdaq Stock Market on June 28, 2002 (the last business day of registrant’s most recently completed second fiscal quarter) the aggregate market value of voting stock of Interpore International, Inc. held by non-affiliates was $142,684,000.  The number of shares of common stock outstanding as of March 17, 2003 was 17,335,964.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of our Joint Proxy Statement for the 2003 Annual Meeting of Stockholders of Interpore International, Inc. are incorporated by this reference into Part III as set forth herein.

PART I

Item 1.   Business

Overview

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

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

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

Spine Anatomy

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

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

Spine Disorders

          The following are the four major categories of spine disorders:

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Spinal Implant Market Overview

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

          Advanced cases of spine disorders can require that surgeons remove all or part of a damaged disc and/or fuse two or more adjoining vertebrae together.  A fusion involves the placement of bone graft material between two vertebrae and may involve the use of spinal implants to immobilize the vertebrae while they fuse together.  The bone graft is intended to provide a matrix that facilitates new bone ingrowth.  Complete formation of new bone may take six to eighteen months.  For many years, surgeons have sought a means to increase the rate of new bone formation at a surgical site.  However, until recently, no growth inducing agents were commercially available. 

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

Our Spinal Implant Products

          In the spinal implant product category, our principal product offering includes the SYNERGY™ Spinal System, the C-TEK® Anterior Cervical Plate system, the GEO STRUCTURE™ vertebral body replacement device and the TPS™ Telescopic Plate Spacer.  With the release of the GEO STRUCTURE in 2002, we believe our product offering is applicable to nearly all spine stabilization procedures.

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

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

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

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

Orthobiologics Market Overview

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

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

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

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

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

Our Orthobiologic Products

          Our principal orthobiologic offering includes bone graft products and AGF® (Autologous Growth Factors®) related products.  Our PRO OSTEON® products are implanted in a bone deficit and provide a matrix that facilitates new bone ingrowth.  PRO OSTEON was the first synthetic bone graft substitute to obtain FDA approval for orthopedic applications.  Our BONEPLAST® is a resorbable bone void filler that is replaced by the patient’s own bone during the healing process.  In 2002, we released our INTERGRO® Osteoinductive DBM putty which combines allograft material with a non-toxic, lipid carrier.  AFG products concentrate growth factors derived intraoperatively from platelets found in a patient’s own blood.  These growth factors are known to initiate the bone healing cascade.

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

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

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

          AGF (Autologous Growth Factors).  AGF products concentrate growth factors derived from platelets in a patient’s blood which have been known to encourage more complete and rapid bone growth in bone defects.  Our two key AGF related products are the UltraConcentrator^® Permeability Hemodialyzer and the Automated Processor.  Cleared for marketing by the FDA in the fourth quarter of 1998, these products are used to produce a concentrated growth factor gel from platelets in the patient’s own blood.  Our AGF related products were commercially launched in 1999. 

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

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

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Minimally Invasive Surgery Market Overview

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

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

Our Minimally Invasive Surgery Products

          Our minimally invasive surgery products consist of systems designed to facilitate the delivery of materials into bone through small incisions, a procedure referred to as osteoplasty. Initially, these products are being used by surgeons in the treatment of vertebral compression fractures.

Research and Development

          As of March 1, 2003, our research and development department consisted of 27 full-time employees.  We also engage outside consultants and academic research facilities for assistance with our new product development and will license technology from third parties under appropriate circumstances.  We plan to continue to use outside resources for product research. We have agreements with prominent spine surgeons, who assisted in the development of certain of our spine systems, under which we pay royalties ranging from approximately 1% to 7% of net revenues generated from the sale of certain products.  Our expenditures for research and development were $5.3 million in 2000, $6.7 million in 2001 and $7.8 million in 2002. 

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

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Intellectual Property

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

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

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

          Minimally Invasive Surgery Products.  We own one U.S. patent related to the CDO system.

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

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

Customers, Sales and Marketing

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

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

          Our domestic sales organization consists of independent agencies and direct sales representatives.  As of March 1, 2003, we had contracts with 38 independent agencies which employed approximately 200 sales representatives, and we had 15 direct sales representatives.  The domestic sales organization is managed by a Vice President of Domestic Spinal Product Sales, two Division Managers for Orthobiologic Sales and two Division Managers for Minimally Invasive Surgery Products sales.   We invoice hospitals directly, generally at list prices, and pay commissions to the agencies and direct sales representative.  We provide consignment inventories to our independent agencies, direct sales representatives and some hospitals.  We select agency organizations and direct sales representatives for their expertise in spinal implant, orthopedic or medical device sales, their reputation within the surgeon community and their sales coverage within a geographic area.  Each agency organization and direct sales representative is assigned a sales territory for some or all of our products and is subject to periodic performance reviews.  In addition, each new independent sales agency and direct sales representative participates in training programs before initiating sales efforts for our products.  We also require each independent agency and direct sales representative to attend periodic sales and product training. 

          Outside of the United States, we distribute products only through independent distributors.  We have a Vice President of International Sales, three Division Managers and a European business liaison and have established distribution arrangements with 37 distributors in 31 countries.  Our international sales represented approximately 20% of sales in 2000, 22% of sales in 2001 and 18% of sales in 2002.  Sales to our international customers are denominated in U.S. dollars. 

          In the United States, there are no significant customer concentrations, as we invoice hospitals directly for product used or shipped.  However, in the international markets, we have three significant distributors that on a combined basis accounted for approximately 50.8% of our 2002 international sales and 9.1% of our 2002 worldwide sales. 

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

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

Third-Party Reimbursement

          We expect that sales volumes and prices of our products will continue to be dependent in large part on the availability of reimbursement from third-party payors.  In the United States, our products are purchased by hospitals that are reimbursed by third-party payors for the devices provided to their patients.  Such payors include governmental programs (e.g., Medicare and Medicaid), private insurance plans and managed care programs.  These third-party payors may deny reimbursement if they determine that a device used in a procedure was not used in accordance with cost-effective treatment methods, as determined by the third-party payor, or was used for an unapproved indication.  Also, third-party payors are increasingly challenging the prices charged for medical products and services.  In international markets, reimbursement and healthcare payment systems vary significantly by country and many countries have instituted price ceilings on specific product lines.  There can be no assurance that our products will be considered cost-effective by third-party payors, that reimbursement will be available or, if available, that the third-party payors’ reimbursement policies will not adversely affect our ability to sell our products profitably. 

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

          We believe that the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry to reduce the costs of products and services.  There can be no assurance that third-party reimbursement and coverage will be available or adequate, or that future legislation, regulation, or reimbursement policies of third-party payors will not adversely affect the demand for our products in development or our ability to sell these products on a profitable basis.  The unavailability or inadequacy of third-party payor coverage or reimbursement could have a material adverse effect on our business, operating results and financial condition. 

Manufacturing

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

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

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          Orthobiologic Products.  Coral is the primary raw material used to manufacture our PRO OSTEON products.  The coral used in our products is sourced from two genera located in a wide variety of geographic locations.  Our source for coral has been the tropical areas of the Pacific and Indian Oceans.  We believe we have an adequate supply of coral for the foreseeable future.  Coral is covered under an international treaty entitled Convention on International Trade of Endangered Species of Wild Fauna and Flora, which regulates for approximately 140 nations around the world the import/export of raw coral and products derived therefrom.  To date, the limitations imposed by this treaty have not significantly affected our ability to source raw coral, however, conditions in countries controlling the export of coral have recently had a negative effect on our ability to source raw coral.  The manufacturing process for our PRO OSTEON line of bone graft substitute products involves coral qualification and cutting, hydrothermal conversion, testing, packaging and sterilization of the product, all of which, with the exception of sterilization, are performed at our facilities. 

          Our INTERGRO DBM putty is manufactured using a proprietary formula which involves combining demineralized bone matrix (DBM), which is available from third party allograft tissue processors, with a biocompatible, non-soluble lipid carrier.  While we have been able to obtain adequate quantities of the DBM to meet our requirements to date, only limited quantities of cadaver tissue are generally available, and therefore there can be no assurance that sufficient quantities will be available to meet our future requirements.

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

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

Competition

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

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

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          Growth Factors. DePuy AcroMed is marketing under the Symphony™ tradename a system which is competitive to AGF.  We believe that the sales efforts for Symphony have negatively affected our sales of AGF-related products.  In addition, there are several companies introducing systems that produce gel products which may compete with AGF.  There is significant development activity ongoing that, if successful, would potentially produce other products competitive with our AGF technology. Stryker Corporation has rights to a recombinant human bone morphogenetic protein called OP-1 for which the FDA granted Humanitarian Device Exemption status as an alternative to autograft for long-bone non-union fractrues.  Medtronic Sofamor Danek has rights to Wyeth’s recombinant human bone morphogenetic protein (rhBMP-2) and developed a product called InFUSE™ which was introduced to the U.S. market in 2002.

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

          We compete in all of our markets primarily on the basis of product performance and price, as well as customer loyalty and service. 

Government Regulation

          Our products are regulated by the FDA under the federal Food, Drug and Cosmetic Act, as well as other federal, state and local governmental authorities and similar regulatory agencies in other countries.  The FDA permits commercial distribution of a new medical device only after the FDA has cleared a 510(k) premarket notification or has approved a Premarket Approval application for such medical device.  In general, the FDA will clear marketing of a medical device through the 510(k) premarket notification process if it is demonstrated that the new product is substantially equivalent, in terms of safety and intended use to certain 510(k) cleared products which are already commercially available and legally sold on the market. 

          The Premarket Approval process is lengthier and more burdensome than the 510(k) premarket notification process.  The Premarket Approval process generally requires detailed animal and clinical studies, as well as manufacturing data and other information.  If clinical studies are required by the FDA, an Investigational Device Exemption is also required.  An Investigational Device Exemption restricts the investigational use of the device to a limited number of investigational sites, investigators and patients.  Its purpose is to prove safety and efficacy of the device.  FDA approval of a Premarket Approval application indicates that the FDA concurs that a device has been scientifically proven, through the completion and submission of animal data, a completed Investigational Device Exemption and other pertinent information, to be safe and effective for its intended use. 

Spinal Implant Products

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

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

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

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

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

Orthobiologic Products

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

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

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

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

Minimally Invasive Surgery Products

          Our minimally invasive surgery products fall within the Class I category of medical devices as determined by the FDA.  Class I contains those devices which generally do not present an unreasonable risk of illness or injury to the patient and are therefore subject only to the general controls authorized under the FDA regulations.  No premarket approval or premarket notification submissions are required for Class I devices.

          Other FDA requirements govern product labeling and prohibit a manufacturer from marketing an approved device for unapproved applications.  If the FDA believes that a manufacturer is not in compliance with the law, it can institute proceedings to detain or seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the manufacturer, its officers and employees. 

          We are registered as a medical device manufacturer with the FDA, with state agencies such as the Food and Drug Branch of the California Department of Health Services and with the European Community.  These agencies inspect our facilities from time to time to determine whether we are in compliance with various regulations relating to medical device manufacturing, including the FDA’s Quality System Regulations and ISO 9001/EN46001/ISO 13485, which govern design, manufacturing, testing, quality control, sterilization and labeling of medical devices.  We believe we are in compliance with the regulations established by these agencies applicable to our business.  The European Community Notified Body, the FDA and the California Department of Health Services have inspected our manufacturing facilities and quality assurance procedures in the past and we expect them to continue to do so in the future. 

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          With respect to our bone graft substitute products, we must also comply with the requirements of the Convention on International Trade of Endangered Species of Wild Fauna and Flora, or CITES.  This is an international agreement signed by approximately 140 nations, which agreement regulates the import and export of products which are derived from endangered wildlife.  Although the coral we use is not an endangered species, all harvested coral is subject to regulation under CITES.  As a result, we must register and obtain licensure from the U.S. Department of Fish and Wildlife for both the import of raw coral and the export of finished product.  We maintain a multi-year supply of coral to minimize the risk of supply interruptions.  Because each shipment of product exported outside of the United States or its possessions requires individual permitting, and also to improve shipping efficiencies and service to our international customers, we entered into an agreement with a contract warehouse in the Netherlands for the purpose of international distribution of our products. 

          We must also comply with registration requirements of foreign governments and with import and export regulations when distributing our products to foreign nations.  Each foreign country’s regulatory requirements for product approval and distribution are unique and may require the expenditure of substantial time, resources and effort to obtain and maintain approvals for marketing.  In September 1995, we received approval to use the “CE” mark for our entire line of orthopedic and oral/maxillofacial synthetic bone graft materials.  We received approval to use the “CE” mark for our spinal implant systems in 1998, and applied the “CE” mark to our minimally invasive surgery products in 2001.  The CE mark indicates that the products are approved for sale within 18 countries in the European Community and European Free Trade Association and that we are in compliance with the ISO 9001 and EN 46001 standards which govern medical device manufacturers that are marketing products in Europe.  The CE mark is now also accepted by several countries outside of the European Community.  We received our ISO 13485 certification in 2001 and our Canadian Medical Device Conformity Assessment System certification in 2002 which allows us to continue exportation to Canada.  The ISO 13485 standard is designed for medical devices and will eventually replace ISO 9001 and EN 46001 standards for Europe.

Employees

          As of March 1, 2003, we had 169 full-time employees, of whom 57 were engaged in marketing and sales, 44 in manufacturing, 24 in regulatory affairs and quality assurance, 17 in general administration and finance and 27 in research and development.  None of these employees is represented by a union, and we have never experienced a work stoppage.  We consider our relations with our employees to be good. 

Certain Business Considerations

          Investors are cautioned that certain statements contained in or incorporated by reference into this Annual Report on Form 10-K, or which are otherwise made by us or on our behalf are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include statements that are predictive in nature, which depend upon or refer to future events or conditions, which include words such as “believes,” “plans,” “anticipates,” “estimates,” “expects” or similar expressions.  In addition, any statements concerning future financial performance, ongoing business strategies or prospects, and possible future actions, which may be provided by our management, are also forward-looking statements.  Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties, and assumptions about our company, economic and market factors and the industry in which we do business, among other things.  These statements are not guaranties of future performance and we undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

          Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors.  Factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements, include, but are not limited to those discussed below and elsewhere in this Annual Report on Form 10-K.

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We are dependent on a few products which may be rendered obsolete. 

          A majority of our revenues currently comes from SYNERGY and PRO OSTEON sales.  We cannot assure you that we will be successful in increasing sales of our current product offering.  Additionally, we cannot assure you that our efforts to develop new products will be successful.  Even if our development efforts are successful, there can be no assurance that we will be successful in marketing and selling our new products.  Moreover, our competitors may develop and successfully commercialize medical devices that directly or indirectly accomplish what our products are designed to accomplish in a superior and less expensive manner.  If our competitors’ products prove to be more successful than ours, our products could be rendered obsolete.  As a result, we may not be able to produce sufficient sales to maintain profitability. 

If we fail to compete successfully against existing or potential competitors, our operating results may be adversely affected. 

          The market for our products is intensely competitive, subject to change and significantly affected by new product introductions and other market activities of industry participants.  Our principal global competitors with respect to our spinal implant product line are Medtronic Sofamor Danek USA, DePuy AcroMed, Inc., a Johnson & Johnson company, and SYNTHES-STRATEC, Inc. Our principal global competitors with respect to our orthobiologic products include DePuy AcroMed, Medtronic Sofamor Danek USA, Osteotech, Inc., Orthovita, GenSci Regeneration Sciences, Regeneration Technologies and Wright Medical Technology. Our principal competitor with respect to our minimally invasive surgery products is Kyphon Inc.  We compete in all of our markets primarily on the basis of product performance and price, as well as customer loyalty and service. Many of our competitors have greater resources for product development, sales and marketing and patent litigation than we do.  Accordingly, they could substantially increase the resources they devote to the development and marketing of products that are competitive with ours.  Many of our potential customers have existing relationships with our competitors that could make it difficult for us to continue to penetrate the markets for our products.  Additionally, several of our competitors have broader product lines that we do.  If we fail to compete successfully against our existing or potential competitors, our operating results may be adversely affected.

We may not be able to develop new products that will be accepted by the market. 

          Our future growth will be dependent on our ability to develop and introduce new products, including enhancements to our existing products.  We cannot assure you that we will be able to successfully develop or market new products or that any of our future products will be accepted by our customers.  If we do not develop new products in time to meet market demand or if there is insufficient demand for these products, our revenues and profitability may be adversely affected.  The success of any new product offerings or enhancements to existing product offerings will depend on several factors, including our ability to:

          In addition, we have spent and expect to continue to spend significant cash on the development, product launch and continued marketing of new products and if there is insufficient demand for these new products, our cash flow could suffer and our liquidity would be adversely affected.

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The long-term efficacy and market acceptance of AGF is uncertain. 

          Our AGF related products were introduced under a 510(k) clearance, and we lack published long-term clinical data regarding the efficacy and long-term results of AGF.  If long-term studies or clinical experience indicate that procedures involving AGF do not provide patients with improved clinical outcomes, anticipated sales of our AGF related products may never materialize.  Our success in selling our AGF related products will depend, in large part, on the medical community’s acceptance of AGF.  The medical community’s acceptance of AGF will depend upon our ability to demonstrate the efficacy of AGF and its advantages, favorable clinical performance and cost-effectiveness.  The medical community’s acceptance of AGF will also depend upon our ability to introduce ACCESS, a new processing system for AGF, that is less complex.  We cannot predict whether the medical community will accept AGF or, if accepted, the extent of its use.  If long-term studies or clinical experience indicate that AGF causes negative effects, we could be subject to significant liability. 

Our minimally invasive surgery products business may not achieve the growth we expect and our profitability could be adversely affected.

          To date, our M.I.S. revenues have been below our expectations.  To address this, we are investing significantly in the hiring and training of a group of direct sales representatives.  We believe that these efforts may allow us to achieve the expected growth in AOM revenues.  However, we cannot assure you that our efforts will be successful.  The creation of a direct sales force is very expensive, and if this sales force does not achieve the expected growth in M.I.S. revenues, our profitability could be materially and adversely affected.

We face risks related to the maintenance, upgrading and expansion of our domestic distribution network. 

          In domestic markets, we primarily use independent sales agents for the distribution of our spinal implant products and orthobiologic products.  However, because of the agents’ focus on selling only to spinal surgeons, our orthobiologic products sales have suffered.  Therefore, we have created an initial direct sales force to distribute our orthobiologic products in certain underperforming territories, and we plan to significantly increase this sales force in the future.  However, we cannot assure you that we will be successful in our efforts to identify and hire qualified candidates for these positions, or that such candidates, upon their hiring, will be successful in distributing our orthobiologic products.  Additionally, this effort requires a substantial investment and our profitability could be adversely affected as a result.

          We expect to continue to rely primarily on independent agencies for the domestic distribution of our spinal implant products.  Independent commissioned sales agencies may represent other medical devices for a variety of manufacturers and may not dedicate enough time or attention to selling our products.  Furthermore, we expend significant resources to train and educate new independent agencies about our products and our marketing programs.  Our ability to recruit independent sales agencies has been aided by some of our competitors’ replacement of independent agencies with direct sales representatives.  However, our competitors may not continue to utilize direct sales representatives and we cannot assure you that we will continue to be able to attract new or retain our current independent sales agencies.  We also cannot assure you that we will be able to develop an effective distribution network or that our independent agencies will be able to continue to increase sales or maintain current sales levels of our products.

We may face challenges to our patents and proprietary rights. 

          We rely on a combination of patents, trade secrets and nondisclosure agreements to protect our proprietary intellectual property.  Our patent positions and those of other medical device companies are uncertain and involve complex and evolving legal and factual questions.  We cannot assure you that pending patent applications will result in issued patents, that patents issued to or licensed by us will not be challenged or circumvented by competitors or that such patents will be found to be valid or sufficiently broad to protect our technology or to provide us with any competitive advantage.  Third parties could also obtain patents that may require licensing for the conduct of our business, and there can be no assurance that the required licenses would be available.  We also rely on nondisclosure agreements with certain employees, consultants and other parties to protect, in part, trade secrets and other proprietary technology.  We cannot assure you that these agreements will not be breached, that we will have

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adequate remedies for any breach, that others will not independently develop substantially equivalent proprietary information or that third parties will not otherwise gain access to our trade secrets and proprietary knowledge.  If our intellectual property is not adequately protected, our competitors could use the intellectual property that we have developed to enhance their products and compete more directly with us, which could result in a decrease in our market share and profits. 

          The medical product industry is characterized by frequent and substantial intellectual property litigation and competitors may resort to intellectual property litigation as a means of competition.  Intellectual property litigation is complex and expensive, and the outcome of such litigation is difficult to predict.  We are currently responding to a claim in which a third party is asserting an ownership interest in our GEO STRUCTURE device and its underlying patent, among other things, based on alleged misappropriation of trade secrets.  We cannot assure you that we will be successful in defending against these claims, and any adverse determination in this matter could have a material adverse effect on obligations.  This and any future litigation, regardless of the outcome, could result in substantial expense and significant diversion of the efforts of our technical and management personnel.  Litigation may also be necessary to enforce our patents and license agreements, to protect our trade secrets or know-how or to determine the enforceability, scope and validity of the proprietary rights of others.  An adverse determination in any such proceeding could subject us to significant liabilities to third parties, or require us to seek licenses from third parties or pay royalties that may be substantial.  Accordingly, an adverse determination in a judicial or administrative proceeding or failure to obtain necessary licenses could prevent us from manufacturing or selling certain of our products which in turn would have a material adverse effect on our business, financial condition and results of operations. 

Product introductions or modifications may be delayed or canceled as a result of the FDA regulatory process, which could cause our sales to decline. 

          The medical devices we manufacture and market are subject to rigorous regulation by the FDA and numerous other federal, state and foreign governmental authorities.  Our failure to comply with such regulations could lead to the imposition of injunctions, suspensions or loss of regulatory approvals, product recalls, termination of distribution, or product seizures.  In the most egregious cases, criminal sanctions or closure of our manufacturing facilities are possible.  The process of obtaining regulatory approvals to market a medical device, particularly from the FDA, can be costly and time-consuming, and there can be no assurance that such approvals will be granted on a timely basis, if at all.  The regulatory process may delay the marketing of new products for lengthy periods and impose substantial additional costs or it may prevent the introduction of new products altogether.  In particular, the FDA permits commercial distribution of a new medical device only after the FDA has cleared a 510(k) premarket notification or has approved a Premarket Approval application, or PMA, for such device.  The FDA will clear marketing of a medical device through the 510(k) process if it is demonstrated that the new product is substantially equivalent to other 510(k)-cleared products.  The PMA approval process is more costly, lengthy and uncertain than the 510(k) premarket notification process.  We cannot assure you that any new products we develop will be subject to the shorter 510(k) clearance process and therefore significant delays in the introduction of any new products that we develop may occur.  We anticipate that most of our products that are in final development will be eligible for the 510(k) premarket notification process.  If the FDA does not clear marketing of our products in final development through the 510(k) clearance process, we will be forced to comply with the PMA approval process in order to obtain FDA approval for these products.  If we choose to go through the PMA approval process, there will be significant costs and delays in the introduction of our new products, if they are approved at all.  Moreover, foreign governmental authorities have become increasingly stringent and we may be subject to more rigorous regulation by foreign governmental authorities in the future.  Any inability or failure of our foreign independent distributors to comply with the varying regulations or the imposition of new regulations could restrict such distributors’ ability to sell our products internationally and thereby adversely affect our business.  All products and manufacturing facilities are subject to continual review and periodic inspection by the FDA.  The discovery of previously unknown problems with our company or our products or facilities may result in product labeling restrictions, recall, or withdrawal of the products from the market.  In addition, the FDA actively enforces regulations prohibiting the promotion of medical devices for unapproved indications.  If the FDA determines that we have marketed our products for off-label use, we could be subject to fines, injunctions or other penalties. 

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We may be subject to product liability claims and our limited product liability insurance may not be sufficient to cover the claims, or we may be required to recall our products. 

          We manufacture medical devices that are used on patients in surgical procedures, and we may be subject to product liability claims and product recalls.  The spinal implant industry has been historically litigious and we face an inherent business risk of financial exposure to product liability claims.  Since most of our products are implanted in the human body, manufacturing errors or design defects could result in injury or death to the patient, and could result in a recall of our products and substantial monetary damages.  Any product liability claim brought against us, with or without merit, could result in an increase to our product liability insurance premiums or our inability to secure coverage in the future.  We would also have to pay any amount awarded by a court in excess of our policy limits.  In addition, any recall of our products, whether initiated by us or by a regulatory agency, may result in adverse publicity for us that could have a material adverse effect on our business, financial condition and results of operations.  Our product liability insurance policies have various exclusions, and we may be subject to a product liability claim or recall for which we have no insurance coverage, in which case we may have to pay the entire amount of the award or costs of the recall.  Finally, product liability insurance is expensive and may not be available in the future on acceptable terms, or at all. 

Possible denial of third-party reimbursement could have a material adverse effect on our future business, results of operations and financial condition. 

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

We are dependent on our suppliers and the loss of any of them could adversely affect our business. 

          We do not manufacture the components for our spinal implants or instruments or minimally invasive surgery products; rather, we are dependent upon several suppliers for the manufacturing of such components.  Also, the specialized filter material contained in our UltraConcentrator was sole-sourced from a vendor that no longer supplies the material.  Although we have not identified any alternate vendors of the filter material, we have a several year supply of the material in inventory and we believe there are suppliers that could supply alternate materials which may have equivalent function.  In the event that a re-engineering of the product were necessary due to a conversion to an alternate material, delays in product availability could occur and significant costs could be incurred, either of which could have a material adverse effect on our operations.

The harvesting of coral is subject to regulation which could affect our ability to obtain sufficient quantities of coral in the future. 

          The harvesting and import of the coral used for our coral-based orthobiologic products must comply with the requirements of the Convention on International Trade of Endangered Species of Wild Fauna and Flora.  As a result, we must register and obtain licensure from the U.S. Department of Fish and Wildlife for both the import of raw coral and the export of finished product.  In the future, regulations could make the import or export of coral or coral-derived products prohibitive and could interrupt our ability to supply product.  We cannot assure you that our supply

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of raw coral is sufficient, that we will be able to obtain sufficient quantities of coral in the future or that future regulations will not prohibit its use altogether. 

Our business could be materially adversely impacted by risks inherent in international markets. 

          In 2002, approximately 18% of our sales were generated outside the United States.  We expect that such sales will continue to account for a significant portion of our revenue in the future.  Our international sales subject us to other inherent risks, including the following:

          If we fail to successfully market and sell our products in international markets, our business, financial condition, results of operations, and cash flows could be materially and adversely affected. 

Item 2.   Properties

          We lease two facilities in Irvine, California totaling 64,530 square feet that comprise our headquarters.  The annual average lease expense over the five year term of the lease, which expires January 31, 2008, is $771,000.  The lease provides a right to extend the term for an additional five years at the fair market lease rate of the facility on the extension date, but not less than the rate we paid during the month immediately preceding the commencement of the extension period.  We also lease an additional facility in Irvine, California with a total square footage of 4,274 which provides for additional warehousing, manufacturing, laboratory, office and prototype machine shop space.  We lease a 2,700 square foot warehouse facility in Santa Ana, California.  We lease a sales office with approximately 200 square feet located in Miami, Florida.  We lease in Leesburg, Virginia a 4,200 square foot facility which is currently vacant.  This lease will terminate on February 8, 2004.  We believe our current facilities will be adequate to serve our operational needs through 2003. 

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Item 3.   Legal Proceedings

          On September 5, 2000, Interpore’s wholly-owned subsidiary, Cross Medical Products, Inc. (“Cross”), filed suit in the U.S. District Court, Central District of California, against DePuy AcroMed, Inc., a Johnson & Johnson company and Biedermann Motech GmbH, which suit alleged that DePuy AcroMed had infringed and continued to infringe Cross’ U.S. Patent Nos. 5,466,237 and 5,474,555.  These patents relate to screw technology embodied in certain components of the SYNERGY Spinal System.  The complaint sought damages for willful past and continuing infringement of the patents.  The Complaint also sought a declaratory judgment against DePuy AcroMed and Biedermann Motech that Cross was not infringing Biedermann Motech’s Patent No. 5,207,678.  DePuy AcroMed responded to the Complaint alleging that Cross’ patents are invalid and unenforceable, and alleging that it did not infringe.

          On January 24, 2003, the parties settled this case.  In connection with the confidential settlement agreement entered into between the parties, DePuy AcroMed paid Cross $15 million and agreed to pay a royalty on future sales of certain products.  As required by the settlement agreement, the parties filed a request to dismiss the lawsuit, which request was granted on February 7, 2003.

          On December 20, 2002, in response to allegations by Biomet, Inc. of misappropriation of certain trade secrets by Interpore’s wholly-owned subsidiary Interpore Cross International, Inc. (“Interpore Cross”) and its employee, Jens Peter Timm (a former employee of Biomet), Interpore, Interpore Cross, Cross and Mr. Timm filed a complaint for declaratory relief in the United States District Court for the Central District of California.  The complaint sought a declaration as to Interpore Cross’s rights in its GEO STRUCTURE device and all related products and technology.  On February 14, 2003, the Court dismissed the complaint without prejudice based on its findings that the declaratory relief action was unnecessary because there was no threat of imminent or inevitable litigation at the time the complaint was filed.

          On January 16, 2003, Biomet filed an action in the United States District Court for the Northern District of Indiana, South Bend Division, against Interpore, Interpore Cross, Cross and Mr. Timm.  The complaint asserted claims alleging causes of action for declaration of patent ownership, constructive trust, patent infringement, misappropriation of trade secrets and unjust enrichment.  Biomet seeks an equitable ownership interest in Interpore Cross’s U.S. Patent Number 6,206,924 (the “‘924 patent”), a constructive trust over the proceeds of any products relating to the ‘924 patent, including the GEO STRUCTURE device, an injunction against infringement of the ‘924 patent, damages (including treble damages for willful conduct) and attorneys’ fees.  Biomet is claiming damages (before trebling) in excess of one million dollars. 

          In response to Biomet’s complaint Interpore filed three separate motions on March 10, 2003:  a motion to dismiss for lack of personal jurisdiction on behalf of Interpore and Cross; a motion to transfer venue to California; and a motion to strike the request for monetary damages for patent infringement and a motion for a more definite statement as to the allegedly misappropriated trade secrets.  As of March 20, 2003, no date has been set for the hearing. 

        Interpore is unable at this time to predict the outcome of the litigation with Biomet. As of this date, Interpore does not believe that this litigation could reasonably be expected to have a material adverse effect on its business or financial condition. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in Interpore’s assumptions or the effectiveness of Interpore’s strategies related to these proceedings.

          Aside from the patent litigation, the nature of Interpore’s business subjects it to product liability and various other legal proceedings from time to time.  Interpore is currently involved in legal proceedings incidental to the normal conduct of its business.  It does not believe that any liabilities relating to the legal proceedings to which it is a party are likely to be, individually or in the aggregate, material to its consolidated financial condition or results of operations. 

Item 4.   Submission of Matters to a Vote of Security Holders

          None.

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PART II

Item 5.   Market for Registrant’s Common Stock and Related Stockholder Matters

          Our common stock trades on The Nasdaq Stock Market under the symbol “BONZ”.  The following table sets forth, for the periods indicated, the intra-day high and low sales prices for our common stock on The Nasdaq Stock Market:

          On March 17, 2003, the closing sale price for our common stock as reported on The Nasdaq Stock Market was $7.37.  The number of record holders of our common stock as of March 17, 2003 was 459.

          We currently do not pay any dividends on our common stock and our Board of Directors has no present intention to pay cash dividends.  The Board of Directors intends to use any earnings for the development and expansion of our business.

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Item 6.   Selected Financial Data

          The table below presents the selected consolidated financial data of Interpore International, Inc.  This information has been prepared using the consolidated financial statements of Interpore International, Inc. as of and for the years ended December 31, 1998, 1999, 2000, 2001 and 2002.

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Item 7.   Management’s Discussion and Analysis of Results of Operations and Financial Condition

          You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes to those statements appearing elsewhere in this annual report.  This discussion contains forward-looking statements that involve risks and uncertainties, including those discussed above under the subheading “Certain Business Considerations.”

Financial Overview

          Our revenues are generated from the sale of medical devices in three principal categories—spinal implant products, orthobiologic products and minimally invasive surgery (M.I.S.) products.  Our spinal implant products consist of titanium or stainless steel hooks, rods, plates, spacers and screws and related instruments required for the surgeon to assemble a construct which restores the natural anatomy of the spine, keeping it immobilized while a bone graft eventually fuses the vertebrae.  Our orthobiologic products consist of bone graft substitute materials and products used to derive Autologous Growth Factors (AGF).  AGF fibrinogen-rich extract is used to provide faster, more complete bone growth and enhance the performance of our bone graft products.  Our M.I.S. products consist of instruments and devices used to deliver biocompatible materials into bony structures in a minimally invasive procedure. 

          All of our operations are located in the United States; however, we sell our products to customers both within and outside the United States.  Within the United States, we distribute our products through independent agencies and direct sales representatives.  The independent agencies and our direct sales representatives provide a delivery and consultative service to our surgeon and hospital customers and receive commissions based on sales in their territories.  The commissions are reflected in our income statement within selling and marketing expense. 

          For our spinal implant products and M.I.S. products, we invoice hospitals directly following a surgical procedure in which our products are used.  These products are made available to hospitals from consignment inventories maintained by our independent agencies, or from loaner implant sets that we ship from our facility.  For our orthobiologic products, we generally ship directly to hospitals from our facility, and we invoice hospitals upon shipment. 

          Outside the United States, we sell our products directly to distributors who maintain an inventory of our products.  We record revenue at the time of shipment to the distributor at prices reflecting a discount from our U.S. list prices.  The distributors service the surgeons and hospitals, deliver products and invoice hospitals directly at prices determined by the distributors. 

          Because our revenues from U.S. hospitals are primarily at list price, and our revenues from international distributors are at a discount to U.S. list prices, our overall gross margin is subject to fluctuation based on our domestic versus international sales mix, with domestic gross margins being somewhat higher than international gross margins.  Additionally, the mix between spinal implant products sales and orthobiologic products sales also affects our gross margins, with higher margins in orthobiologics. 

Critical Accounting Policies and Estimates

          Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.  On an on-going basis, we evaluate our estimates including those related to product returns, bad debts, inventories, intangible assets, income taxes and litigation.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

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          We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements: 

Results of Operations

          The following table presents our results of operations as percentages:

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

          For the year ended December 31, 2002, sales of $58.9 million were $7.6 million, or 14.9%, higher than sales of $51.3 million for the year ended December 31, 2001.  The following table presents sales by category (in thousands):

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          Sales of spinal implant products increased in the year ended December 31, 2002 by $7.3 million, or 24.8%, to $36.8 million, compared to $29.5 million for the year ended December 31, 2001.  The increase is attributable to increased sales of the SYNERGY Spinal System, increased sales of our C-TEK Anterior Cervical Plate System and sales of our recently released GEO STRUCTURE Device. 

          Sales of orthobiologic products decreased by $2.0 million, or 10.2%, to $18.1 million for the year ended December 31, 2002, compared to $20.1 million for the year ended December 31, 2001.  Sales of our synthetic bone graft products decreased by 13.1% from sales in 2001.  We believe that the decline in sales of our orthobiologic products has resulted primarily from the focus of our independent agencies on the spinal implant market.  To combat the decline in sales of our orthobiologic products, we recently introduced an allograft putty product, and we plan to introduce ACCESS, our improved AGF processing system, in the first half of 2003.  Additionally, we are expanding a direct sales force specifically responsible for sales of our orthobiologic products.  We anticipate that these efforts may begin to reverse the decline in sales of our orthobiologic products; however, we cannot assure you that we will be able to successfully introduce ACCESS or that ACCESS will begin to contribute to our sales or that our efforts to reverse the sales trend will be successful.

          Sales of M.I.S. products increased by $2.4 million to $4.0 million for the year ended December 31, 2002, compared to $1.7 million for the year ended December 31, 2001.  This product line was acquired in July 2001, and accordingly, the 2001 period only included sales since the acquisition.

          Domestic sales for all product categories increased $8.5 million, or 21.4%, to $48.4 million for the year ended December 31, 2002, compared to $39.9 million for the year ended December 31, 2001.  International sales for the year ended December 31, 2002 decreased 7.9%, or $904,000, to $10.5 million from $11.4 million for the year ended December 31, 2001.  

          Beginning in the second quarter of 2003, our revenues will reflect any royalties received from DePuy Acromed in connection with our patent dispute settlement.  See “Liquidity and Capital Resources.”

          For the year ended December 31, 2002, the gross margin as a percentage of sales was 72.1%, compared to 72.0% for the year ended December 31, 2001. 

          Total operating expenses for the year ended December 31, 2002 increased by $8.2 million, or 26.3%, to $39.2 million, compared to $31.0 million during the same period of 2001.  As a percentage of net sales, total operating expenses increased from 60.5% in the year ended December 31, 2001 to 66.5% in the year ended December 31, 2002 because the rate of operating expense growth exceeded the sales growth rate.  The greatest operating expense growth occurred in the selling and marketing and general and administrative expense categories.  The selling and marketing expense increase of 28.7% over 2001 reflects our investment in additional sales personnel for our M.I.S. products.  Additionally, 2002 included a full year of M.I.S. selling expenses compared to less than a half year of similar expense in 2001.  General and administrative expenses increased in 2002 by $1.7 million, or 30.3%, primarily as the result of legal expenses associated with the DePuy AcroMed litigation and increased products liability insurance premiums on higher sales. Also, research and development expenses in 2002 increased by 16.3%, or $1.1 million, due primarily to efforts related to the development of potential new products and a full year of expenses related to our M.I.S. business.  We expect our operating expenses to continue to increase in 2003, partially in the sales and marketing expense category, with the expansion of our direct sales forces for orthobiologic and M.I.S. products.

          Total interest and other income decreased $342,000, or 33.9%, to $668,000 for the year ended December 31, 2002, compared to $1.0 million for year ended December 31, 2001.  The decrease in interest income resulted from lower average cash and cash equivalents balances in 2002.

          Because of the significant tax benefit in 2002 resulting from tax savings projects undertaken during 2002, we recorded a benefit of $190,000 for the year ended December 31, 2002.  The effective tax rate for the year ended December 31, 2001 was 38.5%.  We anticipate that the effective tax rate for the year 2003 will be approximately 40%, absent any further tax savings projects. 

25

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

          For the year ended December 31, 2001, sales of $51.3 million were $7.0 million, or 15.7%, higher than sales of $44.3 million for the previous year.  The following table presents sales by category (in thousands):

          Sales of spinal implant products increased in the year ended December 31, 2001 by $5.8 million, or 24.4%, to $29.5 million, compared to $23.7 million for the year ended December 31, 2000.  The increase is attributable to increased sales of the SYNERGY Spinal System, and sales of our C-TEK Anterior Cervical Plate System which was introduced in the first quarter of 2001. 

          Sales of orthobiologic products decreased by $466,000, or 2.3%, to $20.1 million for the year ended December 31, 2001, compared to $20.6 million for the year ended December 31, 2000.  Sales of our bone graft substitute products decreased by 3.7% versus 2000.  We believe that the decreased sales of bone graft substitute products have resulted from the intentional focus of our distribution resources on the spinal surgery market.  Sales of our AGF-related products remained relatively unchanged compared to the year ended December 31, 2000.

          Sales of M.I.S. products were $1.7 million for the year ended December 31, 2001.  This product line was acquired in July 2001, as part of the AOM acquisition and accordingly, no sales were recorded during 2000.

          Domestic sales for all product categories increased 12.4%, or $4.4 million, to $39.9 million for the year ended December 31, 2001, compared to $35.5 million for the same period of 2000.  International sales of $11.4 million for the year ended December 31, 2001 were higher by 29.2% or $2.6 million compared to $8.8 million for the same period of 2000. 

          For the year ended December 31, 2001, the gross margin as a percentage of sales was 72.0%, compared to 69.6% for the year ended December 31, 2000.  This improvement primarily resulted from operating efficiencies resulting from increased production volumes and higher average unit selling prices for our domestic spinal implant products.

          Total operating expenses for the year ended December 31, 2001 increased by $5.8 million, or 22.9%, to $31.0 million, compared to $25.3 million during the same period of 2000.  Research and development expenses in 2001 increased by 27.2%, or $1.4 million, due primarily to efforts related to the development of potential new products and expenses related to our M.I.S. business.  Selling and marketing expenses in 2001 increased $2.8 million, or 17.8%, compared to 2000, primarily due to commissions on increased sales and expenses related to our M.I.S. business.  General and administrative expenses increased by $1.8 million, or 46.0%, in 2001, primarily as the result of legal expenses associated with the DePuy AcroMed litigation and expenses related to our M.I.S. business.

          Total interest and other income was approximately $1.0 million in both 2001 and 2000.  Lower interest income resulted from comparatively lower interest rates and the decrease in cash and cash equivalents associated with the approximately $8 million of cash used in connection with the acquisition of the M.I.S. business in July 2001.  The decrease in interest income was offset by decreased interest expense resulting from the elimination of long-term debt in 2000 and higher royalty income.

          The effective tax rates for 2000 and 2001 were 37.3% and 38.5%, respectively.

26

Liquidity and Capital Resources

          In 2002, we invested significantly in the development of new spinal implant products and orthobiologic products, some of which were launched in 2002, and others which are scheduled for market launch in 2003.  In addition to product development costs, we built substantial inventories to support the launch and future sales of these products.  This is especially significant in our spinal implant business, where we must build complete sets of implants in many designs and sizes together with the instruments required for their surgical implantation.  Enough complete sets must be manufactured to support consignment inventory needs for our domestic sales agencies and for some U.S. hospitals as well as for loaner sets maintained at our facilities.  As a result, our inventories grew by $15.5 million in 2002.  This was the primary reason for our $9.5 million net cash used in operations for the year ended December 31, 2002. 

          At December 31, 2002, cash and cash equivalents were $1.8 million, down $4.7 million from $6.5 million at December 31, 2001.  We have a $10.0 million secured revolving bank line of credit which expires in June 2005.  At December 31, 2002, we had borrowed approximately $5.8 million under this facility to fund our working capital needs. 

          On January 27, 2003, we received a $15 million payment from DePuy AcroMed in settlement of patent litigation, some of which was used to pay off the outstanding balance on our line of credit.  Additionally, the settlement agreement provides that DePuy AcroMed will pay us a royalty on all licensed spinal implants sold in the U.S. after January 27, 2003.

          We plan to continue making significant investments in initial inventory levels for new products.  We also intend to continue to invest in the development of our business.  We believe we currently possess sufficient resources, including our revolving bank line of credit, to meet the cash requirements of our operations for at least the next year.  In addition, we have used and may continue to use our cash, our common stock, or a combination of both to pay for purchased technologies, product lines, mergers and acquisitions.  Some of these activities may require resources in excess of those which we currently possess, and we cannot assure you that we will be able to raise additional capital on satisfactory terms, if at all.

          At December 31, 2002, we had no material commitments for capital expenditures.

Item 7a.  Quantitative and Qualitative Disclosures About Market Risk

          We are exposed to market risk for changes in interest rates related primarily to our cash and cash equivalent balances and marketable securities.  However, as all of our investments are in short-term instruments, we believe that we have no material market risk exposure. 

Item 8.   Financial Statements and Supplementary Data

          The Financial Statements and Supplementary Data of Interpore International, Inc. are listed and included under Item 16 of this report. 

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

          None. 

27

PART III

Item 10.  Directors and Executive Officers of the Registrant

          There is hereby incorporated herein by reference the information appearing under the caption Election of Directors in the Proxy Statement for the Interpore International 2003 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 2003. 

Item 11.  Executive Compensation

          There is hereby incorporated herein by reference the information appearing under the caption Executive Compensation in the Proxy Statement for the Interpore International 2003 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 2003. 

Item 12.  Security Ownership of Certain Beneficial Owners and Management

          There is hereby incorporated herein by reference the information appearing under the caption Security Ownership of Certain Beneficial Owners and Management in the Proxy Statement for the Interpore International  2003 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 2003.

Item 13.  Certain Relationships and Related Transactions

          There is hereby incorporated by reference the information appearing under the caption Certain Relationships and Related Transactions in the Proxy Statement for the Interpore International 2003 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 2003.

Item 14.  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 SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized 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 necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

          Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.  Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

          There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

Item 15.  Principal Accountant Fees and Services

          There is hereby incorporated by reference the information appearing under the caption Independent Auditor Fee Information in the Proxy Statement for the Interpore International 2003 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 30, 2003.

28

PART IV

Item 16.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

29

SIGNATURES

          Pursuant to the requirements of Section 13 or 15(d) 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. 

          Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. 

30

INTERPORE INTERNATIONAL, INC.

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification

I, David C. Mercer, certify that:

31

INTERPORE INTERNATIONAL INC.

Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification

I, Richard L. Harrison, certify that:

32

INTERPORE INTERNATIONAL, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Interpore International, Inc.

          We have audited the accompanying consolidated balance sheets of Interpore International, Inc. as of December 31, 2001 and 2002, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2002.  Our audits also included the financial statement schedule listed in the Index at Item 16(a).  These financial statements and schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

          We conducted our audits in accordance with auditing standards generally accepted in the United States.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion. 

          In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interpore International, Inc. at December 31, 2001 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States.  Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. 

Orange County, California
February 7, 2003,
except for Note 8, as to which the date is
March 20, 2003

F-2

INTERPORE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)