INTERPORE INTERNATIONAL INC /DE/ - 10-Q Quarterly Report

(Former name, former address and former fiscal year, if changed since last report)

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

As of April 30, 2004, there were 18,010,587 shares of the registrant’s common stock issued and outstanding.

Interpore International, Inc. (“Interpore”) operates in one business segment: the design, manufacture and marketing of medical devices for the orthopedic marketplace. Interpore’s products are distributed in the United States and internationally.

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to Securities and Exchange Commission regulations. In the opinion of management, the accompanying condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated financial position at March 31, 2004 and the consolidated results of operations and cash flows for the three month periods ended March 31, 2003 and 2004.

The accompanying condensed consolidated financial statements include the accounts of Interpore and its subsidiaries after elimination of all significant intercompany transactions.

The results of operations and cash flows for the three months ended March 31, 2004 are not necessarily indicative of results to be expected for future quarters or the full year.

These consolidated financial statements should be read in conjunction with the financial statements included in Interpore’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission.

Basic earnings (loss) per share (EPS) is calculated by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of all dilutive securities, consisting of employee stock options and warrants. The following table presents the computation of net income (loss) per share (in thousands, except per share data):

Inventories are stated at the lower of first-in, first-out average cost or market. Inventories are comprised of the following (in thousands):

Interpore accounts for stock compensation to employees using the intrinsic value method provided for by Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issuedto Employees and related interpretations. Interpore applies APB 25 and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation, requires use of option valuation models that were not developed for use in valuing employee stock options.

Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if Interpore had accounted for employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions: a risk-free interest rate of 3% in 2003 and 2004, a volatility factor of the expected market price of Interpore common stock of .73 in 2003 and .61 in 2004, a weighted-average expected life of the options of six years, and no dividend yield.

The following table illustrates the effect on net income (loss) per share, had compensation expense for the employee stock-based plans been recorded based on the fair value method under SFAS 123 (in thousands, except per share data):

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.

On March 22, 2004, Cross filed a motion for partial summary judgment that Medtronic is infringing Claim 5 of Cross’ U.S. Patent No. 5,474,555. On April 26, 2004, Medtronic filed a cross-motion for partial summary judgment that it is not infringing Claim 5 of Cross’ U.S. Patent No. 5,474,555. The parties’ partial summary judgment motions regarding infringement are set to be heard on May 17, 2004.

On April 19, 2004, Cross filed a motion for partial summary judgment that Claim 5 of Cross’ U.S. Patent No. 5,474,555 is not invalid. On May 3, 2004, Medtronic filed a motion for partial summary judgment that Claim 5 of Cross’ U.S. Patent No. 5,474,555 is invalid, and further requested additional time to oppose Cross’ Motion. The parties’ partial summary judgment motions regarding validity are set to be heard on May 24, 2004.

On December 4, 2003, Drs. Puno and Byrd filed a motion to intervene in Cross’ litigation with Medtronic claiming ownership of Cross’ U.S. Patent Nos. 5,466,237, 5,474,555, and 5,624,442, 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, 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. This amount is included in intangible assets, net in the accompanying balance sheet and is being amortized over ten years.

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. (“Biomet”). 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, however, Interpore is not able at this time to predict the outcome of this litigation.

On April 9, 2004, a putative stockholder class action lawsuit was filed in Superior Court of the State of California, County of Orange, against Interpore, each of its directors, and Biomet. The lawsuit, Spring Partners, LLC v. Mercer, et al. (Case No. 04CC00156), alleges that Interpore and each of its directors breached their fiduciary duties of care, loyalty and disclosure owed to public stockholders of Interpore in connection with the proposed merger, and that Biomet aided and abetted these breaches. Specifically, the lawsuit alleges that the defendants breached their fiduciary duties by deciding to sell Interpore to Biomet without attempting to obtain the best possible value for stockholders, entering into the transaction with Biomet without attempting to negotiate with third parties, including defensive provisions in the transaction agreement that prevent superior bids from being made, and structuring the transaction agreement such that the individual defendants benefited to the exclusion of other public stockholders of Interpore. Moreover, the lawsuit alleges that the proposed price to be paid by Biomet to acquire Interpore is unfair and inadequate, since it does not reflect the intrinsic value of Interpore’s stock or any efforts by the defendants to ascertain Interpore’s value through an open bidding process.

The lawsuit also alleges that the defendants breached their duty of disclosure by failing to disclose the amounts each director and officer will receive as a result of the acquisition, the amounts each officer or director will receive under any employment agreement, details concerning the conversion of stock options under the acquisition, details about the negotiations between Interpore and Biomet, the identity of any financial advisors and/or investment bankers used by Interpore, any prior relationship between Piper Jaffray and Interpore or Biomet, the identity of any Interpore or Biomet officers or directors who have entered into any employment, consulting or other agreement regarding their retention or continued employment by Biomet or the entity that emerges post-acquisition, the amounts purportedly received by certain individual defendants in exchange for entering into any voting agreements, and any details concerning other indications of interest, proposals or offers received by Interpore regarding a strategic transaction or combination. The lawsuit also alleges an indemnification claim against the defendants.

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 the defendants have breached their fiduciary duties and/or aided and abetted such breaches in entering into the proposed transaction with Biomet, a declaration that defendants have breached their duty of disclosure, indemnification from the defendants for breach of fiduciary duty, an injunction barring the proposed acquisition and directing the defendants to make corrective disclosures, damages, and attorneys’ and experts’ fees.

defend against the allegations in the complaint, however, Interpore is not able at this time to predict the outcome of this litigation.

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.

At December 31, 2003 and March 31, 2004, accrued legal expenses were $434,000 and $853,000, respectively.

On March 7, 2004, Interpore entered into a definitive agreement with Biomet under which Interpore will become a wholly-owned subsidiary of Biomet, and the holders of Interpore’s outstanding common stock will receive 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 Interpore’s stockholders and other customary closing conditions, it is expected that the transaction will close in the second quarter of 2004.

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 quarterly report. This discussion contains forward-looking statements that involve risks and uncertainties, including those discussed above under the subheading “Certain Business Considerations.”

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.

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:

For the quarter ended March 31, 2004, net revenues of $18.8 million were $3.0 million or 19.1% higher than net revenues of $15.8 million for the quarter ended March 31, 2003. Net product sales for the quarter ended March 31, 2004 of $17.8 million were $2.0 million or 12.5% higher than net product sales of $15.8 million for the quarter ended March 31, 2003. The following table presents net revenues by product sales by category and royalty and related income (in thousands):

Sales of spinal implant products increased in the quarter ended March 31, 2004 by $1.3 million, or 12.8%, to $11.7 million, compared to $10.4 million for the quarter ended March 31, 2003. The increase is primarily attributable to growth in sales of SYNERGY^™ and GEO STRUCTURE^™ as well as sales of our recently released ALTIUS^™ products.

Sales of orthobiologic products increased by $455,000, or 10.1%, to $4.9 million for the quarter ended March 31, 2004, compared to $4.5 million for the quarter ended March 31, 2003. The sales growth resulted from increased sales of our INTERGRO^™ allograft putty and paste products, partially offset by a decline in sales of our AGF products.

Sales of M.I.S. products increased by $193,000, or 20.1%, to $1.2 million for the quarter ended March 31, 2004, compared to $962,000 for the quarter ended March 31, 2003.

Domestic sales of all product categories increased $555,000, or 4.4%, to $13.3 million for the quarter ended March 31, 2004, compared to $12.7 million for the quarter ended March 31, 2003. International sales for the quarter ended March 31, 2004 increased by 45.9%, or $1.4 million, to $4.5 million from $3.1 million for the quarter ended March 31, 2003. Domestic sales growth has declined in each of the last two quarters, with fluctuating sales performance in the domestic orthobiologics category, and rapidly decreasing sales growth in the domestic spine products category. We believe that most of the decline in domestic spine product sales growth is due to weakened sales in one sales region, and that this trend has little likelihood of reversing in the near future.

During the quarter ended March 31, 2004, we recorded royalty and related income of $1.0 million related to licenses we have granted to certain of our spinal implant patents. This royalty income stream began in the second quarter of 2003.

For the quarter ended March 31, 2004, gross profit was 70.1% of net revenues compared to 71.7% of net revenues for the quarter ended March 31, 2003. However, before accounting for the effect of the royalty and related income, the gross profit as a percentage of net product sales declined from 71.7% in the quarter ended March 31, 2003 to 68.3% in the quarter ended March 31, 2004. The decline reflects the comparatively lower gross margin on sales to international customers which comprised a larger percentage of total sales in the quarter ended March 31, 2004 compared to the same quarter of 2003.

Total operating expenses for the quarter ended March 31, 2004 increased by $4.1 million, or 41.3%, to $14.0 million, compared to $9.9 million during the same quarter of 2003. As a percentage of net revenues, total operating expenses increased from 62.5% of net revenues in the quarter ended March 31, 2003 to 74.1% in the quarter ended March 31, 2004. Research and development expenses increased $171,000, or 8.4% due primarily to efforts related to the development of potential new products. Selling and marketing expenses increased $2.0 million, or 32.7%, primarily due to expenses related to an international symposium we sponsored in January 2004 and our continued investment in additional direct sales personnel for our orthobiologic and M.I.S. products. General and

administrative expenses increased $1.9 million or 109.1% primarily related to legal fees associated with our patent litigation and expenses related to the pending acquisition by Biomet.

Total interest and other income decreased to $326,000 for the quarter ended March 31, 2004, compared to $15.3 million during the same period of 2003. Other income in 2003 included a $15 million payment from DePuy Spine, received in January 2003, in settlement of patent litigation.

At March 31, 2004, cash, cash equivalents and short-term investments totaled $12.5 million, a decrease of $1.0 million from $13.5 million at December 31, 2003. This takes into account a $2.5 million prepayment of future royalty obligations during the quarter ended March 31, 2004. Also, during that quarter, cash provided from operations was approximately $1.4 million. We have a $10.0 million secured revolving bank line of credit which expires in June 2005. We currently have no outstanding borrowings under our line of credit.

Our future capital requirements will depend on a variety of factors, including whether the proposed acquisition by Biomet is completed. If we remain independent, our plan calls for continued significant investments in initial inventory levels for new products, and continued investment in the development of our business and under certain circumstances, we could be required to pay Biomet an $8 million termination fee. 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.

Investors are cautioned that certain statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q, 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 Quarterly Report on Form 10-Q.

We may not be successful in completing our proposed acquisition by Biomet, which may cause our business to suffer.

On March 7, 2004, we entered into a definitive agreement with Biomet under which we will become a wholly-owned subsidiary of Biomet, and the holders of our outstanding common stock will receive 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:

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 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. We have experienced reduced growth in domestic sales of spine products in the last two fiscal quarters which we believe may reflect a loss of market share for these products in the United States. We believe this trend has little likelihood of reversing in the near future, and there can be no assurance that we will ever be able to reverse this trend. If we fail to compete successfully against our existing or potential competitors, our operating results may be adversely affected.

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

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

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

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.

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.

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 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 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.

The information contained in this report is as of March 31, 2004, unless expressly stated as of another date. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. We also may make additional disclosures in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we may file from time to time with the Securities and Exchange Commission. Please also note that we provide a cautionary discussion of risks and uncertainties under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2003. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed here could also adversely affect us. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995.

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.

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 March 31, 2004. 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.

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.

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. 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, however, Interpore is not able at this time to predict the outcome of this litigation.

The time for the defendants to respond to the complaint has not yet expired and no motions are currently at issue. Interpore and Biomet believe that this lawsuit is meritless and Interpore and Biomet intend to vigorously defend against the allegations in the complaint, however, Interpore is not able at this time to predict the outcome of this litigation.



31.01		Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.02		Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.01		Certifications of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.02		Certifications of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

On March 9, 2004, an 8-K was filed describing a definitive agreement and plan of merger, pursuant to which Biomet, Inc. will acquire all of the outstanding shares of Interpore International, Inc.

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


181 Technology Drive, Irvine, California		92618-2402
(Address of Principal Executive Offices)		(Zip Code)


		Page(s)

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of December 31, 2003 and March 31, 2004 (unaudited)	3

	Condensed Consolidated Statements of Operations (unaudited) for the three month periods ended March 31, 2003 and March 31, 2004	4

	Condensed Consolidated Statements of Cash Flows (unaudited) for the three month periods ended March 31, 2003 and March 31, 2004	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4.	Controls and Procedures	21

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	22

Item 6.	Exhibits and Reports on Form 8-K	24

Signatures		25


	December 31, 2003			March 31, 2004
Assets				(unaudited)
Current assets:
Cash and cash equivalents	$	5,837		$	4,842
Short-term investments		7,651			7,624
Accounts receivable, less allowance for doubtful accounts of $411 and $459 in 2003 and 2004, respectively		13,213			14,787
Inventories		32,982			32,011
Income taxes receivable		1,189			1,326
Prepaid expenses		2,388			1,514
Deferred income taxes		2,169			2,169

Total current assets		65,429			64,273
Property, plant and equipment, net		2,847			2,677
Goodwill		19,883			19,930
Other intangible assets, net		2,572			4,992
Other assets		87			84

Total assets	$	90,818		$	91,956

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	1,925		$	2,137
Accrued compensation and related expenses		2,114			1,954
Accrued royalties		512			336
Other accrued liabilities		1,423			2,417

Total current liabilities		5,974			6,844

Deferred income taxes		427			427
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.01 per share: Authorized shares—5,000,000; issued and outstanding shares—none		—			—
Common stock, par value $.01 per share: Authorized shares—50,000,000; issued and outstanding shares—18,541,462 at December 31, 2003 and 18,611,837 at March 31, 2004		186			186
Additional paid-in-capital		69,940			70,410
Deferred compensation		(825	)		(765	)
Retained earnings		18,225			17,963

		87,526			87,794
Less treasury stock, at cost—605,000 shares at December 31, 2003 and March 31, 2004		(3,109	)		(3,109	)

Total stockholders’ equity		84,417			84,685

Total liabilities and stockholders’ equity	$	90,818		$	91,956


	Three months ended March 31,
	2003			2004
Net product sales	$	15,807		$	17,785
Royalty and related income		—			1,043

Net revenues		15,807			18,828


Cost of goods sold		4,476			5,632

Gross profit		11,331			13,196


Operating expenses:
Research and development		2,044			2,215
Selling and marketing		6,068			8,053
General and administrative		1,765			3,690

Total operating expenses		9,877			13,958


Income (loss) from operations		1,454			(762	)


Interest income		28			46
Interest expense		(9	)		—
Legal settlement		15,000			—
Other income		233			280

Total interest and other income, net		15,252			326


Income (loss) before taxes		16,706			(436	)
Income tax provision (benefit)		6,683			(174	)

Net income (loss)	$	10,023		$	(262	)


Net income (loss) per share:
Basic	$	.58		$	(.01	)
Diluted	$	.56		$	(.01	)

Weighted average shares:
Basic		17,336			17,979
Diluted		17,774			17,979


	Three months ended March 31,
	2003			2004
Cash flows from operating activities
Net income (loss)	$	10,023		$	(262	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		324			321
Amortization		79			99
Provision for doubtful accounts		52			48
Provision for excess and obsolete inventory		437			73
Stock-based compensation expense		98			139
Changes in operating assets and liabilities:
Accounts receivable		323			(1,622	)
Inventories		(1,096	)		898
Prepaid expenses		294			874
Other assets		35			3
Income taxes receivable / payable		6,862			(137	)
Accounts payable and accrued liabilities		(1,107	)		994

Net cash provided by operating activities		16,324			1,428


Cash flows from investing activities
Net cash paid for American OsteoMedix Corporation		(161	)		(171	)
Capital expenditures		(290	)		(151	)
Expenditures for patent and license rights		(67	)		(2,519	)
Maturities of short-term investments		—			27
Purchase of short-term investments		(2,495	)		—

Net cash used in investing activities		(3,013	)		(2,814	)


Cash flows from financing activities
Repayment of long-term debt		(5,818	)		—
Proceeds from exercise of stock options		104			391

Net cash provided by (used in) financing activities		(5,714	)		391


Net increase (decrease) in cash and cash equivalents		7,597			(995	)
Cash and cash equivalents at beginning of period		1,810			5,837

Cash and cash equivalents at end of period	$	9,407		$	4,842


	December 31, 2003		March 31, 2004
Raw materials	$	3,878	$	3,724
Work-in-process		970		1,024
Finished goods		28,134		27,263

	$	32,982	$	32,011


	Three months ended March 31,
	2003		2004
Net income (loss), as reported	$	10,023	$	(262	)
Deduct: total stock based employee compensation expense determined under fair value based method, net of related tax effects		322		324

Net income (loss), as adjusted	$	9,701	$	(586	)


Basic net income (loss) per share:
As reported	$	.58	$	(.01	)
As adjusted	$	.56	$	(.03	)
Diluted net income (loss) per share:
As reported	$	.56	$	(.01	)
As adjusted	$	.55	$	(.03	)


	Percentage of net revenues Three months ended March 31,				Percentage change
	2003		2004		2004 vs. 2003
Net revenues	100.0	%	100.0	%	19.1	%
Cost of goods sold	28.3		29.9		25.8

Gross profit	71.7		70.1		16.5

Operating expenses:
Research and development	12.9		11.8		8.4
Selling and marketing	38.4		42.8		32.7
General and administrative	11.2		19.5		109.1

Total operating expenses	62.5		74.1		41.3

Income (loss) from operations	9.2	%	(4.0	%)	(152.4	%)


	Three months ended March 31,				Change
	2003		2004		Amount		%
Spinal implant product sales	$	10,359	$	11,689	$	1,330	12.8	%
Orthobiologic product sales		4,486		4,941		455	10.1	%
M.I.S. product sales		962		1,155		193	20.1	%

Net product sales		15,807		17,785		1,978	12.5	%
Royalty and related income		—		1,043		1,043	n/a

Net revenues	$	15,807	$	18,828	$	3,021	19.1	%


DATE: May 7, 2004	INTERPORE INTERNATIONAL, INC. (Registrant)

	By:	/s/ David C. Mercer

		David C. Mercer, Chairman and Chief Executive Officer


	By:	/s/ Richard L. Harrison

		Richard L. Harrison Sr. Vice President and Chief Financial Officer