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OPERATOR: Good morning, ladies and gentlemen, and welcome to the Integra LifeSciences third quarter 2004 earnings conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions following the presentation. It is now my pleasure to turn the floor over to your host, Mr. Stuart Essig. Sir, you may begin.

STUART ESSIG, PRESIDENT & CEO, INTEGRA LIFESCIENCES HOLDING CORP: Thank you. Good morning, everybody, and thank you for joining us for the Integra LifeSciences investors conference call. I am Stuart Essig, President and Chief Executive Officer of Integra LifeSciences Holdings Corporation. Joining me today is David Holtz, our Senior Vice President of Finance. During this call we will review our financial results for the third quarter of 2004 which we released yesterday afternoon and our forward-looking guidance for the fourth quarter of 2004 and the full year 2005. At the conclusion of our prepared remarks we will take questions from members of the telephonic audience. Before we begin David Holtz will make some remarks regarding the contents of this conference call.

DAVID HOLTZ, SENIOR VP FINANCE, INTEGRA LIFESCIENCES HOLDING CORP: This presentation is open to the general public and can be heard through telephone access or via a live webcast. A replay of the conference call will be accessible starting one hour after the conclusion of the live event. Access to the replay is available through November 22, 2004, by dialing (973)341-3080, access code 4865983, or through the webcast available on our home page. Today's call is a proprietary presentation of Integra LifeSciences Holdings Corporation and is being recorded by Integra. No recording, reproduction, transcript, transmission or distribution of today's presentation is permitted without Integra's consent. Because the content of this call is time sensitive the information provided is accurate only as of the date of this live broadcast, November 8, 2004. Unless otherwise posted or announced by Integra the information in this call should not be relied on beyond November 22, 2004, the last day that an archived replay by the call authorized by Integra will be available. Certain statements made during this call are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995, among others statements concerns managements expectations of future financial results, new product launches and market acceptance of these new products, future product development programs and potential business acquisitions are forward-looking. Forward-looking statements involve risk and uncertainties that could cause actual results to differ materially from predicted results. For a discussion of such risk and uncertainties please refer to the risk factors that may affect our future performance included in the business section of Integra's annual report on Form 10(K) for the year ended December 31, 2003, and to information contained in our subsequent filings with the Securities and Exchange Commission. These forward-looking statements are made based upon our current expectations and we undertake no duty to update information provided during this call.

STUART ESSIG: Thank you, David. Integra develops, manufactures and markets medical devices for use primarily in neuro-trauma and neurosurgery, plastic and reconstructive surgery and general surgery.

Our products lines include monitoring and drainage systems, surgical instruments and fixation systems and innovative tissue repair products that incorporate our proprietary absorbable implant technology. We reported a net loss of $7.6 million or 25 cents per share for the third quarter of 2004. That loss reflects the effect of the special charges we took in the quarter. Excluding these special charges our net earnings for the third quarter of 2004 were $8.7 million or 28 cents per share. Total revenues in the third quarter of 2004 increased by $12.1 million to $59.1 million, a 26% increase over the third quarter of 2003. Product revenues increased by $15.4 million to $58.9 million while other revenues decreased by $3.3 million. Excluding recently acquired product lines third quarter product revenues increased by $9.6 million or 22% over the prior year period. Changes in foreign currency exchange rates contributed $600,000 to our year-over-year product revenue growth.

Neuromonitoring revenues increased by 9% primarily as a result of increased sales of our intra cranial monitoring products, including our Camino and LICOX systems. Our operating room revenues increased by 54% as a result of growth in sales of our DuraGen and DuraGen Plus Dural Graft Matrix products and the inclusion of Integra Dermal Regeneration Template and INTEGRA Bilayer Matrix Wound Dressing sales in operating room revenues. NeuraGen sales were also strong. Revenues from our instrument product lines grew 52% over the prior year quarter largely as a result of sales from recently acquired product lines. Increased sales of our JARIT surgical instrument lines also contributed to the growth in instrument product revenues. Our private label product revenue increased by 6%.

The increase in revenues attributable to our remaining private label products including the Absorbable Collagen Sponge we supply for use in Medtronic's INFUSE bone graft product more than offset the exclusion of the Integra Dermal Regeneration Template from this category. Our gross margin on product revenues in the third quarter of 2004 was 62%. The current quarter's gross margin benefited from strong sales growth in our higher margin products. Total other operating expenses which exclude cost of product revenue but include amortization increased to $48.9 million in the third quarter of 2004 compared to $17.3 million in the third quarter of 2003, largely as a result of special charges taken during the period. Sales and marketing expenses increased 24% over the prior year period to $12.5 million as a result of strong revenue growth and increased spending to support our plastic and reconstructive surgery product lines and the recently acquired Mayfield and Electro Tom product lines. Sales and marketing expenses decreased to 21% of product revenues in the third quarter of 2004 from 23% in the third quarter of 2003. Research and development expenses increased approximately $2.5 million to $5.1 million in the third quarter, approximately $1.9 million of this increase is attributable to the in process research and development charges we took in connection with our making of a milestone payment to a third party developer and a license payment for technology under development. General and administrative expenses increased $26.3 million to $30.1 million in the third quarter. Excluding the share based compensation charge general and administrative expenses were 11% of product revenues in the third quarter of 2004 as we continue to incur professional fees related to Sarbanes-Oxley compliance activities, the limitation of new Oracle Enterprise resource management system and the Merck litigation. I will now turn the presentation over to David Holtz, our Senior Vice President of Finance who will provide more information regarding our interest income, tax rate and foreign currency exposure.

DAVID HOLTZ: Thank you, Stuart. We recorded net interest income of $240,000 in the third quarter of 2004 compared to net interest expense of $190,000 in the prior year period. This change resulted from the positive impact of the interest rate swap we executed in August of 2003 and higher interest income on our cash balances. We recorded other income of $300,000 in the third quarter, the same as in the prior year period. In the third quarter of 2004 as a result of our strong operating performance we generated cash flows from operations of $11.6 million. We used $14.2 million during the quarter to repurchase 500,000 shares of our common stock at an average price of $28.48. We had cash investments totally $191 million at September 30, 2004. We have increased our projected effective tax rate to 39% in 2004 primarily due to an incremental $750,000 tax charge in connection with the reorganization of certain of our European operations. We anticipate that the reorganization of our European assets will lower our effective tax rate for future years. Overall we project a 36% effective tax rate for Integra in 2005. We expect our actual cash tax rate will remain -- will continue to be substantially lower than our effective tax rate as we continue to use our net operating loss carry forwards. The weighted average common shares outstanding used for the calculation of diluted loss per share in the third quarter of 2004 was approximately 30.3 million shares as the share count excludes anti dilutive securities. Our adjusted earnings per share of 28 cents is based on a weighted average common shares outstanding of 31.3 million shares. As most of you know the Financial Accounting Standards Board recently ratified Emerging Issues Task Force issue number 0408 which will require that companies with outstanding contingently convertible debt, such as Integra include the number of shares issuable upon conversion of that debt in their dilutive share count. As a result of this new rule beginning in the fourth quarter we will add back approximately $1 million of interest expense to our quarterly pre-tax net income when calculating dilutive earnings per share and add 3.5 million shares to our weighted average common shares outstanding.

It is important to note that the ratification of EITF 0408 will affect only our reported earnings per share and will have no impact on our operating results, revenues, net income or cash position. We estimate that the dilutive affect of these modifications to our earnings per share calculations will be 1 to 2 cents per share in the fourth quarter of 2004 and 7 to 8 cents per share in the full year of 2005. We anticipate that our average weighted shares outstanding for the fourth quarter of 2004 and full year 2005 will be approximately 35 million shares with the inclusion of the shares associated with our convertible note. During the third quarter of 2004 our foreign currency denominated expenses exceeded our foreign currency denominated revenues by approximately $4.2 million. We expect this imbalance to continue through the remainder of 2004. We currently do not hedge our exposure to foreign currency risk. Now let me turn the presentation back over to Stuart.

STUART ESSIG: Thank you, David. Our very strong organic revenue growth and favorable gross margin performance increases our ability to invest in the future of the Company. We can make significant investments in new product development, a global ERP system, a new sales force, a larger marketing department, and SaOx compliance initiatives and still show strong EPS numbers. We're realizing the benefit of the restructuring of our R&D functions that we completed last year with the introduction of 19 new products during 2004. We expect that the introduction of new products that have been internally develop will position us for continued strong organic growth in the future. Our future is very exciting. This quarter we began the planned shutdown of our Pembrooke, Massachusetts site, the integration of our Mayfield acquisition and the transition from distributors to our direct sales organization for the Mayfield product lines as well as the relocation of our national distribution center from Plainsboro, New Jersey, to Reno, Nevada. Each of these restructuring activities is planned to be completed by the end of 2004. As I stated on previous calls our management team continue to seek out external opportunities for growth and any such opportunities that we consummate could affect our results going forward. It's a top priority of our management team to complete significant and accretive transactions this year and next. However, the forward-looking guidance that we have provided and will now update does not reflect the impact of any such future business acquisitions or additional strategic partnerships.

Our guidance for the fourth quarter of 2004 is for total revenues in the range of 60 million to $63 million and earnings per share of 29 to 31 cents before giving effect to the change in accounting for our convertible contingent senior notes and the increase in our effective tax rate to 39%, including the effect of EITF 0408 and the increase in our effective tax rate for 2004, earnings per diluted share are expected to be between 27 and 29 cents. For Q4 35 million shares are used in this latter calculation. We expect total revenues of between 270 million and 280 million in 2005. Consolidated gross margin is expected to be 64%. Importantly we plan to ramp our research and development spending up to 6% of total revenues next year. We expect our earnings to be within a range of $1.42 to $1.47 per share in 2005 before the change in accounting for the Company's contingent convertible notes. Including these items earning per diluted share are expected to be between $1.35 and $1.39. For 2005 35 million shares are used in this latter calculation. In modeling 2005, we are assuming an approximately 4 cent per quarter progression throughout the year. I would now like to take a moment to focus on the expectations for each of our product categories and other revenue for modeling purposes. Based on our total revenue guidance for 2005 we expect neuromonitoring revenues of approximately 53 to $55 million, operating revenues of -- operating room revenues of 100 to $105 million, instrument revenues of 92 to $95 million, and private label and other revenues of approximately $25 million. Looking beyond 2005 we expect sales to grow in excess of 25% for the operating room product lines and 15% for the remainder of the product lines. Overall we continue to target long-term revenue growth at 18%. I would like to remind everyone that Integra will be presenting at 3:30 PM Eastern Standard Time on Tuesday, November 9th, at the CIBC Healthcare conference and will host an analyst forum on Monday, November 15, 2005 at 3 PM Eastern Time at the Hilton Times Square Hotel in New York City. We will also be presenting at the 11:30 AM Phoenix, Arizona time on Thursday, November 18 at the CSFB conference. This concludes our prepared remarks. I will be happy to answer all of your questions. Operator, you may turn the call over to our participants.

OPERATOR: Thank you. The floor is now open for questions. (Caller Instructions) Our first question is coming from Adam Galeon with CSFB.


ADAM GALEON, ANALYST, CSFB: Morning, gentlemen. Hi, can you hear me okay?

STUART ESSIG: Yeah, hi, Adam, we can hear you.

ADAM GALEON: Okay great. My first question, I just want to understand a little better the trends in DuraGen's market. First, can you help us with Dural substitute that's a percent of the total Dura repair market, so mix versus autologous grafts and where you think that goes over first few years and then obviously you've seen a few new markets entrants in Medtronic and J&J, so any commentary there on what the new landscape is like And maybe also your marketing message when it comes to the competition.

STUART ESSIG: Okay. Yeah, on DuraGen, first of all this quarter we did see the introduction of a second competitor which was Medtronic into the market through their PS Medical or Neuro Technologies division. Our assessment is that they are actually not fully launched into the market. It's a early part of that launch and we've not really seen any significant impact on our business. Certainly it's making our guys refocus their efforts on their existing customers as well as making sure that they are aggressive in looking for new customers. As for the J&J Codman launch which began in February with their approval -- the introduction in April at the AA&S and now 6 or 7 months into the launch again we've not seen any significant impact on our business. So in both cases we have good competitors but competitors that we are used to competing with in the ICP monitoring market and the drainage market, in cranial plates and screws and other areas and, you know, with the kind of install base we have, close to 2000 hospitals, well over 300,000 implants and just a significant amount of data and experience, it's going to continue to be very hard for the competitors to have any significant impact, particularly since both of them have limited to no human clinical data.

ADAM GALEON: What about that first question about substitutes versus autologous grafts, is that still a climbing mix?

STUART ESSIG: Yeah, it's still -- there is still a lot of opportunity if that's your question. You know, we don't break out our Dural grafting sales. As you know it's a part of that operating room segment. Growth continues to be very strong, well in excess of the 25% target for that category which is obviously in excess of the corporate target of 18%. In terms of the mix, we are seeing a lot of up take of our DuraGen Plus product. I'm sure you saw our press release for having now introduced in Europe a DuraGen Plus adhesion barrier matrix. In terms of the overall market we continue to think the worldwide market for Dural substitutes is somewhere between 100 and 120 million. And if you add our sales plus all the competitors I'm pretty sure we still haven't penetrated 50% of the available market in terms of the opportunity to take the autologous market. So you could be looking anywhere from 50 to 70 million of opportunity in the autologous market where no Dural substitute is used. And then if you go 1 step further DuraGen Plus is a price premium to DuraGen.

Endura opens up the sutured market for us and that product has been doing nicely for us. And then the adhesion market is very significant. We estimate on the order of a $300 million market were we to have U.S. approval in addition to the European approval but the European approval alone gives us an opportunity to get out there and sale to a market probably 3 and 4 times the Dural substitute market.

So I don't think we are limited in any way by the market penetration at this point.

ADAM GALEON: Okay. And then you mentioned DuraGen Plus. Why would somebody use DuraGen, the previous version versus DuraGen Plus, is it price sensitivity, case specific, is it just that a doctor's dedicated to one or the other? Help us there.

STUART ESSIG: DuraGen Plus is an improvement over DuraGen. It allows to you use either side of the DuraGen facing down, it allows you to have a better and more consistent pore structure. It is stronger than DuraGen which allows us to have larger sizes such as 5 by 7. In all candor it's a segmentation strategy on our part from a marketing perspective. One is sold at a price premium and therefore in price sensitive accounts they are going to stick with DuraGen and our plan is to make sure they stick with DuraGen rather than switching to any competitor. In accounts that are focused on having the most cutting edge technology they are going to use DuraGen Plus.

ADAM GALEON: And the last one for David. Just help us understand that 300,000 of other income if you would. Is that one time? Is that recurring? What should we model there?

DAVID HOLTZ: It's actually -- .

STUART ESSIG: You mean the other revenue, right?

DAVID HOLTZ: No, he means other income.

ADAM GALEON: No, other income.

DAVID HOLTZ: You mean other income, right, nonoperating. There's actual 2 components. We did have a gain for the quarter on a disposal of an asset so that's not recurring and that was a little bit less than have of it, or a little bit more than half I should say. The rest of it is related to foreign currency transaction gains and losses and as you've seen over the last couple quarters and even back into last year we continue to have currency gains from a transaction basis.

STUART ESSIG: I guess, Adam, to answer the question you didn't ask the other revenues have to do with some licensing activity that we have and we always have a little bit of other revenues on our top line.


OPERATOR: Thank you. Our next question is coming from Tom Gunderson with Piper Jaffray.



TOM GUNDERSON: Thank you for the detail on the numbers. Let me just ask 2 quick questions that may have longer answers. Number one is on R&D products, congratulations on 19 new products this year and ramping up R&D as a percentage next year. Stuart, what's your goal here. Would it be more than 19 new products next year? That seems like a pretty high bar but you like high bars.

STUART ESSIG: All right. A couple -- a couple answers. First of all as you know over the last 18 months we really have radically restructured our R&D program. I think we've become a lot more efficient in tissue engineering and I point out with spending less money and shutting our corporate research site we probably -- we definitely have introduced more tissue engineered products in the last 18 months than ever before. So I think the focus and the accountability has been very helpful. And as you look into 2005 we see more tissue engineered products. I used to say one a year. This year I think we've had 3. Next year I'm certainly hopeful we can keep up that target. So on the tissue engineering side I think we are more efficient, more effective and therefore have some dollars to reinvest in the non tissue engineered products so the ICP monitor and the ultrasonic aspirator, et cetera. In terms of targets for next year I am optimistic it will be 20 or more. You know,19 is not a round number and as you know it's hard to predict with these things. But I don't expect it to go down significantly. We brought on Jerry Carlozzi about a year and change ago to really refocus our internal operations on better integrating market -- marketing and development, to bring in more individuals in the engineering and product development side. I believe we've hired as many as 20 new engineers and well over 20 to 25 new marketing people. And what you are seeing is a result of that. And so I am sure Jerry will challenge them in 2005 to come up with 20 to 25 new products, remembering that some of them are going to be simply product line extensions and some of them are going to be very significant new entrants. One example of that is our new NPH. valve form normal pressure hydrocephalus which used a technology that we had in house from an acquisition we did several years ago but that we hadn't taken advantage of and through the focus of our product development team and our marketing team we now have the not me too but the only product that's been developed for normal pressure hydrocephalus which is an area that our competitors have been spending a lot of money in market development on. And, you know, right out of the gate coming out of the C&S we had just a pipeline of orders for that product which is at a price point twice of our normal price point on hydrocephalus products. So I think you are going to see a lot more of that. We've set a target of 6% of sales for next year which as you know is up significantly based on our guidance that's 15 to $17 million. And that's up significantly from this year. So that's a long answer but one to an important question which is I think we are almost over the hump of being able to say that we've got an excellent R&D group able to methodically pound out new products the way we've historically been able to pound out acquisitions.

TOM GUNDERSON: Thanks for that. And then as we get closer to '05 we would like to focus more on '05, what is -- you sell a goodly portion of your revenues as equipment. What's the health of your customers out there? How are the hospitals doing and is it any harder today than it was 6 months or a year ago to sell capital equipment into the hospital, even small dollar capital equipment?

STUART ESSIG: Yeah, I don't -- well, let me answer the question, the yeah was not that it was harder. First on the question, I don't have a capital number for you guys but I keep in my head it's somewhere between 10 and $15 million. So I want to dispel any sense that we are a capital Company. Generally the capital falls into 2 buckets.

Monitors that go with our disposables and the ICP monitoring and then ultrasonic aspirators and electrosurgery devices that show up in our instrument sales. That being said, the market seems to be good. We are not feeling any pressure. We are not hearing anything more than the usual, you know, hospitals are price sensitive, hospitals want to maximize the value for their bottom line. But, no, we haven't heard of anything pulling back on the capital cycle. And in fact last quarter we were delighted with the progression, for example, in our LICOX monitors where we sold, I think, 25 monitors in the quarter which is more than we've ever sold before in the United States, I mean. So -- no, I don't really see anything although I would say, you know, we are not at the front end of the capital cycle so we are not probably the best Company get an answer to that. Certainly on the instrument side, you know, we've been saying that you should expect 10% growth in our instrument business and we brought in, you know, 20%. So we were pretty proud of that. And, you know, we think we can grow our instrument business.


OPERATOR: Thank you. Our next question is coming from Dave Turkaly from W. R. Hambrecht. Please pose your question.

STUART ESSIG: Hi, Dave. Hey, how are you? Good.

DAVE TURKALY, ANALYST, WR HAMBRECHT: Since you mentioned LICOX, could you -- is there a chance you can give us an update on how many of those systems are out there now?

STUART ESSIG: Yeah, I do have an update. Hang on. To date we've sold just about 160 LICOX monitors in the United States and to correct we sold 24 in the third quarter. So that's pretty good. We have 100 plus hospitals in the U.S. currently using LICOX and there's approximately 200 monitors outside the United States being actively used. I would also point out that we are launching our cerebral blood flow monitoring system, the NeuroSensor, this quarter. We showed it at the Congress of Neurosurgeons a few weeks ago. There has been a significant demand for that project. There is a lot of enthusiasm for the product and it's yet another parameter. Again -- well, LICOX, historically, in the last few years has not met our expectations in terms of dollars, as you know, it really has very beneficial for our overall ICP monitoring business and allowed us to raise the awareness of the importance of neuromonitoring. I think the CBF product, A., should have a positive impact on our numbers but also will do the same thing. It's also positioned us to be unambiguously the market in the neuro-intensive care unit and that's a very positive thing in terms of the overall heath of our business. I should mention also we announced a strategic alliance with a company in the third quarter, the company's the Moe Berg Company, or also known as CNS, and this is for a very interesting product that will allow us to integrate all of the data feeds that come from our Camino, Ventrix, LICOX, CBF, and allow much more intelligent use of all the parameters and evaluation of the parameters and the use of the data to better predict how patients are going to do in the intensive care unit. It also has a very interesting educational module. So, we continue to position ourselves to be at the cutting edge and back to Tom Gunderson's question, you know, we are ahead of the curve in developing a lot of new products and we are doing it not just in the tissue engineering side but in the ICU as well.

DAVE TURKALY: Great. And then modeling one, I think you said going forward 3.5 million incremental shares. Was there some interest expense that you said we should be modeling added back into our model as well.

STUART ESSIG: What -- you want to get it, David?

DAVID HOLTZ: Yeah. What we were referring to is just the calculation of diluted earnings per share. When you count the additional 3.5 million shares as part of that calculation you add back the interest expense on a pre-tax basis first. So, whichever one is more dilutive, the shares outstanding or shares not outstanding with the interest expense, is the way we will report dilutive earnings per share.

STUART ESSIG: And so the way this works is the net income won't change but when you do your earnings per share calculation you add back about $4 million of interest expense but then you divide by 35 million shares when you are doing the annual number.

DAVID HOLTZ: It's the standard way a convertible debt is used for calculation of earnings per share.

DAVE TURKALY: Okay. And last, if we are looking at your product lines I see that you are guiding for margins to go up by 200 basis points next year. I know you said you closed the Pembrooke plant. Maybe you can give us an update on which plants are going to still be operating next year, what you think is driving that 200 basis point increase?

And for one last one, the instrument business, I think that's a little higher than we were looking for, any comment on the strength there? Thanks.

STUART ESSIG: In terms of plant closures, as you know, we are always looking hard at our plants and there was already built into the 2004 activities plant shut down activities. What we were able to do is announce it very late in the quarter the shutdown of the Pembrooke facility which allows us to move the cranial plate and screw manufacturing into our newly acquired Mayfield plant which is also a metal manufacturing plant and move the neuro-supplies activity here into corporate and into our Reno distribution center. So we have a lot of moving parts. We haven't announced any further shutdowns beyond that but if you look at our plants right now there certainly are other opportunities as we go into 2005 both in our existing plants as well as if we require other things to continue the consolidation process. Keep in mind, though, that the biggest impact of these plant shutdowns in the short term is on reducing G&A, not Cost of Goods, because it takes a good 180 days to turn the Cost of Goods made in most of these plants before you start to see the benefit. So the Pembrooke shutdown will positively affect G&A going into the new year but really not into the middle of the new year -- sorry, into the middle of 2005 significantly impact Cost of Goods. The major impact that you will see in 2005 that allows the continued growth of the gross margin is mix, the continued sale of DuraGen and Integra and DuraGen Plus and the Bilayer Matrix and NeuraGen and the adhesion barrier matrix over in Europe, and then capacity utilization. Because with fewer plants and growing revenues in most of our product lines we are absorbing more overhead. And as you know with the exception of perhaps the instrument product lines the lions share of any product we make is overhead absorption. So number 1 is probably overhead absorption, actually, and then second is mix. In terms of the instrument revenues, you know, we bought a great company when we bought JARIT. And, you know, there probably were 6 to 9 months of uncertainty in that group in terms of what the future of that organization is. You know, they are over that now. We have got a strong sales organization. We've added a couple of sales reps into that organization. We've added -- we are in the process of adding national contracts people into that organization. We are getting the benefit of joint sales activities between the JARIT group, our P&R sales force and our neuro group. So JARIT is taking business and it's taking share. It won the premiere contract earlier this year and we are taking significant revenues from a market share perspective from our competitors because of that premiere contract. You know, in the area of instruments these contracts are pretty compliant and so with the kind of quality people we have and customer service we are taking share. That's the biggest explanation for why JARIT has gone up.

DAVE TURKALY: I will let someone else have a chance. Thanks.

OPERATOR: Thank you. Our next question is coming from Glenn Novarro with Banc of America.


GLENN NOVARRO, ANALYST, BANC OF AMERICA: Hi. 2 questions, one on neuromonitoring, sales came in a little bit below what we were looking for. That business has jumped around a bit, it's been a little lumpy over the last several quarters. Is this all LICOX related? Maybe you can give us a little bit more color there. And then as you go to '05 you are forecasting an acceleration in this business, so maybe any color there? And then second, you know, we are hearing a lot about some of your graft products being used in combination with KCI's VAC system. Any color there in terms of pull through for some of your sales products? Thanks.

STUART ESSIG: Yeah. Okay. First under our monitoring, you know, we have continued to say we expect that our monitoring business in the long-term to grow at 15 to 20%. You can see as we've now introduced some 2006 forward-looking guidance we are kind of through some of the restructuring in our private label business so we are now saying we expect the OR products to grow north of 25% and the remainder of our product lines to grow north of 15%. So actually increasing our expectations for the instrument product lines and going into 2006, the private label product lines. So for a combined organic growth rate going forward of 18%. We've stuck with our point of view on neuromonitoring and intend to. In all candor this year it hasn't done as well as we expect it to do. It's not LICOX, LICOX has done real well. It's just a combination of various factors working through our numbers which don't allow it -- has not allowed it to meet our expectations. Some of it are things that are smaller product lines that frankly we've not had as much focus on and so we've allowed it to dwindle to some extent. As we go into 2005 I don't know how to say it differently except our monitor sales haven't been stronger. I don't know exactly the number we've got this year but I think it's over 500 monitors that we've sold this year which is certainly a record for the Company. So the install base is growing and expanding and that includes both Camino, Ventrix, and LICOX as we go out and launch the cerebral blood flow monitor we expect that to have a positive impact on 2005. And one of the things we're going to do at our Investor meeting next Monday is have Linda Littlejohns, who is the clinical educator responsible for really being at the cutting edge of Neuro Technology, kind of take you through how all of this fits together. I really can't give you a good answer expect it isn't doing what we want it to but we still expect it to and we certainly expect that to happen in 2005 and, yes, you're right, it has been a little bit lumpy. As it relates to artificial skin and in particular the uptake of what we call the BMWD, the Bilayer Matrix Wound Dressing, a couple things. First, we really have had a lot of new introductions of skin. We had our first American Society Plastic and Reconstructive Surgery meeting this quarter that we presented at -- e introduced both the BMWD and now a single layer version, so one that doesn't have the silicone which allows you to, for example, layer the dressing and therefore be able to handle deeper wounds. We also got approval this quarter of a PMA supplement for our Integra skin that takes it out of the carrier that it historically has been delivered in and puts it in a much more user friendly delivery system for the customer. So we've really, since we took overt product line in January, had a dramatic impact on the products available to our growing sales force, the quality of the products. And we've also ramped up the sales force. We should finish the year with 20 reps in the P&R group and we plan to be at 30 by the middle of next year.

In terms of KCI, again, we have an informal relationship with Kinetic Concepts. The product Integra, any of the products I mention, work very well under the VAC and there's been papers now published that say that the VAC on top of our Integra reduces the initial healing time of the Integra from 21 days to 10 and the biggest drawback of Integra is the time you have to wait before you do the thin epidermal autograph 21 days later and that's been the biggest draw back probably for 10 years now of that product. So the reduction in healing time that you see from the VAC and that's in trauma, in reconstruction as well as in chronic wounds is significant for the patient and is significant for the hospital. Go 1 step further those guys have many hundred, I think it's 800, reps who are to our benefit talking about the synergy between the Integra and the VAC. And we are not paying KCI to do this. This is a grassroots effort that's come up really from the clinical community to help patients. There is a paper that's been published at our Investor meeting next Monday, we are going to have speak for about half an hour Doctor Molnar(ph), who wrote the paper on his successes using VAC with the Integra skin. Is it having a significant impact on our numbers? Sure it is. Is it dramatic yet? No. Is it helping us exceed any of our expectations on skin? Absolutely.

GLENN NOVARRO: Can you give us any color on how big the skin portfolio is today and where you think that can go 3 to 5 years from now?

STUART ESSIG: My objective is to not give out that number. I don't really want it available for competitors to shoot at. So I am not going to answer that question, Glen , I don't mean to be cagey but the answer is no. But in terms of the market opportunity again, we are going to go through the market opportunity next Monday at the Investor meeting which is available for anybody dialing in on this call to listen to. But that being said we think the available marketed in burns alone is about 50 million, in plastic is about 100 million , in trauma is about 100 million, and wounds is a very hard number to estimate. And, you know, for our product it could be anywhere from 50 to a couple hundred million. When we put out our press release at the ASPRS we said there's a very reasonable number of somewhere under $500 million that could be addressed with our product. As you know we probably telling you guys to, you know, build in nothing more than, you know, 20 to 30% growth in this product line in models because the last thing we want are models to get ahead of reality. But certainly, you know, we've built some significant growth in our skin number into our forward-looking guidance for 2005.

GLENN NOVARRO: Okay. That's very helpful, Stu, thanks. I will see you next week.


OPERATOR: Thank you. Our next question is coming from Pat Pace with UBS.


PAT PACE, ANALYST, UBS: Hey, Stuart, how are you?


PAT PACE: Can you just talk a little bit about your focus for M&A activity. Are you looking more at plastics now or neurosurgery or is it just kind of equally at both?

STUART ESSIG: Okay. First of all, as you know, we have a very aggressive acquisition focus. We've done 4 acquisitions year-to-date.

Both -- all 4 of them happened in early in -- well early in the first quarter and then the second quarter. There is still a lot of year left and so we are optimistic that we can get at least 1or more done before the year is out. The focus is we've got, because we've grown and we've invested in our G&A we have several people who focus full time on looking at acquisitions now and in the finance department working on evaluating the acquisitions. We also have 2 people who work full time, and this is probably the most important thing, on the integrations, putting together the GAN chart for the 3 to 6 months that it takes to actually do the due diligence on a deal and then the 3 to 6 months to integrate it. I think our, you know, our success in the last 7 years in doing these acquisitions and the fact that we've been able to integrate over 20 acquisitions comes to a great extent on our -- from our focus on details and our focus on tying up loose ends and our willingness to dedicate full time resources to the integration activity. In terms of how we are spending our time we continue to try to -- wish to do 4 to 5 acquisitions a year. We wish to deals that are accretive to our earnings and that allow us to buy businesses typically at 1.5 to 2 times sales, sometimes as low as 1 time sales and anywhere from 5 to 9 times cash flow. That's our target. It doesn't mean we won't do things outside. Generally we've done smaller deals but we are always looking for bigger deals and we think we've got the infrastructure and the resources to handle bigger deals. In terms of where they are, a rough guideline would be we would love to do, if we did 5 in a year, 3 in neuro, 1 in plastic and 1 in JARIT. There are a lot of opportunities in plastic so I think we can do more there. Certainly a deal or 2 for plastic that would allow us to more rapidly ramp up the U.S. sales force would be very beneficial and it would be similar to the way we grew the neuro group, which was we were able to maintain the accretion to earnings by buying companies that had existing revenues that allowed to us reinvest those commission dollars into a broader portfolio of products and certainly there is nothing that we are planning to change in terms of that kind of a strategy. So, I hope as we go into the next 12 to 18 months we could still get 3 deals done for neuro and maybe a couple or 3 done for plastic, and maybe a couple done for JARIT. So, I mean we are trying to make sure we growing each of the platforms and get into critical mass. We are the leader now in neurosurgery with our 80 direct reps and 10 regional managers and 10 clinical educators we are bigger and more effective than our number one and number 2 competitors in the neuro market but that doesn't mean we don't want to continue to grow it and we guess there's about a $1.5 billion market opportunity and we are still only addressing about half the segments in that market in neuro. So there are plenty of other things to either introduce new products or buy in neuro.

PAT PACE: Very helpful. As far as the NPH. market can you just talk a little bit about how big that market could be? To me it seems like this is an area that is going to take a decent bit of education as far as coordinating referral line, just what you guys might be looking at strategically to get that ramped up?

STUART ESSIG: Yeah, NPH, the good news is we are not alone in the pursuit of developing that market. If you get on the Web and search for normal pressure hydrocephalus or NPH, you will get to at least 5 plus full Web sites, not just pages on a Web, but full websites on normal pressure hydrocephalus. There is an estimate of something like 375,000 patients that may have normal pressure hydrocephalus and it kind of looks like Alzheimers's but when presented to a neurologist or under MRI or CT they can identify that one potential cure would be to shunt the patient. And this is not a new phenomenon. To some extent the growth in differential pressure valves that were programmable that our competitors have experienced over the last 2 years, both Codman and Medtronic Neuro Technologies have had significant growth in their pressure valve business in the last couple of years because of doctors using their programmable valves to try to treat NPH. We have not been able to participate in that market because of a lack of a technology to do so and our NPH. valve not just gets us to parody but puts us ahead of them technologically. We now have a hell of a story and it's the first time we've had a story in hydrocephalus since I came to this Company and started buying hydrocephalus companies. By the way, we we acquired number 3 and number 4 and number 5 in the market in the last 5 years. So we actually have a decent install base now in hydrocephalus. We just didn't have a leading technology. Now with a leading technology we think we can pull through not just the normal pressure hydrocephalus sales but some of the other less differentiated products because we will now have a lead product to sell. You are right, though. If you do the math on 375,000 patients and multiply by our and the competitors list price, which is $2,300, it's a really big market.

And that's not going to fall in our lap tomorrow. If you do that math it's close to $750 billion market and nobody on this call is saying we expect to get to $750 billion. What I am saying is it's probably the biggest market in neuro until you start to address the spine. If we are able to do the market development of these NPH. patients and again we just have to have a little impact to have a significant impact on our numbers. But it is a complex referral pattern. They don't just present themselves to the neurosurgeons. You have to get a reference from a neurologist or a family practitioner and our competitors and we will be putting some amount of effort into education. Keep in mind, though, the neurosurgery department is a money maker for most hospitals. It's not a loss maker. And so the hospitals are very willing to put community marketing dollars into growing their neurosurgery practices. And so there is going to be a fair amount of enthusiasm in trying at the hospital level to build awareness for this and the fact that the hospitals have technologies that can treat these patients because it's going to bring -- it's going to be a competitive advantage to the hospitals that they're at the leading edge of this.

PAT PACE: Great, thanks a bunch.

OPERATOR: Thank you. Our next question is coming from Ryan Rauch with SunTrust Robinson Humphries. Please pose your question.



Congratulations on a good quarter. Just 3 or 4 just quick once. Did you pay the Mayfield distribution network as well as your direct neuro reps during the quarter? And if so kind of how much -- how did that impact SG&A and when do you think you will stop paying dual commissions for their product line?

STUART ESSIG: Built into this quarter and into our guidance for next quarter is continued payments of the Mayfield dealers. And Dave's staring at the numbers, if he doesn't give me an answer I will give you a round number. You have a number?

DAVID HOLTZ: I think it was 350,000 in this quarter.

STUART ESSIG: That was my guess, it was about 350 to 400,000 this quarter and another couple hundred thousand next quarter. And, yes, we pay both and, yes, that was a good decision even if it did negatively impact our earning a little bit because we've gotten almost complete cooperation and to my knowledge none of the former Mayfield dealers in the United States, I don't want to be this clear, maybe one or 2, but of about 20 dealers virtually none of them have picked up a competitive product to compete with us. As I mentioned many of them were our JARIT dealers and so by treating them fairly and allowing for some commission overlap we have not enabled competitors in the disruptive period of the transition. And I think that is going to have been proven as we go into the new year a wise decision. Mayfield sales for this quarter were quite strong, I believe a record for Mayfield.

RYAN RAUCH: Okay, then can you just give us a little bit more detail on your '05 guidance, I mean, revenue was unchanged, the gross margin was increased, the tax rate was lowered and R&D was slightly increased. Can you give us -- I mean, what makes up the rest? I mean, can you give us sort of SG&A as well as the shares we should use?

I'm just curious why your guidance might not have headed higher based on a couple of line items that you gave.

STUART ESSIG: Okay. Well, a couple thing. First, I think we give -- we gave pretty comprehensive guidance. So I can try to be a little more helpful. In terms of the revenue, yeah, 270 to 280, we didn't change it. So there is really no change there. In terms of the gross profit, yes, we raised our gross profit guidance by 1 percentage point from 63% and, you know, the truth is this year's turned out better than we had planned and we are delighted with that and while we probably would have preferred to be conservative and go into the new year at 63% the truth is we just didn't see it come out that way.

So we raised it to 1%, raised it 1% to 64. We think it's smart and I feel we've got the team to essentially reinvest a great deal of that into R&D. I think that's the right thing for the Company and the right thing for the shareholders. And so you see a pick up in R&D to roughly 6%. In terms of shares out we are telling to you model 35 million including the impact of the CO/CO and I think all of our going forward guidance as we move into the, you know, fourth quarter and into 2005, since now the rule is official we will now been continuing to talk GAAP which means GAAP including the impact of the CO/CO. So we gave you both this quarter to be helpful in modeling but the reality is going forward it's going to be the numbers including the impact of the CO/CO. In terms of sales and marketing again it should be between 21 and 22%. That's always been our target. We told you in the second and third quarter of this year, it would be a little bit higher because of how we were treating the Mayfield dealers and because of the ramp up in P&R. And that's true and as we go into next year we will start to get some economy of scale out of the sales organization that we've built but we intend to invest to a greater extent in the new year in our European business. You know, we've not put a lot of effort into our European activities in the last 2 years other than going direct and putting our salespeople on the ground. And we are actively recruiting for some management people and some distributor management and some marketing to beef up Europe.

And that is built into next years numbers now. But I think between 21 and 22% of sales -- sorry, of revenues for sales and marketing is a good number and the then tax rate of 36% and so, that's pretty much the whole thing and we gave earnings per share range. So it's just filling in the blanks and that's where, you know, we just finished our budgeting process and this is where we think we will come out next year.

RYAN RAUCH: Gotcha, Stuart. What's the FX, the implicit or implied FX guidance in your '05 revenue guidance and gross margin guidance, just what the exchange that you are using?

STUART ESSIG: It's 125, right, David?

DAVID HOLTZ: 125 is what we had in our budgeting model.

RYAN RAUCH: Okay. And then finally where do you, again, stand on the ERP system, is that fully implemented, any disruptions there or anything else you could add would be great.

STUART ESSIG: The good news is we did implement our ERP system in the middle of August. It went, as I am told, better than most. As you know, I mean, the positive at Integra is because we do as many acquisitions and integrations as we do we generally know how to staff these things effectively. We have had probably on the order of 20 to 30 full time people doing nothing but the ERP implementation and we still do, plus, you know, these outside consultants. But, yeah, we are up and running. We are shipping all our U.S. activities with a couple small exceptions out of our new Oracle system. Our collagon plant, which is, you know, is a significant chunk of our revenues is up and running in the Oracle system. We have completed the move of the distribution center from New Jersey to Reno, Nevada, so for the most part all of our orders are now being shipped out of Reno, Nevada. Is there still a lot of worked to? Absolutely. This is as you know a complex and time consuming task. Has there been some disruption? Certainly there was some disruption in the third quarter.

Was it significant? Did it significantly impact revenues? I doubt it.

Has it hurt us in the long run with our customers? No. The good news nowadays is almost every hospital has gone through some kind of a systems change so you actually get a certain amount of sympathy but, you know, the worst we've had is a day or 2 where an order got shipped late or got shipped to the wrong place and we pride ourselves on that never happening and it has happened but I would -- I'm very optimistic that before the year's out we'll be back to our highest level of customer service.

RYAN RAUCH: Thanks a lot. Have a nice day.

OPERATOR: Thank you. Our next question is coming from Jayson Bedford with Adams Harkness. Please pose your question.

STUART ESSIG: Hey, Jayson.



JAYSON BEDFORD: A few quick questions for you. Just last quarter you provided an organic growth rate backing out the DRT sales, I think it was 24%. Do you have a similar metric this quarter that you could break out for us?

STUART ESSIG: The answer is no. And I will give you a couple reasons.

First, we did it last quarter because we wanted to be helpful and we were trying to bridge, to some extent, people's understanding. That being said it's grown a lot and so I'm not sure what number I would use for last year since we didn't sell it last year. And so I really don't think it's relevant. We are spending a lot of money to sell the product and building out the sales organization and so from our perspective, you know, I don't really know what I would do, pick a theoretical J&J number, gross it up and then say how much better did we do and then build it into the organic growth. I think that is an exercise that is not particularly beneficial to the way we look at it. So, I'm not trying to be difficult but I just don't see the benefit, particularly since I'm already telling you it's growing a lot and so then you are going to say, well, then , if it's growing a lot how do I calculate the organic growth, do I say what it would have done under their hands in terms of growing and then we only get credit for the additional amount? It's too much of a theoretical exercise in our opinion. So we are not going to back it out. That being said it's gone very well and it continues to go very well. And we are, you know, I mean we're spending money to grow it. So I don't really have a better answer than that. You know me, I try to be really helpful but I don't see, you know, the benefit.

JAYSON BEDFORD: Okay. That's fair. Then just kind of digging down on the operating room growth, obviously 54% was stellar. You've grown it at that level pretty much throughout the whole year but you exited '03 at 21% growth. I guess my question is besides DRT what are the other key drivers that's really attributed to this acceleration?

STUART ESSIG: A ll right, a couple things. First, DuraGen continues to do real well and I'm incredibly proud of our sales and marketing group in terms of having some real competition now for 6 plus months and defending our business well and making sure we are not losing momentum in the growth. As we go forward we are barely penetrated in the United States and outside the United States in spine. If you look at -- now I'm still talking as Dural graft not as an adhesion barrier outside the U.S. Because our U.S. business in the cranial side has grown so well we continue to not get, percentage wise, the penetration out of spine that we want. So we still see a lot of opportunity in Dural grafting in the spine. Then if you go outside the U.S. this adhesion barrier label is very significant and gives us significant upside and I guess you asked about past not future but I'm answering in the future. Then in terms of this quarter DRT, BMWD, the 2 skin products, significant growth, big markets, new sales organization and growing sales organization, and certainly some tail wind help from the visibility that KCI has given us outside of where our sales guys call. NeuroGen, the nerve guide, and now NeuroWrap, our nerve wrap, did incredibly well this quarter, I don't have a number in front of me, I think it's up 50% year-over-year. I don't want -- .

DAVID HOLTZ: Over 50%.

STUART ESSIG: Over 50% year-over-year and that's a cooperative effort between the plastic and reconstructive reps and the neuro reps. So all of those things are adding up to significant growth in the segment and we are proud of it.

JAYSON BEDFORD: Okay and then I guess just looking for on your guidance on that segment, besides the anniversary of DRT what brings it down to 25%, I guess?

STUART ESSIG: Well, you know, again, some of it is the anniversarying of the DRT We're certain -- and it's also just how all these numbers add up. The -- we don't -- we are not planning and we don't anticipate any significant headwind in our Dural grafting performance but we've certainly built in, as we said on the last call, some competitive activity having an impact on our numbers. So I think the growth reflects as we go into the new year on the one hand a high degree of confidence that we are not going to lose share and that we will continue to get the benefit of the growth in the market but having some reasonably conservative expectations for that and that's a balance and it's an internal negotiation and so, you know, I think there's a good opportunity to over perform if we have been overly conservative about our Dural grafting franchise and on the other hand it's our best guess and what we think is reasonable.

JAYSON BEDFORD: Okay, on the instrument side what was the organic growth rate in the quarter?

STUART ESSIG: Organic growth, I think we have that, hang on 1 second.

Organic growth, you got it, Dave?

DAVID HOLTZ: Yeah, I have it. It was 8% organic growth once you back out the acquisitions in the instrument category.

JAYSON BEDFORD: Okay. And then just looking at growth going into '05, or new products, I guess, you're -- obviously there's an acceleration in 3 of the 4 business units implied in '05. What are some of the new products that you plan on introducing in '05 that helps you get to that guidance.

STUART ESSIG: Let me make a comment. When we talk about organic growth in the instrument business. JARIT was up close to 20%. So, I want to be clear. There's a lot of restructuring activity that we do in these things and so there are other things that are down which is how you get to that 8%. The biggest part of our business which is JARIT has been growing at 20%. So I want to make clear the difference between David's absolute number and performance of JARIT. In terms of going forward what are the biggest, most impactful things? It's the continued growth of JARIT. It's the contraction of the selector quantum in the back half of this year which is our new generation ultrasonic aspirator and it's the beneficial that have come out of the restructuring of some of these acquisitions that we have done, 46, , so as with get some of the things that we acquired to the appropriate level of profitability there is some lose of revenues in some of these -- these smaller acquisitions the net result of which is we continue to -- we've raised our guidance for next year for the instrument business to over 15% as all of these various pieces shake out. Mayfield has been a stellar acquisition and our estimates next year are over 15% for Mayfield as well.

JAYSON BEDFORD: Okay. And then lastly for '05 what should we model in for other revenue for non product.

STUART ESSIG: I think our guidance is zero and make it a surprise if we -- . You know, we got a lot of technology in the Company and not all of it is relevant to our business and we've been pretty successful over the last 5 to 7 years partnering it. In truth we have restructured a lot of our activities to do less of that. So we don't budget any as we go into the new year. From time to time things come along, for example this quarter we did a couple deals with our historical RGD technology, the old Telios technology, which is still great technology but we don't sell a product which is manufactured with it so we don't really budget that. So the budget for next year is zero.

JAYSON BEDFORD: Okay, thanks a lot.

OPERATOR: Thank you. Our next question is coming from Bob Goldman with Buckingham Research.


BOB GOLDMAN, ANALYST, BUCKINGHAM RESEARCH: Good morning. A couple of sort of clean up questions, maybe clarifications. First, on the assumed conversion under the FASB rule, Stuart, when you say take out $1 million, I imagine you mean to eliminate $1 million of expense every quarter going forward?

STUART ESSIG: Correct. We were not being articulate, that's correct.

BOB GOLDMAN: Okay. Second is on the dermal regeneration template, 2 little things on that. That does show up in operating room product sales, correct.


BOB GOLDMAN: And just to followup on another question can you give us some sense of the sales growth, you know, with the sales that J&J had at the end user level versus the sales that you now have at the end user level?

STUART ESSIG: Our best guess is its north of the 25% for the product category so our guidance for that product category has been 25% and that is in excess of the 25%.

BOB GOLDMAN: Okay. Then finally any impact of pricing year-over-year on this quarter.

STUART ESSIG: Yeah, well, we did put some prices up in July, not DuraGen but we put some prices up and we generally when we put our prices up are able to achieve 3 to 4%. I doubt there's more than a percentage point of overall across the whole business but we did put a number of our prices up in July so to certainly some of it.

BOB GOLDMAN: That would be 1 percentage point on sales.

STUART ESSIG: Bob, it's a guess. And David and I are looking at each other, he thinks it's less.

BOB GOLDMAN: Okay, that's it. Thank you.

STUART ESSIG: It's not -- it's not a statistic I carry on a sheet of paper here, Bob, that's why I can't give you a, you know, straight answer but on average we believe when we put our prices up across the board in the United States on existing products rather than new products that we are able to carry about a 3 to 4% increase, and that's been pretty consistent for the last 3 to 5 years. So if we put up our prices on say a quarter of our products in the U.S. in one quarter and got 3 to 4%, that's kind of how we are staring at each other guessing at that number. You wouldn't say, let's pick a big number and assume that the bulk of the growth that we got in the quarter was from price increase, that would be absolutely wrong.

BOB GOLDMAN: Great. Thank you.

OPERATOR: Thank you. Our next question is coming from Bill Plovanic with First Albany.



STUART ESSIG: Good morning.

BILL PLOVANIC: Can you hear me okay?


BILL PLOVANIC: Fantastic. Just a question about guidance, Stuart. As I look at the fourth quarter guidance, you know, if I look at the revenues your fourth quarter is typically a stronger quarter, seasonality in the third quarter and such. And I was just trying to get a feel for as I look at the guidance is this more you being conservative in that 60 to $63 million number or is there something else, is it just you being conservative?

STUART ESSIG: Well, we just try to be accurate. Do I hope there's some upside in it? Sure. We try to be conservative every quarter. I think I got asked that, you know, like the last quarter and the quarter before that as well. So, we don't sand bag our numbers. We go through a bottoms up process and we try to be reasonable about the numbers and sometimes we-- we try never to come out at the bottom of our range but we sometimes come out in the middle like we did in the third quarter, sometimes at the top and if we've done a really stellar job, above. So, we are doing our best to try to get across the number. If you look into our quarter-over -- year-over-year guidance total sales growth anticipated in the fourth quarter compared to the prior year when you do apples-to-apples is 23%. So it's above our long-term earnings guidance -- sorry, above our long term growth guidance in revenues.

BILL PLOVANIC: Okay. And then, you know, with the stock buyback we saw you buyback a half million shares in the quarter. Is that something we could see continue in the future or is this thing that -- with the stock up that's probably very unlikely?

STUART ESSIG: You know, it will depend. We have 1.5 million authorization so there's 1 million more we could buy. And we think the stock -- we've seen how strong our cash flows are. And we have a lot of acquisitions but in all candor there's been more cash laying around than acquisitions and we would like to do more acquisitions but we refuse to do them if they are not strategic and they are not priced right. So you got a pretty conservative management team but you also have a group who's thinking that having $190 million lying around when we are generating for example, last quarter 14 million of operating cash flow, that's probably too much cash to be laying around so you could see us back in the market buying stock and while the stock has traded nicely in the last few weeks we think there's a lot of upside.

BILL PLOVANIC: Okay. And then just to circle back to the guidance on the sales and marketing line. As you look out you gave us the 21 to 22% range next year which really isn't that much leverage, is that kind of where we should look at this longer term is it to stay in that 21 to 22% range and any leverage you would see would be more on the G&A and the gross margin line?

STUART ESSIG: Correct. I think we've said, although we don't have in our formal guidance, that we've been trying to keep our sales and marketing at about 21%. And in some acquisitions we've done it's ramped up to 23%, like with the Mayfield acquisition, because we've had some one time or shorter period activities to try to keep the sales right. And so I think we are being a little smarter maybe than we've been in the past in terms of, or maybe a little less cheap, in terms of trying to make sure that we continue to maintain the sales momentum and not rush to try to pull the earnings benefits out. So as we go into the new year, since there's no acquisitions built into our numbers, we see the percentage trading -- the percentage going down from the 22, 23, to 21 to 21.5 and that's probably a good number.

Again, there's always a balance, I mean we don't spend as much as we wish we could spend on sales and marketing. We have not invested in our European infrastructure nearly to the extent that perhaps other companies would or that our competition has. And so we see an opportunity to accelerate our revenue growth over in Europe in particular if we make these investments in sales and marketing. And so as we looked at our budget for 2005 and said, okay, we know where the P&R group is going to be, we probably could have gotten more leverage but we are looking out to 2006 and saying, you know, we want to keep growing and we want to keep investing and we haven't come close to hitting the limits in terms of building out a sales and marketing structure in Europe. I mean, keep in mind in Europe we have about 18 direct reps covering Germany, France and England. Our international sales are only 20% of our overall sales and European sales are only about half that number. That's really not very good compared to, for example, larger companies and given the breath of products we have a lot of the time we are still selling whatever particular product lines the company we acquired in Europe happened to have sold historically rather than having the time and -- having spent the time and money to invest in building the marketing structure. For example we don't have a marketing department in Europe. They still leverage the U.S. marketing department. What a huge opportunity for us as we've gotten to critical mass in neuro in the States and as we have our plans to get the critical mass in P&R and JARIT is where we want it to be, to take whatever dollars we have that are coming out of the increase in revenues and gross margin and reinvest it in sales and marketing to perhaps accelerate or improve the top line. So it's all a balance but, that was a long answer to we are still modeling 21.5 %.

BILL PLOVANIC: That's fine. I appreciate that. Just recap again, what was the U.S./O.U.S. split in the quarter.

STUART ESSIG: It was 20, Dave, right?

DAVID HOLTZ: Yeah, about 20%.

BILL PLOVANIC: And then lastly, you know, I know you don't like to give percentage of growth or what have you, mix overall, but just on the DuraGen, just trying to figure out was that number actually up on a sequential basis? You are giving me bigger than a breadbox but, the answer is yes, we are up substantially sequentially. That's all I'm asking. Thank you very much, Stuart.

OPERATOR: Thank you. Our next question is coming from Chad Suggs with CIBC World Markets.


CHAD SUGGS, ANALYST, CIBC WORLD MARKETS: Morning. Just 3 quick ones and first of all just say look forward to having you tomorrow at the conference. First 2 questions, just a couple modeling questions for Dave. For gross margin and R&D as a percentage of sales what are you looking for as far as in the 4Q, '04 and then my last question just related to do Bilayer Wound Dressing, I know there's a lot of markets within this area that you can target, is there -- can you talk a little bit about what your strategy is, is there any particular market that's more attractive and how does that relate to, you know, any increases in the plastic and reconstructive sales force?

DAVID HOLTZ: Okay. I mean, Stuart gave '05 guidance in terms of some of the operating costs as a percentage of revenues. If you look at it that's pretty consistent with, I would say the fourth quarter is going to be very consistent with that. So there's really nothing different from the fourth quarter to the '05 in terms of modeling if you look at it.


DAVID HOLTZ: The gross margin, again, we've been fairly consistent this year in the 61 doma 62 range and that's where we expect it to continue and then grow into the second half of next year above that so that we average for the full year our guidance. I think that answers your question. I mean, a lot of the sales and marketing growth into next year if you look at it in absolute dollars is in the expansion of the P&R group as Stuart had mentioned.

STUART ESSIG: And then in terms of your question on BMWD can you repeat it, Chad, because we were staring at the numbers trying to give you a crisp answer.

CHAD SUGGS: Oh sure. I just wanted to talk about it because there's a lot of areas within wound dressing that you can address.

STUART ESSIG: Oh, okay, where are we going to direct -- our sales force's call point is going to be reconstructive surgery. So that's not aesthetics and it's not wound care, it's reconstructive surgery.

The plastic surgeon who is operating in a hospital. And by the way, their suite is almost always within a short walking distance of the neurosurgeon. Okay? So there's some real synergy amongst the way we have our sales forces call but it's the reconstructive surgeon, plastic surgeon, operating in a hospital environment. That's where we are building into our numbers, our growth, that would be where the BMWD would grow. And what you are getting with the VAC is some flow outside of that market into, for example, a reconstructive or plastic surgeon is working not in a hospital but in a surga-center and is getting a referral from a podiatrist for a recurrent deep wound that can't be cured with conventional compression therapy but might be cured with a surgery and our Integra BMWD and then a VAC on top. So, maybe that helps give you some guidance. Although, by the way the VAC can go into the hospital, too, and be very helpful in a hospital procedure.

CHAD SUGGS: Right. That's very helpful, thanks. We'll see you tomorrow.

OPERATOR: Thank you. Our next question is coming from Karen Mroz Brimmer with Shaker Investments.

KAREN MROZ BRIMMER, ANALYST, SHAKER INVESTMENTS: Yes, I'm sorry if I missed this earlier but could you comment on your DSOs? They seem to have gone up this quarter.

STUART ESSIG: Our target on days sales outstanding has always been 55 to 60 days. We've actually historically beat the target and I 'd remind you that for a medical device Company that's quite good. We generally, because historically we're always cash constraint, we've always had a really great receivables department and since we don't have very much direct sales outside the U.S. we haven't had significantly longer days. Now that being said we bought quite a few businesses O.U.S. and the O.U.S. businesses carry longer days.

Bertal, for example, is doing on the order of $8 million and that product has longer DSOs. Also the direct shipping that we have coming out of various of our European facilities has longer DSOs. So I don't think the number here is a significant deviation from our historical range and I don't see it as a trend or an expectation of a worsening.

KAREN MROZ BRIMMER: Okay, thank you very much.

OPERATOR: Thank you. Gentlemen, I'm showing no further questions at this time.

STUART ESSIG: Okay. Well, then, thank you, everybody, for joining us for this quarterly call. And as I mentioned we have a presentation tomorrow at the CIBC Conference. We are doing our investor meeting next Monday and everybody on the call is invited to attend and then we will be presenting later this month at the CSFB Conference. Thank you for your interest in Integra.

OPERATOR: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.

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