<PAGE>

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

                               ----------------

                                   FORM 10-K

                               ----------------

   [X]           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                    For Fiscal Year Ended: December 31, 1999

                                       OR

   [_]         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
     OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
                                      TO          .

                          Commission File No. 0-22958

                               ----------------

                         INTERPORE INTERNATIONAL, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                            <C>
                  Delaware                                       95-3043318
       (State or other jurisdiction of                        (I.R.S. employer
       incorporation or organization)                      identification number)

  181 Technology Drive, Irvine, California                       92618-2402
  (Address of principal executive offices)                       (Zip code)
</TABLE>

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

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

<TABLE>
<CAPTION>
                                               Name of each exchange
             Title of each class                on which registered
             -------------------               ---------------------
<S>                                            <C>
                    None
</TABLE>

          Securities registered pursuant to Section 12(g) of the Act:
                           Common stock, no par value

                               ----------------

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

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

   As of March 3, 2000, the aggregate market value of voting stock of Interpore
International, Inc. held by non-affiliates was $114,361,000 based upon the
closing price of such stock on The Nasdaq Stock Market. The number of shares of
common stock outstanding as of that date was 13,750,282.

                      DOCUMENTS INCORPORATED BY REFERENCE

   Portions of our Joint Proxy Statement for the 2000 Annual Meeting of
Shareholders of Interpore International, Inc. are incorporated by this
reference into Part III as set forth herein.

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<PAGE>

                                     PART I

Item 1. Business

Overview

   Prior to our merger with Cross, Interpore International developed and
marketed a line of synthetic bone graft materials. In May 1998 we merged with
Cross, a company offering a broad line of spinal implants. Our merger with
Cross created a medical device company with a complementary combination of
spinal implant and orthobiologic technologies, an expanded product portfolio
and distribution channels specifically addressing the spinal surgery market.
Our combined product portfolio addresses two of the fastest growing areas in
the medical device industry--spinal implants and orthobiologics.

   In the spinal implant product category, we offer the Synergy Spinal System
which is used in spine fusion procedures. Our current product offering is
applicable to lumbar and thoracic fusions, which represent over 58% of spine
fusion procedures. We believe our Synergy Spinal System enhancements, cervical
devices and spine cages, which are in late stage development, will provide us
with the products necessary to address the remaining spine fusion procedures
that utilize spinal implants.

   Our principal orthobiologic offering includes synthetic bone graft products
and AGF related products. Our Pro Osteon products are implanted in a bone
deficit and provide a matrix that facilitates new bone ingrowth. Pro Osteon was
the first synthetic bone graft substitute to obtain FDA approval for orthopedic
applications. We estimate that it has been used in more than 150,000 patients
since its introduction. Our BonePlast is a resorbable bone void filler that is
replaced by the patient's own bone during the healing process. We commercially
launched our AGF related products in the second quarter of 1999 and estimate
that approximately 5,000 patients have been treated with AGF since the
beginning of 1999. AGF is a concentrate of growth factors derived from
platelets in a patient's own blood which is used to accelerate bone repair. We
believe AGF will have application in a wide variety of bone and soft tissue
procedures.

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

Spine Anatomy

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

  . Cervical vertebrae are the first seven vertebrae in the neck;

  . Thoracic vertebrae are the next twelve vertebrae in the chest or rib
    cage;

  . Lumbar vertebrae are the next five vertebrae in the lower back; and

  . The sacrum.

Spine Disorders

   The following are the four major categories of spine disorders:

  . Degenerative conditions. Degenerative conditions in the facet joints and
    disc can result in instability and impingement on the nerve roots as
    they exit the spinal canal, causing back pain or radiating pain in the
    arms or legs.

                                       1
<PAGE>

  . Deformities. Deformities, such as scoliosis, are deviations in the
    normal curvature and alignment of the spine. Deformities range in
    severity from cosmetic issues through varying levels of pain, discomfort
    or reduced function.

  . Trauma. Trauma, or injuries to the spine, if not corrected, can result
    in instability, pain, damage to the spinal cord and/or nerve roots,
    paralysis and deformity.

  . Tumors. Tumors in the spine typically occur in the vertebral body and
    eventually result in fracture of the vertebral body, causing
    instability, pain and deformity.

Surgical Treatment of Spine Disorders

   The prescribed treatment for spine disorders depends on the severity and
duration of the disorder and the success or failure of non-operative therapies.
Non-operative therapies include bed rest, medication, lifestyle modification,
exercise, physical therapy, chiropractic care and steroid injections. However,
non-operative treatment options are not effective in many cases, and we
estimate that over 500,000 patients undergo spinal surgery, such as spine
fusions and spinal discectomies, each year in the United States.

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

   We estimate that approximately 42% of the spine fusion procedures are
performed in the cervical spine, approximately 52% are performed in the lumbar
spine, and approximately 6% are performed in the thoracic spine. Our current
spinal implants address the lumbar and thoracic regions of the spine.

Spinal Implant Market Overview

   The number of spine fusion procedures performed annually in the United
States is estimated to exceed 260,000. In 1998, the U.S. market for spinal
implants, one of the fastest-growing markets in the medical device industry,
grew over 25%, and sales exceeded $670 million. We believe that the number of
spine fusion procedures will continue to grow, primarily as a result of
demonstrated better outcomes, surgeons' familiarity with spinal implants and
the overall aging of the population.

Our Spinal Implant Products

   Synergy Spinal System. Our Synergy Spinal System consists of rods, hooks and
screws that are attached to vertebrae adjacent to an injured or defective area
of the spine. Our system is a "universal" implant system that allows surgeons
to treat both the thoracic and lumbar portions of the spine.

   We believe our Synergy Spinal System offers a number of benefits, including
the following:

  . Ease of Use. Our Synergy Spinal System was engineered to be easy for
    surgeons to use, reducing surgical time and requiring less manipulation.
    The screws and hooks are top tightening, the rods do not require pre-
    loading of additional components, and all implants allow for free rod
    rotation.

    . Our patented variable locking screw design allows the surgeon to angle
      and tighten screws in any plane, reducing the amount of required rod
      bending and facilitating rod placement.

    . The patented design of the external hexagonal head of our double hex
      set screw shears off at a predetermined torque, allowing the surgeon
      to consistently tighten screws to the right tension. However, an
      internal hexagonal cavity remains to allow the surgeon to remove the
      set screw if necessary.

                                       2
<PAGE>

  . Universal Application. Synergy implants come in various sizes and types
    to meet the surgeon's preferences and the patient's anatomy, providing a
    secure anatomic fit for virtually any pathology. The Synergy Spinal
    System does not require that surgeons follow a single surgical protocol,
    but provides several options, and can be used in both anterior and
    posterior applications, in both adults and children.

  . Smaller and Stronger. We offer Synergy implants in either nitrogen-
    strengthened stainless steel or titanium. The strength of the Synergy
    implants provides resistance to fatigue and allows the implants to be
    produced smaller than competing products. Titanium implants are
    preferred in many foreign markets and are being used increasingly in the
    United States because titanium allows magnetic resonance imaging of the
    spinal area.

  . Low Profile. Profile describes the prominence of implants above the
    normal bony surfaces of the spine. The Synergy Spinal System was
    designed to minimize the height and bulk of its implants, reducing the
    risk of irritation, inflammation and infection for the patient. It is
    consistently ranked as having one of the lowest profiles of commonly
    available spinal implant systems.

Our Spinal Implant Products in Late Stages of Development

   We continue to expand and enhance our spinal implant product line and are in
the late stages of developing:

  . Cervical Implants. Implants are in development that will be applicable
    to the cervical region of the spine, an area not currently addressed by
    the Synergy Spinal System. We plan to submit a 510(k) application for
    our cervical implants in mid-2000.

  . Synergy Low Back Improvements. Planned improvements to our Synergy
    Spinal System include screw and nut designs intended to reduce the space
    taken up by screws along a rod, making the system easier to use in the
    lower back. We have received 510(k) clearance for these improvements and
    are in the process of commercially releasing the products.

  . Corpectomy Cage. We have developed an expandable titanium cage intended
    to replace one or two vertebral bodies in the cervical spine that have
    been removed because of tumor. We have received a Humanitarian Device
    Exemption from the FDA for the cervical version of our Telescopic Plate
    Spacer (TPS(TM)). We are developing a version of the TPS for use in the
    lumbar and thoracic regions of the spine, and plan to seek FDA approval
    later in 2000.

   Other products that we are currently developing are described in "Research
and Development."

Description of Orthobiologics

   Orthobiologic products are used to replace bone damaged due to degenerative
conditions, deformities, trauma or tumors, or to provide supplemental bone
required in spine fusion procedures or in revision total joint procedures.

   There are three types of orthobiologic products:

  . Osteoconductive materials, which act as a scaffold for bone and tissue
    growth while healing occurs;

  . Osteoinductive materials, which promote or stimulate bone or tissue
    growth; and

  . Combination materials with both osteoconductive and osteoinductive
    characteristics.

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

                                       3
<PAGE>

   Bone Grafts. Bone grafts are used in 400,000 to 500,000 procedures annually
in the United States. They are used for a wide variety of indications including
spine fusions, total joint surgery, maxillofacial applications and other
surgical procedures. There are currently three major categories of bone grafts:
autograft, allograft, and synthetic bone graft substitutes. We estimate that
more than half of the bone graft procedures performed in the United States are
autograft procedures, with the remaining procedures divided approximately
equally between allografts and synthetic bone graft substitutes.

   Autograft bone is bone harvested from another part of the patient's
skeleton, typically the iliac crest or hip. Once harvested, the bone is grafted
to the site of the bone deficit. Harvesting bone typically requires a second
surgical procedure, increases total operating time and expense, and can lead to
complications such as infection, chronic pain, deformity and excess blood loss.
Autograft bone can have both osteoinductive and osteoconductive properties.

   Allograft bone is bone obtained from a cadaver and is available in a variety
of forms, including chips, paste, blocks, gels and putties. While allograft
bone is available from numerous bone banks, its use carries risks of implant
rejection and transmission of infectious agents such as hepatitis B and HIV.
Also, allograft bone is not always readily available due to the storage,
processing and donor screening required, and patients are often reluctant to
have allograft implanted in their bodies. Allograft bone can have
osteoconductive and osteoinductive properties, however, we believe growth
factors may be destroyed in commonly used sterilization procedures.

   Synthetic bone graft substitutes are artificially produced and can be used
as bone substitutes in place of autograft or allograft or mixed with autograft
or allograft. Synthetic bone graft substitutes are available in a wide range of
forms, including granules, blocks, strips, gels, slurries and injectable bone
graft cements. Synthetic bone graft substitutes generally have osteoconductive
properties.

   Growth Factors. Specific proteins, called growth factors, regulate bone
generation by stimulating either the formation of new bone cells or the
replication of existing cells. We believe that the combination of growth
factors with bone grafts is the next major advancement in bone grafting. To
derive growth factors, a number of methods are under development, including
recombinant DNA technology and advanced filtration technologies. With
recombinant DNA technology, the desired human growth protein gene is introduced
into a production host, usually an animal, bacterial or yeast cell, and the
host makes the human protein along with its own. These proteins are then
concentrated and made into a usable form. Using filtration methods, the human
growth factor proteins are removed from the patient's own blood. These proteins
can be concentrated and combined with any of the three major categories of bone
graft.

                                       4
<PAGE>

Our Orthobiologic Products

   Bone Graft Substitutes. Our Pro Osteon bone graft substitute products are
derived from the exoskeleton of two specific genera of coral and chemically
converted into a material with porosity, architecture and chemical composition
similar to that of human bone, using our proprietary manufacturing process. Due
to its structure, the graft provides a matrix that facilitates new bone
ingrowth. Our BonePlast bone void filler is a calcium sulfate (plaster-of-
paris) material that resorbs and is replaced with bone during the healing
process. Our line of osteoconductive bone graft products and, in the case of
Pro Osteon 200R, products awaiting regulatory approval, includes:

<TABLE>
<CAPTION>
                                                                     U.S. Regulatory
        Product              Description           Indication             Status
-----------------------  -------------------- -------------------- --------------------
<S>                      <C>                  <C>                  <C>
Pro Osteon 500           Bone graft           Repair skeletal      PMA approved in
(hydroxyapatite)         substitute. 500      defects in           1992.
                         micron pore size     extremities.
                         blocks and granules.

Pro Osteon 500R          Patented resorbable  Repair all skeletal  510(k) cleared in
(hydroxyapatite/calcium  bone graft           defects, including   1998.
carbonate composite)     substitute. 500      spine.
                         micron pore size
                         granules.

Pro Osteon 200/          Bone graft           Repair skeletal      510(k) cleared in
Interpore 200            substitute. 200      defects in           1985.
(hydroxyapatite)         micron pore size     oral/maxillofacial
                         blocks and granules. areas.

BonePlast (calcium       Fast resorbing,      Fill voids in bone.  510(k) cleared in
sulfate)                 moldable bone void   Used in extremities, 1999.
                         filler.              spine and pelvis.

Pro Osteon 200R          Patented resorbable  Proposed for repair  510(k) submitted in
(hydroxyapatite/calcium  bone graft           of skeletal defects  2000.
carbonate composite)     substitute. 200      in oral/
                         micron pore size     maxillofacial areas.
                         granules.
</TABLE>

   Our Pro Osteon and BonePlast products compare favorably with autograft,
allograft and other synthetic bone grafts used today. Our products:

  . Eliminate morbidity and cost associated with autograft harvesting;

  . Eliminate disease transmission and host rejection risk;

  . Require no special handling or storage conditions;

  . Can be prepared simultaneously with surgery;

  . Contain no fillers such as glycerol, which can inhibit bone growth;

  . Are easily shaped by surgeons to fill bone voids; and

  . Can be easily combined with AGF.

   AGF (Autologous Growth Factors). AGF is a concentrate of growth factors
derived from platelets in a patient's blood which is used to encourage more
complete and rapid bone growth in bone defects. We were the first to market
FDA-cleared devices that extract and concentrate autologous growth factors
intraoperatively to levels shown in studies to stimulate bone growth. Our two
key products used to collect AGF are the UltraConcentrator Permeability
Hemodialyzer and the Automated Processor. Cleared via the 510(k) pathway in the
fourth quarter of 1998, these products are used to produce a concentrated
growth factor "gel" from platelets in the patient's own blood. Our AGF related
products were commercially launched in June 1999, and we estimate that
approximately 5,000 patients have been treated with AGF since the beginning of
1999.

                                       5
<PAGE>

   In the AGF collection process, blood from the patient is separated into
different component layers using a device called a cell washer, which is
routinely available in the operating room during spine fusion and revision
total joint replacement procedures. The layer of platelet-rich plasma is then
processed using a proprietary filtering technology which super-concentrates the
platelets, releasing fibrinogen and a "cocktail" of growth factors, including
Platelet-Derived Growth Factor and Transforming Growth Factor Beta. With the
addition of thrombin, the fibrinogen is converted into fibrin, giving AGF a
gel-like consistency. AGF can be combined directly with a bone graft material,
such as our Pro Osteon and BonePlast products, as well as autograft and
allograft, and placed at the bone graft site.

   We believe that AGF provides the surgeon with the growth factors desired for
faster and more complete bone graft healing that may be safer and more
economical than synthetic growth factors being developed by other companies due
to factors which include the following:

  . Many surgeons prefer autologous solutions, such as AGF, that are derived
    from the patient's own tissue;

  . AGF's gel-like consistency discourages migration from the bone defect
    site to other areas in the body;

  . Using the patient's own growth factors eliminates dosage concerns; and

  . Lower cost than that anticipated for competitive products under
    development.

Business Strategy

   Our goal is to establish a leadership position in the development of
products for the surgical treatment of spine disorders. In order to achieve
this goal, we are undertaking the following strategies:

   Expand and Enhance our Spinal Implant Product Portfolio. We currently offer
products targeted at the thoracic and lumbar regions of the spine. Spinal
procedures often involve treatments in multiple regions of the spine including
the cervical region. We are enhancing our product portfolio through the
development of Synergy Spinal System improvements, cervical devices and spine
cages. This will allow us to offer physicians a comprehensive surgical
solution. We plan to invest significant resources in research and development
in an effort to introduce technological advancements in the spinal market. We
will also consider the acquisition of companies and products to complement our
current product platform.

   Capitalize on "First to Market" with our AGF Technology. Our AGF related
products received market clearance in December 1998 and were nationally
launched in June 1999. Other synthetically derived growth factors are being
developed and are in late stages of clinical trials or the Premarket Approval
process, but none are yet approved for use in the United States. We plan to
capitalize on our position as the first company making growth factors available
domestically by increasing the number of our field technical specialists,
increasing product promotion, and conducting numerous clinical studies to prove
the effectiveness of AGF.

   Continue to Expand and Strengthen our Distribution Network. In the United
States, we have selected independent agents as the primary channel to
distribute our product portfolio. Other companies in our industry are
attempting to transition from independent agents to a direct sales force. We
have been the beneficiary of such transitions, as many highly qualified agents
prefer to remain independent and find our product offering attractive. We
intend to attract and retain independent agents who have many years of
experience selling spinal products and strong relationships with spine surgeons
and can distribute both of our product lines. Our product offering presents
cross-selling opportunities for our distribution network. We provide extensive
technical training programs on new and current products and demonstrate how
these products can be used in combination. We believe these efforts will enable
us to further penetrate the spine market.

   Expand our Clinical Leadership Base. We intend to increase market awareness
of our products through a combination of symposia, VIP tours and extensive
training and education programs for leading spine surgeons and key opinion
leaders. We also intend to enlist these leading physicians in various studies
involving our products. Upon completion of these studies, we will seek to
publish the results in well-known industry journals.


                                       6
<PAGE>

Research and Development.

As of March 1, 2000, our research and development department consisted of 24
full-time employees. We also engage outside consultants and academic research
facilities for assistance with our new product development and will license
technology from third parties under appropriate circumstances. We plan to
continue to use outside resources for product research. In 1992, we formed the
Synergy System Advisors, a group of prominent spine surgeons, that assisted in
the development of the Synergy Spinal System. We have agreements with the
advisors under which we pay royalties ranging from 5% to 7% of net revenues
generated from the sale of certain products within the Synergy Spinal System.
Our expenditures for research and development were $3.2 million in 1997, $3.7
million in 1998 and $4.2 million in 1999.

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

  . Additional Cervical Implants. These include an occipital-cervical plate
    which will allow surgeons to extend constructs of implants to the skull
    from the cervical region of the spine, and a cervical plate spacer, a
    single implant to replace the use of a separate spacer and plate in
    cases where a discectomy is performed. We expect to submit 510(k)
    applications for these products by year-end 2000.

  . Geo(TM) Structure. This unique titanium spacer has a geometric design
    which provides very high strength with a minimum amount of metal in the
    implant. This design will allow the surgeon to place a larger quantity
    of graft material at the graft site, which increases the probability of
    a successful fusion. It will also allow better radiographic
    visualization of the graft site postoperatively for better assessment of
    fusion. We expect to submit a 510(k) application for this product by
    year-end 2000.

  . Intervertebral Cages. We are currently conducting mechanical testing on
    several alternative designs. Our objective is to develop a cage which
    would be a stand-alone device, expandable to optimize anatomic fit, and
    radiolucent. Intervertebral cages are currently Class III devices, and
    would require PMA approval.

  . Artificial Disc. Our simple design, with no moving parts, could allow a
    surgeon to replace a diseased disc while maintaining motion of the spine
    in the affected segment, eliminating the need for fusion. We expect to
    begin animal studies on this device later this year.

  . Applications of BonePlast for Vertebroplasty. Vertebroplasty is a
    treatment for compression fractures of the vertebrae, a common
    occurrence among osteoporotic patients. In a vertebroplasty, material is
    inserted into the vertebral body to restore the height of the vertebra
    and reduce pain. BonePlast could potentially be used to perform this
    procedure in a minimally-invasive manner. We are currently conducting
    feasibility studies in this area.

  . Polymer-reinforced Pro Osteon Material. We have development efforts
    underway for a polymer-reinforced Pro Osteon material. We believe that
    increasing the strength of our resorbable version of Pro Osteon in
    various configurations, combined with AGF, holds promise for potential
    use as a natural, resorbable alternative to titanium and composite
    spinal implants currently available in the market. Such a product would
    be several years from the market, if developed at all.

   We currently have a number of prospective randomized clinical studies
underway at a variety of institutions to demonstrate the efficacy of our AGF-
related products for multiple indications.

Intellectual Property

   As part of our ongoing research, development and manufacturing activities,
we have a policy of seeking patent protection. Patents relating to particular
products, uses or procedures, however, do not preclude other manufacturers
from employing alternative processes or from successfully marketing substitute
products. We believe that although patents often are necessary to protect our
technology and products, the lengthy FDA approval process and certain
manufacturing processes are more significant barriers to entry. Moreover, much
of the proprietary technology and manufacturing processes developed by us
reside in our key scientific and

                                       7
<PAGE>

technical personnel and such technology and processes are not easily
transferable to other scientific and technical personnel. The loss of the
services of key scientific, technical and manufacturing personnel could have a
material adverse effect on our business and results of operations.

   Spinal Implant Products. We own eight U.S. patents related to various
aspects of our spinal implant products, including the bone anchor, the
rod/anchor interface, instrumentation and transverse connectors. We have four
U.S. patents pending concerning enhancements to our Synergy Spinal System and
for several new products.

   Orthobiologic Products. We own eleven U.S. patents related to our
orthobiologic products. Of these, two relate to our Pro Osteon 500R resorbable
bone graft substitute, and three are for our AGF related products. We have two
U.S. patents pending, and one relates to our polymer-reinforced Pro Osteon
material.

   In the fourth quarter of 1999, we purchased all of the intellectual property
of Quantic Biomedical, Inc. Quantic previously had licensed to us the right to
design, manufacture and market orthopedic products incorporating technology to
produce AGF. We acquired this technology in order to preserve our access to all
markets for our AGF related products.

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

   Our trademarks include "Interpore(R)," "Cross Medical(R)," "Cross(R)," "Pro
Osteon(R)," "Pro Osteon 500(R)," "Interpore 200(R)," "AGF(TM)," "Autologous
Growth Factors(TM)," "Synergy(TM)," "BonePlast(TM)," "TPS(TM)," "Geo(TM)
Structure," and "Integral(TM)."

Customers, Sales and Marketing

   The decision to use our products is made by the orthopedic surgeon or the
neurosurgeon. We direct our domestic marketing efforts to the approximately
14,000 practicing orthopedic surgeons in the United States in private practice,
hospitals and orthopedic treatment centers. Of the 14,000 practicing orthopedic
surgeons, we estimate there are over 2,000 fellowship trained spine surgeons.
In addition to the orthopedic surgeons, we estimate that there are over 1,000
neurosurgeons performing spine fusion procedures that utilize implants.

   Our domestic sales organization consists of a combination of independent
agents and direct sales representatives. As of March 3, 2000, we had contracts
with 43 independent agents which employed approximately 135 sales
representatives and we employed six direct sales representatives. We are
decreasing our reliance on direct sales representatives and are increasing our
reliance on independent sales agents because
we believe we can attract independent agents that desire our complementary
product portfolio and that possess strong surgeon relationships, an important
factor for competing in our industry. The domestic sales organization is
managed by a Vice President of North American Sales and five division managers
manage the domestic sales organization. We invoice hospitals directly,
generally at list prices, and pay commissions to the agents and direct sales
representatives. We provide consignment inventories to our independent agents,
direct sales representatives and hospitals. We select agent organizations and
direct sales representatives for their expertise in spinal implant, orthopedic
or medical device sales, their reputation within the surgeon community and
their sales coverage within a geographic area. Each agent organization and
direct sales representative is given an exclusive sales territory for some or
all of our products and is subject to periodic performance reviews. In
addition, each new independent sales agent and direct sales representative goes
through training programs before initiating sales of our products. We also
require each independent agent and direct sales representative to attend
periodic sales and product training.

                                       8
<PAGE>

   Outside of the United States, we distribute products only through
independent distributors. We have a Vice President of International Sales, one
Latin America sales manager and a European business liaison and have
established distribution arrangements with 54 distributors in 41 countries. Our
international sales represented approximately 24% of sales in 1997, 23% of
sales in 1998 and 22% of sales in 1999. Sales to our international customers
are denominated in U.S. dollars.

   In the United States, there are no significant customer concentrations, as
we invoice hospitals directly for product used or shipped. However, in the
international markets, we have two significant distributors that on a combined
basis accounted for approximately 31% of our 1999 international sales and 7% of
our 1999 worldwide sales.

   In order to improve shipping efficiencies and service to our international
customers, in January 1998, we entered into an agreement with a contract
warehouse in the Netherlands to ship bone graft products to customers in
countries outside of North America.

   We participate in over two dozen professional meetings including the
American Academy of Orthopaedic Surgeons Meeting, the North American Spine
Society Meeting and the Congress of Neurological Surgeons. We also participate
in scientific presentations and professional seminars at hospitals.

Third-Party Reimbursement

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

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

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

                                       9
<PAGE>

Manufacturing

   Spinal Implants. Implantable grade stainless steel and titanium bar stocks
are the primary raw materials used to manufacture our spinal implants. We
purchase and inventory these materials, which are available from several
sources and currently have a purchase order lead time of approximately two
months, so that we can best control the quality and consistency of material
used to manufacture our spinal implant products. We resell the raw material to
our contracted outside vendors for the manufacture of our spinal implants based
on our specifications. Following the receipt of product at our facility, we
conduct inspection, packaging and labeling operations. Our spinal implant
products are distributed in a non-sterile condition, which is customary in the
spinal implant market.

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

   Some of the products and materials supplied by our vendors are currently
sole-sourced, but we believe that we could locate alternative vendors for
supply of these components. However, the UltraConcentrator, one of our products
used to collect AGF, is manufactured under an exclusive supply agreement with a
vendor that itself has a sole source of supply of the contained filter
material. Although the filter material is not readily available through
alternative sources, we believe that there are suppliers that could supply
alternate materials with probable equivalent function. In the event that a re-
engineering of the product were necessary due to an interruption in supply from
our current vendor, delays in product availability could occur and significant
costs could be incurred, either of which could have a material adverse effect
on our operations.

Competition

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

   Orthopedic Bone Graft Substitute Market. Our synthetic bone products compete
with natural bone obtained from autograft procedures, which is the physician's
"gold standard," with allograft bone obtained from cadavers and with other
synthetic bone products. Autograft and allograft bone have been used for graft
material for a much longer period than synthetic bone graft materials, and in
order to maintain and increase our future sales of our synthetic bone graft
products, we will have to continue to demonstrate to the medical community the
surgical and patient advantages, safety, efficacy, cost effectiveness and
clinical results of our synthetic bone graft products. Competitive bone
substitute products include: Grafton(R) demineralized bone products from
Osteotech, DynaGraft demineralized bone products from GenSci Regeneration
Technologies, OsteoSet(TM) calcium sulfate from Wright Medical Technology, as
well as other bone substitute products used in non-orthopedic applications.
Several other companies are pursuing additional synthetic bone graft materials
for orthopedic applications which could ultimately compete with our synthetic
bone graft products in the United States.

                                       10
<PAGE>

   Growth Factors. There is significant development activity ongoing that, if
successful, would potentially produce products competitive with our AGF
technology. Creative Biomolecules has a recombinant human bone morphogenetic
protein (OP-1), which is in human clinical studies under an FDA-approved
Investigational Device Exemption. Genetics Institute, Inc. has a recombinant
human bone morphogenetic protein (rhBMP-2) in human clinical studies. Sulzer
Orthopedics Biologics, a subsidiary of SulzerMedica of Switzerland, has an
extract of bovine (cow)-derived bone growth protein that is in preclinical
animal studies and may be in clinical evaluation.

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

Government Regulation

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

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

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

   In March 2000, the Food and Drug Administration approved a Humanitarian
Device Exemption (HDE) for the cervical version of our corpectomy cage, the
Telescopic Plate Spacer (TPS). An HDE is designed to encourage the discovery
and use of devices intended to benefit patients in the treatment or diagnosis
of diseases or conditions that affect or are manifested in fewer than 4000
individuals in the United States per year. In the case of the TPS cage, the
approved indication is for the replacement of normal body structures following
a vertebrectomy or corpectomy of the spine for metastatic disease in the
cervical or cervical-thoracic spine.

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

   In July 1997, the FDA cleared the use of a competitive synthetic bone graft
substitute product with a 510(k). Prior to clearance of this device, companies
were required to obtain marketing approval from the FDA for bone graft
substitutes via the Premarket Approval process. It is possible that some
clearances of other bone

                                       11
<PAGE>

graft substitute products may now be obtained through the less burdensome
510(k) premarket notification process. This may increase competition. In
September 1998, we received a 510(k) clearance from the FDA for our Pro Osteon
500R resorbable bone graft substitute product. The approved indications include
use in bony voids or gaps of the skeletal system, such as the extremities,
spine and pelvis.

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

   In December 1998, we received FDA 510(k) clearances for the two key products
used to collect AGF, the UltraConcentrator Permeability Hemodialyzer and the
Automated Processor.

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

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

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

   We must also comply with registration requirements of foreign governments
and with import and export regulations when distributing our products to
foreign nations. Each foreign country's regulatory requirements for product
approval and distribution are unique and may require the expenditure of
substantial time, resources and effort to obtain and maintain approvals for
marketing. In September 1995, we received approval to use the "CE" mark for our
entire line of orthopedic and oral/maxillofacial synthetic bone graft
materials. We received approval to use the "CE" mark for our spinal implant
systems in 1998. The CE mark indicates that the products are approved for sale
within 18 countries in the European Community and European Free Trade
Association and that we are in compliance with the ISO 9001 and EN 46001
standards which govern medical device manufacturers that are marketing products
in Europe. The CE mark is now also accepted by several countries outside of the
European Community.

Employees

   As of March 1, 2000, we had 122 full-time employees, of whom 38 were engaged
in marketing and sales, 31 in manufacturing, 16 in regulatory affairs and
quality assurance, 13 in general administration and finance

                                       12
<PAGE>

and 24 in research and development. None of these employees is represented by a
union, and we have never experienced a work stoppage. We consider our relations
with our employees to be good.

Certain Business Considerations

   This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. Actual results may differ significantly from
the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed below
and elsewhere in this Annual Report on Form 10-K.

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

   We anticipate that most of our revenue growth in the future, if any, will
come from our spinal implant products and from our orthobiologic products.
There can be no assurance that we will be successful in increasing sales of our
current product offering. Additionally, there can be no assurance that our
efforts to develop new products will be successful. If our development efforts
are successful, there can be no assurance that we will be successful in
marketing and selling our new products. Moreover, our competitors may develop
and successfully commercialize medical devices that directly or indirectly
accomplish what our products are designed to accomplish in a superior and less
expensive manner. If our competitors' products prove to be more successful than
ours, our products could be rendered obsolete. As a result, we may not be able
to produce sufficient sales to maintain profitability.

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

   Our principal global competitors with respect to our spinal implant product
line are Medtronic Sofamor Danek USA, DePuy Acromed, Inc., a Johnson & Johnson
company, and SYNTHES-STRATEC, Inc. Our principal global competitors with
respect to our orthobiologic products include Osteotech, Inc., GenSci
Regeneration Technologies and Wright Medical Technology. Many of these
companies have broader product lines than we do. Many potential customers have
relationships with our competitors that could make it difficult for us to
continue to penetrate the markets for our products. In addition, many of our
competitors have significantly greater resources than we do. Accordingly, they
could substantially increase the resources they devote to the development and
marketing of products that are competitive with ours.

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

   Because our AGF related products were introduced only recently under a
510(k) clearance, we lack long-term clinical data regarding the efficacy and
long-term results of AGF. To date, we have completed no long-term clinical
studies of AGF. If long-term studies or clinical experience indicate that
procedures involving AGF do not provide patients with improved clinical
outcomes, anticipated sales of our AGF related products may never materialize.
Our success in selling our AGF related products will depend, in large part, on
the medical community's acceptance of AGF. The medical community's acceptance
of AGF will depend upon our ability to demonstrate the efficacy of AGF and its
advantages, favorable clinical performance and cost-effectiveness. We cannot
predict whether the medical community will accept AGF or, if accepted, the
extent of its use. If long-term studies or clinical experience indicate that
AGF causes negative effects, we could be subject to significant

                                       13
<PAGE>

liability. Our strategy to increase sales of AGF is to market these products
primarily to our spinal implant customers. There is no assurance that the
strategy will work, however, and no assurance that sales of our AGF related
products will increase.

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

   We have recently made significant changes to our domestic distribution
network for the sale of our products. We have decreased the number of direct
sales representatives and increased the number of and expanded the territories
of independent agents. We expect to continue to increase our reliance on
independent agents for the domestic distribution of both orthobiologic and
spinal implant products. Independent commissioned sales agents 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 agents about our
products and our marketing programs. Our ability to increase our use of
independent sales agents has been aided by some of our competitors' replacement
of independent agents with direct sales representatives. However, our
competitors may not continue to utilize direct sales representatives and we can
therefore give no assurance that we will continue to be able to attract new or
retain our current independent sales agents. There can be no assurance that we
will be able to develop an effective distribution network or that our sales
force will be able to continue to increase sales or maintain current sales
levels of our products.

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
facility are possible. The process of obtaining regulatory approvals to market
a medical device, particularly from the FDA, can be costly and time-consuming,
and there can be no assurance that such approvals will be granted on a timely
basis, if at all. The regulatory process may delay the marketing of new
products for lengthy periods and impose substantial additional costs or it may
prevent the introduction of new products altogether. In particular, the FDA
permits commercial distribution of a new medical device only after the FDA has
cleared a 510(k) premarket notification or has approved a Premarket Approval
application, or PMA, for such device. The FDA will clear marketing of a medical
device through the 510(k) process if it is demonstrated that the new product is
substantially equivalent to other 510(k)-cleared products. The PMA approval
process is more costly, lengthy and uncertain than the 510(k) premarket
notification process. There can be no assurance 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 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.

                                       14
<PAGE>

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 our spinal products are often 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. Prior to our merger with Cross, Cross had been named as a defendant in
approximately 800 cases alleging principally that it had participated in an
industry-wide conspiracy to market pedicle screw implants for off-label use,
although none of the four remaining conspiracy lawsuits involve any of our
products. 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.

We may face challenges to our patents and proprietary rights.

   We rely on a combination of patents, trade secrets and nondisclosure
agreements to protect our proprietary intellectual property. Our patent
positions and those of other medical device companies are uncertain and involve
complex and evolving legal and factual questions. There can be no assurance
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. There can be no assurance 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.

   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. Any future litigation, regardless of the outcome, could result in
substantial expense and significant diversion of the efforts of our technical
and management personnel. Litigation may also be necessary to enforce our
patents and license agreements, to protect our trade secrets or know-how or to
determine the enforceability, scope and validity of the proprietary rights of
others. An adverse determination in any such proceeding could subject us to
significant liabilities to third parties, or require us to seek licenses from
third parties or pay royalties that may be substantial. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing or selling certain of
our products which in turn would have a material adverse effect on our
business, financial condition and results of operations.

Possible denial of third-party reimbursement could materially adversely affect
our future business, results of operations and financial condition.

   In the United States, our products are purchased by hospitals, who are
reimbursed for the devices provided to their patients by third-party payors,
such as governmental programs (e.g., Medicare and Medicaid), private

                                       15
<PAGE>

insurance plans and managed care programs. These third-party payors may deny
reimbursement if they determine that a device used in a procedure was not used
in accordance with cost-effective treatment methods, as determined by the
third-party payor, or was used for an unapproved indication. Also, third-party
payors are increasingly challenging the prices charged for medical products and
services. In international markets, reimbursement and healthcare payment
systems vary significantly by country and many countries have instituted price
ceilings on specific product lines. There can be no assurance that our products
will be considered cost-effective by third-party payors, that reimbursement
will be available or, if available, that the third-party payors' reimbursement
policies will not adversely affect our ability to sell our products profitably.

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

   We do not machine the components for our spinal implants or instruments;
rather, we are dependent upon several suppliers for the machining of such
components. Also, the UltraConcentrator(TM), one of our products used to
collect AGF, is manufactured under an exclusive supply agreement with a vendor
that itself has a sole source of supply for filter material, a key component of
the UltraConcentrator. In the event that we are unable to obtain components for
any of our products, or obtain such components on commercially reasonable
terms, we may not be able to manufacture or distribute our products on a timely
and competitive basis, or at all. Any delays in product availability or costs
incurred in locating alternative suppliers 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.

   In 1999, approximately 22% of our sales were generated outside the United
States. We expect that such sales will continue to account for a significant
portion of our revenue in the future. Our international sales subject us to
other inherent risks, including the following:

  . fluctuations in currency exchange rates;

  . regulatory, product approval and reimbursement requirements;

  . tariffs and other trade barriers;

  . greater difficulty in accounts receivable collection and longer
    collection periods;

  . difficulties and costs of managing foreign distributors;

  . reduced protection for intellectual property rights in some countries;

  . burdens of complying with a wide variety of foreign laws;

  . the impact of recessions in economies outside the United States;

  . political and economic instability; and

  . seasonal reductions in business activity during the summer months in
    Europe and other parts of the world.

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<PAGE>

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.

Future acquisitions could adversely affect our operations or financial results.

From time to time, we consider acquisition of technology product lines or
businesses to supplement our current product offering. Any such future
acquisitions involve risks such as the following:

  . we may be exposed to unknown liabilities of acquired companies;

  . our acquisition and integration costs may be higher than we anticipated
    and may cause our quarterly and annual operating results to fluctuate;

  . we may experience difficulty and expense in assimilating the operations
    and personnel of the acquired businesses, disrupting our business and
    diverting management's time and attention; and

  . our relationships with key customers of acquired businesses may be
    impaired, due to changes in management and ownership of the acquired
    businesses.

Item 2. Properties

   We are headquartered in Irvine, California where we lease a 35,528 square
foot facility. The annual average lease expense over the ten year term of the
lease, which expires January 31, 2003, is $387,000. The lease provides a right
to extend the term for an additional five years at the fair market lease rate
of the facility on the extension date, but not less than the rate we paid
during the month immediately preceding the commencement of the extension
period. We also lease a 2,700 square foot warehouse facility in Santa Ana,
California, a 4,274 square foot facility in Irvine, California to provide
additional warehousing, laboratory and office space, an 1,800 square foot
prototype machine shop in Irvine, California and a sales office with
approximately 200 square feet in Miami, Florida. We believe our current
facilities will be adequate to serve our operational needs through 2000.

   We also lease a 27,680 square foot facility in Dublin, Ohio that is vacant.
The lease term began on April 1, 1996 and terminates on June 1, 2001.

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Item 3. Legal Proceedings

   Cross Medical Products and a number of other spinal implant manufacturers
were named as defendants in various products liability lawsuits alleging
injuries from spinal implants supplied by Cross and others. Approximately 800
such suits were filed in which a large number of plaintiffs claimed, in
addition to damages from spinal implants, a conspiracy among manufacturers,
physicians and other spinal implant industry members to defraud the public and
market products without the proper regulatory approvals. We have been dismissed
as a defendant from all but four of the pedicle screw conspiracy cases, none of
which involves our products.

   Aside from the pedicle screw conspiracy litigation, the nature of our
business subjects us to products liability and various other legal proceedings
from time to time. We are currently involved in legal proceedings incidental to
the normal conduct of our business. We do not believe that any liabilities
relating to the legal proceedings to which we are a party are likely to be,
individually or in the aggregate, material to our consolidated financial
condition or results of operations.

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

   None.

                                       18
<PAGE>

PART II

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

   Our common stock commenced trading on the Nasdaq National Market under the
symbol "BONZ" on December 20, 1993. The following table sets forth, for the
periods indicated, the intra-day high and low sales prices per share of common
stock on the Nasdaq National Market:

<TABLE>
<CAPTION>
                                                                    High   Low
                                                                   ------ -----
<S>                                                                <C>    <C>
Year Ended December 31, 1998
First Quarter..................................................... $ 9.13 $5.50
Second Quarter.................................................... $ 7.75 $5.00
Third Quarter..................................................... $ 5.50 $3.69
Fourth Quarter.................................................... $ 6.13 $2.38

Year Ended December 31, 1999
First Quarter..................................................... $ 5.97 $4.06
Second Quarter.................................................... $ 5.38 $3.88
Third Quarter..................................................... $ 8.25 $4.13
Fourth Quarter.................................................... $ 8.00 $4.94

Year Ended December 31, 2000
First Quarter through March 13, 2000.............................. $14.25 $7.63
</TABLE>

   On March 3, 2000, the closing sale price for our common stock as reported on
The Nasdaq National Market was $12.50. The number of record holders of our
common stock as of March 3, 2000 was 611.

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

                                       19
<PAGE>

Item 6. Selected Financial Data

   The table below, presents the selected consolidated financial data of
Interpore International, Inc. This information has been prepared using the
consolidated financial statements of Interpore International, Inc. as of and
for the years ended December 31, 1995, 1996, 1997, 1998 and 1999. Interpore
International, Inc. and Cross Medical Products, Inc. merged in May 1998. The
merger was accounted for as a pooling-of-interests. Accordingly, data as of and
for the years ended December 31, 1995, 1996 and 1997 have been restated to
include the financial information of both companies.

<TABLE>
<CAPTION>
                                  Year ended December 31,
                          ------------------------------------------------------------
                           1995         1996         1997          1998         1999
                          -------      -------      -------      --------      -------
                           (in thousands, except per share data)
<S>                       <C>          <C>          <C>          <C>           <C>
Statement of Operations
 Data:
Net sales...............  $21,194(/1/) $28,489(/1/) $28,429(/1/) $ 30,209      $38,856
Cost of goods sold......    6,793        9,497        9,110(/2/)    8,552       11,645
                          -------      -------      -------      --------      -------
  Gross profit..........   14,401       18,992       19,319        21,657       27,211
Total operating
 expenses...............   16,415       19,396       20,095(/1/)   24,528(/3/)  22,521
                          -------      -------      -------      --------      -------
  Income (loss) from
   operations...........  (2,014)        (404)        (776)       (2,871)        4,690
Total interest and other
 income, net............     560          324          566           506           515
                          -------      -------      -------      --------      -------
Income (loss) before
 taxes..................  (1,454)         (80)        (210)       (2,365)        5,205
Income tax provision
 (benefit)(/4/).........  (2,050)        (788)      (2,119)           59           407
                          -------      -------      -------      --------      -------
  Income (loss) from
   continuing
   operations...........  $  596       $  708       $1,909       $(2,424)       $4,798
                          =======      =======      =======      ========      =======
Income (loss) from con-
 tinuing operations
 per share:
  Basic.................  $ 0.05       $ 0.05       $ 0.14       $ (0.17)      $  0.36
  Diluted...............  $ 0.04       $ 0.05       $ 0.14       $ (0.17)      $  0.35
Shares used in computing
 income (loss) from
 continuing operations
 per share:
  Basic.................   12,695       13,080       13,460        13,904       13,506
  Diluted...............   13,478       14,530       14,111        13,904       13,876
<CAPTION>
                                     As of December 31,
                          ------------------------------------------------------------
                           1995         1996         1997          1998         1999
                          -------      -------      -------      --------      -------
<S>                       <C>          <C>          <C>          <C>           <C>
Balance Sheet Data:
Total cash, cash
 equivalents and short-
 term investments.......  $11,629      $10,480      $16,590      $  7,908      $ 9,774
Total assets............   31,203       39,869       41,483        34,147       40,793
Short-term obligations..    3,194        1,664           95            15           15
Long-term obligations...       85        5,482        5,124         3,181        3,165
Total stockholders'
 equity.................   22,579       24,179       31,634        26,951       33,237
</TABLE>
-------------------------------
(/1/)Our dental implant business was sold in May 1997. The transaction,
 including associated costs, resulted in a net charge to operating expenses of
 $617,000 in 1997. Net sales from the dental business were approximately $8.1
 million, $7.1 million and $1.7 million in 1995, 1996 and 1997, respectively.

(/2/)In 1997, we recognized an inventory valuation adjustment of $925,000 for
 inventory made obsolete by our Synergy Spinal System enhancements.

(/3/)Amount includes $5.0 million of non-recurring charges related to the May
 1998 merger with Cross, the subsequent restructuring associated with the
 closing of the Dublin, Ohio facility and the relocation of employees and
 assets from Dublin to Irvine, California.

(/4/)In 1995, 1996, 1997, 1998 and 1999, we recognized deferred tax assets of
 $1.6 million, $683,000, $2.0 million, $211,000 and $1.6 million, respectively,
 which had previously been fully reserved in accordance with Statement of
 Financial Accounting Standards No. 109.

                                       20
<PAGE>

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

Financial Overview

   Our revenues are generated from the sale of products in two principal
product categories--spinal implant products and orthobiologic products. Our
spinal implant products consist of titanium or stainless steel hooks, rods 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 synthetic bone graft substitute materials and products used to derive AGF.
AGF is used to provide faster, more complete bone growth and enhance the
performance of our bone graft products.

   In May 1998, Interpore International, Inc. merged with Cross Medical
Products, Inc., combining Interpore's orthobiologics expertise and product
offering with Cross' spinal implant expertise and products. The merger was
accounted for as a pooling-of-interests, and all financial information related
to periods prior to the merger has been restated to reflect the financial
information of both companies as if we had always been a combined entity.

   All of our operations are located in the United States, however, we sell our
products to customers both within and outside the United States. In 1999, our
domestic sales were 78% of total sales and our international sales were 22% of
total sales. Within the United States, we distribute our products primarily
through independent agents. These independent agents provide a delivery and
consultative service to our surgeon and hospital customers and receive
commissions based on sales in their territories. The commissions are reflected
in our income statement within selling and marketing expense.

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

   Outside the United States, we sell our products directly to distributors who
maintain an inventory of our products. We record revenue at the time of
shipment to the distributor at prices generally ranging from 40% to 70% of our
U.S. list prices. The distributors service the surgeons and hospitals, deliver
products and invoice hospitals directly at prices determined by the
distributors.

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

Financial Trends

   We experienced operating losses in the years 1995 through 1998. Factors
contributing to the losses through 1997 include our significant investment in
the development of our spinal implant business and declining sales and
profitability in our former dental implant business, which was sold in May
1997. The $776,000 loss from operations in 1997 included a $617,000 loss on the
sale of our dental implant business and a $925,000 unfavorable adjustment for
inventory made obsolete by our Synergy Spinal System enhancements. In 1998, we
had a $2.9 million operating loss which included approximately $5 million in
non-recurring charges, including charges related to our merger with Cross.
However, without the non-recurring charges, we would have had operating profit
of $2.1 million in 1998, representing 7% of sales.


                                       21
<PAGE>

   In 1999, our revenue grew by 29%, and we had an operating profit of $4.7
million, or 12% of sales. We believe the improved performance was primarily the
result of the following:

  . The successful recruiting of more experienced independent agents and
    sales managers from our larger spinal implant competitors, which
    improved our revenue growth rate;

  . Incremental profit from increased revenues, including over $2.8 million
    in sales of newly-introduced AGF related products; and

  . Cost reductions and operating efficiencies resulting from the
    consolidation of operations following the merger of Interpore and Cross.

   Despite our operating losses in the years 1995 through 1997, we reported
positive income from continuing operations. This resulted from the recognition
of deferred tax assets which had previously been fully reserved in accordance
with Statement of Financial Accounting Standards No. 109. In 1998, despite a
pre-tax loss, taxable income was recognized as a result of some disallowed
merger cost deductions. This coupled with the reduction of the valuation
allowance resulted in a net tax provision of $59,000. In 1999, our increased
profitability eliminated the remaining valuation allowance against our deferred
tax assets. This resulted in the need to record an income tax provision for the
quarter and year ended December 31, 1999, and we expect to record tax
provisions going forward. Therefore, the recording of tax provisions will
negatively affect net income for the year 2000 in comparison to 1999. Had we
recorded an income tax provision in 1999 at an effective tax rate of 39%, our
diluted earnings per share would have been $0.23 versus the $0.35 that we
reported.

   All of the information set forth above relates to our continuing operations.
However, discontinued operations contributed significantly to net income in
1996 and 1997. Income from discontinued operations was $1.2 million in 1996 and
$2.5 million in 1997, including a $2.2 million gain on the sale of our recovery
products segment in March 1997.

Results of Operations

   The following table presents our results of operations as percentages:

<TABLE>
<CAPTION>
                                                              Percentage Change
                                     Percentage of Net Sales  -----------------
                                     Year ended December 31,
                                    ------------------------- 1998 vs. 1999 vs.
                                      1997     1998    1999     1997     1998
                                    -------- -------- ------- -------- --------
<S>                                 <C>      <C>      <C>     <C>      <C>
Net sales..........................  100.0%   100.0%   100.0%   6.3%    28.6%
Cost of goods sold.................   32.0%    28.3%    30.0%  (6.1%)   36.2%
                                    -------- -------- ------- -------   ------
  Gross profit.....................   68.0%    71.7%    70.0%  12.1%    25.7%
                                    -------- -------- ------- -------   ------
Operating expenses:
  Research and development.........   11.3%    12.1%    10.7%  13.4%    14.9%
  Selling and marketing............   40.7%    39.1%    36.0%   2.2%    18.2%
  General and administrative.......   16.5%    13.4%    11.2% (13.8%)    7.8%
  Merger-related expenses..........     --     10.0%     --      --       --
  Restructuring charges............     --      5.0%     --      --       --
  Non-recurring charges............     --      1.6%     --      --       --
  Loss on sale of dental business..    2.2%      --      --      --       --
                                    -------- -------- ------- -------   ------
    Total operating expenses.......   70.7%    81.2%    57.9%  22.1%    (8.2%)
                                    -------- -------- ------- -------   ------
      Income (loss) from
       operations..................   (2.7%)   (9.5%)   12.1%    --       --
                                    ======== ======== ======= =======   ======
</TABLE>

                                       22
<PAGE>

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

   For the year ended December 31, 1999, sales of $38.9 million were $8.6
million, or 28.6%, higher than sales of $30.2 million for the previous year.
The following table presents sales by category (in thousands):

<TABLE>
<CAPTION>
                                          Year ended December 31,     Change
                                          ----------------------- --------------
                                             1998        1999     Amount Percent
                                          ----------- ----------- ------ -------
<S>                                       <C>         <C>         <C>    <C>
Spinal implant product sales............. $    15,367 $    20,807 $5,440  35.4%
Orthobiologic product sales..............      14,842      18,049  3,207  21.6%
                                          ----------- ----------- ------  -----
  Total sales............................ $    30,209 $    38,856 $8,647  28.6%
                                          =========== =========== ======  =====
</TABLE>

   Sales of spinal implant products increased in the year ended December 31,
1999 by $5.4 million, or 35.4%, to $20.8 million, compared to $15.4 million for
the year ended December 31, 1998. The increase reflects continued market
penetration of the Synergy Spinal System, aided by improved distribution and
territory coverage.

   Sales of orthobiologic products increased by $3.2 million, or 21.6%, to
$18.0 million for the year ended December 31, 1999, compared to $14.8 million
for the year ended December 31, 1998. Our new AGF related products, which were
launched on a nationwide basis during the second quarter of 1999, accounted for
$2.8 million of orthobiologic products sales during 1999. Sales of synthetic
bone products remained relatively level for the two periods.

   Total domestic sales of spinal products and orthobiologic products increased
30.2%, or $7.0 million, to $30.1 million for the year ended December 31, 1999,
compared to $23.1 million for the same period of 1998. International sales
increased $1.6 million, or 23.4%, to $8.7 million for the twelve months ended
December 31, 1999, compared to $7.1 million for the same period of 1998.

   For the year ended December 31, 1999, gross margin as a percentage of sales
was 70.0%, compared to 71.7% for the year ended December 31, 1998. Spine
products sales, which have a lower gross margin than orthobiologic products
sales, comprised a greater percentage of total sales in 1999 than in 1998.

   Total operating expenses for the year ended December 31, 1999 decreased by
$2.0 million, or 8.2%, to $22.5 million, compared to total operating expenses
of $24.5 million during the same period of 1998. Excluding merger related
expenses, restructuring charges and non-recurring charges recorded in 1998,
operating expenses increased $3.0 million, or 15.4%, but decreased as a
percentage of sales from 64.6% in 1998 to 57.9% in 1999. Research and
development expenses increased by 14.9%, or $542,000, in 1999 due primarily to
salaries for additional engineers hired for spinal implant development
projects. Selling and marketing expenses in 1999 increased $2.2 million, or
18.2%, compared to 1998, primarily due to increased commissions on higher
domestic sales in 1999 and the hiring of additional sales and marketing staff.
General and administrative expenses increased by $316,000, or 7.8%, in 1999,
primarily as the result of increased corporate bonus expense and higher product
liability insurance premiums resulting from increased sales offset partially by
a decrease in property taxes resulting from the closure of the Ohio facility.

   Total interest and other income were approximately the same in the two
periods, as reduced interest income on lower average cash, cash equivalents and
short-term investments balances in 1999 was mostly offset by reduced interest
expense. We had lower average cash, cash equivalents and short-term investments
balances in 1999 compared to 1998 due to the payment of merger-related
expenses, restructuring charges and non-recurring charges, the repurchase of
605,000 shares of our common stock and the redemption of convertible
debentures. Interest expense was lower in 1999 than in 1998 due primarily to
the write-off of prepaid debt issuance costs associated with convertible
debentures which were redeemed during 1998. This redemption also lowered
interest expense in 1999.

                                       23
<PAGE>

   In 1998, despite a pre-tax loss, taxable income was recognized as a result
of some disallowed merger cost deductions. This coupled with the reduction of
the valuation allowance resulted in a net tax provision of $59,000. In 1999,
our increased profitability eliminated the remaining valuation allowance
against our deferred tax assets. This resulted in the need to record an income
tax provision for the year ended December 31, 1999 at an effective tax rate of
approximately 7.8%. We expect to record an income tax provision in 2000.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

   For the year ended December 31, 1998, net sales of $30.2 million were $1.8
million, or 6.3%, higher than net sales of $28.4 million for the previous year.
However, 1997 included $1.7 million of sales from the dental business which was
sold in May 1997. Excluding dental products, net sales increased $3.5 million,
or 13.0%, in 1998 compared to 1997. The following table presents sales by
category (in thousands):

<TABLE>
<CAPTION>
                                                  Year ended
                                                 December 31,        Change
                                                --------------- ----------------
                                                 1997    1998   Amount  Percent
                                                ------- ------- ------- --------
<S>                                             <C>     <C>     <C>     <C>
Spinal implant product sales................... $12,918 $15,367 $2,449    19.0%
Orthobiologic product sales....................  13,805  14,842  1,037     7.5%
                                                ------- ------- ------- --------
  Sub-total....................................  26,723  30,209  3,486    13.0%
Dental product sales...........................   1,706      -- (1,706) (100.0%)
                                                ------- ------- ------- --------
  Total sales.................................. $28,429 $30,209 $1,780     6.3%
                                                ======= ======= ======= ========
</TABLE>

   Sales of spinal implant products increased in the year ended December 31,
1998 by $2.4 million, or 19.0%, to $15.4 million, compared to $12.9 million for
the year ended December 31, 1997. The increase reflects continued market
penetration of this relatively new system, aided by the improved distribution
and greater domestic territory coverage following the merger.

   Sales of orthobiologic products increased by $1.0 million, or 7.5%, to $14.8
million for the year ended December 31, 1998, compared to $13.8 million for the
year ended December 31, 1997. Pro Osteon sales increased by $1.7 million, due
to the introduction of the resorbable version, Pro Osteon 500R, in the fourth
quarter of 1998, along with improved distribution following the merger and
resultant consolidation of sales forces. OEM sales, which are dependent upon
the ordering patterns of two customers, decreased by $624,000 in 1998 versus
1997.

   Total domestic sales of spinal products and orthobiologics increased 15.6%,
or $3.1 million, to $23.1 million for the year ended December 31, 1998,
compared to $20.0 million for the same period of 1997. International sales
increased $363,000, or 5.4%, to $7.1 million for the twelve months ended
December 31, 1998, from $6.7 million for the same period of 1997.

   For the year ended December 31, 1998, gross margin as a percentage of sales
was 71.7%, compared to 68.0% for the year ended December 31, 1997. The 1997
gross margin was lower as a result of an inventory valuation adjustment of
$925,000 that was recognized for inventory made obsolete by our Synergy Spinal
System enhancements. Additionally, domestic sales, which have a higher gross
margin than international sales, comprised a greater percentage of total sales
in 1998 than in 1997.

   Total operating expenses for the year ended December 31, 1998 increased by
$4.4 million, or 22.1%, to $24.5 million, compared to total operating expenses
of $20.1 million during the same period of 1997. The increase in operating
expenses was primarily due to $5.0 million of merger-related expenses,
restructuring charges and non-recurring charges incurred in 1998. Excluding
these charges and the 1997 loss on the sale of the dental business, total
operating expenses remained relatively level between the two periods. Research
and development expenses increased by 13.4%, or $430,000, in 1998 as a result
of increased spinal product

                                       24
<PAGE>

development efforts and increased regulatory expenses related to obtaining FDA
clearances for Pro Osteon 500R and AGF related products. Selling and marketing
expenses in 1998 increased $251,000, or 2.2%, compared to 1997 due primarily to
increased commissions on higher domestic sales in 1998, offset partially by the
elimination of selling and marketing expenses related to the dental business.
General and administrative expenses decreased by $648,000, or 13.8%, in 1998,
primarily as the result of cost reductions following the sale of the dental
business and the merger with Cross.

   The $60,000, or 10.6%, decrease in net interest and other income relates to
a reduction in interest income due to lower cash, cash equivalents and short-
term investments. The decrease was partially offset by increased royalty
income.

   In 1998, despite a pre-tax loss, taxable income was recognized as a result
of some disallowed merger cost deductions. This coupled with the reduction of
the valuation allowance resulted in a net tax provision of $59,000. In 1997 an
income tax benefit was recognized as a result of reducing the valuation
allowance against the deferred tax assets.

Liquidity and Capital Resources

   In 1999, our operations generated positive cash flow of approximately $2.9
million. We invest our excess cash in U.S. Treasury securities and high-grade
marketable securities. At December 31, 1999, cash, cash equivalents and short-
term investments totaled $9.8 million, up $1.9 million from $7.9 million at
December 31, 1998. We also have a $5.0 million revolving line of credit
available to us that had no amount outstanding at December 31, 1999 and which
expires in June 2000. We currently intend to seek an extension of that
facility.

   Other significant sources of cash in the past included $8.2 million in
proceeds from the sale of our recovery products segment in 1997 and $1.5
million in net proceeds in 1997 and 1998 from the sale of our dental business.

   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. We also intend to continue to invest in the development of
our business. In 1998, we merged with Cross and exchanged approximately 6.7
million shares of our common stock for all of the outstanding common stock of
Cross. In 1999, we purchased all of the intellectual property of Quantic
Biomedical, Inc., which included all of the AGF patents and technology, for
$500,000 in cash, 100,000 unregistered shares of our common stock and warrants
to purchase 200,000 shares of our common stock.

   We believe we currently possess sufficient resources to meet the cash
requirements of our operations for at least the next year. However, some of the
aforementioned activities may require cash in excess of that which we currently
possess, and we can give no assurance that we will be able to raise the
additional capital on satisfactory terms, if at all.

   At December 31, 1999, we had no material commitments for capital
expenditures.

Impact of Year 2000

   Year 2000 problems are the result of computer programs being written using
two digits rather than four to define the applicable year. If not corrected,
many computer applications could fail or create erroneous results by not
recognizing "00" to mean the year 2000.

   In 1999, we completed our testing of all critical software and hardware
systems and determined that all are Year 2000 compliant. Vendor certifications
were received from all critical vendors indicating that they were either
currently compliant or that they would be compliant by December 31, 1999. To
date, we have not needed to implement any major system or software replacements
due to the Year 2000 issue. We have not incurred and do not expect to incur any
material direct costs associated with Year 2000 issues.

                                       25
<PAGE>

   We have not experienced and do not expect to experience any significant Year
2000 problems or interruptions. We cannot assure you that mission critical
vendors and customers will not incur a Year 2000 problem or interruption, but
we believe we have adequate computer file backup procedures and manual
operating procedures that will enable us to continue the critical processes of
our business.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

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

Item 8. Financial Statements and Supplementary Data

   The Financial Statements and Supplementary Data of Interpore Cross are
listed and included under Item 14 of this report.

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

   None.

PART III

Item 10. Directors and Executive Officers of the Registrant

   There is hereby incorporated herein by reference the information appearing
under the caption "Proposal to Elect Interpore Cross' Directors" of Interpore
Cross' definitive Proxy Statement for its 2000 Annual Meeting to be filed with
the Securities and Exchange Commission on or before April 30, 2000.

Item 11. Executive Compensation

   There is hereby incorporated herein by reference the information appearing
under the caption "Proposal to Elect Interpore Cross' Directors--Executive
Compensation" of Interpore Cross' definitive Proxy Statement for its 2000
Annual Meeting to be filed with the Securities and Exchange Commission on or
before April 30, 2000.

Item 12. Security Ownership of Certain Beneficial Owners and Management

   There is hereby incorporated herein by reference the information appearing
under the caption "Ownership of Interpore Cross Stock" of Interpore Cross'
definitive Proxy Statement for its 2000 Annual Meeting to be filed with the
Securities and Exchange Commission on or before April 30, 2000.

Item 13. Certain Relationships and Related Transactions

   There is hereby incorporated herein by reference the information appearing
under the caption "Certain Relationships and Related Transactions of Interpore
Cross" of Interpore Cross' definitive Proxy Statement for its 2000 Annual
Meeting to be filed with the Securities and Exchange Commission on or before
April 30, 2000.

                                       26
<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

  (a) (1)The following financial statements are referenced in Part II Item 8
      and submitted herewith:

<TABLE>
<CAPTION>
                                                                         Page
                                                                        Number
                                                                        ------
       <S>                                                              <C>
       Report of Independent Auditors..................................  F-2

       Report of Independent Accountants...............................  F-3

       Consolidated Balance Sheets at December 31, 1998 and 1999.......  F-4

       Consolidated Statements of Operations for the Years Ended
        December 31, 1997, 1998 and 1999...............................  F-5

       Consolidated Statements of Shareholders' Equity for the Years
        Ended December 31, 1997, 1998 and 1999.........................  F-6

       Consolidated Statements of Cash Flows for the Years Ended
        December 31, 1997, 1998 and 1999...............................  F-7

       Notes to Consolidated Financial Statements......................  F-8
</TABLE>

    (2) The following financial statement schedule for the years ended
        December 31, 1997, 1998 and 1999 is submitted herewith:

      Schedule II--Valuation and Qualifying Accounts

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

    (3) The list of exhibits contained in the Index to Exhibits is
        submitted herewith.

  (b) Reports on Form 8-K

    None.

                                       27
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                                          INTERPORE INTERNATIONAL, INC.

                                                    /s/ David C. Mercer
                                          By: _________________________________
                                                      David C. Mercer
                                                Chairman and Chief Executive
                                                          Officer

Date: March 14, 2000

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

<TABLE>
<CAPTION>
                                                      Title                     Date
                                                      -----                     ----

 <C>                                    <S>                                <C>
          /s/ David C. Mercer           Chairman of the Board, Chief       March 14, 2000
 ______________________________________  Executive Officer and Director
            David C. Mercer              (Principal Executive Officer)

          /s/ Joseph A. Mussey          President, Chief Operating         March 14, 2000
 ______________________________________  Officer and Director
            Joseph A. Mussey

        /s/ Richard L. Harrison         Sr. Vice President--Finance,       March 14, 2000
 ______________________________________  Chief Financial Officer and
          Richard L. Harrison            Secretary (Principal Financial
                                         and Accounting Officer)

       /s/ William A. Eisenecher        Director                           March 14, 2000
 ______________________________________
         William A. Eisenecher

        /s/ Daniel A. Funk, M.D.        Director                           March 14, 2000
 ______________________________________
          Daniel A. Funk, M.D.

         /s/ G. Bradford Jones          Director                           March 14, 2000
 ______________________________________
           G. Bradford Jones

         /s/ Robert J. Williams         Director                           March 14, 2000
 ______________________________________
           Robert J. Williams
</TABLE>

                                       28
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Auditors...........................................  F-2

Report of Independent Accountants........................................  F-3

Consolidated Balance Sheets at December 31, 1998 and 1999................  F-4

Consolidated Statements of Operations for the Years Ended December 31,
 1997, 1998 and 1999.....................................................  F-5

Consolidated Statements of Shareholders' Equity for the Years Ended
 December 31, 1997, 1998 and 1999........................................  F-6

Consolidated Statements of Cash Flows for the Years Ended December 31,
 1997, 1998 and 1999.....................................................  F-7

Notes to Consolidated Financial Statements...............................  F-8

Schedule II--Valuation and Qualifying Accounts........................... F-23
</TABLE>

                                      F-1
<PAGE>

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors
Interpore International, Inc.

   We have audited the accompanying consolidated balance sheets of Interpore
International, Inc. as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and the schedule based on our audits. We did not audit the financial
statements and schedule of Cross Medical Products, Inc., which statements
reflect total assets of $18,762,000 as of December 31, 1997, and total revenues
of $12,918,000 for the year ended December 31, 1997. Those statements and
schedule were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the data included for Cross Medical
Products, Inc., is based solely on the report of the other auditors.

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

   In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Interpore International, Inc.
at December 31, 1998 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

                                        /s/ Ernst & Young LLP

Orange County, California
February 4, 2000 except
 for the first paragraph
 of note 6, as to which
 the date is March 1,
 2000

                                      F-2
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of
Cross Medical Products, Inc. and Subsidiary


We have audited the consolidated statements of income, shareholders' equity,
and cash flows of Cross Medical Products, Inc. and Subsidiary (formerly
Danninger Medical Technology, Inc. and Subsidiaries) (the Company) for the year
ended December 31, 1997. We have also audited the financial statement schedule
for the year ended December 31, 1997, listed in the index at Item 14(a) of this
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations, cash flows, and
changes in shareholders' equity of Cross Medical Products, Inc. and Subsidiary
for the year ended December 31, 1997 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule for the year ended December 31, 1997 referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

                                          /s/ PricewaterhouseCoopers L.L.P.

Coopers & Lybrand L.L.P.
Columbus, Ohio
February 4, 1998, except
 for Note 11 to the
 consolidated financial
 statements for which the
 date is February 11, 1998

                                      F-3
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

                          CONSOLIDATED BALANCE SHEETS

                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                               December 31,
                                                            -------------------
                                                              1998      1999
                                                            --------- ---------
<S>                                                         <C>       <C>
Assets
Current assets:
 Cash and cash equivalents................................  $  7,908  $  6,315
 Short-term investments...................................       --      3,459
 Accounts receivable, less allowance for doubtful accounts
  of $506 and $516 in 1998 and 1999, respectively.........     6,418     8,887
 Inventories..............................................    12,115    13,070
 Prepaid expenses.........................................     1,205       995
 Deferred income taxes....................................     1,426     1,750
 Other current assets.....................................       436       129
                                                            --------- ---------
Total current assets......................................    29,508    34,605
Property, plant and equipment, net........................     1,467     1,349
Deferred income taxes.....................................     2,504     2,333
Intangible assets, net....................................       338     2,274
Other assets..............................................       330       232
                                                            --------- ---------
Total assets..............................................  $ 34,147  $ 40,793
                                                            ========= =========
Liabilities and stockholders' equity
Current liabilities:
 Current portion of capital lease obligations.............  $     15  $     15
 Accounts payable.........................................       609     1,046
 Accrued compensation and related expenses................     1,010     1,615
 Accrued royalties........................................       300       339
 Reserve for products liability claims....................       232       183
 Accrued disposition costs................................       250       118
 Accrued merger-related expenses and restructuring
  charges.................................................       726       324
 Income taxes payable.....................................       --        326
 Other accrued liabilities................................       873       425
                                                            --------- ---------
Total current liabilities.................................     4,015     4,391
                                                            --------- ---------
Long-term obligations:
 Long-term debt...........................................     3,152     3,152
 Obligations under capital leases, net....................        29        13
                                                            --------- ---------
Total long-term obligations...............................     3,181     3,165
                                                            --------- ---------
Commitments and contingencies
Stockholders' equity:
 Series E convertible preferred stock, voting, par value
  $.01 per share: Authorized--594,000; issued and
  outstanding shares -- 32,906 at December 31, 1998 and
  25,573 at December 31, 1999; aggregate liquidation value
  of $247 at December 31, 1998 and $192 at December 31,
  1999....................................................       --        --
 Preferred stock, par value $.01 per share: Authorized
  shares -- 4,406,000; outstanding shares -- none.........       --        --
 Common stock, par value $.01 per share: Authorized
  shares -- 50,000,000; issued and outstanding shares --
  14,059,690 at December 31, 1998 and 14,272,279 at
  December 31, 1999.......................................       141       143
 Additional paid-in-capital...............................    43,961    45,451
 Accumulated deficit......................................   (14,042)   (9,244)
 Accumulated other comprehensive loss.....................       --         (4)
                                                            --------- ---------
                                                              30,060    36,346
 Less treasury stock, at cost -- 605,000 shares at
  December 31, 1998 and December 31, 1999.................    (3,109)   (3,109)
                                                            --------- ---------
Total stockholders' equity................................    26,951    33,237
                                                            --------- ---------
Total liabilities and stockholders' equity................  $ 34,147  $ 40,793
                                                            ========= =========
</TABLE>


   See accompanying notes.

                                      F-4
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                     Year ended December 31,
                                                    --------------------------
                                                      1997     1998     1999
                                                    -------- --------  -------
<S>                                                 <C>      <C>       <C>
Net sales.......................................... $28,429  $30,209   $38,856
Cost of goods sold.................................   9,110    8,552    11,645
                                                    -------- --------  -------
Gross profit.......................................  19,319   21,657    27,211
                                                    -------- --------  -------
Operating expenses:
  Research and development.........................   3,220    3,650     4,192
  Selling and marketing............................  11,575   11,826    13,978
  General and administrative.......................   4,683    4,035     4,351
  Merger-related expenses..........................     --     3,031      --
  Restructuring charges............................     --     1,512      --
  Non-recurring charges............................     --       474      --
  Loss on sale of dental business..................     617      --       --
                                                    -------- --------  -------
Total operating expenses...........................  20,095   24,528    22,521
                                                    -------- --------  -------

Income (loss) from operations......................    (776)  (2,871)    4,690
                                                    -------- --------  -------
Interest income....................................     835      744      457
Interest expense...................................    (580)    (600)    (342)
Other income.......................................     311      362      400
                                                    -------- --------  -------
Total interest and other income, net...............     566      506      515
                                                    -------- --------  -------
Income (loss) before taxes and discontinued
 operations........................................    (210)  (2,365)    5,205
Income tax provision (benefit).....................  (2,119)      59      407
                                                    -------- --------  -------

Income (loss) from continuing operations...........   1,909   (2,424)    4,798
                                                    -------- --------  -------
Income from discontinued operations (net of income
 taxes of $168)....................................     290      --       --
Gain on sale of discontinued operations (net of
 income taxes of $1,400)...........................   2,180      --       --
                                                    -------- --------  -------
Income from discontinued operations................   2,470      --       --
                                                    -------- --------  -------
Net income (loss).................................. $ 4,379  $(2,424)  $ 4,798
                                                    ======== ========  =======

Basic earnings per share:
  Income (loss) from continuing operations......... $  0.14  $ (0.17)  $ 0.36
  Income from discontinued operations..............    0.19      --       --
                                                    -------- --------  -------
  Net income (loss)................................ $  0.33  $ (0.17)  $ 0.36
                                                    ======== ========  =======

  Shares used in computing earnings per share......  13,460   13,904    13,506

Diluted earnings per share:
  Income (loss) from continuing operations......... $  0.14  $ (0.17)  $ 0.35
  Income from discontinued operations..............    0.17      --       --
                                                    -------- --------  -------
  Net income (loss)................................ $  0.31  $ (0.17)  $ 0.35
                                                    ======== ========  =======

  Shares used in computing earnings per share......  14,111   13,904    13,876
                                                    ======== ========  =======
</TABLE>

See accompanying notes.

                                      F-5
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                (in thousands)

<TABLE>
<CAPTION>
                           Series E
                          Convertible
                           Preferred                             Accumulated
                             Stock     Common Stock  Additional     Other                             Total
                         ------------- -------------  Paid-In   Comprehensive Accumulated Treasury Stockholders
                         Shares Amount Shares Amount  Capital       Loss        Deficit    Stock      Equity
                         ------ ------ ------ ------ ---------- ------------- ----------- -------- ------------
<S>                      <C>    <C>    <C>    <C>    <C>        <C>           <C>         <C>      <C>
Balance at December 31,
 1996...................    77  $   1  13,239  $132   $40,195       $ --       $(15,997)  $  (152)   $24,179
  Net income and
   comprehensive
   income...............   --     --      --    --        --          --          4,379       --       4,379
  Retirement of treasury
   stock................   --     --      --    --       (152)        --            --        152        --
  Exercise of stock op-
   tions................   --     --      155     1       401         --            --        --         402
  Conversion of pre-
   ferred stock into
   common stock.........   (44)    (1)     44     1       --          --            --        --         --
  Issuances under em-
   ployee stock
   purchase plan........   --     --       21   --         90         --            --        --          90
  Options granted in
   exchange for
   services.............   --     --      --    --        172         --            --        --         172
  Sale of common stock..   --     --      280     3     2,239         --            --        --       2,242
  Debentures converted
   into common stock....   --     --       27     1       169         --            --        --         170
                         ------ ------ ------  ----   --------      -----      ---------  --------   --------
Balance at December 31,
 1997...................    33    --   13,766   138    43,114         --        (11,618)      --      31,634
  Net loss and compre-
   hensive loss.........   --     --      --    --        --          --         (2,424)      --      (2,424)
  Exercise of stock op-
   tions................   --     --      252     3       647         --            --        --         650
  Issuances under em-
   ployee stock
   purchase plan........   --     --       27   --        127         --            --        --         127
  Debentures converted
   into common stock....   --     --       15   --         73         --            --        --          73
  Repurchase of common
   stock................   --     --      --    --        --          --            --     (3,109)    (3,109)
                         ------ ------ ------  ----   --------      -----      ---------  --------   --------
Balance at December 31,
 1998...................    33    --   14,060   141    43,961         --        (14,042)   (3,109)    26,951
  Unrealized loss on
   short-term invest-
   ments (including tax
   benefit of $2).......   --     --      --    --        --          (4)           --        --          (4)
  Net income............   --     --      --    --        --          --          4,798       --       4,798
                         ------ ------ ------  ----   --------      -----      ---------  --------   --------
  Comprehensive income
   (loss) ..............   --     --      --    --        --          (4)         4,798       --       4,794
  Exercise of stock op-
   tions................   --     --       81     1       178         --            --        --         179
  Conversion of pre-
   ferred stock into
   common stock.........    (7)   --        7   --        --          --            --        --         --
  Issuances under em-
   ployee stock
   purchase plan........   --     --       24   --        103         --            --        --         103
  Shares issued in
   purchase of AGF
   technology...........   --     --      100     1     1,209         --            --        --       1,210
                         ------ ------ ------  ----   --------      -----      ---------  --------   --------
Balance at December 31,
 1999...................    26  $ --   14,272  $143   $45,451       $ (4)      $ (9,244)  $(3,109)   $33,237
                         ====== ====== ======  ====   ========      =====      =========  ========   ========
</TABLE>
See accompanying notes.

                                      F-6
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)

<TABLE>
<CAPTION>
                                                      Year ended December 31,
                                                     --------------------------
                                                       1997     1998     1999
                                                     -------- -------- --------
<S>                                                  <C>      <C>      <C>
Cash Flows From Operating Activities:
  Income (loss) from continuing operations.......... $ 1,909  $(2,424) $ 4,798
  Adjustments to reconcile income (loss) from
   continuing operations
   to net cash provided by (used in) operating
   activities:
    Depreciation and amortization...................     714      724      852
    Loss on sale of dental business.................     617      --       --
    Loss on disposal of property, plant and
     equipment......................................     --       229      --
    Changes in operating assets and liabilities:
     Accounts receivable............................     431      172   (2,469)
     Inventories....................................  (3,888)  (1,741)    (955)
     Prepaid expenses...............................     (70)    (767)      43
     Other assets...................................     (89)       6      405
     Deferred income taxes..........................  (1,873)     108     (151)
     Accounts payable and accrued liabilities.......    (568)    (630)     376
                                                     -------- -------- --------
  Net cash used in continuing operations............  (2,817)  (4,323)   2,899
  Net cash provided by discontinued operations......      92      --       --
                                                     -------- -------- --------
    Net cash provided by (used in) operating
     activities.....................................  (2,725)  (4,323)   2,899
                                                     -------- -------- --------
Cash Flows From Investing Activities:
  Purchases of short-term investments...............  (3,775)  (3,937)  (3,465)
  Sales of short-term investments...................   3,146    8,718      --
  Capital expenditures..............................    (673)    (796)    (621)
  Expenditures for patent rights....................     (60)     (30)    (146)
  Purchase of AGF technology........................     --       --      (526)
  Proceeds from sale of dental business, net........     741      749      --
                                                     -------- -------- --------
   Net cash provided by (used in) continuing
    operations......................................    (621)   4,704   (4,758)
   Net cash used in discontinued operations.........     (91)     --       --
   Cash received from sale of recovery products
    segment.........................................   8,177      --       --
                                                     -------- -------- --------
    Net cash provided by (used in) investing
     activities.....................................   7,465    4,704   (4,758)
                                                     -------- -------- --------
Cash Flows From Financing Activities:
  Repurchase of common stock........................     --    (3,109)     --
  Repayment of long-term debt and capitalized lease
   obligations......................................  (1,796)  (1,950)     (16)
  Proceeds from exercise of stock options...........     402      650      179
  Proceeds from employee stock purchase plan........      90      127      103
  Proceeds from sale of common stock................   2,242      --       --
                                                     -------- -------- --------
   Net cash provided by (used in) continuing
    operations......................................     938   (4,282)     266
   Net cash used in discontinued operations.........    (197)     --       --
                                                     -------- -------- --------
    Net cash provided by (used in) financing
     activities.....................................     741   (4,282)     266
                                                     -------- -------- --------
Net increase (decrease) in cash and cash
 equivalents........................................   5,481   (3,901)  (1,593)
Cash and cash equivalents at beginning of year......   6,328   11,809    7,908
                                                     -------- -------- --------
Cash and cash equivalents at end of year............ $11,809  $ 7,908  $ 6,315
                                                     ======== ======== ========
</TABLE>


See accompanying notes.

                                      F-7
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                               DECEMBER 31, 1999

1. Summary of Significant Accounting Policies

Organization and Description of Business

   Interpore International, Inc. ("Interpore"), doing business as Interpore
Cross International ("Interpore Cross") operates in one business segment: the
design, manufacture and marketing of medical devices for the orthopedic
marketplace. The products are distributed in the United States and
internationally.

Basis of Presentation

   The accompanying consolidated financial statements include the accounts of
Interpore Cross and its subsidiaries after elimination of all significant
intercompany transactions. In February 1998, Interpore entered into an
agreement to merge with Cross Medical Products, Inc. ("Cross"), a publicly
traded Ohio-based worldwide supplier of spinal implant systems used to treat
degenerative conditions and deformities of the spine. This merger has been
accounted for as a pooling-of-interests. Accordingly, financial information for
1997 has been restated to include the financial information of each company.
Certain amounts have been reclassified to conform to the 1999 presentation.

Discontinued Operations

   In March 1997, substantially all of the assets and liabilities related to
Cross' recovery products segment were sold. The accompanying consolidated
financial statements reflect the reclassification of the recovery products
segment as discontinued operations. Income from discontinued operations has
been adjusted for the effect of the allocation of certain general corporate
overhead costs associated with continuing operations. Interest expense has been
allocated to continuing operations based upon specific identification of
indebtedness that was retained. Unless otherwise stated, the notes to the
financial statements disclose information related to continuing operations.

Revenue Recognition

   Revenue from sales of product where the customer immediately accepts title
is recorded at the time of shipment. Revenue from sales of consigned inventory
is recorded upon receipt of written acknowledgement from sales agents or
customers that the product has been used in a surgical procedure. Provision is
made currently for estimated product returns based on historical experience and
other known factors.

                                      F-8
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Per Share Information

   Basic earnings per share (EPS) is calculated by dividing net earnings 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, convertible securities and warrants. The following
table presents the computation of net income per share (in thousands, except
per share data):

<TABLE>
<CAPTION>
                                                     Year ended December 31,
                                                     --------------------------
                                                      1997     1998      1999
                                                     ------- --------   -------
<S>                                                  <C>     <C>        <C>
Income (loss) from continuing operations............ $ 1,909 $(2,424)   $ 4,798
Income from discontinued operations.................   2,470     --         --
                                                     ------- --------   -------
Net income (loss)................................... $ 4,379 $(2,424)   $ 4,798
                                                     ======= ========   =======
Shares used in computing net income (loss) per
   share--basic Weighted average common shares
   outstanding......................................  13,460  13,904     13,506
Effect of dilutive securities:
  Weighted average convertible preferred stock......      67    --(/1/)      31
  Common share equivalents outstanding..............     584    --(/1/)     339
                                                     ------- --------   -------
Shares used in computing net income (loss) per
 share--diluted.....................................  14,111  13,904     13,876
                                                     ======= ========   =======
Basic earnings per share:
  Income (loss) from continuing operations.......... $  0.14 $ (0.17)   $  0.36
  Income from discontinued operations...............    0.19     --         --
                                                     ------- --------   -------
  Net income (loss)................................. $  0.33 $ (0.17)   $  0.36
                                                     ======= ========   =======
Diluted earnings per share:
  Income (loss) from continuing operations.......... $  0.14 $ (0.17)   $  0.35
  Income from discontinued operations...............    0.17     --         --
                                                     ------- --------   -------
  Net income (loss)................................. $  0.31 $ (0.17)   $  0.35
                                                     ======= ========   =======
</TABLE>
--------
(/1/)Effect would have been anti-dilutive, accordingly, the amounts are
 excluded from shares used in computing diluted earnings per share. Weighted
 average convertible preferred stock would have been 33 shares and common share
 equivalents outstanding would have been 346 shares.

   Shares issuable from the convertible subordinated debentures were excluded
from the calculation of diluted earnings per share in all years because their
effect would have been anti-dilutive.

Concentrations of Business and Credit Risk

   Interpore Cross operates in worldwide markets which are subject to rapid
technological advancement and significant government regulation. The
introduction of technologically advanced products by competitors and increased
regulatory or trade barriers could have a material impact on the future
operations of Interpore Cross.

   In the normal course of business, Interpore Cross provides credit to its
customers. At December 31, 1999, 59% of Interpore Cross' accounts receivable
are from domestic customers, and 41% are from foreign customers. Interpore
Cross performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses which, when realized, have been within
the range of management's expectations. As of December 31, 1999, Interpore
Cross had no significant concentrations of credit risk. Sales to domestic
customers were 76%, 77% and 78% of total sales in 1997, 1998 and 1999,
respectively, and sales to foreign customers were 24%, 23% and 22% of total
sales in 1997, 1998 and 1999, respectively. All sales to foreign customers for
the periods presented were denominated in United States dollars.

                                      F-9
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In the U.S., there are no significant customer concentrations, as Interpore
Cross invoices hospitals directly for product used or shipped. However, in the
international markets, Interpore Cross has two significant distributors that on
a combined basis accounted for approximately 31% of its 1999 international
sales and 7% of our 1999 worldwide sales.

   Some of the products and materials supplied by Interpore Cross' vendors are
currently sole-sourced, but the Company believes that it could locate
alternative vendors for supply of these components. However, the
UltraConcentrator, one of the products used to collect AGF, is manufactured
under an exclusive supply agreement with a vendor that itself has a sole source
of supply of the contained filter material. Although the filter material is not
readily available through alternative sources, Interpore Cross believes that
there are suppliers that could supply alternate materials with probable
equivalent function. In the event that are-engineering of the product were
necessary due to an interruption in supply from our current vendor, delays in
product availability could occur and significant costs could be incurred, both
of which would have a material adverse effect on Interpore Cross' operations.

Stock Option Plans

   Interpore Cross accounts for stock compensation to employees using the
intrinsic value method provided for by Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees and related interpretations, and
provides supplementary disclosures in the notes to the consolidated financial
statements of the differences between using this method and the fair value
method as required by Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation.

Advertising

   Interpore Cross expenses as incurred the costs of advertising which totaled
$162,000, $201,000 and $219,000 for the years ended December 31, 1997, 1998 and
1999, respectively.

Research and Development

   Expenditures for research and development are expensed as incurred.

Cash, Cash Equivalents and Short-term Investments

   Interpore Cross invests excess cash in United States Treasury securities and
high grade corporate marketable securities. Highly liquid investments with a
maturity of three months or less at the date of purchase are classified as cash
equivalents. Short-term investments consist of highly liquid investments with a
maturity of more than three months when purchased. Pursuant to Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, Interpore Cross' short-term investments are
classified as available-for-sale securities and are reported at fair market
value.

Inventories

   Inventories are stated at the lower of first-in, first-out average cost or
market. Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 ---------------
                                                                  1998    1999
                                                                 ------- -------
       <S>                                                       <C>     <C>
       Raw material............................................. $ 1,024 $ 1,159
       Work-in-process..........................................     279     442
       Finished goods...........................................  10,812  11,469
                                                                 ------- -------
                                                                 $12,115 $13,070
                                                                 ======= =======
</TABLE>

                                      F-10
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Property, Plant and Equipment

   Property, plant and equipment are stated at cost and are comprised of the
following (in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                               -----------------
                                                                 1998     1999
                                                               -------- --------
       <S>                                                     <C>      <C>
       Machinery and equipment................................ $ 3,056  $ 3,418
       Furniture and fixtures.................................     441      644
       Leasehold improvements.................................     571      627
                                                               -------- --------
       Property, plant and equipment, at cost.................   4,068    4,689
       Less accumulated depreciation and amortization.........  (2,601)  (3,340)
                                                               -------- --------
       Property, plant and equipment, net..................... $ 1,467  $ 1,349
                                                               ======== ========
</TABLE>

   Depreciation is provided using the straight-line method over the following
estimated useful lives:

<TABLE>
       <S>                                              <C>
       Machinery and equipment......................... 3 to 5 years
       Furniture and fixtures.......................... 5 years
       Leasehold improvements.......................... Lesser of estimated
                                                        useful life or term of
                                                        lease
</TABLE>

Intangible Assets

   Intangible assets include patents and license rights. The patents and
license rights are amortized on a straight-line basis over their useful lives.
Amortization begins at the time the patents are issued. Management periodically
evaluates the recoverability of intangible assets based on undiscounted future
cash flows. Amortization expense for the years ended December 31, 1997, 1998
and 1999 was $6,000, $75,000 and $113,000, respectively. Accumulated
amortization of intangible assets was $84,000 and $197,000 at December 31, 1998
and 1999, respectively.

Consolidated Statements of Cash Flows

   Interpore Cross paid income taxes of $129,000, $1,053,000 and $163,000 and
interest of $604,000, $416,000 and $294,000 in 1997, 1998 and 1999,
respectively.

Long-Lived Assets

   In accordance with Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets, Interpore Cross reviews
long-lived assets and certain intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Interpore Cross believes no impairment of the carrying value of
its long-lived assets existed at December 31, 1999.

Use of Estimates

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.

Comprehensive Income

   Effective January 1, 1998, Interpore Cross adopted Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS
130 establishes new rules for the reporting and display of comprehensive income
and its components. The adoption of SFAS 130 had no impact on Interpore Cross'

                                      F-11
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

net income or shareholders' equity. SFAS 130 requires unrealized gains or
losses on available-for-sale-securities to be included in other comprehensive
income. All periods presented have been reclassified to conform to the
requirements of SFAS 130.

2. Business Combination

   The merger of Interpore and Cross was approved by the stockholders of both
companies on May 6, 1998 and became effective on May 7, 1998. Shareholders of
Cross received 1.275 shares of Interpore common stock for each share of issued
and outstanding Cross common stock. Accordingly, Interpore issued 6.7 million
shares of its common stock to Cross shareholders in exchange for all of the
outstanding common stock of Cross. In addition, approximately 895,000 shares of
Interpore Cross common stock were reserved for issuance upon the exercise of
assumed Cross stock options. The merger has been accounted for as a pooling-of-
interests.

   During the second quarter of 1998, Interpore Cross recorded merger-related
expenses and restructuring charges of $3.0 million and $1.5 million,
respectively. The merger-related expenses included legal, accounting and
administrative costs incurred in connection with the merger of Interpore and
Cross. The restructuring charges were associated with the closing of the
Dublin, Ohio facility and included severance benefits for 23 employees not
remaining with Interpore Cross, the write-off of fixed assets which were not
transferred to Interpore Cross' Irvine, California headquarters, and the
accrual of remaining lease payments for the Dublin facility. During the third
and fourth quarters of 1998, Interpore Cross recorded $474,000 of non-recurring
charges related to the relocation of assets and employees from the Dublin, Ohio
facility to the Irvine, California headquarters.

   Restructuring costs and related liabilities for the two years in the period
ended December 31, 1999 are summarized below (in thousands):

<TABLE>
<CAPTION>
                                 Severance Remaining lease Write-off of
                                 benefits     payments     fixed assets Total
                                 --------- --------------- ------------ ------
   <S>                           <C>       <C>             <C>          <C>
   Restructuring costs..........  $  782       $  501         $  229    $1,512
   1998 write-offs, payments....     498           76            229       803
                                  ------       ------         ------    ------
   Accrued restructuring costs
    at December 31, 1998........     284          425             --       709
   1999 payments................     196          189             --       385
                                  ------       ------         ------    ------
   Accrued restructuring costs
    at December 31, 1999........  $   88       $  236         $   --    $  324
                                  ======       ======         ======    ======
</TABLE>

   Interpore Cross expects that the accrued restructuring costs of $324,000 at
December 31, 1999 is adequate to cover remaining exposures and will be paid
over the next 16 months.

                                      F-12
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Selected financial information for the combining entities included in the
consolidated statements of operations for the year ended December 31, 1997 and
four months ended April 30, 1998 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                           For the period ended
                                                          ----------------------
                                                          December 31, April 30,
                                                              1997       1998
                                                          ------------ ---------
<S>                                                       <C>          <C>
Net sales
 Interpore...............................................   $15,511     $ 4,664
 Cross...................................................    12,918       4,647
                                                            --------    -------
Combined.................................................   $28,429     $ 9,311
                                                            ========    =======

Income (loss) from continuing operations
 Interpore...............................................   $ 2,771     $   770
 Cross...................................................      (862)         74
                                                            --------    -------
Combined.................................................   $ 1,909      $  844
                                                            ========    =======

Income from discontinued operations
 Interpore...............................................   $   --      $   --
 Cross (net of income taxes of $1,568)...................     2,470         --
                                                            --------    -------
Combined.................................................   $ 2,470     $   --
                                                            ========    =======

Net income
 Interpore...............................................   $ 2,771     $   770
 Cross...................................................     1,608          74
                                                            --------    -------
Combined.................................................   $ 4,379     $   844
                                                            ========    =======
</TABLE>

3. Acquisition of AGF Technology

   In December, 1999, Interpore Cross purchased all the intellectual property
of Quantic Biomedical, Inc. which included the patents and technology for
making AGF(TM) ("Autologous Growth Factors(TM)"). The purchase price of $1.9
million included a cash payment of $500,000, 100,000 unregistered shares of
Interpore Cross common stock with a fair market value of $551,000 and 200,000
stock purchase warrants which vest over a two-year period at exercise prices
ranging from $7.13 to $8.63 with a fair market value of $659,000. Additionally,
previously paid unamortized license fees of $167,000 were reallocated to the
purchase price. The total purchase price has been recorded as an intangible
asset and is being amortized over a ten-year period.

4. Fair Value of Financial Instruments

   The estimated fair value of financial instruments (in thousands):

<TABLE>
<CAPTION>
                                                 December 31,    December 31,
                                                     1998            1999
                                                --------------- ---------------
                                                Carrying  Fair  Carrying  Fair
                                                 Amount  Value   Amount  Value
                                                -------- ------ -------- ------
<S>                                             <C>      <C>    <C>      <C>
Assets:
   Cash and cash equivalents...................  $7,908  $7,908  $6,315  $6,315
   Short-term investments......................     --      --    3,459   3,459
Liabilities:
   Long-term debt..............................  $3,152  $3,152  $3,152  $3,897
</TABLE>

                                      F-13
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Due to the short-term nature of cash, cash equivalents and short-term
investments, the carrying amount approximates the fair value. The fair value of
the long-term debt, consisting of Convertible Subordinated Debentures, is based
upon the greater of the fair market value of Interpore Cross common stock into
which the Debentures are convertible, or the carrying amount.

5. Long-Term Obligations

   Long-term debt consisted of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                 -------------
                                                                  1998   1999
                                                                 ------ ------
<S>                                                              <C>    <C>
Convertible Subordinated Debentures, due in June 2003 plus
 interest at 8.5%, payable semi-annually........................ $3,152 $3,152
Obligations under capital leases................................     44     28
                                                                 ------ ------
                                                                  3,196  3,180
Less current maturities.........................................     15     15
                                                                 ------ ------
                                                                 $3,181 $3,165
                                                                 ====== ======
</TABLE>

   The 8.5% Convertible Subordinated Debentures (the "Debentures") due June 1,
2003 are convertible at any time before maturity, unless previously redeemed,
into shares of Interpore Cross common stock at a conversion price of $6.37 per
share. Pursuant to the terms of the underlying indenture, upon the merger of
Interpore and Cross, Debenture holders were allowed to request redemption until
June 26, 1998 at 101% of the principal amount thereof, plus accrued interest.
Requests for redemption totaling $1.8 million were made. Beginning July 1, 1999
and on July 1 of each succeeding year, Interpore Cross will be obligated to
redeem any Debentures tendered by June 1, 1999 or June 1 of any succeeding
year, respectively, at 100% of the principal amount thereof plus accrued
interest, subject to an annual limitation of $25,000 per holder and an annual
aggregate limitation of $262,500. During 1998, $97,000 of Debentures were
converted into 15,221 shares of Interpore Cross common stock. There were no
conversions recorded in 1999. The indenture permits Interpore Cross to call for
the redemption of all or part of the Debentures at any time at prices ranging
from 100% to 105% of the principal amount thereof, depending on the date of
redemption, plus accrued interest through the date of redemption. The fair
value of the Debentures approximated the book value at December 31, 1998 and
was approximately $3.9 million at December 31, 1999.

   Other assets include $573,000 of offering costs related to issuance of the
Debentures. Amortization of offering costs of $83,000, $206,000 and $48,000 for
the years ended December 31, 1997, 1998 and 1999, respectively, are included in
interest expense. Accumulated amortization was $359,000 and $407,000 as of
December 31, 1998 and 1999, respectively.

   Interpore Cross has available a $5 million line of credit facility with its
primary bank. The line is secured by substantially all of the assets of
Interpore Cross, bears interest at the bank's prime rate (8.25% at December 31,
1999), and matures June 2000. The facility contains certain financial covenants
with which Interpore Cross was in compliance at December 31, 1999. No amount
was outstanding under the facility at December 31, 1999.

                                      F-14
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Long-term debt matures as follows (in thousands):

<TABLE>
       <S>                                                                <C>
       2000.............................................................  $   15
       2001.............................................................      13
       2002.............................................................     --
       2003.............................................................   3,152
       Thereafter.......................................................     --
                                                                          ------
                                                                          $3,180
                                                                          ======
</TABLE>

6. Stockholders' Equity

Series E Convertible Preferred Stock

   The terms of the Series E Convertible Preferred Stock provide for
noncumulative dividends to be paid at the times and in the amounts paid per
share on the common stock and a liquidation preference at an amount no greater
than $7.50 per share. The Series E Convertible Preferred Stock has no
redemption rights (although Interpore Cross may redeem the stock in certain
circumstances) and is convertible into common stock at conversion ratios
averaging 1.005 shares of common stock for each share of preferred stock,
subject to certain antidilution provisions. On March 1, 2000, Interpore Cross
common stock closed above $10.00 for the twentieth day out of 30 consecutive
trading days and accordingly, as provided in the Series E Preferred Stock
Agreement, all of the outstanding Series E Preferred Stock converted into
common stock.

Common Stock

   In connection with the merger discussed in Note 2, Interpore Cross was
reincorporated from California to Delaware on May 6, 1998, and the total number
of common shares authorized was increased from 20 million no par value shares
to 50 million shares with $.01 par value per share.

Stock Options

   Interpore Cross has seven stock option plans that provide for the granting
of incentive stock options or non-qualified stock options to officers, key
employees, directors and consultants. The 1995 Stock Option Plan (the "1995
Plan"), the Stock Option Plan for Non-Employee Directors (the "Directors Plan")
and the 1999 Consultants Stock Option Plan (the "Consultants Plan") are the
only plans with stock option awards available for grant. The other four plans
have either expired or have been terminated with respect to future option
grants, but have shares exercisable at December 31, 1999. Options outstanding
under Interpore Cross' seven stock option plans generally vest over a four- or
five-year period, and expire either six years or ten years from the date of
grant.

   The number of shares reserved for issuance under the 1995 Plan increases
annually by an amount equal to 3% of the number of shares of common stock
issued and outstanding as of the close of business on December 31 of the
immediately preceding year, up to the plan maximum of 1.5 million shares. At
December 31, 1999 there were 433,625 shares available for grant under the 1995
Plan, all of which may be granted in 2000.

   The Directors Plan provides for a maximum of 200,000 shares to be issued
pursuant to options granted under the plan. At December 31, 1999, there were
approximately 118,500 shares available for grant under the Directors Plan.

   The Consultants Plan provides for a maximum of 300,000 shares to be issued
pursuant to options granted under the plan. All 300,000 shares are available
for grant at December 31, 1999.

                                      F-15
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following is a summary of stock option activity and weighted average
exercise price per share for periods indicated:

<TABLE>
<CAPTION>
                                                                   Weighted
                                                                   Average
                                                       Shares   Exercise Price
                                                     ---------- --------------
<S>                                                  <C>        <C>
Outstanding at December 31, 1996.................... 2,051,556      $4.72
  Granted...........................................   552,277       6.48
  Exercised.........................................  (154,673)      2.78
  Forfeited and Expired.............................   (53,482)      5.35
                                                     ----------
Outstanding at December 31, 1997.................... 2,395,678       5.24
  Granted...........................................   305,818       5.41
  Exercised.........................................  (260,961)      2.66
  Forfeited and Expired.............................  (219,788)      5.77
                                                     ----------
Outstanding at December 31, 1998.................... 2,220,747       5.52
  Granted...........................................   428,000       4.76
  Exercised.........................................   (80,937)      2.21
  Forfeited and Expired.............................  (164,880)      6.72
                                                     ----------
Outstanding at December 31, 1999.................... 2,402,930       5.41
                                                     ==========

Options exercisable at:
  December 31, 1997................................. 1,294,588      $4.58
  December 31, 1998................................. 1,704,684       5.49
  December 31, 1999................................. 1,706,805       5.54

Estimated fair value per share of options granted
 during year
  1997..............................................                $3.48
  1998..............................................                 3.80
  1999..............................................                 3.13
</TABLE>

   The weighted average remaining contractual life of stock options outstanding
at December 31, 1997, 1998 and 1999 were approximately 4.9, 5.2 and 5.4 years,
respectively.

   Summary information about stock options outstanding at December 31, 1999
follows:

<TABLE>
<CAPTION>
                                                   Exercisable at December
                Outstanding at December 31, 1999           31, 1999
              ------------------------------------ ------------------------
                         Weighted
                          Average
                         Remaining
  Range of              Contractual    Weighted                 Weighted
  Exercise                 Life        Average                  Average
   Price       Number   (in Years)  Exercise Price  Number   Exercise Price
------------  --------- ----------- -------------- --------- --------------
<S>           <C>       <C>         <C>            <C>       <C>
$1.00--$3.00    310,760     2.3         $1.71        310,760     $1.71
$3.01--$5.00    705,800     7.9          4.57        196,925      4.47
$5.01--$7.00    847,970     4.7          5.84        708,845      5.91
$7.01--$9.00    538,400     5.1          7.96        490,275      7.87
              ---------                            ---------

$1.00--$9.00  2,402,930     5.4         $5.41      1,706,805     $5.54
              =========                            =========
</TABLE>

                                      F-16
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Employee Stock Purchase Plan

   Interpore Cross has a qualified employee stock purchase plan which allows
employees to purchase shares of Interpore Cross common stock every six months
through payroll deductions. The purchase price for the shares is 85% of the
lesser of the fair market value of such shares on the first or last day of each
six-month period. The plan provides for a maximum of 300,000 shares to be
issued pursuant to the plan. As of December 31, 1999, 91,376 shares of common
stock had been issued pursuant to the plan.

Stockholder Rights Plan

   Under Interpore Cross' Stockholder Rights Plan, every share of Interpore
Cross common stock currently issued or to be issued is accompanied by one
right, and every common share issued upon conversion of Interpore Cross
preferred stock also will be accompanied by one right. The plan provides for
the rights to become exercisable upon the earlier to occur of (i) ten days
following the announcement that a person or group of persons has acquired or
obtained the right to acquire 15% or more of Interpore Cross common stock, or
(ii) ten days following the announcement or commencement of a tender offer
which would result in ownership of 15% or more of the common stock.

   If any person or group of persons acquires 15% or more of Interpore Cross
common stock, each right, once exercisable and excluding any rights acquired by
the 15% holder, will entitle its holder to purchase that number of additional
shares of Interpore Cross common stock having a market value of twice the
rights' exercise price. If Interpore Cross is involved in a merger or other
business combination involving the exchange of Interpore Cross common stock for
stock of an acquiring company at any time after the rights become exercisable,
each right will entitle its holder to purchase that number of the acquiring
company's common stock having a market value of twice the rights' exercise
price.

   The rights' current exercise price is $33.00. The exercise price and the
number of shares issuable upon exercise are subject to adjustment from time to
time to prevent dilution. The rights will expire on November 17, 2007, subject
to Interpore Cross' right to extend such date, unless earlier redeemed or
exchanged by Interpore Cross or terminated. Interpore Cross is entitled to
redeem the rights at one cent per right at any time before they become
exercisable.

Treasury Stock

   In November 1998, Interpore Cross' Board of Directors approved a plan to
repurchase up to 4.0 million shares of Interpore Cross common stock. Through
December 31, 1998, Interpore Cross repurchased and placed into treasury 605,000
shares at a cost of approximately $3.1 million under this program. The
repurchase approval terminated following the 605,000 share repurchase.

Accounting for Stock-Based Compensation

   Interpore Cross applies Accounting Principles Board Opinion No. 25 (APB 25),
Accounting for Stock Issued to Employees, 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. Under APB 25, because the exercise
price of Interpore Cross' employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.

   Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if Interpore Cross had
accounted for employee stock options granted on or after January 1, 1995

                                      F-17
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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
6% for Interpore or 7% for Cross in 1997 and 6% in 1998 and 1999, a volatility
factor of the expected market price of Interpore Cross common stock of .51 for
Interpore or .57 for Cross in 1997, .75 in 1998 and .67 in 1999, a weighted-
average expected life of the options of five years in 1997 and six years in
1998 and 1999, and no dividend yield.

   For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. Interpore
Cross' pro forma information, which reflects the charges related to options
issued in 1997, 1998 and 1999 and may not be indicative of such charges in
future periods, is as follows:

<TABLE>
<CAPTION>
                                                          Year Ended December
                                                                  31,
                                                         ----------------------
                                                          1997    1998    1999
                                                         ------ -------- ------
<S>                                                      <C>    <C>      <C>
Pro forma net income (loss) (in thousands).............. $3,559 $(3,138) $3,958
Pro forma basic net income (loss) per share............. $ 0.26 $ (0.23) $ 0.29
Pro forma diluted net income (loss) per share........... $ 0.25 $ (0.23) $ 0.29
</TABLE>

7. Income Taxes

   Interpore Cross uses the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Under this method, deferred taxes are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse. Deferred tax assets are recognized and
measured based on the likelihood of realization of the related tax benefit in
the future.

   A reconciliation of the income tax provision (benefit) using the federal
statutory rate to the book provision for income taxes follows (in thousands):

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                       ------------------------
                                                         1997    1998    1999
                                                       -------- ------ --------
<S>                                                    <C>      <C>    <C>
Statutory federal provision (benefit) for income tax-
 es..................................................  $   (72) $(804) $ 1,770
Increase (decrease) in taxes resulting from:
 State tax, net of federal benefit...................      100     26      131
 Research and development tax credits................      (58)   --        35
 Reduction in valuation allowance....................   (2,029)  (211)  (1,609)
 Permanent differences and other.....................      (60) 1,048       80
                                                       -------- ------ --------
Income tax provision (benefit).......................  $(2,119) $  59  $   407
                                                       ======== ====== ========
</TABLE>

                                      F-18
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Significant components of the income tax provision (benefit) are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                           Year Ended December
                                                                   31,
                                                          ---------------------
                                                            1997   1998   1999
                                                          -------- ----- ------
<S>                                                       <C>      <C>   <C>
Current expense:
 Federal................................................. $(1,657) $(54) $ 277
 State...................................................    (293)    5    281
                                                          -------- ----- ------
Total current............................................  (1,950)  (49)   558
                                                          -------- ----- ------
Deferred benefit:
 Federal.................................................    (102)   85    (68)
 State...................................................     (67)   23    (83)
                                                          -------- ----- ------
Total deferred...........................................    (169)  108   (151)
                                                          -------- ----- ------
Total income tax provision (benefit)..................... $(2,119) $ 59  $ 407
                                                          ======== ===== ======
</TABLE>

   At December 31, 1999, Interpore Cross has unused net operating loss
carryforwards of approximately $6.2 million for federal income tax purposes
which expire beginning in 2005. Interpore Cross also has research and
development tax credit and alternative minimum tax credit carryforwards of
approximately $325,000 for federal tax purposes and $120,000 for California tax
purposes. The research and development tax credit carryforward began to expire
in 1999. Prior to 1995, a valuation allowance was recorded to entirely offset
the tax benefits of the federal carryforwards. In 1997, 1998 and 1999, the
valuation allowance was reduced, and ultimately eliminated, to recognize the
future tax benefits which management believes are more likely than not to be
realized.

   The Tax Reform Act of 1986 includes provisions which significantly limit the
potential use of net operating losses and tax credit carryforwards in
situations where there is a change in ownership, as defined, of more than 50%
during a cumulative three-year period. Accordingly, if a change in ownership
occurs, the ultimate benefit realized from these carryforwards may be
significantly reduced in total, and the amount that may be utilized in any
given year may be significantly limited. California has enacted similar
legislation. Interpore Cross has had stock issuances during the past three
years and as a result of the merger with Cross, a greater than 50% change in
ownership occurred during the year ended December 31, 1998. Accordingly, the
use of these carryforwards will be limited to approximately $2.3 million per
year.

   In addition to the net operating losses discussed above, Interpore Cross has
net operating loss carryforwards and research and development tax credit
carryforwards at December 31, 1999 of approximately $4.2 million and $20,000,
respectively, for federal income tax purposes resulting from the acquisition of
Interpore Orthopaedics, Inc. ("Orthopaedics"). As a result of the acquisition,
Orthopaedics experienced a more than 50% ownership change. Accordingly, under
the provisions of the 1986 Tax Reform Act, the use of Orthopaedics' net
operating loss carryforwards is limited to approximately $300,000 per year.
These carryforwards expire beginning in the year 2001. As a result of the
annual limitation, it is estimated that a maximum of $1.6 million in net
operating loss carryforwards will be available for use prior to expiration. The
ultimate realization of the benefits of these loss carryforwards is dependent
on future profitable operations of Orthopaedics.

                                      F-19
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
net deferred tax asset consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                               ----------------
                                                                 1998    1999
                                                               -------- -------
<S>                                                            <C>      <C>
Deferred tax assets:
 Interpore net operating loss carryforwards................... $ 2,943  $ 2,095
 Orthopaedics net operating loss carryforwards................     981      538
 Research and development and alternative minimum tax credit
  carryforwards...............................................     382      448
 Orthopaedics research and development tax credit
  carryforward................................................      55       20
 Reserves and accruals not currently deductible for tax
  purposes....................................................     917      489
 Inventory capitalization.....................................     281      361
 Depreciation not currently deductible for tax purposes.......     (20)     130
                                                               -------- -------
Total deferred tax assets.....................................   5,539    4,081
 Less valuation allowance.....................................  (1,609)     --
                                                               -------- -------
Net deferred tax asset........................................ $ 3,930  $ 4,081
                                                               ======== =======
</TABLE>

8. Commitments and Contingencies

License Agreements

   Interpore Cross has agreements with its Synergy System Advisors under which
it pays royalties ranging from 5% to 7% of net revenues generated from the sale
of certain products within the Synergy Spinal System. Royalties are paid to the
developers of the AGF technology at a rate of 5% of certain products within
this product group.

Litigation

   Cross Medical Products and a number of other spinal implant manufacturers
were named as defendants in various products liability lawsuits alleging
injuries from spinal implants supplied by Cross and others. Approximately 800
such suits were filed in which a large number of plaintiffs claimed, in
addition to damages from spinal implants, a conspiracy among manufacturers,
physicians and other spinal implant industry members to defraud the public and
market products without the proper regulatory approvals. Cross has been
dismissed as a defendant from all but four of the pedicle screw conspiracy
cases, none of which involves its products.

   Aside from the conspiracy litigation, the nature of Interpore Cross'
business subjects it to products liability and various other legal proceedings
from time to time. In the opinion of management, the amount of ultimate
liability with respect to any known proceedings or claims will not materially
affect the financial position or results of operations of Interpore Cross.

                                      F-20
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


9. Lease Commitments

   Future minimum rentals under noncancelable operating leases for
manufacturing and office facilities and equipment at December 31, 1999 are as
follows (in thousands):

<TABLE>
      <S>                                                                 <C>
       2000.............................................................. $  788
       2001..............................................................    635
       2002..............................................................    504
       2003..............................................................     41
       Thereafter........................................................    --
                                                                          ------
                                                                          $1,968
                                                                          ======
</TABLE>

   Rent expense was $792,000, $706,000 and $640,000 in 1997, 1998 and 1999,
respectively.

   The lease for Interpore Cross' principal office and manufacturing facility,
which expires January 31, 2003, provides a right to extend the lease for an
additional five years at the fair market lease rate of the facility on the
extension date, but not less than the rate paid by Interpore Cross during the
month immediately preceding the commencement of the extension period.

10. Sale of Assets

   In April 1997, Interpore entered into a definitive agreement for the sale of
its dental implant business. In May 1997, the sale was completed, and Interpore
received an initial cash payment of $1.5 million. A deferred cash payment of
$749,000 was received in March 1998. The transaction, including associated
costs, resulted in a net charge of $617,000 in the second quarter of 1997.

11. Sale of Recovery Products Segment

   On March 12, 1997, Cross entered into an agreement to sell its recovery
products segment for approximately $8.2 million in cash and the assumption of
approximately $5.0 million of debt and other liabilities. The buyer also
acquired 30,000 shares of Cross' common stock for $242,000. Cross recognized a
gain of $2.2 million, net of related income taxes of $1.4 million. Revenues for
the recovery products segment were $2.5 million through the date of disposal
for the year ended December 31, 1997.

                                      F-21
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


12. Quarterly Results (unaudited)

   The following table presents a summary of the quarterly results of
operations for 1998 and 1999 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                            Quarter
                               ------------------------------------------
                                First   Second        Third       Fourth
                               ------- ---------     -------      -------
<S>                            <C>     <C>           <C>          <C>
1998
Net sales..................... $ 7,370 $ 7,333       $ 7,343      $ 8,163
Gross profit..................   5,534   5,119         5,213        5,791
Net income (loss).............     943  (4,321)(/1/)     166(/1/)     788(/1/)
Net income (loss) per share--
 basic........................ $  0.07 $ (0.31)      $  0.01      $  0.06
Net income (loss) per share--
 diluted...................... $  0.07 $ (0.31)      $  0.01      $  0.05

1999
Net sales..................... $ 8,986 $ 9,642       $ 9,549      $10,679
Gross profit..................   6,177   6,696         6,898        7,440
Net income....................   1,082   1,083         1,394        1,239
Net income per share--basic... $  0.08 $  0.08       $  0.10      $  0.09
Net income per share--
 diluted...................... $  0.08 $  0.08       $  0.10      $  0.09
</TABLE>
--------
(/1/)In May 1998, Interpore and Cross merged and subsequently closed the
 Dublin, Ohio facility. Merger-related expenses and restructuring charges
 associated with the merger totaling $4.5 million were recorded in the second
 quarter of 1998. Non-recurring charges related to the consolidation of
 operations to the Irvine, California facility amounting to $381,000 and
 $93,000 were recorded in the third and fourth quarters of 1998, respectively.

                                      F-22
<PAGE>

                         INTERPORE INTERNATIONAL, INC.

                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS

                  Years ended December 31, 1997, 1998 and 1999

<TABLE>
<CAPTION>
                                 Balance at                          Balance at
                                 Beginning   Additions       Write-    End of
          Description            of Period  (Deductions)      offs     Period
          -----------            ---------- ------------    -------- ----------
<S>                              <C>        <C>             <C>      <C>
Year ended December 31, 1997:
  Allowance for doubtful
   accounts receivable.......... $  434,000  $  (20,000)(1) $ 44,000 $  370,000
  Reserve for excess and
   obsolete inventory...........  1,074,000     392,000 (1)  749,000    717,000

Year ended December 31, 1998:
  Allowance for doubtful
   accounts receivable.......... $  370,000  $  196,000     $ 60,000 $  506,000
  Reserve for excess and
   obsolete inventory...........    717,000     120,000          --     837,000

Year ended December 31, 1999:
  Allowance for doubtful
   accounts receivable.......... $  506,000  $  120,000     $110,000 $  516,000
  Reserve for excess and
   obsolete inventory...........    837,000   1,198,000      598,000  1,437,000
</TABLE>
--------
(1) Includes deductions recorded as part of the sale of the dental business of
    $125,000 and $605,000, in the accounts receivable allowance and inventory
    reserve, respectively.

                                      F-23
<PAGE>

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  3.01   Certificate of Incorporation of Interpore International, Inc. as
         amended (1)

  3.02   Bylaws of Registrant (1)

  3.03   Amendment Number One to Bylaws (16)

  4.01   Rights Agreement dated November 19, 1998, between Interpore
         International, Inc. and U.S. Stock Transfer Corporation, which
         includes the form of Certificate of Determination of the Series A
         Junior Participating Preferred Stock of Interpore International, Inc.
         as Exhibit A, the form of Right Certificate as Exhibit B and the
         Summary of Rights to Purchase Preferred Shares as Exhibit C (2)

  4.02   Registration Rights Agreement dated December 8, 1999 by and between
         Interpore International, Inc., John A. Dawdy and Andrew G. Hood

 10.01   Cancellation and Release Agreement dated March 1, 1993 among
         Registrant, Interpore Orthopaedics, Inc., Pfizer, Inc. and Howmedica,
         Inc. (3)

 10.02   Series E Preferred Stock and Common Stock Warrant Purchase Agreement
         dated December 19, 1991 (3)

 10.03   Series E Preferred Stock Purchase Agreement dated October 30, 1992 (3)

 10.04   Single Tenant Lease dated July 25, 1991 between Registrant and The
         Irvine Company as amended by a Third Amendment to Lease dated December
         11, 1996 (4)

 10.05   Amended and Restated Loan and Security Agreement dated June 22, 1999
         among Registrant, Interpore Orthopaedics, Inc., Cross Medical
         Products, Inc., Interpore Cross International Inc., and Silicon Valley
         Bank (19)

 10.06   Amended and Restated Stock Option Plan dated March 19, 1991 (6), First
         Amendment to the Amended and Restated Stock Option Plan, effective
         October 15, 1991 (3); Amendment to the Amended and Restated Stock
         Option Plan dated September 17, 1994 (7)
 10.07   1995 Stock Option Plan (8)

 10.08   Stock Option Plan for Non-Employee Directors of Interpore
         International (9)

 10.09   Danninger Medical Technology, Inc. Amended and Restated 1984 Non-
         Statutory Stock Option Plan (10)

 10.10   Danninger Medical Technology, Inc. Amended and Restated 1984 Incentive
         Stock Option Plan (10)

 10.11   Cross Medical Products Inc. Amended and Restated 1994 Stock Option
         Plan (10)

 10.12   Asset Purchase Agreement dated March 12, 1997, among Cross Medical
         Products, Inc., Danninger Healthcare, Inc. and OrthoLogic Corp. (11)

 10.13   Indenture concerning 8.5% Convertible Subordinated Debentures between
         Cross Medical Products, Inc. and Fifth Third Bank (12)

 10.14   Supplemental Indenture between Interpore International, Inc. and Cross
         Medical Products, Inc. and Fifth Third Bank (5)

 10.15   Form of Indemnification Agreement (13)

 10.16   Schedule of Parties to Form of Indemnification Agreement (14)

 10.17   Agreement between Dr. Edward Funk and Cross Medical Products, Inc.
         dated February 11, 1998 (15)
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 Number                               Description
 -------                              -----------
 <C>     <S>
 10.18   Form of Employment Agreement dated August 17, 1998 between Interpore
         International, Inc. and its executive officers (14)

 10.19   Schedule of Parties to Form of Employment Agreement dated August 17,
         1998 (14)

 10.20   1999 Consultants Stock Option Plan (17)

 10.21   Amended and Restated Employee Qualified Stock Purchase Plan dated
         November 13, 1998 (18)

 10.22   Asset Purchase Agreement dated December 8, 1999, by and among
         Interpore Orthopaedics, Inc., Quantic Biomedical, Inc., Quantic
         Biomedical Partners, John A. Dawdy and Andrew G. Hood

 23.01   Consent of Ernst & Young LLP, Independent Auditors

 23.02   Consent of PricewaterhouseCoopers, LLP, Independent Accountants

 27.01   Financial Data Schedule
</TABLE>
--------
 (1) Incorporated by reference from our Registration Statement on Form S-4,
     Registration No. 333-49487.
 (2) Incorporated by reference from our Current Report on Form 8-K dated
     December 1, 1998.
 (3) Incorporated by reference from our Registration Statement on Form S-1,
     Registration No. 33-69872.
 (4) Incorporated by reference from our Current Report on Form 8-K dated
     February 11, 1998.
 (5) Incorporated by reference from our Quarterly Report on Form 10-Q for the
     fiscal quarter ended June 30, 1998.
 (6) Incorporated by reference from our Registration Statement on Form S-8,
     Registration No. 33-77426.
 (7) Incorporated by reference from our Registration Statement on Form S-8,
     Registration No. 33-86290.
 (8) Incorporated by reference from our Proxy Statement for the 1994 Annual
     Meeting of Shareholders.
 (9) Incorporated by reference from our Proxy Statement for the 1995 Annual
     Meeting of Shareholders.
(10) Incorporated by reference from our Registration Statement on Form S-8,
     Registration No. 333-53775.
(11) Incorporated by reference from the Cross Medical Products, Inc. Annual
     Report on Form 10-K for the year ended December 31, 1996.
(12) Incorporated by reference from the Cross Medical Products, Inc.
     Registration Statement on Form S-2, Registration No. 333-02273.
(13) Incorporated by reference from our Quarterly Report on Form 10-Q for the
     fiscal quarter ended March 31, 1998.
(14) Incorporated by reference from our Quarterly Report on Form 10-Q for the
     fiscal quarter ended September 30, 1998.
(15) Incorporated by reference from the Cross Medical Products, Inc. Annual
     Report on Form 10-K for the year ended December 31, 1997.
(16) Incorporated by reference from our Annual Report on Form 10-K for the
     fiscal year ended December 31, 1998.
(17) Incorporated by reference from our Proxy Statement for the 1999 Annual
     Meeting of Stockholders.
(18) Incorporated by reference from our Quarterly Report on Form 10-Q for the
     fiscal quarter ended March 31, 1999.
(19) Incorporated by reference from our Quarterly Report on Form 10-Q for the
     fiscal quarter ended June 30, 1999.