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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For Fiscal Year Ended: December 31, 2003

OR

FOR THE TRANSITION PERIOD FROM             TO             .

Commission File No. 0-22958

INTERPORE INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Common stock, no par value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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

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PART I

Item 1. Business

Overview

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

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

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

Recent Developments

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

Spine Anatomy

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

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

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Spine Disorders

The following are the four major categories of spine disorders:

Spinal Implant Market Overview

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

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

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

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

Our Spinal Implant Products

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

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

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

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

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

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

Orthobiologics Market Overview

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

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

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

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

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

Our Orthobiologic Products

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

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

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

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

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

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

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

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

Minimally Invasive Surgery Market Overview

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

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

Our Minimally Invasive Surgery Products

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

Research and Development

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

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

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Intellectual Property

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

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

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

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

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

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

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Customers, Sales and Marketing

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

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

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

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

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

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

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

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Third-Party Reimbursement

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

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

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

Manufacturing

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

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

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

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

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

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

Competition

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

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

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

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

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

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

Government Regulation

Overview

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

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

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

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

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

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

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

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

Spinal Implant Products

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

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

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

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

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

Orthobiologic Products

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

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

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

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

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

Minimally Invasive Surgery Products

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

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

Continuing FDA Regulation

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

The FDA has broad post-market and regulatory and enforcement powers. Failure to comply with the applicable U.S. medical device regulatory requirements could result in, among other things, warning letters, fines, injunctions, consent decrees, civil penalties, repairs, replacements, refunds, recalls or seizures of products, total or partial suspension of production, the FDA’s refusal to grant future premarket clearances or approvals, withdrawals or suspensions of current product applications, and criminal prosecution. If any of these events were to occur, it could significantly slow or stop our sales for an indefinite period of time, which could cause our sales to decline.

Other Regulatory Agencies

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.

Federal and State Privacy and Security Laws

Our business operations may be affected by Federal and state laws designed to protect the confidentiality and security of certain personal health information. For example, the U.S. Department of Health and Human Services (HHS) has published the Standards for Privacy of Individually Identifiable Health Information, or the Privacy Rule, pursuant to the Health Insurance Portability and Accountability Act of 1996, or HIPAA. The Privacy Rule imposes standards governing the use and disclosure of personal health information by covered entities, which include health plans, health care clearinghouses and certain health care providers, and subjects those covered entities to civil and criminal penalties for failure to comply. The Privacy Rule not only requires covered entities to comply with these standards, but also requires them to obtain satisfactory assurances from any business associate of theirs who receives personal health information that the business associate will safeguard that personal health information. Furthermore, HHS issued additional HIPAA regulations governing the security of electronic personal health information, which are likely to add to the contractual obligations imposed on business associates in the future. While we are not currently a covered entity, the patient data that we access, collect and analyze in the course of our business may include personal health information obtained from covered entities. If so, we may be asked to enter into written agreements that obligate us to comply with certain HIPAA obligations and impose liability on us for failure to comply. In addition, we may be subject to state laws regulating the privacy and security of health information. Our efforts to comply with these Federal and state laws and related contractual obligations may be costly, and we may incur liability if we fail to comply with them.

Anti-kickback Laws

Our operations and relationships with hospitals, physicians or other health care providers are subject to federal and state anti-kickback laws. Certain provisions of the Social Security Act, which are commonly known collectively as the Medicare Fraud and Abuse Statute, prohibit persons from knowingly and willfully soliciting, receiving, offering or providing remuneration directly or indirectly to induce either the referral of an individual, or the furnishing, recommending, or arranging for a good or service, for which payment may be made under a federal healthcare program such as Medicare and Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value, including such items as gifts, discounts, waiver of payments, and providing anything at less than its fair market value. HHS has issued regulations, commonly known as safe harbors, that set forth certain provisions which, if fully met, will assure healthcare providers and other parties that they will not be prosecuted under the Medicare Fraud and Abuse Statute. Although full compliance with these provisions ensures against prosecution under the Medicare Fraud and Abuse Statute, the failure of a transaction or arrangement to fit within a specific safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the Medicare Fraud and Abuse Statute will be pursued. The penalties for violating the Medicare Fraud and Abuse Statute include imprisonment for up to five years, fines of up to $25,000 per violation and possible exclusion from federal healthcare programs such as Medicaid and Medicaid. Many states have adopted prohibitions similar to the Medicare Fraud and Abuse Statute, some of which apply to the referral of patients for healthcare services reimbursed by any source, not only by the Medicare and Medicaid programs.

Employees

As of February 1, 2004, we had 213 full-time employees, of whom 90 were engaged in marketing and sales, 47 in manufacturing, 27 in regulatory affairs and quality assurance, 19 in general administration and finance and 30 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 may not be successful in completing our proposed acquisition by Biomet.

On March 7, 2004, we entered into a definitive agreement with Biomet, Inc. under which Biomet will acquire all of our outstanding common stock for cash in an amount equal to $14.50 per share. Although we executed a definitive merger agreement with Biomet, the closing of the transaction is subject to various conditions, including approval by our stockholders and regulatory approval, and we cannot assure you that the transaction will close in a timely manner or at all. If the proposed acquisition is not completed or is delayed, our business may suffer for a number of reasons including, but not limited to:

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

A majority of our revenue currently comes from sales of our SYNERGY, C-TEK and PRO OSTEON products. We cannot assure you that we will continue to market these products successfully or that we will be able to increase sales of these products in the future. Any significant diminished sales of our SYNERGY, C-TEK or PRO OSTEON products would adversely affect our business and results of operations.

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, Inc., DePuy Spine, Inc., a Johnson & Johnson company, and Synthes-Stratec, Inc. Our principal global competitors with respect to our orthobiologic products include DePuy Spine, Inc., Medtronic Sofamor Danek, Inc., Osteotech, Inc., Orthovita, IsoTis OrthoBiologics, 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, price and ease of use, as well as customer loyalty and service. Many of our competitors have greater resources for product development, sales and marketing and patent litigation than we do. Accordingly, they could substantially increase the resources they devote to the development and marketing of products that are competitive with ours. Many of our potential customers have existing relationships with our competitors that could make it difficult for us to continue to penetrate the markets for our products. Additionally, several of our competitors have broader product lines that we do. Moreover, our competitors may develop and successfully commercialize medical devices that directly or indirectly accomplish what our products are designed to accomplish in a superior and less expensive manner. If our competitors’ products prove to be more successful than ours, our products could be rendered obsolete. If we fail to compete successfully against our existing or potential competitors, our operating results may be adversely affected.

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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.

The market for spinal fusion implants may be negatively affected by the introduction of artificial disc prostheses.

Numerous spinal product companies and developing surgeons are designing artificial disc prostheses for use primarily in treating patients with degenerative disc disease. These patients currently are often treated using spine fusion procedures instrumented with spinal implant systems such as the ones we produce and sell. By using an artificial disc to treat degenerative disc disease, physicians will be able to maintain the natural motion of the spine, a benefit that is not available in a spinal fusion procedure. The first artificial disc implant is expected to be approved by the FDA and launched in 2005, and will likely be followed by others. Many analysts and market research firms believe that utilization of artificial disc implants in patients with degenerative disc disease will cause the market for implants used in spine fusion procedures to decline.

We have developed an artificial disc and are in the early stages of pursuing FDA approval to market this product. We expect our artificial disc design to be approved by the FDA and launched in the United States no earlier than 2008, if at all. If we are unable to launch the device, if our launch is delayed or unsuccessful or if our device, once launched, fails to compete effectively against other similar products, our sales, profitability and financial condition could be materially adversely affected.

Our ability to increase the market penetration of AGF, via the introduction of our new ACCESS processing system, is uncertain.

Our AGF related products were commercially launched in 1999 and were the first products available that could concentrate a patient’s platelet-derived growth factors to levels shown in studies that would enhance bone growth in grafts. Since that time, several competitors have introduced competitive products that, while unable to achieve comparable growth factor concentrations, are simpler to use than our original AGF processing system and can produce smaller quantities at a lower cost. Also, one competitor has introduced an FDA approved recombinant human bone morphogenetic protein. As a result, sales of our AGF related products have declined.

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We have designed our new ACCESS system to address these competitive issues. We are also in late stages of building a direct sales force for our orthobiologic products, and we expect this direct sales force will be a critical component in our domestic introduction of ACCESS. However, many of our competitors have greater financial resources and distribution than us, and we cannot assure you that our efforts to increase sales of AGF related products via the ACCESS launch will be successful.

Additionally, published data regarding the efficacy of AGF are limited and in some cases present unfavorable outcomes. 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 and ACCESS technology 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. We cannot predict whether the medical community will accept AGF or ACCESS or, if accepted, the extent of the medical community’s use of these products. If long-term studies or clinical experience indicate that AGF causes negative effects, we could be subject to significant liability.

Our M.I.S. products business may not achieve the growth we expect and our results of operations and financial condition 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 that will be dedicated primarily to the sale of our M.I.S. products. We believe that these efforts may allow us to achieve the expected growth in M.I.S. 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 results of operations and financial condition 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 are in late stages of building a direct sales force to distribute our orthobiologic products. 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 ongoing 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.

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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 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.

We are from time to time involved in litigation to protect or enforce our patents and proprietary rights, or to defend against claims brought by others, which could be expensive and time consuming.

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 cannot assure you that we will be successful in defending against these claims. 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. Additionally, 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. 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. For example, we recently filed suit against another medical device manufacturer claiming that certain of its products infringe several of our spinal implant patents, including U.S. Patent Nos. 5,466,237, 5,474,555, 5,624,442 and 6,224,602, and seeking a declaratory judgment that our products do not infringe its patents. The medical device manufacturer filed a counterclaim seeking declaratory judgment that it does not infringe our patents, claiming that our patents are invalid and unenforceable, and claiming that we infringe on two of its patents. The court recently ruled that one of our patents, U.S. Patent No. 5,466,237, is partially invalid. We currently plan to challenge this ruling; however, we cannot assure you that any challenge will be successful. As to our claims for infringement of the remaining patents, the court has made no ruling. This and any future litigation to protect or enforce our proprietary rights could result in substantial expense and significant diversion of management’s attention from our business.

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 we cannot assure you 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

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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.

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 coverage and reimbursement if they determine that a device used in a procedure was not medically necessary or 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

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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 coral used for our coral-based orthobiologics is also sole source supplied and we have not identified an alternate supplier. We believe that our current supply of coral is sufficient to satisfy our needs for the next ten years at our current rate of production. However, we cannot assure you that our current supply will be sufficient for our ongoing operations or that we will be able to locate an alternate supply source on reasonable terms or at all. Any delays in our ability to produce our orthobiologics products could have a material adverse effect on our operations.

The 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 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.

For the year ended December 31, 2003, approximately 20% of our net product 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.

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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 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 believe our current facilities will be adequate to serve our operational needs through 2004.

Item 3. Legal Proceedings

Cross Medical Products v. Medtronic Sofamor Danek

On May 1, 2003, our wholly owned subsidiary, Cross Medical Products, Inc. (“Cross”), filed an amended complaint in the United States District Court for the Central District of California against Medtronic Sofamor Danek, Inc. and Medtronic Sofamor Danek USA, Inc. (collectively, “Medtronic”), which complaint alleges that Medtronic has infringed and continues to infringe Cross’ U.S. Patent Nos. 5,466,237, 5,474,555 and 5,624,442. These patents relate to technology embodied in certain components of the SYNERGY Spinal System. The complaint seeks damages for willful past and continuing infringement of the patents. The complaint also seeks a declaratory judgment against Medtronic that Cross is not infringing U.S. Patent Nos. 5,591,165, 4,641,636, 4,815,453 and 5,005,562. On June 23, 2003, Medtronic filed counterclaims for a declaratory judgment that it does not infringe Cross’ patents, and that the patents are invalid and unenforceable.

On October 10, 2003, Medtronic filed a motion to amend its answer and counterclaims to add certain affirmative defenses and causes of action against Cross on behalf of Medtronic and SDGI Holdings, Inc. (“SDGI”) for past and continued infringement of U.S. Patent Nos. 6,152,927 and 6,533,786 based on Cross’ C-TEK anterior cervical plate system.

On October 22, 2003, the Court, at the request of Cross, dismissed Cross’ claims for declaratory judgment that Cross is not infringing U.S. Patent Nos. 5,591,165, 4,641,636, 4,815,453 and 5,005,562.

On November 3, 2003, the Court granted Medtronic’s motion to amend its answer and counterclaims to allege causes of action against Cross on behalf of Medtronic and SDGI for past and continued infringement of U.S. Patent Nos. 6,152,927 and 6,533,786 based on Cross’ C-TEK anterior cervical plate system.

On October 22, 2003, Cross, Interpore Cross International, Inc. (“Interpore Cross”), and Interpore Orthopaedics, Inc. (“Interpore Orthopaedics”) filed an amended complaint in the United States District Court for the Central District of California against Medtronic and SDGI, which complaint alleges that Medtronic has infringed and continues to infringe Cross’ U.S. Patent No. 6,224,602. That patent relates to technology embodied in certain components of the C-TEK anterior cervical plate system. The complaint seeks damages for willful past and continuing infringement of the patent. The complaint also seeks a declaratory judgment against Medtronic and SDGI that Interpore Cross and Interpore Orthopaedics are not infringing U.S. Patent Nos. 6,152,927 and 6,533,786.

On March 1, 2004, the Court granted Medtronic’s motion for summary judgment of the invalidity of Cross’ U.S. Patent No. 5,466,237, ruling that this patent was partially invalid. Cross is exploring strategies in response to this ruling and currently plans to challenge it. However, there can be no assurance that Cross will be successful in any such challenge.

Interpore is unable at this time to predict the outcome of this litigation.

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Cross Medical Products v. Puno and Byrd

On December 4, 2003, Drs. Puno and Byrd filed a motion to intervene in the Cross’ litigation with Medtronic claiming ownership of Cross’ U.S. Patent Nos. 5,466,237, 5,474,555, and 5,624,442 patents, as well as other of Cross’ patents not at issue in this litigation, on the basis of a purported termination by them of certain royalty agreements with Cross. On December 10, 2003, Cross filed a demand for arbitration of the claims raised by Drs. Puno and Byrd with the American Arbitration Association under the terms of the royalty agreements seeking a declaration that Drs. Puno and Byrd have no interest in any of Cross’ patents, and no interest in any of the settlement recovery received from the settlement of Cross’ lawsuit with DePuy Spine, Inc. in January 2003. On January 5, 2004, Drs. Puno and Byrd filed a counterclaim in the arbitration claiming entitlement to Cross’ U.S. Patent Nos. 5,466,237, 5,474,555, 5,624,442, 5,496, 321, and 5,360,431 Patents, and at least $21,000,000 from Cross’ settlement with DePuy Spine. On January 26, 2004, Cross entered into an agreement with Drs. Puno and Byrd clarifying Cross’ ownership of all of its patents and the right of Drs. Puno and Byrd to receive royalties on certain of Cross’ products. On January 29, 2004, Drs. Puno and Byrd withdrew their motion to intervene in the Medtronic litigation and the parties dismissed the arbitration. Separately, Cross entered into an agreement with Drs. Puno and Byrd to prepay royalties remaining under the existing royalty agreements with respect to certain other Cross products in the amount of $2.5 million, and the parties agreed to terminate those royalty agreements.

Abrams v. Interpore International, Inc., et al

On March 8, 2004, one of Interpore’s alleged stockholders filed a putative class action lawsuit in the Superior Court of the State of California, County of Orange, against Interpore and each member of its board of directors. The lawsuit, Abrams v. Interpore International, Inc., et al., (Case No. 04CC00093), alleges that Interpore and its directors breached the fiduciary duties of care, loyalty, candor, and independence owed to Interpore’s stockholders in connection with the proposed acquisition of Interpore by Biomet, Inc. Specifically, the lawsuit alleges that Interpore and its directors failed to take steps to maximize the value of Interpore, took steps to avoid competitive bidding, gave Biomet an unfair advantage, failed to solicit other potential acquirors or alternative transactions and failed to properly value Interpore. The plaintiff seeks to enjoin Interpore from proceeding with the proposed acquisition by Biomet. Additionally, the complaint seeks certification of a class, a declaration that Interpore and its directors have breached their fiduciary duties in entering into the proposed transaction with Biomet, an injunction barring the proposed acquisition and directing Interpore to pursue a transaction in the best interests of its stockholders, a constructive trust upon any benefits improperly received by Interpore or any of its directors as a result of the proposed acquisition, costs, and attorneys’ and experts’ fees. Interpore believes that this lawsuit is without merit and intends to vigorously defend against the allegations in the complaint.

Aside from the aforementioned matters, 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 February 27, 2004, the closing sale price for our common stock as reported on The Nasdaq Stock Market was $11.09 The number of record holders of our common stock as of February 27, 2004 was 411.

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.

Recent Sales of Unregistered Securities

On October 22, 2003, we issued 25,000 shares of common stock to Andrew G. Hood upon his exercise of a warrant to purchase shares of common stock at an exercise price of $7.125 per share. The shares were issued in exchange for payment of the aggregate exercise price of $178,000. In issuing the underlying common stock to Mr. Hood, we relied on the exemption from registration set forth in Section 4(2) of the Securities Act of 1933, as amended.

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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, 1999, 2000, 2001, 2002 and 2003.

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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 device products and from the receipt of royalty payments from third parties to which we have granted licenses to certain of our spinal implant patents. Our medical device products fall into three principal categories—spinal implant products, orthobiologic products and minimally invasive surgery, or 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^®, or 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 delivery and consultative services 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 and direct sales representatives, 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. Our AGF and ACCESS^® processors are usually placed on consignment at hospitals; the hospitals are invoiced for AGF and ACCESS disposables.

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 provide service to 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.

Recent Developments

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

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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.

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

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Results of Operations

The following table presents our results of operations as percentages:

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

For the year ended December 31, 2003, net revenues of $70.7 million were $11.8 million, or 20.0%, higher than net revenues of $58.9 million for the year ended December 31, 2002. Net product sales for the year ended December 31, 2003 of $67.5 million were $8.6 million or 14.6% higher than net product sales of $58.9 million for the year ended December 31, 2002. The following table presents net revenues by product sales by category and royalty income (in thousands):

Sales of spinal implant products increased in the year ended December 31, 2003 by $7.8 million, or 21.1%, to $44.6 million, compared to $36.8 million for the year ended December 31, 2002. The increase is primarily attributable to growth in sales of C-TEK, GEO STRUCTURE and SYNERGY products as well as sales of our recently released ALTIUS and TPS-TL products.

Sales of orthobiologic products increased by $568,000, or 3.1%, to $18.7 million for the year ended December 31, 2003, compared to $18.1 million for the year ended December 31, 2002. The sales growth resulted from sales of our INTERGRO allograft putty and paste products, which were introduced in 2002 and 2003, partially offset by a decline in sales of our synthetic bone graft products.

Sales of M.I.S. products increased by $248,000, or 6.2%, to $4.3 million for the year ended December 31, 2003, compared to $4.0 million for the year ended December 31, 2002. In the fourth quarter of 2002, we initiated significant organization changes in our M.I.S business; beginning with the closing of the M.I.S. related facility in Leesburg, Virginia. In early 2003 we hired two domestic sales division managers for our M.I.S. products and began to expand the direct sales force which is exclusively focused on selling our M.I.S. products. The length of time it takes for a newly-hired direct sales representative to achieve a satisfactory level of monthly sales has been greater than we had anticipated. Nonetheless, we believe that these efforts are necessary to help generate growth in sales in this product category. However, we cannot assure you that our efforts will ultimately result in the sales growth we expect in M.I.S. products.

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Domestic sales for all product categories increased $5.7 million, or 11.7%, to $54.1 million for the year ended December 31, 2003, compared to $48.4 million for the year ended December 31, 2002. International sales for the year ended December 31, 2003 increased $2.9 million, or 27.9% to $13.4 million from $10.5 million for the year ended December 31, 2002.

During the year ended December 31, 2003, we received royalty payments totaling $3.2 million from third parties to which we have granted licenses to certain of our spinal implant patents. This royalty payment stream began in the second quarter of 2003.

For the year ended December 31, 2003, the gross profit was 71.4% of net revenues compared to 72.1% of net revenues for the year ended December 31, 2002. However, before accounting for the effect of the royalty income, the gross profit as a percentage of net product sales declined from 72.1% in the year ended December 31, 2002 to 70.0% in the year ended December 31, 2003. The decline reflects the comparatively lower gross margin on sales of certain recently released products, primarily INTERGRO allograft products and ACCESS processors.

Total operating expenses for the year ended December 31, 2003 increased by $4.0 million, or 10.3%, to $43.2 million, compared to $39.2 million during the same period of 2002. However, as a percentage of net revenues, total operating expenses decreased from 66.5% in the year ended December 31, 2002 to 61.1% in the year ended December 31, 2003. Research and development expenses in 2003 increased by $508,000, or 6.5% due primarily to efforts related to the development of potential new products. Selling and marketing expenses increased $3.6 million, or 15.1%, primarily due to our investment in additional direct sales personnel for our orthobiologic and M.I.S. products. General and administrative expenses decreased in 2003 by $109,000, or 1.5%.

Total interest and other income increased to $16.1 million for the year ended December 31, 2003, compared to $668,000 during the same period of 2002. Other income in 2003 included a $15 million payment from DePuy Spine, received in January 2003, in settlement of patent litigation.

The effective tax rate for the year ended December 31, 2003 was 36.0%. Because of the significant tax benefit in 2002 resulting from tax savings projects undertaken during that year, we recorded a tax benefit for the year ended December 31, 2002 of $190,000.

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

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

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 was attributable to increased sales of the SYNERGY Spinal System, increased sales of our C-TEK Anterior Cervical Plate System and sales of our GEO STRUCTURE Device which was released in 2002.

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 resulted primarily from the focus of our independent agencies on the spinal implant market.

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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 date.

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.

For the year ended December 31, 2002, the gross margin as a percentage of net revenues 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 revenues, 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 Spine 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.

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 an income tax 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%.

Liquidity and Capital Resources

At December 31, 2003, cash, cash equivalents and short-term investments totaled $13.5 million, an increase of $11.7 million from $1.8 million at December 31, 2002. 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 2002 working capital needs, which were driven primarily by significant investments in inventories to support new product launches. On January 27, 2003, we received the $15 million payment from DePuy Spine in settlement of patent litigation, some of which was used to pay off the outstanding balance on our line of credit. We currently have no outstanding borrowings under our line of credit.

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, 2003, we had no material commitments for capital expenditures.

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Contractual Obligations

The following table presents our contractual obligations as of December 31, 2003 (in thousands):

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.

Item 9A. 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 for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the quarter ended December 31, 2003. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

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

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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 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 29, 2004.

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 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 29, 2004.

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 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 29, 2004.

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 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 29, 2004.

Item 14. 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 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before April 29, 2004.

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PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

Schedule II—Valuation and Qualifying Accounts

All other schedules are omitted because they are not applicable or the required information is presented in the financial statements or notes thereto.

None.

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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.

Date: March 12, 2004

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.

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INTERPORE INTERNATIONAL, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

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R EPORT 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, 2002 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(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, 2002 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, 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.

/s/ ERNST & YOUNG LLP

Orange County, California

February 4, 2004,

except for Notes 8 and 10, as to which the date is

March 8, 2004

F-2

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I NTERPORE INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

See accompanying notes.

F-3

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I NTERPORE INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)