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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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(Mark One)

|x | Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2003
|- | --------------------------------------------------------------------------------------------------------------------------------



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 number 0-28748



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CLOSURE MEDICAL CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 56-1959623                          
|(State or other jurisdiction of Incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|5250 Greens Dairy Road Raleigh, North Carolina                 |  | 27616                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



Registrants
telephone number, including area code: (919) 876-7800



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



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  | None                                     



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



Common
Stock, par value $.01 per share

(Title of class)



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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 the definitive proxy
statement incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. ̈



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



As of June 30, 2003 the aggregate market value of the voting and non-voting Common Stock held by non-affiliates of the registrant was $136,271,987 based upon the closing price of the Common
Stock as reported on the Nasdaq National Market. Shares of common stock held by each officer and director and by each person who owns five percent or more of the outstanding common stock have been excluded from this calculation as such persons may
be considered to be affiliated with the Company.



As of March
8, 2004, the number of shares of Common Stock outstanding was 14,246,378.



DOCUMENTS INCORPORATED BY REFERENCE



Portions of the following document are incorporated by reference into this report: Definitive Proxy Statement in connection with the 2004 Annual Meeting of Shareholders



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##### Table of Contents

TABLE OF CONTENTS



|                              |  |                                                                                       |  |   
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --
|PART I                        |  |                                                                                       |  | 3 
|                              |  |                                                                                      
|ITEM 1.                       |  | BUSINESS                                                                              |  | 3 
|                              |  |                                                                                      
|ITEM 2.                       |  | PROPERTIES                                                                            |  | 18
|                              |  |                                                                                      
|ITEM 3.                       |  | LEGAL PROCEEDINGS                                                                     |  | 18
|                              |  |                                                                                      
|ITEM 4.                       |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 18
|                              |  |                                                                                      
|PART II                       |  |                                                                                       |  | 19
|                              |  |                                                                                      
|ITEM 5.                       |  | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                 |  | 19
|                              |  |                                                                                      
|ITEM 6.                       |  | SELECTED FINANCIAL DATA                                                               |  | 20
|                              |  |                                                                                      
|ITEM 7.                       |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 21
|                              |  |                                                                                      
|ITEM 7A.                      |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.                            |  | 26
|                              |  |                                                                                      
|ITEM 8.                       |  | FINANCIAL STATEMENTS                                                                  |  | 26
|                              |  |                                                                                      
|ITEM 9.                       |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |  | 27
|                              |  |                                                                                      
|ITEM 9a.                      |  | CONTROLS AND PROCEDURES                                                               |  | 27
|                              |  |                                                                                      
|PART III                      |  |                                                                                       |  | 27
|                              |  |                                                                                      
|ITEM 10.                      |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                    |  | 27
|                              |  |                                                                                      
|ITEM 11.                      |  | EXECUTIVE COMPENSATION                                                                |  | 27
|                              |  |                                                                                      
|ITEM 12.                      |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                        |  | 28
|                              |  |                                                                                      
|ITEM 13.                      |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                        |  | 28
|                              |  |                                                                                      
|ITEM 14.                      |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                |  | 28
|                              |  |                                                                                      
|PART IV                       |  |                                                                                       |  | 28
|                              |  |                                                                                      
|ITEM 15.                      |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                      |  | 28
|                              | 
|SIGNATURES                    |  | 31                                                                                   
|                              | 
|INDEX TO FINANCIAL STATEMENTS |  | F-1                                                                                  



Closure Medical
Corporation® is a registered trademark of the
registrant. DERMABOND is a registered trademark of ETHICON, Inc.; BAND-AID® is a registered trademark of Johnson & Johnson; SOOTHE-N-SEAL® is a registered trademark of Colgate Oral Pharmaceuticals, Inc.; and NEXABAND® is a registered trademark of Closure Medical Corporation.



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PART I



ITEM 1. BUSINESS.



FORWARD-LOOKING
STATEMENTS



The statements set forth below that are not
historical facts or statements of current conditions are forward-looking statements. Such forward-looking statements may be identified by, among other things, the use of forward-looking terminology such as believes, expects,
forecasts, estimates, plans, continues, may, will, should, anticipates or intends or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy or intentions. These forward-looking statements, such as statements regarding present or anticipated scientific progress, development of potential products, future revenues, capital expenditures
and research and development expenditures, future financings and collaborations, management, manufacturing development and capabilities, regulatory clearances and approvals, and other statements regarding matters that are not historical facts,
involve predictions. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Potential risks and uncertainties that could affect Closures actual
results, performance or achievements include, but are not limited to, the Risk Factors set forth in Item 1 of this Annual Report. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on
any such forward-looking statements. Furthermore, we disclaim any obligation or intent to update any such factors or forward-looking statements to reflect future events or developments.



AVAILABLE INFORMATION



Closure Medical files annual, quarterly, and current reports, proxy statements, and other documents with the SEC under the Securities
Exchange Act of 1934. The public can obtain any documents that we file with the SEC at http://www.sec.gov. We make available free of charge through our website, http://www.closuremed.com, our Annual Report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. We are not including
the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.



BUSINESS OVERVIEW



Closure Medical Corporation develops and manufactures innovative biomaterial-based medical devices for wound care and wound closure that fulfill the needs of healthcare practitioners, patients and consumers. Each of
our products utilizes our proprietary medical grade cyanoacrylate technology. Our strategy is to focus our business around three primary platforms: topical wound care, internal surgical sealants and new complementary technologies. Our primary
platform is topical wound closure and to date we have commercialized products for wound care and closure for the professional healthcare, over-the-counter, or OTC, and veterinary markets. Within the internal surgical sealants platform, we have
completed a human pilot study for a vascular sealant product and plan to initiate the definitive clinical study in the first half of 2004. In addition, we have ongoing research into other devices and surgical sealants to be used inside the body.



Our leading product, DERMABOND adhesive, is sold to healthcare professionals
as an alternative to sutures and staples to rapidly close wounds and incisions while sealing and protecting them from infection. This product allows natural healing to proceed by closing and sealing injured tissue without the trauma caused by
suturing or stapling. We believe that using DERMABOND adhesive results in enhanced patient and physician benefits such as lower overall procedure costs and is easier and quicker to use than sutures or staples.



We have other products that are marketed in the OTC market. BAND-AID® Brand Liquid Bandage quickly seals, protects and stops
bleeding from minor cuts and scrapes. SOOTHE-N-SEAL® adhesive provides a protective barrier that shields oral ulcers and sores from irritation caused by eating and drinking while providing immediate and long-term pain relief.



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In addition, we have two veterinary products in our NEXABAND® product line that are used in cat declaw procedures as well as spay and neuter
procedures.



We have entered into partnerships with third parties for the
distribution and marketing of our current products to professionals and consumers. Our partners include Ethicon, Inc., a Johnson & Johnson company; Johnson & Johnson Consumer Products Company; Colgate Oral Pharmaceuticals, Inc.; and Abbott
Laboratories, Inc.



TECHNOLOGY OVERVIEW



We have developed and manufactured nonabsorbable biomaterial-based medical devices based on
our proprietary medical grade cyanoacrylate technology. Cyanoacrylates are a family of liquid monomers that react under a variety of conditions to form polymer films with strong adhesive properties. Industrial adhesives based on cyanoacrylates were
first introduced in 1958 and are widely used in the aerospace and automotive industries, as well as in consumer products such as super glue. Our proprietary medical grade cyanoacrylate technology allows us to customize the physical and chemical
properties of cyanoacrylates to meet specific market needs related to wound care and wound closure. Such properties include, but are not limited to, viscosity, flexibility, bond strength, stability, setting time, porosity and biodegradation.



Our technology enables us to develop nonabsorbable formulations for topical
use and we have recently completed a human pilot study using our technology inside the body for the first time. Nonabsorbable formulations close and seal skin wounds and incisions for the duration of healing, then slough off naturally as new skin
cells are produced and the wound heals. When used on the skin, our cyanoacrylate technology provides a barrier against bacteria that cause infections that does not exist when using traditional wound care technologies. Internal adhesives may be used
as surgical sealants and degrade, in a predictable, biocompatible manner, into components that are eliminated from the body naturally.



We have developed applicator and packaging technology to deliver DERMABOND adhesive and other products to wound sites to enhance the utility of our products. For example,
the current DERMABOND adhesive applicator contains a catalyst that controls the rate of polymerization and allows the adhesive film to be applied in multiple layers, which enhances bond strength. Our current products perform consistently and
reproducibly, do not require special preparation or refrigeration and have shelf-lives of at least 12 to 24 months.



PRODUCTS CURRENTLY MARKETED



DERMABOND Topical Skin Adhesive



Our leading product, DERMABOND adhesive, is a nonabsorbable, topical tissue adhesive that can be used to close wounds from skin lacerations, incisions, plastic surgery
and other minimally invasive surgeries. DERMABOND adhesive is used as an alternative to topical suturing and stapling which involve puncturing healthy tissue in order to align and close the wound. These procedures may allow leakage or cause
additional scarring at the puncture sites, require anesthetics, are time consuming in their application, and generally require return patient visits and physician time to remove the sutures or staples. DERMABOND adhesive may be applied quickly, may
not require anesthetics, does not induce trauma to surrounding tissues and may not require return visits to the physician for removal. DERMABOND adhesive is not intended for use on high skin tension areas such as the hands, feet or across joints. We
have entered into an exclusive worldwide agreement with Ethicon to market and distribute all DERMABOND adhesive products. Ethicon has been distributing DERMABOND adhesive in the United States since 1998 and is currently marketing DERMABOND adhesive
in approximately 37 foreign countries and regions, including Japan.



In January
2003, we received approval from the U.S. Food & Drug Administration, or FDA, to market High Viscosity DERMABOND Topical Skin Adhesive. This new formulation of DERMABOND adhesive is thicker which provides physicians greater precision and control
of application, especially when used on curved areas of the body such as around the eyes and nose. Our marketing partner, Ethicon, has been distributing this product in Europe since late 2002 and launched the product in the United States during the
first quarter of 2003.



We enhanced the DERMABOND delivery system by developing
ProPen and ProPen XL which were launched in the U.S. and Europe in January 2004. The new design provides physicians greater precision application and control of adhesive flow by utilizing the high-viscosity formulation of DERMABOND adhesive. The
ProPen is a single-use



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device and includes interchangeable tips, which allows for fine-line delivery of adhesive for those wound closures
requiring precise application. The XL version of ProPen differs in that it delivers twice the express volume as the ProPen for closing longer surgical incisions or lacerations.



In 2002, DERMABOND adhesive received approval from the FDA to include in its device labeling that the product acts mechanically as a barrier
to microbial penetration and protects against the two most common bacteria that cause infection, staphylococcus and pseudomonas. We believe that this is a significant benefit of using DERMABOND adhesive as opposed to sutures and staples which have
not been shown to protect against microbial penetration. The unit cost of DERMABOND adhesive is greater than sutures or staples, however we believe that the use of DERMABOND adhesive results in lower overall procedure costs because it may reduce
treatment time and the need for anesthetics, simplify post-closure wound care and eliminate a follow-up visit for suture or staple removal.



BAND-AID® Brand Liquid Bandage



In January
2001, we received FDA clearance to market our liquid bandage, which was the first cyanoacrylate medical device approved by the FDA for the OTC adhesive bandage market. Our liquid bandage utilizes the same proprietary technology as our professional
product, DERMABOND adhesive. Clinical trials demonstrated the effectiveness of our proprietary nonabsorbable formulation as compared to traditional adhesive bandages when applied to minor cuts and abrasions. In the clinical trials, it was found that
our liquid bandage speeds wound healing, provides a superior barrier to bacteria that cause infections versus traditional adhesive bandages, stops bleeding and can help to reduce the pain associated with minor cuts and abrasions.



In May 2001, we entered into an agreement providing Johnson & Johnson Consumer Products
Company, or CPC, with worldwide supply, distribution and development rights to our liquid bandage technology. The agreement includes rights to the liquid bandage and certain future OTC products, excluding our SOOTHE-N-SEAL® adhesive technology. During February 2002, CPC began
the marketing and distribution of our liquid bandage as BAND-AID® Brand Liquid Bandage and the product is currently available in most major retail, food and drug outlets in the United States. . During the first quarter of 2003, CPC began distributing BAND-AID® Brand Liquid Bandage in Canada and began shipping to
other international markets such as France in late 2003.



The first
BAND-AID® Brand Liquid Bandage line extension, a
skin crack gel, was launched in January 2004. This product is a thicker formulation than the original liquid bandage and is used to fill in and protect painful skin cracks to assist in accelerating healing. Similar to the liquid bandage, this
product reduces minor pain and stops minor bleeding while providing a waterproof seal.



SOOTHE-N-SEAL®
canker sore relief



In 1999, we received FDA clearance to market
SOOTHE-N-SEAL® adhesive, which was the first
cyanoacrylate adhesive approved by the FDA for the OTC consumer market. In clinical trials, SOOTHE-N-SEAL® adhesive was found to provide immediate and long-term pain relief associated with oral ulcers, as well as providing a protective barrier that shields oral ulcers and mouth sores from
irritation due to eating and drinking. SOOTHE-N-SEAL® adhesive utilizes the same proprietary technology as our professional product, DERMABOND adhesive.



In December 2000, we entered into an agreement providing Colgate Oral Pharmaceuticals, Inc. with exclusive worldwide supply, distribution and development rights to
SOOTHE-N-SEAL® adhesive technology. Since the
second quarter of 2001, Colgate has been distributing SOOTHE-N-SEAL® adhesive to Wal-Mart and several other national drug chains.



NEXABAND®
adhesives



We have developed two topical tissue adhesive products under
the NEXABAND® trade name for use in veterinary
wound closure and wound care. NEXABAND® Liquid
Topical Tissue Adhesive, designed for use in cat declaw surgeries, reduces procedure time, seals exposed nerve endings and reduces leakage and irritation. NEXABAND® S/C Topical Tissue Adhesive is indicated for the topical closure and sealing of various surgical incisions, including
those made during spay and neuter procedures and provides an effective, flexible barrier against dirt and contaminants.



In July 2001, we entered into an agreement providing Abbott Laboratories, Inc. with worldwide supply, distribution and development rights to the NEXABAND® product line. Abbott distributes our veterinary
products in North



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America, Australia, Germany, Sweden, Switzerland and the United Kingdom. Prior to our distribution agreement with Abbott,
NEXABAND® products were marketed and distributed
only in North America.



PRODUCTS UNDER DEVELOPMENT



We continue to pursue modifications and improvements to our existing products to enhance
their effectiveness and expand their marketability. We are also developing additional nonabsorbable and internal adhesive products. These future products require further development and are subject to clinical trials and regulatory clearance or
approval before commercialization.



Internal adhesives



We have dedicated scientists with extensive surgical device development experience who are
developing biocompatible, absorbable biomaterial formulations and devices for potential internal product applications. These scientists have initially focused on developing a vascular surgical sealant for use in an array of surgical procedures such
as arteriovenous shunt procedures for dialysis access and femoralpopliteal bypass surgery. In August 2003, the FDA approved our Investigational Device Exemption, or IDE, request and the first patient of a ten patient pilot study was enrolled on
November 4, 2003 at the University of Virginia Medical Center. This represented the first human use of our technology inside the body. The pilot study enrollment was completed in December 2003 and, given the positive results thus far, we anticipate
beginning a definitive clinical study in the first half of 2004 to support U.S. Premarket Approval and European CE Mark approval. Current plans are to enroll patients at multiple centers in the United States and Europe for treatment to be conducted
in a hospital setting, with four- and twelve-week follow-up visits. The end-point of the study will assess the ability of the vascular sealant to prevent leakage in the reconstruction of vascular structures.



While the vascular surgical sealant is the first device in our internal surgical sealants
platform, we are researching and developing products for other applications of our internal tissue sealant and surgical adhesive device technology. These and other future products are in the pre-clinical stages and require further development and
may be subject to clinical trials and regulatory clearance or approval before commercialization.



MARKETING AGREEMENTS



We do not
presently employ a direct sales force and our strategy for current products has been to use marketing partners to promote, sell and distribute our products. We are dependent on our marketing partners to market and distribute these products in
accordance with the terms of their respective arrangements. However, we may decide to establish a direct sales force for the distribution of products for which we do not currently have marketing partners, such as future internal adhesive products.



Ethicon, Inc.



In March 1996, we entered into an eight-year supply and distribution agreement providing
Ethicon with exclusive worldwide rights to market, distribute and sell DERMABOND adhesive. The agreement requires Ethicon to make minimum purchases that increase annually and to pay royalties based upon net sales. During December 2003, the agreement
was amended to extend the term until March 2005 and to provide that the agreement will automatically renew for consecutive periods of one year unless Ethicon serves notice of termination at least by December 15 of the year preceding the expiration
date of the renewal period. The agreement is terminable upon specified events, including material breach by either party and insolvency of either party. Upon certain events of default by us, including failure to provide an adequate supply of
product, Ethicon may end its arrangement to purchase DERMABOND adhesive from us, and may manufacture the product itself and pay us royalties based on sales. In addition, the agreement allows for the joint collaboration and cost sharing of continuing
development activities.



Johnson & Johnson Consumer Products Company



In May 2001, we entered into an agreement providing CPC with exclusive
worldwide supply, distribution and development rights to BAND-AID® Brand Liquid Bandage technology. Included in the agreement are rights to certain future OTC products co-developed by the parties, excluding our SOOTHE-N-SEAL® adhesive technology. The agreement requires CPC to purchase annual minimum quantities
during each contract year. The agreement will automatically renew each year for a period of one year after the initial contract term expires unless either party provides at least six months prior notice of its intention not to renew. The agreement
is terminable upon specified



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events, including material breach by either party. In addition, the agreement allows for the joint collaboration and cost
sharing of continuing development activities. Upon execution of the agreement and achievement of certain milestones by Closure, CPC made payments to us in recognition of our previous research and development expenditures. These payments have been
deferred and are being recognized ratably over the life of the agreement. In accordance with the agreement, we may receive a future milestone payment, based on achievement of certain criteria.



Colgate Oral Pharmaceuticals, Inc.



In December 2000, we entered into an exclusive worldwide supply, distribution and
development rights agreement for SOOTHE-N-SEAL®
adhesive with Colgate. Under the agreement, Colgate acquired exclusive worldwide rights to market, sell and distribute SOOTHE-N-SEAL® adhesive and future oral care products based upon our proprietary cyanoacrylate technology to both professional and consumer markets. Upon execution of
the agreement, Colgate paid Closure a license fee and consideration for all right, title and interest in the SOOTHE-N-SEAL® adhesive trademark. These payments were deferred and are being recognized ratably over the life of the agreement. The agreement requires Colgate to
purchase annual minimum quantities and, at the end of the seven-year term, may be renewed by agreement of both parties for additional periods. The agreement is terminable upon specified events, including material breach by either party. In addition,
the agreement allows for the joint collaboration and cost sharing of continuing development activities.



Abbott Laboratories, Inc.



In July
2001, we entered into an agreement providing Abbott with exclusive worldwide supply, distribution and development rights to our veterinary NEXABAND® product line. This agreement also grants Abbott rights to future veterinary products co-developed through the collaboration of the parties, including
product improvements, line extensions and new veterinary products based on Closures cyanoacrylate technology. The agreement requires Abbott to purchase a minimum dollar amount of product during each contract year. At the end of the contract
term, the agreement may be renewed for additional periods with the consent of both parties. In addition, the agreement allows for the joint collaboration and cost sharing of continuing development activities.



PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS



Our success depends in large part on our ability to obtain patents, maintain trade secret
protection and operate without infringing on the proprietary rights of third parties. As of March 8, 2004, we have 54 issued United States patents with expiration dates ranging from 2004 to 2021 of which the average remaining life is 13 years. Also,
we have 13 issued foreign patents with expiration dates ranging from 2014 to 2019 of which the average remaining life is 13 years. We also have filed applications for 40 additional United States patents and 58 applications for patents outside the
United States. The issued and pending United States patents relate to our tissue products, processes and delivery technology.



In addition to patent protection, we rely on unpatented trade secrets and proprietary technological expertise. We rely on confidentiality agreements with our marketing
partners, employees, advisors, vendors and consultants to protect our trade secrets and proprietary technological expertise.



GOVERNMENT REGULATIONS



Our products and operations are subject to substantial government regulation in the United States and foreign countries.



FDA Regulation



Most medical devices, including our medical tissue adhesives for humans, are subject to stringent government regulation in the United States by the FDA under the Federal Food, Drug and Cosmetic Act, or the FDC Act,
and, in many instances, by foreign and state governments. The FDA regulates the preclinical and clinical testing, manufacture, safety, labeling, sale, distribution and promotion of medical devices. Included among these regulations are premarket
clearance and approval requirements and good manufacturing practices, or GMPs. Other statutory and regulatory requirements include, among other things, establishment registration and inspection, medical device listing, prohibitions against
misbranding and adulteration, labeling and postmarket reporting. The regulatory process is lengthy, expensive and uncertain. Securing FDA approvals and clearances may require the submission of extensive preclinical and clinical data and supporting
information to the FDA. Failure to comply with applicable requirements



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can result in refusal to approve or clear new applications or notifications, withdrawals of existing product approvals or
clearances, issuances of warning letters, application integrity proceedings, injunctions, civil penalties, fines, recalls or seizures of products, total or partial suspensions of production and criminal prosecution.



Under the FDC Act, medical devices are classified into one of three classes (Class I, II or
III) on the basis of the controls necessary to reasonably ensure their safety and effectiveness. Before any new medical device may be introduced to the market, the manufacturer generally must obtain either premarket clearance through the 510(k)
premarket notification process or premarket approval through the lengthier premarket application, or PMA, process. A 510(k) premarket notification will be granted if the submitted data establishes that the proposed device is substantially
equivalent to a legally marketed Class I or Class II medical device, or to a Class III medical device for which the FDA has not called for PMAs. Prior to making a substantial equivalence determination, the FDA may request extensive data,
including clinical trials of the devices safety and effectiveness. It generally takes from three to nine months from submission to obtain 510(k) premarket clearance. If our product is found to be not substantially equivalent to a legally
marketed Class I or II device, or if it is a Class III device for which the FDA has called for PMAs, then we must file a PMA application. DERMABOND adhesive, SOOTHE-N-SEAL® adhesive and BAND-AID® Brand Liquid Bandage are Class III, II and I medical devices, respectively. A PMA application must be supported by extensive data, including
laboratory, preclinical and clinical trial data, to demonstrate the safety and efficacy of the device, as well as extensive manufacturing information. Before initiating human clinical trials, the manufacturer often must first obtain an IDE for the
proposed medical device. Before granting a PMA, the FDA will generally conduct an inspection of the manufacturers facilities to ensure compliance with GMPs and the FDA must approve final labeling. Approval of a PMA could take two or more years
from the date of submission of the application or petition. The PMA process can be expensive, uncertain and lengthy, and there is no guarantee of ultimate approval.



Modifications or enhancements to products that are either cleared through the 510(k) process or approved through the PMA process that could
affect safety or effectiveness or effect a major change in the intended use of the device may require further FDA review through new 510(k) or PMA submissions. Additionally, future modifications of our manufacturing facilities and processes may
subject us to further FDA inspections and review before implementation of such modifications.



In 2002, Congress enacted the Medical Device User Fee and Modernization Act, which authorizes the FDA to assess and collect user fees for premarket notifications and premarket approval applications filed on or after
October 1, 2002. Fees for fiscal year 2004 range from $3,480 for premarket notifications to $206,811 for premarket approval applications, although fee reductions are available for companies qualifying as small businesses. We expect that we may spend
up to approximately $100,000 in user fees during 2004.



Companies that
manufacture devices distributed in the United States must comply with GMP requirements governing the design, manufacture, release, packaging, and distribution of devices. Manufacturers must continue to expend time, money, and effort in the area of
production and quality control to ensure full technical compliance with GMPs. Medical devices also are subject to postmarket reporting requirements for certain adverse events and device malfunctions. Additionally, the FDA actively enforces
regulations prohibiting marketing of devices for indications or uses that have not been cleared or approved by the FDA. If safety or efficacy problems occur after the product reaches the market, the FDA may take steps to prevent or limit further
marketing of the product.



In August 1998, DERMABOND adhesive received
premarket approval. SOOTHE-N-SEAL® adhesive and
BAND-AID® Brand Liquid Bandage received 510(k)
clearances in September 1999 and January 2001, respectively. DERMABOND adhesive, SOOTHE-N-SEAL® adhesive and BAND-AID® Brand Liquid Bandage are subject to GMP, postmarket reporting and other FDA requirements.



Foreign Regulatory Matters



In order for us to market our products in Europe, Australia, Canada and certain other foreign jurisdictions, we must obtain required market authorizations and otherwise
comply with extensive regulations regarding safety, manufacturing processes and quality. These regulations, including the requirements for authorizations to market, may differ from the FDA regulatory scheme. The time required to obtain authorization
for marketing our products in foreign countries may be longer or shorter than that required for FDA clearance or approval. In addition, there may be foreign regulatory barriers other than market authorizations.



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Pursuant to the FDC Act, a non-FDA approved medical device may be exported to any country, provided that the device
complies with the laws of that country and has valid marketing authorization or the equivalent from the appropriate authority in a listed country. The listed countries include Australia, Canada, Israel, Japan, New Zealand, Switzerland,
South Africa and any member nation in the European Union or the European Economic Area. Generally, export of unapproved devices (i.e., those requiring a PMA in the United States) that do not have marketing authorization in a listed country will
continue to require prior FDA export authorization.



Medical devices that are
marketed or put into service within the European Union are required to comply with Council Directive 93/42/EEC, the medical devices directive, or MDD. As of June 14, 1998, compliance with the MDD requires that manufacturers of devices covered by the
MDD must obtain the right to display the CE mark, which allows the device to be marketed, put into service and circulated freely within the European Union. We received authorization to display the CE mark in the European Union for DERMABOND adhesive
and other topical and ophthalmic tissue adhesive applications in August 1997. In addition, our liquid bandage product is CE marked in compliance with MDD for distribution in Europe. We plan to pursue the right to display the CE mark on future
products for human use that we may develop.



Upon receipt of the CE mark, we
must demonstrate every six months for two years and annually thereafter, that our quality management system meets the requirements of the MDD and our technical documentation for products displaying the CE mark is accurate and reflects the current
manufacturing process.



Environmental Regulations



Our activities involve the controlled use of hazardous materials and chemicals. We are
subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such material and certain waste products. We believe that our safety procedures for handling and disposing of such materials
comply in all material respects with the standards prescribed by such laws and regulations, but risk of accidental contamination or injury from these materials cannot be completely eliminated. To help minimize these risks, we utilize an outside
professional services organization to help us evaluate environmental regulations and monitor our compliance with such regulations.



MANUFACTURING



We have devoted considerable resources to the development of manufacturing processes and technologies capable of providing our products with clinical efficacy, safety, ease of use and suitable shelf-life. We have
developed a manufacturing process designed to produce a highly purified base material which is not achievable by other known methodologies. We rely heavily on internal trade secrets and technological expertise and expect to keep our manufacturing
process in-house and, where applicable, seek patent protection for specific manufacturing applications.



Since 1998, we have been manufacturing our products in a 50,000 square foot facility in Raleigh, North Carolina. During the fourth quarter 2003, we expanded this area by 19,000 square feet and expect that over the
next several years we will continue to expand our manufacturing capabilities. Our facility integrates the production of all of our product formulations as well as filling, labeling and packaging capabilities for certain products. In addition, third
party vendors currently perform filling, labeling and sterilization for certain products manufactured by Closure.



Beginning in 1997, in connection with our application for a CE mark to market DERMABOND adhesive in the European Union, the British Standards Institution, or BSI,
registered us to certify that our quality management system complies with the requirements of the ISO 9002 international quality assurance standard issued by the International Organization of Standardization of Geneva, Switzerland. In 1998, BSI
expanded the scope of our quality system certification to include compliance with ISO 9001, a comprehensive international standard for manufacturing and servicing firms for quality assurance in design, development, production, installation and
servicing.



COMPETITION AND TECHNOLOGICAL CHANGE



We compete with domestic and foreign medical device and pharmaceutical companies in various
rapidly evolving and technologically advanced fields in developing our technology and products.



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In the worldwide wound closure market, DERMABOND adhesive competes with the suture products of Ethicon as well as the
staple products of Ethicon Endo-Surgery, Inc., both subsidiaries of Johnson & Johnson. We also compete with the suture and staple products of United States Surgical Corporation, a subsidiary of Tyco International Ltd. In addition, there are
currently three other cyanoacrylate-based topical adhesives with which DERMABOND adhesive competes, only one of which is approved for sale in the United States. In 2002, United States Surgical, a division of Tyco Health Group, LP, received FDA
approval to market Indermil® Tissue Adhesive, a
butyl cyanoacrylate. Tyco has been marketing Indermil® in the United Kingdom since 1996 and it is currently available in many other countries. B. Braun GmbH markets Histoacryl® as a topical closure adhesive for small lacerations and incisions in low skin tension areas of the body. MedLogic Global Corporation markets
LiquiBand adhesive, primarily in Europe, however
it is not marketed in the United States as it does not yet have FDA approval.



In the domestic OTC adhesive bandage market, BAND-AID® Brand Liquid Bandage competes with the BAND-AID® Brand Adhesive Bandages of CPC as well as 3M® brand and Curad®
brand (marketed by Beiersdorf AG) adhesive and liquid bandages. These three brands in total comprise approximately 80% of the adhesive bandage market. In the domestic OTC oral pain relief market, SOOTHE-N-SEAL®adhesive competes with the following four major products that comprise
approximately 75% of that category: Colgate Orabase® Gel marketed by Colgate, Anbesol® Oral Anesthetic products marketed by American Home Products Corporation, Orajel® products marketed by Del Laboratories and Zilactin® products marketed by Zila Consumer Pharmaceuticals.



SCIENTIFIC ADVISORS



We have established a team of recognized scientific advisors who advise us about present and long-term scientific planning, research and development. The Scientific advisors have recognized expertise in relevant
sciences or clinical medicine. Our scientific advisors consist of independent professionals who meet on an individual basis with management and their services are provided under the terms of consulting and confidentiality agreements. In addition,
Closure actively recruits and hires scientific thought leaders on short-term retainer for specific learning needs.



EMPLOYEES



As of March 8, 2004, we had 122 full-time employees, up from 101 in March 2003, of whom 104 were dedicated to research, development, manufacturing, quality control and regulatory affairs, and 18 were dedicated to
administrative activities. Seventeen members of our research, development and regulatory affairs staff have doctoral or advanced degrees. Our employees are not represented by a union, and we believe relationships with our employees are good.



EXECUTIVE OFFICERS



The table below sets forth the names, ages and positions of the persons who are the
executive officers as of March 8, 2004.



|                      |  |     |  |                                                             
|--------------------- |  | --- |  | ------------------------------------------------------------
|Name                  |  | Age |  | Position                                                    
|Daniel A. Pelak       |  | 52  |  | President and Chief Executive Officer and Director          
|James F. Buck         |  | 41  |  | Vice President of Marketing                                 
|William M. Cotter     |  | 53  |  | Vice President of Manufacturing and Operations              
|J. Michael Hoban      |  | 52  |  | Vice President of Human Resources                           
|Jerry Y. Jonn         |  | 47  |  | Vice President of Research                                  
|Bruce J. Krattenmaker |  | 51  |  | Vice President of Regulatory, Clinical and Quality Assurance
|Debra L. Pawl         |  | 51  |  | Vice President and General Counsel                          
|Gabriel N. Szabo      |  | 41  |  | Vice President of Product Development                       
|Benny Ward            |  | 40  |  | Vice President of Finance and Chief Financial Officer       



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Daniel A. Pelak has served as President and Chief Executive Officer of Closure since September 2002. Prior to
joining Closure Medical, Mr. Pelak spent 26 years with Medtronic, Inc. During his career he has held positions in sales, sales management, marketing, and general management. Immediately prior to joining Closure, he was the Vice President and General
Manager of Medtronics Perfusion Systems Division. From March 2000 until January 2002, he was the Vice President and General Manager of Medtronics Cardiac Surgery Technologies Division. From 1992 to 2000, Mr. Pelak managed progressively
larger sales and marketing operations within the Cardiovascular areas of Medtronic, including Vice President Cardiovascular Marketing and Vice President U.S. Cardiac Surgery Business. Prior to 1992, he held the position of Vice President and General
Manager of Medtronics Nortech Division. Mr. Pelak holds a B.S. in Biology from Pennsylvania State University.



James F. Buck has served as Vice President of Marketing since April 2003. Prior to joining Closure, he spent almost eleven years with St. Jude Medical in various
roles of increasing responsibility, including marketing research, sales and sales management, corporate business development and product marketing. Most recently, he was Senior Director of Healthcare Services, a corporate strategic marketing
position. Mr. Buck holds a M.M. degree from Northwestern Universitys Kellogg School of Management and a B.S. in Business Administration from Indiana University.



William M. Cotterhas served as Vice President of Manufacturing and Operations of Closure since June 1997. From 1989 to 1997, Mr.
Cotter was Vice President of Operations (North America) of Sanofi Diagnostics Pasteur, Inc., a company involved in the design, manufacturing and marketing of in vitro diagnostics instrumentation and biological reagents. From 1984 to 1988, he worked
at Genetic Systems Corporation, a subsidiary of Bristol Myers Company, where he was involved in the commercialization of one of the first diagnostic test kits for the HIV virus. Before that time, Mr. Cotter worked at Advanced Technology
Laboratories, Inc., a division of E.R. Squibb Company. Mr. Cotter holds a B.A. degree in Political Science from Ohio University.



J. Michael Hoban has served as Vice President of Human Resources since January 2004. Prior to that time, Mr. Hoban served as Closures Director of Human
Resources for six years. Prior to joining Closure Medical in January 1998, Mr. Hoban spent 20 years with Bristol-Myers Squibb Inc. serving in such capacities as Vice President of Human Resources for the Zimmer Surgical Products Division and
Corporate Director, International Human Resources for all Asian Pacific operations. He holds a B.S. degree in Labor and Industrial Relations from Michigan State University.



Jerry Y. Jonn, Ph.D. has served as Vice President of Research since January 2004. Prior to that time, Dr. Jonn served as Vice
President of Internal Products Development and as Director, Absorbable Products Research of the Company beginning in May 1999. Prior to employment with Closure Medical, Dr. Jonn spent seven years with U. S. Surgical Corporation where he last served
as the Director of U.S. Surgicals Research and Development efforts. Dr. Jonn earned his M.S. and Ph.D. degrees in Polymer Chemistry from Cornell University.



Bruce J. Krattenmaker has served as Vice President of Regulatory, Clinical and Quality Assurance since January 2004. Mr. Krattenmaker
has over 20 years of experience within the quality assurance and regulatory fields. Most recently, he served as Vice President of Regulatory Affairs, Quality Assurance and Clinical Programs at Ev3 Inc. where he was responsible for developing and
executing regulatory strategies on a global basis. He also held various executive positions at Boston Scientific Corporation, C.R. Bard, Inc. and Baxter Healthcare Corporation. Mr. Krattenmaker has a B.S. in Biology and an M.S. in Microbiology and
Biochemistry, each from Northern Illinois University.



Debra L. Pawl has
served as Vice President and General Counsel since 1998. Previously, Ms. Pawl served as Patent Manager for the J.M. Huber Corporation and practiced in the patent law departments of The BFGoodrich Company, Owens-Corning Fiberglas Corporation, The
Standard Oil Company (Ohio) and the Washington, D.C. law firm of Cushman, Darby and Cushman. Prior to practicing law, Ms. Pawl worked as a research chemist for the Diamond Shamrock Corporation. Ms. Pawl holds a J.D. degree from the University of
Toledo, College of Law, and a M.S. and a B.S. degree in biology/chemistry from John Carroll University.



Gabriel N. Szabo has served as Vice President of Product Development since January 2004. Prior to that time, Mr. Szabo served as Closures Director of Marketing for Closure Medicals consumer care
products. Prior to joining the Company in 1999, Mr. Szabo worked for Johnson & Johnson in various marketing roles. Most recently, he was the product director of the PEPCID® AC brand in the Johnson & Johnson/Merck joint venture. Prior to Johnson & Johnson, he worked for General
Electric Company in various management, product development, and engineering roles. Mr. Szabo holds a B.S. in Mechanical Engineering from Northeastern University and an M.B.A. from Duke Universitys Fuqua School of Business.



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Benny Ward has served as Vice President of Finance and Chief Financial Officer of Closure since April 2000. From
1996 until 2000, Mr. Ward served as Closures Controller. From 1993 to 1996, Mr. Ward served as a Senior Accountant with Price Waterhouse LLP. From 1990 to 1993, he worked for Alcatel Network Systems, N. A. Mr. Ward holds B.S. degrees in
Accounting and Political Science from East Carolina University and is a certified public accountant.



RISK FACTORS



In
addition to the other information in this Annual Report on Form 10-K, the following risk factors should be carefully considered. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also impair our business, operating results and financial condition. The occurrence of any of the following risks could adversely affect our business, operating results and financial
condition, as well as adversely affect the value of an investment in our common stock.



Certain of our products are in the early stage of product commercialization and if they are not successful, our operating results and business may be substantially impaired.



We were granted 510(k) premarket clearance for BAND-AID® Brand Liquid Bandage in January 2001. We believe that our continued growth will depend
in large part on sales of DERMABOND adhesive which was initially launched in 1997 and BAND-AID® Brand Liquid Bandage which is approaching its third year of commercialization. There can be no assurance that we and our marketing partners will be able to commercialize successfully or
achieve market acceptance of our technologies or products, or that our competitors will not develop technologies that are less expensive or otherwise superior. The failure to develop and market successfully our existing products as well as new
products could have a material adverse effect on our results of operations and financial condition.



If we are unable to develop new products based on our proprietary cyanoacrylate technology, our future operating results may suffer.



In addition to the commercialization of our current products, our future success depends on our ability to develop new products based on our
core technology, which could be expensive and time consuming. The successful development of new products depends on a number of factors, including the following:



| |  | obtaining regulatory clearances or approvals;
| | - | ---------------------------------------------



| |  | acceptance of new products by the market;
| | - | -----------------------------------------



| |  | inherent developmental risks, including ineffectiveness or lack of safety and unreliability;
| | - | --------------------------------------------------------------------------------------------



| |  | high commercial cost and preclusion or obsolescence resulting from third parties proprietary rights or superior or equivalent products;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to enter into favorable marketing agreements;
| | - | ---------------------------------------------------------



| |  | our ability to develop repeatable processes to manufacture new products in sufficient quantities for commercial sales; and
| | - | --------------------------------------------------------------------------------------------------------------------------



| |  | general economic conditions.
| | - | ----------------------------



If any of these factors cannot be overcome, we may not be able to develop and introduce new products in a timely or cost-effective manner, which could affect our future growth and results of operations.



If we are unable to produce adequate quantities of our products, our operating results may
suffer.



Our future success is dependent on our ability to
manufacture our products:



| |  | in commercial quantities;
| | - | -------------------------



| |  | in compliance with regulatory requirements; and
| | - | -----------------------------------------------



| |  | at an acceptable cost.
| | - | ----------------------



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We currently manufacture all of our products in a 69,000 square foot facility in Raleigh, North Carolina, with the
exception of certain processes completed by third parties. Production of increased quantities may involve technical challenges for us and may require significant scale-up expenses for additions to facilities and personnel. There can be no assurance
that we will be able to achieve sufficient manufacturing capabilities to satisfy demand in a cost-effective manner or to produce the quantities necessary for us to maintain profitability.



If we are unable to meet our marketing partners manufacturing requirements for DERMABOND adhesive, revenues generated from
DERMABOND adhesive will decrease.



If we are unable to meet the
manufacturing requirements for DERMABOND adhesive imposed by Ethicon, then Ethicon may itself manufacture DERMABOND adhesive and pay us royalties on sales. The royalty payments we would receive would be substantially less than the revenues currently
generated by selling DERMABOND adhesive to Ethicon.



If our products are not
accepted by the medical community and consumers, the commercial opportunities for our products would be limited.



The success of our existing products and products we develop in the future will depend on continued and initial acceptance of these products by the medical community as
well as consumers. We cannot predict how quickly, if at all, the medical community or consumers will accept our products or the extent to which our products will be used. If the medical or consumer community does not accept our products, our
revenues would suffer.



We may face product liability claims that could
result in costly litigation and significant liabilities for which we may not have adequate insurance protection.



The manufacture and sale of medical products exposes us to an inherent risk of product liability claims. The medical device industry in general has been subject to
significant product liability litigation. Any claims, with or without merit, could result in costly litigation, reduced sales, significant liabilities and diversion of our managements time, attention and resources. Based on our experience, we
believe that we maintain adequate product liability insurance to cover any such litigation. However, we cannot be sure that our product liability insurance coverage is adequate or that it will continue to be available to us on acceptable terms, if
at all. A successful product liability claim or series of claims brought against us could require us to pay substantial amounts that would decrease our profitability, if any.



Our products are subject to costly and extensive premarket clearances and approvals. Any unanticipated costs or delays in these
processes, or any failure to obtain the necessary clearances or approvals, will affect our ability to introduce and market new products.



The regulatory process is lengthy, expensive and uncertain and there can be no assurance that we will obtain the necessary clearances or approvals to market our products.
Before any new medical device may be introduced to the market, the manufacturer generally must obtain FDA clearance or approval through either the 510(k) process or the lengthier PMA, or premarket application, process. It generally takes from three
to nine months from submission to obtain 510(k) premarket clearance, although it may take longer. Approval of a PMA could take two or more years from the date of submission of the application. We expect that some of our future products under
development will be subject to the lengthier PMA process, such as our internal surgical sealant products. Securing FDA clearances and approvals may require the submission of extensive preclinical and clinical data and supporting information to the
FDA, and there can be no guarantee of ultimate clearance or approval. Failure to comply with applicable requirements can result in refusals to approve or clear new applications or notifications, withdrawals of existing product approvals or
clearances, issuances of warning letters, application integrity proceedings, injunctions, civil penalties, fines, recalls or seizures of products, total or partial suspensions of production and criminal prosecution. If any of these failures occur,
it could adversely affect our ability to introduce new products which could adversely effect our future growth and results of operations.



Our products are subject to postmarket reporting requirements. If safety problems occur after one of our products reaches the market, the FDA may take steps to prevent
or limit the further marketing of the product.



Our medical devices and
medical tissue adhesives are also subject to postmarket reporting requirements for certain adverse events and device malfunctions, and correction and removal reporting and recordkeeping requirements for



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actions taken with respect to distributed devices to reduce a risk to health. Additionally, the FDA actively enforces
regulations prohibiting marketing of devices for indications or uses that have not been cleared or approved by the FDA. If safety or efficacy problems occur after the product reaches the market, the FDA may take steps to prevent or limit further
marketing of the product.



Our products are subject to extensive
governmental regulation that could make it more expensive and time consuming for us to manufacture our products.



The manufacture of our products is subject to periodic inspection by regulatory authorities, including the FDA, and certain marketing partners for compliance with good
manufacturing practices, or GMPs, as well as equivalent requirements and inspections by state and foreign regulatory authorities. There can be no assurance that we will continue to satisfy these requirements for DERMABOND adhesive,
SOOTHE-N-SEAL® adhesive and BAND-AID® Brand Liquid Bandage. In addition, there can be no
assurance that the FDA or other authorities will not, during the course of an inspection of existing or new facilities, identify what they consider to be deficiencies in GMPs or other requirements and request, or seek, remedial action. Failure to
comply with such regulations or any delay in attaining compliance may adversely affect our manufacturing activities and could result in, among other things, FDA refusal to grant premarket approvals or clearances for pending or future products,
warning letters, injunctions, civil penalties, fines, recalls or seizures of products, total or partial suspensions of production and criminal prosecution. Additionally, future modifications of our manufacturing facilities and processes may subject
us to further FDA inspections and review before implementation of such modifications. There can be no assurance that we will be able to obtain necessary regulatory approvals or clearances on a timely basis, if at all. Delays in receipt of or failure
to receive such approvals or clearances or the loss of previously received approvals or clearances will affect our ability to timely manufacture our products.



Although we do not receive payments directly from third-party health care payors, their reimbursement methods and policies impact demand for DERMABOND adhesive and
future products.



DERMABOND adhesive is subject to the reimbursement
methods and policies used by the government and other third-party health care payors. If physicians, hospitals and other users of our products fail to obtain sufficient reimbursement from healthcare payors for DERMABOND adhesive or procedures using
DERMABOND, or adverse changes occur in governmental and private third-party payors policies toward reimbursement for this product or these procedures, it could negatively affect the demand for DERMABOND adhesive, which could have a material
adverse effect on our results of operations.



Because of the uncertainty
surrounding the reimbursement status of newly approved health care products, we have no assurance that adequate or any third-party coverage will be provided for new products introduced by Closure. If our new products do not receive adequate coverage
and reimbursement, the market acceptance of these products would be adversely affected, which would have a material adverse effect on our results of operations.



If we do not comply with laws and regulations relating to our use of hazardous materials, we may incur substantial liabilities.



We use hazardous materials and chemicals in our research and development programs and in our
manufacturing operations. We are required to comply with increasingly rigorous laws and regulations governing environmental protection and workplace safety, including requirements governing the handling, storage and disposal of hazardous substances.
Although, we believe that we handle, store and dispose of these materials in a manner that complies with state and federal regulations, the risk of accidental contamination or injury exists. In the event of an accident, we could be held liable for
decontamination costs, other clean-up costs and related damages or liabilities. To help minimize these risks, we utilize an outside professional services organization to help us evaluate environmental regulations and monitor our compliance with such
regulations.



If we are unable to maintain our current arrangements with our
marketing partners, we may not be able to market or sell our current or future products independently.



We have chosen not to market and distribute our products. Our strategy for commercialization of our products has included entering into agreements with other companies to market current and certain future products
incorporating our technology. There can be no assurance that we will be able to enter into additional marketing agreements on terms favorable to us, if at all, or that current or future agreements will ultimately be beneficial to us. Certain



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agreements also permit our marketing partners to pursue existing or alternative technologies in preference to our
technology. There can be no assurance that our interests will continue to coincide with those of our marketing partners or that the marketing partners will not develop, independently or with third parties, products which could compete with our
products, or that disagreements over rights or technology or other proprietary interests will not occur. Furthermore, there can be no guarantee that our marketing partners will not terminate their relationships with us and begin marketing products
of their own or of third parties. If we choose not to, or are unable to, enter into future agreements with marketing partners, we would be forced to commit increased capital to undertake the marketing and sale of our current and future products, or
we may not be able to market such products at all. If we are unable to sell our products independently or identify alternative marketing partners, our revenue and results of operations will be materially adversely affected.



Our product sales for our nonabsorbable products are dependent upon the success of our
marketing partners in performing their responsibilities. If our marketing partners fail to successfully perform their responsibilities, our product sales will suffer.



We have no control over the amount and timing of resources which may be devoted to our marketing partners performances of their
contractual responsibilities. There can be no assurance that our marketing partners will perform their obligations as expected or market any products under the marketing agreements, or that we will derive any revenue from such arrangements. There
can be no assurance that products will be launched in the manner and on the timetable expected by us as such determinations are entirely within the control of our marketing partners. If our marketing partners do not successfully perform their
responsibilities, the revenues we derive from our relationships with them will suffer.



We depend on a single qualified source supplier.If we are unable to obtain adequate commercial quantities or develop alternative source suppliers meeting regulatory, price and timing requirements, our ability to
manufacture our products, including DERMABOND adhesive, may be impaired.



We currently purchase cyanoacetate, the primary raw material used in manufacturing our products, from a single qualified source. There can be no assurance that we will be able to obtain adequate commercial quantities of cyanoacetate to
manufacture our products within a reasonable period of time or at commercially reasonable rates. We may manufacture cyanoacetate ourselves, however it may be more costly and we may not be able to produce commercial quantities as needed. A lack of
adequate commercial quantities of cyanoacetate, or our inability to develop alternative sources meeting regulatory requirements at similar prices and terms within a reasonable time, or any interruptions in supply in the future could have a material
adverse effect on our ability to manufacture our products, including DERMABOND adhesive and liquid bandage, and, consequently, could have a material adverse effect on our results of operations and financial condition. In addition, there are other
critical components of our products that we obtain from a single qualified source. We have plans to qualify a second source or establish supply contracts which include catastrophe plans for each of these items.



If our suppliers and subcontractors cannot provide the components and services that we
require, we may be unable to manufacture our products.



We cannot be sure
that our suppliers and subcontractors will furnish us with required components when we need them. Relying on third parties exposes us to potential interruptions in supply as well as damaged or non-conforming parts which could affect our ability to
ship our products to our customers on a timely basis. These factors could make it more difficult to obtain qualified materials to manufacture our products and manage our inventory effectively which could have a material adverse effect on our results
of operations.



If we are unable to obtain new patents and maintain patent
and trade secret protection, our reputation and competitiveness in the marketplace may be adversely affected.



The medical device industry places considerable importance on obtaining patent and trade secret protection for technologies, products and processes. Our success depends,
in part, on whether we can obtain patents and maintain trade secret protection. There can be no assurance that any pending patent applications will be approved, that we will develop additional proprietary products that are patentable or that any
patents issued to us will provide us with competitive advantages. Furthermore, there can be no assurance that others will not independently develop similar products, duplicate any of our products or design around our patents.



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In addition to patent protection, we rely on unpatented trade secrets and proprietary technological expertise. There can
be no assurance that others will not independently develop or otherwise acquire equivalent techniques, or otherwise gain access to our trade secrets and proprietary technological expertise or disclose such trade secrets. We rely, in part, on
confidentiality agreements with our marketing partners, employees, advisors, vendors and consultants to protect our trade secrets and proprietary technological expertise. There can be no assurance that these agreements will not be breached, that we
will have adequate remedies for any breach or that our unpatented trade secrets and proprietary technological expertise will not otherwise become known or be independently discovered by competitors. Failure to obtain or maintain patent or trade
secret protection, for any reason, could adversely effect our competitiveness in the marketplace.



If we are accused of infringing upon the patents or proprietary rights of others, we may be required to obtain commercially favorable licenses or be forced to engage in costly and time-consuming litigation.



Our commercial success will depend, in part, on our ability to operate
without infringing on patents and other proprietary rights of third parties. Our patents may be challenged by third parties and the patents of others may prevent the commercialization of our products. If it is determined that we have been infringing
upon any third partys patent rights, we could be required to pay damages, alter our products or processes, obtain licenses or cease certain activities. If we are required to obtain any licenses, there can be no assurance that we will be able
to do so on commercially favorable terms, if at all. Our failure to obtain a license to any necessary technology may result in our being barred from manufacturing and selling our products.



We may also be forced to engage in litigation to enforce any patents issued or licensed to
us, or to determine the scope and validity of third party proprietary rights. Moreover, if our competitors prepare and file patent applications in the United States to claim technology that is also claimed by us, we may be forced to participate in
interference proceedings declared by the U.S. Patent and Trademark Office to determine priority of invention. Such litigation and participation in proceedings could result in substantial costs and diversion of our efforts, even if the eventual
outcome is favorable to us. Litigation could also subject us to significant liabilities to third parties, require disputed rights to be licensed from third parties or require us to cease using certain technology.



If our competitors are successful in developing alternative technologies and products that
are more effective, easier to use or more economical, our technology and products may be rendered obsolete and noncompetitive.



We compete with domestic and foreign medical device and pharmaceutical companies in various rapidly evolving and technologically advanced fields in developing our
technology and products. In the worldwide wound closure market, DERMABOND adhesive competes with the suture products of Ethicon as well as the staple products of Ethicon Endo-Surgery, Inc., both subsidiaries of Johnson & Johnson. We also compete
with the suture and staple products of United States Surgical Corporation, a subsidiary of Tyco International Ltd. In addition, there are currently three other cyanoacrylate-based topical adhesives with which DERMABOND adhesive competes, only one of
which is approved for sale in the United States. In 2002, United States Surgical, a division of Tyco Health Group, LP received FDA approval to market Indermil® Tissue Adhesive, a butyl cyanoacrylate. Tyco has been marketing Indermil® in the United Kingdom since 1996 and it is currently available in many other countries.
B. Braun GmbH markets Histoacryl® as a topical
closure adhesive for small lacerations and incisions in low skin tension areas of the body. MedLogic Global Corporation markets LiquiBand adhesive, primarily in Europe, however it is not marketed in the United States as it does not yet have FDA approval. In the domestic OTC adhesive
bandage market, BAND-AID® Brand Liquid Bandage
competes with the BAND-AID® Brand Adhesive Bandages
of CPC as well as 3M® brand and Curad® brand (marketed by Beiersdorf AG) adhesive and liquid
bandages. These three brands in total comprise approximately 80% of the adhesive bandage market. In the domestic OTC oral pain relief market, SOOTHE-N-SEAL® adhesive competes with the following four major products that comprise approximately 75% of that category: Colgate Orabase® Gel marketed by Colgate, Anbesol® Oral Anesthetic products marketed by American Home
Products Corporation, Orajel® products marketed by
Del Laboratories and Zilactin® products marketed by
Zila Consumer Pharmaceuticals.



There can be no assurance that our competitors
will not succeed in developing alternative technologies and products that are more effective, easier to use or more economical than those which have been or are being developed by us or that would render our technology and products obsolete and
noncompetitive in these fields. These competitors may also have greater experience in developing products, conducting clinical trials, obtaining regulatory clearances or approvals, and manufacturing and marketing such products. Certain competitors
may obtain patent protection, approval or clearance by the FDA or product commercialization earlier than us. Finally, under the terms of our marketing agreements, our marketing partners may pursue parallel development of other technologies or
products, which may result in a marketing partner developing additional products that will compete with our products.



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Our plans to market current and future products internationally are subject to several risks and as a result, we may
not be able to successfully commercialize our current or future products in any foreign market.



We and our marketing partners intend to market current and future products in Europe, Australia, Canada and certain other foreign jurisdictions outside of the United States as well as domestically. A number of risks
are inherent in international transactions, including the following:



| |  | our ability to obtain required market authorizations;
| | - | -----------------------------------------------------



| |  | our compliance with extensive safety, manufacturing and quality regulations;
| | - | ----------------------------------------------------------------------------



| |  | differences from the FDA regulatory scheme;
| | - | -------------------------------------------



| |  | the influence of political instability, price controls, trade restrictions and tariff modifications on our international sales; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------



| |  | fluctuations in currency exchange rates.
| | - | ----------------------------------------



There can be no assurance that we will obtain market authorizations in such countries or that we will not be required to incur significant costs in obtaining or
maintaining our foreign market authorizations. Delays in receipt of authorizations to market our products in foreign countries, failure to receive such authorizations or the future loss of previously received authorizations would delay or bar sales
of our products in any such foreign country. Our international sales and related royalties of DERMABOND adhesive are based on sales in foreign currencies, but payable in U.S. dollars, and thus may be adversely affected by fluctuations in currency
exchange rates. Additionally, fluctuations in currency exchange rates may adversely affect demand for our products by increasing the price of our products in the currency of the countries in which the products are sold. There can be no assurance
that we will be able to successfully commercialize our current or future products in any foreign market.



We may need additional funding and may not have access to capital. If we are unable to raise capital when needed, we may need to delay, reduce, eliminate or license our product development and commercialization
effort.



We have expended and expect to continue to expend substantial
funds to complete the research, development and clinical testing of our existing products and future products in development and to increase our current scale of manufacturing. We believe that existing cash and cash equivalents and investments,
which totaled $33,427,000 as of December 31, 2003, will be sufficient to finance our capital requirements for at least 12 to 24 months. There can be no assurance that we will not be required to seek additional capital to finance our operations in
the future. We currently have a $3,000,000 line of credit for working capital purposes. We currently have no commitments for any additional financing, and there can be no assurance that adequate funds for our operations from our revenues, financial
markets, arrangements with marketing partners or from other sources will be available when needed or on terms attractive to us. The inability to obtain sufficient funds may require us to delay, scale back or eliminate some or all of our research and
product development programs, manufacturing operations, clinical studies or regulatory activities or to license third parties to commercialize products or technologies that we would otherwise seek to develop ourselves.



Our stock price is volatile and could experience substantial declines.



The market price of our common stock has historically experienced and might continue to
experience volatility. The market price of our common stock may fluctuate due to our operating results, changes in the economy or the financial markets and other developments affecting us or our competitors. In addition, the stock market has
experienced significant price and volume fluctuations in recent years, as well as significant decreases in value. This volatility and the recent market decline of the last few years have affected the market prices of securities issued by many
companies and might adversely affect the price of our common stock.



Our
operations might be affected if there is a natural disaster or other catastrophic event.



We depend on our manufacturing facility for the continued operation of our business, as well as critical information systems. We currently have in place contingency plans for catastrophic events and natural disasters.
Although we carry limited business interruption and other insurance policies, we might suffer losses as a result of catastrophic events and natural disasters which could have a material negative impact on our operating results.



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Our failure to detect and prevent computer viruses and other malicious acts targeted at our management information
systems and controls could expose us to a breach in security, rendering proprietary information available to outsiders and data unreliable.



Unauthorized access, computer viruses, accidental or intentional actions and other disruptions could occur with regard to our information systems. As a result of
accidental as well as intentional actions of Internet users or hackers, we may experience delays or interruptions in business due to a breach in the security of confidential information. The costs required to mitigate the risks from
computer viruses and alleviate other security problems could be significant and the efforts to address such problems could result in interruptions and delays in our business, which could have a material adverse effect on our results of operations.
Furthermore, a breach in the security of our management information systems could cause our trade secrets and other proprietary information to enter the public domain, which could adversely effect our competitive position in the market.



Our success depends on key personnel, the loss of whom could impair our research and
development efforts.



Our success partially depends upon the efforts and
talents of our senior management and scientific personnel. We have entered into employment agreements with each member of our senior management. The loss of the services of one or more of these key employees could adversely affect our ability to
meet our business objectives. In addition, our success depends on our ability to attract and retain skilled personnel, especially in the areas of research and product development. There is intense competition for such skilled personnel and we may be
unable to attract and retain these individuals. Our failure to do so would have an adverse effect on our business.



Effective control by principal stockholders could allow for control of most matters submitted to our stockholders.



Two principal stockholders, in the aggregate, beneficially own approximately 39% of the
outstanding common stock as of March 8, 2004. Currently, there are no voting trusts or other agreements between these individuals to vote in concert, however, such persons, acting together, could have the ability to control most matters submitted to
stockholders of Closure.



Recently enacted and proposed regulatory changes
may cause us to incur increased costs.



Recently enacted and proposed
changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, will increase our expenses as we evaluate the implications of new rules and devote resources to respond to the new
requirements. In particular, we expect to incur additional general and administrative expense as we implement Section 404 of the Sarbanes-Oxley Act, which requires management to report on, and our independent auditors to attest to, our internal
controls. The compliance of these new rules could also result in continued diversion of managements time and attention, which could prove to be disruptive to normal business operations. Finally, failure to comply with any of the new laws and
regulations, including the requirements of Rule 404, could adversely impact market perception of our company, which could make it difficult to access the capital markets or otherwise finance our operations in the future.



ITEM 2. PROPERTIES.



We lease a 69,000 square foot
facility that houses manufacturing, research and development and our executive offices in Raleigh, North Carolina. The lease expires in November 2008 and we have the option to renew the lease upon termination.



ITEM 3. LEGAL PROCEEDINGS.



None.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.



We did not submit any matters to a vote of security holders during the fourth quarter of 2003.



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##### Table of Contents

PART II



ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.



MARKET INFORMATION



Our Common Stock is quoted on the Nasdaq National Market under the symbol CLSR. The following table sets forth, for the periods indicated, the high and low closing sale price per share of Common Stock, as
reported on the Nasdaq National Market, for 2002 and 2003.



|               |  |                        |       |      |   |       |  |     |       |  |   |      
|-------------- |  | ---------------------- | ----- | ---- | - | ----- |  | --- | ----- |  | - | -----
|               |  | Market Price Per Share
|               |  | 2002                   |       | 2003
|               |  | High                   |       | Low  |   | High  |  | Low
|First Quarter  |  | $                      | 24.30 |      | $ | 18.00 |  | $   | 13.56 |  | $ | 8.28 
|Second Quarter |  |                        | 19.60 |      |   | 13.20 |  |     | 22.96 |  |   | 13.61
|Third Quarter  |  |                        | 15.90 |      |   | 11.01 |  |     | 26.85 |  |   | 18.93
|Fourth Quarter |  |                        | 14.18 |      |   | 8.00  |  |     | 37.27 |  |   | 23.15



HOLDERS



As of March 8, 2004, there were approximately 247 holders of record of our Common Stock. We
have no preferred stock outstanding.



DIVIDEND INFORMATION



We have never declared or paid cash dividends on our Common Stock and do not anticipate
paying any cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon our financial condition, operating results, capital requirements and such other factors as the Board of Directors deems relevant.



19



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##### Table of Contents

ITEM 6. SELECTED FINANCIAL DATA.



The selected
financial data set forth below should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and the related notes included elsewhere in this
Annual Report. We derived the financial data from our audited financial statements. The balance sheets as of December 31, 2002 and 2003 and the related statements of operations, cash flows and stockholders equity for the years ended December
31, 2001, 2002 and 2003 and notes thereto appear elsewhere in this Annual Report.



|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | ---- | ------ |  | ---- | ------ | - |  | - | ------
|                                                                                                                                |  | Years ended December 31,             
|                                                                                                                                |  | 1999                                  |        |   | 2000 |   |        | 2001 |  | 2002 |        |  | 2003
|                                                                                                                                |  | (In thousands, except per share data)
|STATEMENT OF OPERATIONS DATA:                                                                                                   |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Product sales                                                                                                                   |  | $                                     | 13,370 |   |      | $ | 13,076 |      |  | $    | 18,405 |  | $    | 22,711 |   |  | $ | 33,933
|License and product development revenues (1)                                                                                    |  |                                       |       |   |      |   | 625    |      |  |      | 768    |  |      | 1,020  |   |  |   | 1,054 
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Total revenues                                                                                                                  |  |                                       | 13,370 |   |      |   | 13,701 |      |  |      | 19,173 |  |      | 23,731 |   |  |   | 34,987
|Cost of products sold                                                                                                           |  |                                       | 4,722  |   |      |   | 3,841  |      |  |      | 5,450  |  |      | 6,496  |   |  |   | 8,332 
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Gross profit                                                                                                                    |  |                                       | 8,648  |   |      |   | 9,860  |      |  |      | 13,723 |  |      | 17,235 |   |  |   | 26,655
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Research, development and regulatory affairs expenses                                                                           |  |                                       | 6,296  |   |      |   | 5,853  |      |  |      | 5,622  |  |      | 6,436  |   |  |   | 8,134 
|General and administrative expenses                                                                                             |  |                                       | 5,266  |   |      |   | 5,400  |      |  |      | 5,504  |  |      | 6,855  |   |  |   | 6,592 
|Special charge- voluntary packaging recall (2)                                                                                  |  |                                       |       |   |      |   |       |      |  |      | 430    |  |      |       |   |  |   |      
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Total operating expenses                                                                                                        |  |                                       | 11,562 |   |      |   | 11,253 |      |  |      | 11,556 |  |      | 13,291 |   |  |   | 14,726
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Income (loss) from operations                                                                                                   |  |                                       | (2,914 | ) |      |   | (1,393 | )    |  |      | 2,167  |  |      | 3,944  |   |  |   | 11,929
|Interest income, net                                                                                                            |  |                                       | 387    |   |      |   | 481    |      |  |      | 388    |  |      | 315    |   |  |   | 312   
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Income (loss) before taxes                                                                                                      |  |                                       | (2,527 | ) |      |   | (912   | )    |  |      | 2,555  |  |      | 4,259  |   |  |   | 12,241
|Provision (benefit) for income taxes                                                                                            |  |                                       |       |   |      |   |       |      |  |      | 21     |  |      | (5,864 | ) |  |   | 4,430 
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Net income (loss) before cumulative effect of accounting change                                                                 |  |                                       | (2,527 | ) |      |   | (912   | )    |  |      | 2,534  |  |      | 10,123 |   |  |   | 7,811 
|Cumulative effect of accounting change (1)                                                                                      |  |                                       |       |   |      |   | (2,656 | )    |  |      |       |  |      |       |   |  |   |      
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Net income (loss)                                                                                                               |  | $                                     | (2,527 | ) |      | $ | (3,568 | )    |  | $    | 2,534  |  | $    | 10,123 |   |  | $ | 7,811 
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Net income (loss) per common share before cumulative effect of accounting change:                                               |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Basic                                                                                                                           |  | $                                     | (0.19  | ) |      | $ | (0.07  | )    |  | $    | 0.19   |  | $    | 0.75   |   |  | $ | 0.57  
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Diluted                                                                                                                         |  | $                                     | (0.19  | ) |      | $ | (0.07  | )    |  | $    | 0.18   |  | $    | 0.73   |   |  | $ | 0.54  
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Cumulative effect of accounting change per common sharebasic and diluted                                                       |  | $                                     |       |   |      | $ | (0.20  | )    |  | $    |       |  | $    |       |   |  | $ |      
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Net income (loss) per common share:                                                                                             |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Basic                                                                                                                           |  | $                                     | (0.19  | ) |      | $ | (0.27  | )    |  | $    | 0.19   |  | $    | 0.75   |   |  | $ | 0.57  
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Diluted                                                                                                                         |  | $                                     | (0.19  | ) |      | $ | (0.27  | )    |  | $    | 0.18   |  | $    | 0.73   |   |  | $ | 0.54  
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Shares used in computation of net income (loss) per common share:                                                               |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Basic                                                                                                                           |  |                                       | 13,324 |   |      |   | 13,390 |      |  |      | 13,468 |  |      | 13,535 |   |  |   | 13,758
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Diluted                                                                                                                         |  |                                       | 13,324 |   |      |   | 13,390 |      |  |      | 13,852 |  |      | 13,783 |   |  |   | 14,457
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Pro forma amounts are presented below assuming the change in accounting principle adopted in 2000 is applied retroactively
(1): |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Pro forma- Net loss                                                                                                             |  | $                                     | (1,902 | ) |      | $ | (912   | )    |  |      |        |  |      |        |   |  |   |       
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Pro forma- Net loss per common share:                                                                                           |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Basic                                                                                                                           |  | $                                     | (0.14  | ) |      | $ | (0.07  | )    |  |      |        |  |      |        |   |  |   |       
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       
|Diluted                                                                                                                         |  | $                                     | (0.14  | ) |      | $ | (0.07  | )    |  |      |        |  |      |        |   |  |   |       
|                                                                                                                                |  |                                       |        |   |      |   |        |      |  |      |        |  |      |        |   |  |   |       



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|                                                                   |  |                    |        |      |   |        |  |      |        |      |   |        |  |   |       
|------------------------------------------------------------------ |  | ------------------ | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                                                   |  | As of December 31,
|                                                                   |  | 1999               |        | 2000 |   | 2001   |  | 2002 |        | 2003
|                                                                   |  | (In thousands)    
|BALANCE SHEET DATA:                                                |  |                    |        |      |   |        |  |      |        |      |   |        |  |   |       
|Cash and cash equivalents and investments                          |  | $                  | 11,322 |      | $ | 11,832 |  | $    | 12,958 |      | $ | 17,042 |  | $ | 33,427
|Working capital (3)                                                |  |                    | 9,745  |      |   | 8,462  |  |      | 9,321  |      |   | 16,815 |  |   | 30,974
|Total assets                                                       |  |                    | 22,511 |      |   | 22,139 |  |      | 25,340 |      |   | 36,747 |  |   | 53,768
|Long-term debt and capital lease obligations, less current portion |  |                    | 2,155  |      |   | 332    |  |      |       |      |   | 336    |  |   |      
|Total stockholders equity                                         |  |                    | 16,625 |      |   | 13,907 |  |      | 17,247 |      |   | 29,190 |  |   | 47,428

---

|(1) | In 2000, we adopted SEC Staff Accounting Bulletin No. 101 which changed our method of accounting for revenue from license and product development agreements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In 2001, we recalled three production lots of DERMABOND adhesive due to a mechanized packaging problem. See note 3 of notes to financial statements for further discussion.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Working capital is calculated as current assets minus current liabilities.
|--- | --------------------------------------------------------------------------



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.



The statements set forth below that are not historical facts or statements of current conditions are forward-looking statements. Such forward-looking statements may be
identified by, among other things, the use of forward-looking terminology such as believes, expects, forecasts, estimates, plans, continues, may, will,
should, anticipates or intends or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy or intentions. These forward-looking statements, such as statements
regarding present or anticipated scientific progress, development of potential products, future revenues, capital expenditures and research and development expenditures, future financings and collaborations, management, manufacturing development and
capabilities, regulatory clearances and approvals, and other statements regarding matters that are not historical facts, involve predictions. Closures actual results, performance or achievements could differ materially from the results
expressed in, or implied by, these forward-looking statements. Potential risks and uncertainties that could affect Closures actual results, performance or achievements include, but are not limited to, the Risk Factors set forth in
Item 1 of this Annual Report. Given these uncertainties, current or prospective investors are cautioned not to place undue reliance on any such forward-looking statements. Furthermore, we disclaim any obligation or intent to update any such factors
or forward-looking statements to reflect future events or developments.



The following discussion should be read in conjunction with our financial statements, including the notes thereto, included elsewhere in this Annual Report.



OVERVIEW



Since our inception in 1990, we have focused our efforts on developing and manufacturing innovative biomaterial-based medical devices for use in topical wound closure and
wound care in humans and animals. In addition, our research efforts include the development of internal adhesive products.



In 2003, we established a new strategic plan for the corporation. Building upon our expertise in biomaterials, we will pursue three clinical platforms to address unmet
medical needs and we are actively pursuing the clinical areas of topical wound care, internal surgical sealants and new complementary technologies. In order to execute our strategic plan and support our growth, we reorganized our management
structure to enhance the strength of our business and added new senior management team members.



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During 2003, DERMABOND adhesive continued to be our main revenue contributor, aided by the introduction of High-Viscosity
DERMABOND, a thicker, easier to use formulation. This product line extension, approved by the FDA in January 2003, allows for more precise application without the rundown experienced with the less viscous versions. Also, during 2003, we
further enhanced the design of the DERMABOND delivery system by introducing ProPen and ProPen XL, which were launched in both the U.S. and Europe in January 2004.



BAND-AID® Brand Liquid Bandage continued to provide significant revenue growth in just its second year of availability in the U.S. Consistent with the initial
launch in 2002, CPC executed a print and television advertising campaign during the 2003 summer months to increase consumer awareness of the liquid bandage. CPC expanded distribution into foreign markets during 2003 when it introduced the liquid
bandage product in Canada in early 2003 and later in the year in Europe. During the year, we completed the development of the first line extension of our consumer technology with the introduction of the BAND-AID® Brand Liquid Bandage Skin Crack. This product was launched by CPC during January 2004.



During 2003, we continued the development of our internal adhesives,
particularly the vascular sealant product. We filed an Investigational Device Exemption with the FDA in June 2003, and completed enrollment of a ten-patient human pilot study in December. This was a milestone for Closure as this was the first time
our technology has been used inside the human body. We anticipate initiating a definitive clinical study in the first half of 2004 given positive results from the human pilot follow-up with the FDA.



RESULTS OF OPERATIONS



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



Revenues. Total revenues for 2003 were $34,987,000 compared to $23,731,000 for 2002. Product revenues increased by 47% primarily due
to sales of our DERMABOND adhesive and BAND-AID®
Brand Liquid Bandage products. DERMABOND adhesive, which included the introduction of the High-Viscosity product during 2003, continued to represent the majority of total revenues. However, the BAND-AID® Brand Liquid Bandage product experienced significant year-over-year revenue growth,
with the majority of this growth occurring during the first half of the year as CPC was gearing up for the summer bandage season, while the second half of 2003 was supported by the initial international shipments of liquid bandage. CPC introduced
the liquid bandage product in Canada in early 2003 and then later in the year in Europe. In 2003 and 2002, 95% and 94% of product sales were to one customer, respectively. During 2004, we anticipate continued revenue growth as our DERMABOND and
BAND-AID® Brand Liquid Bandage product lines
continue to increase their market penetration, in particular the ProPen products and Liquid Bandage Skin Crack Gel, each of which were launched in January 2004. In addition, we believe another factor in our anticipated revenue growth could be the
fact that we receive a higher percentage of the ultimate selling price of each unit of our ProPen product as compared to the original DERMABOND and High-Viscosity products. However, we will recognize a one-time reduction of revenue in the amount of
$490,000 in the first quarter of 2004 for incentive payments made by Closure to Ethicon. These incentive payments are being made to resolve issues related to the payment provisions of the supply and distribution agreement for the DERMABOND product
and to maintain goodwill and the positive relationship between the companies.



Cost of products sold. Cost of products sold for 2003 was $8,332,000 compared to $6,496,000 for 2002. Cost of products sold as a percentage of revenues was approximately 24% for 2003 and 27% for 2002. The improvement during 2003 was
the result of higher production volumes coupled with manufacturing efficiency initiatives, including an increased scale of production and the addition of automated filling process for the liquid bandage product. We expect that future gross margin
percentages on product sales will fluctuate based on production volumes and the relative proportion of professional products versus OTC products, which generally exhibit lower gross margin percentages. With regard to our ProPen products, despite the
fact that we receive a higher percentage of the ultimate selling price of each unit of ProPen product as compared to the original DERMABOND and High-Viscosity products, we do not expect this to have a significant impact on our overall gross margin
percentages during 2004 because it costs us more to produce the ProPen products than the other DERMABOND products.



Operating expenses. Operating expenses were approximately $14,726,000 and $13,291,000 for 2003 and 2002, respectively. Operating expenses consist of research,
development and regulatory affairs expenses and general and administrative expenses. During 2003, research, development and regulatory affairs expenses increased primarily due to efforts surrounding the development and validation of our new ProPen
and ProPen XL products, the development of an internal vascular sealant and the related pilot study, as well as the development of line extensions for current products. During 2003, research, development and regulatory affairs expenses represented
approximately 23% of total revenues compared to 27% in 2002. We expect these expenses will increase as we expand our product pipeline and related development efforts and clinical trials for potential new products, in particular our internal surgical
sealants. General and administrative expenses decreased in 2003 primarily due to a charge during 2002 of approximately $800,000 related to the transition of our CEO position. Overall, marketing personnel and insurance costs increased during 2003.
General and administrative expenses as a percentage of total revenues decreased from 29% in the 2002 period to 19% in the 2003 period.



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Interest income, net. Net interest income for 2003 decreased slightly to $312,000 from $315,000 for 2002. Total
interest income decreased despite an overall increase in total investments and was primarily due to lower investment yields as a result of market interest rate changes during 2003. In addition, 2003 interest expense was minimal due to the
extinguishment of our term loan balance during the first half of 2003.



Income taxes.The provision for income taxes was $4,430,000 during 2003 compared to a benefit from income taxes of $5,864,000 during 2002. In 2003, we began recording fully-taxed earnings at an effective rate of approximately 36%.
Although we record a provision for income taxes on our statement of operations, we will not be required to pay federal income taxes, other than alternative minimum taxes, until such time as our net operating losses and tax credit carryforwards,
approximately $10,668,000 and $2,189,000, respectively as of December 31, 2003, are exhausted.



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



Revenues. Total revenues for 2002 were $23,731,000 compared to $19,173,000 for 2001. Product revenues increased by 23% which was primarily due to sales of BAND-AID® Brand Liquid Bandage, launched in April by CPC as well as increased shipments of
DERMABOND adhesive. In 2002, DERMABOND adhesive continued to represent the majority of total revenues, approximately 75%. License and product development revenues increased during 2002 to $1,020,000 from $768,000 in 2001 as revenue previously
deferred was recognized ratably over the lives of various contracts with our marketing partners. In 2002 and 2001, 94% and 83% of product sales were to one customer, respectively.



Cost of products sold. Cost of products sold for 2002 was $6,496,000 compared to $5,450,000 for 2001. Cost of products sold as a
percentage of revenues was approximately 27% for 2002 and 29% for 2001. The decrease was attributable to increased production volumes and cost containment. Also, our product sales mix continued to be heavily weighted with the DERMABOND product,
which had significantly higher margins than our over-the-counter products.



Operating expenses. Operating expenses were approximately $13,291,000 and $11,556,000 for 2002 and 2001, respectively. Operating expenses consisted of research, development and regulatory affairs expenses and general and
administrative expenses. During 2002, research, development and regulatory affairs expenses were primarily focused on the development of DERMABOND adhesive line extensions, including the High-Viscosity clinical study, the development of an internal
vascular sealant and wound management products and basic research. Overall, general and administrative expenses increased in 2002 primarily due to a charge of approximately $800,000 related to the transition of the CEO position. The charge included
approximately $600,000 related to transition services provided by our former CEO and his entering into a non-competition agreement. The remainder primarily related to the taxes and benefits on the transition services and recruitment costs associated
with the selection of a new CEO. In addition, general and administrative costs for 2002 increased due to additional outside professional services and personnel costs over the 2001 period.



Interest income, net. Net interest income for 2002 decreased to $315,000 from $388,000 for 2001. Total interest income decreased
primarily due to lower investment yields as a result of market interest rate changes during 2002. Interest expense also declined due to the continued reduction of our term loan balance and capital lease obligations through monthly principal payments
coupled with a decline in interest rates associated with those obligations. All capital lease obligations were retired during 2002.



Income taxes.Prior to 2002, no deferred provision or benefit for income taxes was recorded because we were in a net deferred tax asset position and a full
valuation allowance had been recorded. During the fourth quarter of 2002, we re-evaluated the amount of valuation allowance required in light of numerous factors including the profitability achieved in recent years and expected in future years. As a
result, we reduced the valuation allowance on deferred tax assets to an amount that we believe is more likely than not of being realized based on our assessment of the likelihood of near term operating income coupled with uncertainties with respect
to the impact of future market conditions. At December 31, 2002, the valuation allowance primarily reflects uncertainties involving the realization of state tax credits and loss carryforwards. The valuation allowance was reduced by $8,419,000 during
2002, including $1,210,000 related to net operating losses generated by the exercise of stock options prior to 2002. This portion of the reduction in the valuation allowance, along with $48,000 in similar tax benefits from stock option exercises
during 2002, was credited to additional paid-in-capital.



23



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##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES



We have financed our operations to date primarily through the sale of equity securities, borrowings from lenders, license and product
development revenues and product sales. Our principal sources of liquidity include cash, cash equivalents and marketable investments, which totaled $33,427,000 at December 31, 2003.



As of December 31, 2003, we had no long-term debt or capital lease obligations. Closure maintains a $3,000,000 line of credit for working
capital purposes which had no borrowings under it at December 31, 2003. We currently have no commitments for any additional financing.



Contractual obligations consist of operating leases and capital asset commitments. Operating leases obligations primarily relate to our facility lease. Purchase
obligations represent noncancellable commitments for capital asset investments.



|                                                 |  |                        |  |                 |  |           |  |           |  |                 
|------------------------------------------------ |  | ---------------------- |  | --------------- |  | --------- |  | --------- |  | ----------------
|(in thousands)                                   |  | Payments due by period
|Contractual Obligations as of December 31, 2003: |  | Total                  |  | Less than1 year |  | 1-3 years |  | 3-5 years |  | More than5 years
|                                                 |  | $                      |  | $               |  | $         |  | $         |  | $               
|Long-term debt                                   |  |                       |  |                |  |          |  |          |  |                
|Capital lease obligations                        |  |                       |  |                |  |          |  |          |  |                
|Operating lease obligations                      |  | 3,765                  |  | 762             |  | 1,524     |  | 1,479     |  |                
|Purchase obligations                             |  | 472                    |  | 472             |  |          |  |          |  |                
|Other long term liabilities                      |  |                       |  |                |  |          |  |          |  |                



Capital Expenditures



There are no individually material capital expenditure commitments
outstanding as of December 31, 2003. However, we estimate that capital investments for 2004 could be up to $2,500,000 to support facility expansion and additional manufacturing initiatives. We believe that our balances of cash, cash equivalents, and
investments together with funds generated from operations and existing borrowing facilities will be sufficient to meet our operating cash requirements and fund required capital expenditures for the foreseeable future.



Research and Development



During 2003, Closure incurred approximately $8,134,000 in research, development and
regulatory affairs expenses compared to $6,436,000 in 2002. The increase was primarily due to the development and validation of our new ProPen products, the development of an internal vascular sealant and the related pilot study, as well as the
development of line extensions for current products. We continued to increase our research and development activities to maintain a competitive advantage and we anticipate that research and development expenses will increase for the next several
years as we develop new products and line extensions for existing products. We also expect that clinical trials related to new products and line extensions will be costly and represent a significant part of future expenses. Research and development
costs are expensed as incurred and include items related to personnel, costs of supplies, clinical trials, facility costs and fees paid to consultants and outside contractors and providers. We have arrangements with certain marketing partners in
which we share certain research, development and regulatory affairs expenses related to approved projects. During 2003, 2002 and 2001, we were reimbursed $386,000, $905,000 and $576,000, respectively, in accordance with these cost sharing
arrangements. We cannot estimate the costs to complete our research and development projects due to uncertainties regarding successful completion of projects, clinical trial outcomes and regulatory approvals. We believe that funds for future
research and development needs can be obtained from existing cash and investment balances and from cash generated from operations. However, no assurance can be given that we may not require additional funds to support the completion of new product
development, conduct clinical trials and obtain regulatory approvals.



24



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##### Table of Contents

Cash Flows



Net cash provided by operating activities was $11,510,000 for 2003 compared to $5,713,000 for 2002. The increase in cash provided by operations was primarily due to the
increase in operating income during the 2003 period as well as the use of net operating loss carryforwards to reduce tax payments.



Net cash used by investing activities was $17,987,000 during 2003 and $7,590,000 during the 2002 period. The increase in net cash used during 2003 primarily related to an
increased net investment in marketable securities and purchases of fixed assets supporting the manufacture of new products and our facility expansion.



Net cash provided by financing activities was $7,214,000 during 2003 compared to net cash used during 2002 of $371,000. Our primary financing activity during 2003 was
related to the issuance of shares under the stock option and stock purchase plans.



Based on our current plans, we believe that existing cash, cash equivalents and investments, which totaled $33,427,000 at December 31, 2003, will be sufficient to finance our operating and capital requirements for at least 12 to 24 months.
We anticipate that our recurring operating expenses will increase for the next several years, as we expect research, development and regulatory affairs and general and administrative expenses to increase in order to develop new products, manufacture
in commercial quantities and fund additional clinical trials. We also may invest in long-term assets such as intangible assets and capital expenditures to expand our manufacturing capabilities.



Our future capital requirements, however, will depend on numerous factors, including but not
limited to the following:



| |  | our ability to manufacture and commercialize successfully our existing products, including DERMABOND adhesive and liquid bandage;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| |  | the progress of our research and product development programs for future nonabsorbable and internal adhesive products, including clinical studies;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the effectiveness of product commercialization activities and marketing agreements for our future products, including the scale-up of manufacturing capabilities for increased
capacity in anticipation of product commercialization and development;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to maintain existing marketing agreements, including our agreements with Ethicon and CPC for DERMABOND adhesive and liquid bandage, respectively, and establish and
maintain new marketing agreements;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our ability to achieve product development milestones;
| | - | ------------------------------------------------------



| |  | the costs involved in preparing, filing, prosecuting, defending and enforcing intellectual property rights;
| | - | -----------------------------------------------------------------------------------------------------------



| |  | the effect of competing technological and market developments;
| | - | --------------------------------------------------------------



| |  | timely receipt of regulatory clearances and approvals and the costs of complying with regulatory requirements;
| | - | --------------------------------------------------------------------------------------------------------------



| |  | general acceptance of our products by the medical community and consumers; and
| | - | ------------------------------------------------------------------------------



| |  | general economic conditions.
| | - | ----------------------------



We may be required to seek additional capital to finance our operations in the future. If our currently available funds and internally generated cash flow are not sufficient to satisfy our financing and operating
needs, we will be required to seek additional funding through bank borrowings, additional public or private sales of our securities, including equity securities, or through other arrangements with marketing partners. Other than our working capital
line of credit, we have no credit facility or other committed sources of capital. There can be no assurance that additional funds, if required, will be available to us on favorable terms, if at all.



CRITICAL ACCOUNTING ESTIMATES



This is not a comprehensive list of all of our accounting policies. Our significant
accounting policies are described in note 2 to the financial statements included in Item 8 of this Form 10-K. The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts and related
disclosures. On an ongoing basis, our management re-evaluates its estimates and judgments. We believe the following financial statement items require the most significant judgments and estimates used in the preparation of the financial statements.



25



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##### Table of Contents

Intangible assets.Intangible assets are capitalized until either the related patent or license is issued or
obtained, in which case they are amortized over the shorter of their remaining economic or useful lives or they are rejected or abandoned, in which case they are written off. Management estimates the remaining economic or useful life based on the
subject matter protected, scope of the claims, the competitive barrier function and economic benefit. On an ongoing basis, we evaluate the adequacy of our patents and licenses carrying values in relation to estimated future cash flows and market
trends exhibited by the related products. If estimates made by management related to useful lives of intangible assets prove to be incorrect, our results could be effected by the change in amounts amortized each period.



Inventories. Inventories are stated at the lower of cost (first-in, first-out) or
market. Closure evaluates its inventory for obsolescence on an ongoing basis. Management reviews market trends exhibited by our products and sales forecasts to determine products subject to obsolescence. If marketing conditions or customer
requirements change and are less favorable than those projected by management, the realizable value of inventory may be overstated.



Income taxes. Income taxes are computed using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in our financial statements or tax returns. In estimating future tax consequences, we generally consider all expected future events other than enactment of changes in tax law or
rates. A valuation allowance is recorded when based on available evidence, it is more likely than not that some portion of a deferred tax asset will not be realized. On a quarterly basis, we consider all positive and negative evidence, including our
earnings history and existing contracts and partnerships, to determine whether it is more likely than not that certain deferred tax assets will be realized in the future. At December 31, 2003, Closure had $5,843,000 recorded as deferred tax assets,
primarily related to net operating loss and tax credit carryforwards. If our estimates are incorrect, the realizable value of deferred tax assets may be overstated.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.



INTEREST RATE SENSITIVITY



We are
subject to interest rate risk on our investment portfolio which consists primarily of high quality short-term money market funds, commercial paper, corporate bonds and other investments with an average maturity of less than one year. We mitigate
default risk by investing in what we believe are safe and high credit quality securities and by monitoring the credit rating of investment issuers. The portfolio includes only marketable securities with active secondary or resale markets to ensure
portfolio liquidity and there are limitations regarding average and individual duration of investments. These available-for-sale securities are subject to interest rate risk and will decrease in value if market interest rates increase. At December
31, 2003, our total portfolio consisted of approximately $33,427,000 of cash, cash equivalents and investments, the majority of which had average maturities within one year. Additionally, we generally have the ability to hold fixed income
investments to maturity. Therefore, we do not expect our results of operations or cash flows to be materially affected due to a sudden change in interest rates.



FOREIGN CURRENCY EXCHANGE RISK



Our international sales and related royalties of DERMABOND adhesive and international sales of NEXABAND® adhesives are based on sales in foreign currencies. However, all of our sales to
customers are payable in U.S. dollars and we may be adversely affected by fluctuations in currency exchange rates. Additionally, fluctuations in currency exchange rates may adversely affect demand for our products by increasing the price of our
products in the currency of the countries in which the products are sold.



ITEM 8. FINANCIAL STATEMENTS.



Our financial
statements required by this item are attached to this Form 10-K beginning on page F-1.



26



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##### Table of Contents

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.



None.



ITEM 9A. CONTROLS AND PROCEDURES.



| | (a) | Evaluation of Disclosure Controls and Procedures
| | --- | ------------------------------------------------



The Companys management, with the participation of the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness the
Companys disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and
procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute
assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.



| | (b) | Change in Internal Control over Financial Reporting
| | --- | ---------------------------------------------------



No change in the Companys internal control over financial reporting occurred during the Companys most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Companys internal control over financial reporting.



PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.



The information required by this item concerning directors and compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, is incorporated herein by reference to our definitive 2004 Proxy
Statement to be filed with the Commission not later than 120 days after the end of the fiscal year ended December 31, 2003. The required information as to our executive officers is set forth in Part I hereof and incorporated herein by reference.



We have adopted a Corporate Code of Conduct that applies to, among others, the
Chairman, President and Chief Executive Officer, the Vice President of Finance and Chief Financial Officer and the Controller as required by Section 406 of the Sarbanes Oxley Act of 2002. The Corporate Code of Conduct is posted on our website at
http://www.closuremed.com.



ITEM 11. EXECUTIVE COMPENSATION.



The information
required by this item is incorporated herein by reference to our definitive 2004 Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year ended December 31, 2003.



27



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##### Table of Contents

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.



The information required by this item is incorporated herein by reference to our definitive 2004 Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year ended December
31, 2003.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.



The information required by this item is incorporated herein by reference to our definitive 2004 Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year ended December 31, 2003.



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The information required by this item is incorporated herein by reference to our definitive 2004 Proxy Statement to be filed with the Commission not later than 120 days after the end of the fiscal year ended December 31, 2003.



PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.



|(a) | 1. Financial Statements.
|--- | ------------------------



The financial statements listed in the accompanying Index to Financial Statements at page F-1 are filed as part of this Annual Report.



| | 2. | Financial Statement Schedules.
| | -- | ------------------------------



All financial statement schedules have been omitted because they are not applicable, or not required, or the information is shown in the financial
statements or notes thereto.



| | 3. | Exhibits. (See (c) below)
| | -- | -------------------------



|(b) | Reports on Form 8-K.
|--- | --------------------



On October 16, 2003, the Registrant filed a Current Report on Form 8-K for the purpose of furnishing the press release announcing its earnings for the
third quarter of 2003.



|(c) | Exhibits.
|--- | ---------



The following is a list of exhibits filed as part of this Annual Report. Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location of the exhibit in the previous filing is indicated in parentheses.



|               |  |                                                                    
|-------------- |  | -------------------------------------------------------------------
|Exhibit Number |  | Description                                                        
|               | 
|3.1            |  | Restated Certificate of Incorporation (Exhibit 3.1)(1)             
|               | 
|3.2            |  | Amendment to Restated Certificate of Incorporation (Exhibit 3.2)(2)
|               | 
|3.3            |  | By-Laws (Exhibit 3.2)(1)                                           



28



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##### Table of Contents

|              |  |                                                                                                                                                                        
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                            
|              | 
|10.1         |  | Supply and Distribution Rights Agreement, dated as of March 20, 1996, between Ethicon, Inc. and the Company (Exhibit 10.8)(1)                                          
|              | 
|10.2         |  | Amended and Restated 1996 Equity Compensation Plan of the Company (Exhibit 10.1) (7)                                                                                   
|              | 
|10.3         |  | Employment Agreement, dated as of May 31, 1996, between Robert V. Toni and the Company (Exhibit 10.10)(1)                                                              
|              | 
|10.4         |  | Employment Agreement, dated as of May 31, 1996, between Jeffrey G. Clark and the Company (Exhibit 10.12)(1)                                                            
|              | 
|10.5         |  | Employment Agreement, dated as of May 31, 1996, between Joe B. Barefoot and the Company (Exhibit 10.13)(1)                                                             
|              | 
|10.6          |  | Lease, dated February 14, 1997, between AP Southeast Portfolio Partners, L.P. and the Company (Exhibit 10.19)(2)                                                       
|              | 
|10.7         |  | Employment Agreement, dated as of June 9, 1997, between William M. Cotter and the Company (Exhibit 10.19)(3)                                                           
|              | 
|10.8         |  | Employment Agreement, dated as of January 1, 1998, between Anthony J. Sherbondy and the Company (Exhibit 10.20)(3)                                                     
|              | 
|10.9          |  | Amendment, dated August 15, 1997, to Lease, dated February 14, 1997, between AP Southeast Portfolio Partners, L.P. and the Company (Exhibit 10.22)(3)                  
|              | 
|10.10        |  | 1999 Employee Stock Purchase Plan of the Company (Exhibit 10.1)(4)                                                                                                     
|              | 
|10.11        |  | Distribution, Supply and Development Agreement, dated as of December 21, 2000, between Colgate Oral Pharmaceuticals, Inc. and the Company (Exhibit 10.23) (8)          
|              | 
|10.12        |  | Licensing, Distribution and Supply Agreement between Johnson & Johnson Consumer Products Company and the Company dated as of May 23, 2001 (Exhibit 10.1)(5)            
|              | 
|10.13        |  | Amendment, dated September 15, 1998, to Supply and Distribution Rights Agreement, dated as of March 20, 1996, between Ethicon, Inc. and the Company (Exhibit 10.25) (9)
|              | 
|10.14        |  | Amendment, dated September 30, 1998, to Supply and Distribution Rights Agreement, dated as of March 20, 1996, between Ethicon, Inc. and the Company (Exhibit 10.26) (9)
|              | 
|10.15        |  | Amendment, dated November 6, 2001, to Supply and Distribution Rights Agreement, dated as of March 20, 1996, between Ethicon, Inc. and the Company (Exhibit 10.27) (9)  
|              | 
|10.16         |  | Rights Agreement, dated as of July 30, 2001 between the Company and American Stock Transfer & Trust Company, as Rights Agent (Exhibit 4)(6)                            
|              | 
|10.17        |  | Employment Agreement, dated as of July 9, 2001, between Jerry Y. Jonn and the Company (Exhibit 10.29) (9)                                                              
|              | 
|10.18        |  | Amendment to Employment Agreement, dated as of March, 27, 2002, between Robert V. Toni and the Company (Exhibit 10.30) (9)                                             
|              | 
|10.19        |  | Employment Agreement, dated as of August 29, 2002, between Daniel A. Pelak and the Company (Exhibit 10.1) (10)                                                         
|              | 
|10.20        |  | Defense Agreement, dated as of August 29, 2002, between Daniel A. Pelak and the Company (Exhibit 10.2) (10)                                                            
|              | 
|10.21        |  | Amended and Restated Employment Agreement, dated as of February 13, 2003, between Anthony J. Sherbondy and the Company (Exhibit 10.34) (11)                            
|              | 
|10.22        |  | Employment Agreement, dated as of March 3, 2003, between James F. Buck and the Company (Exhibit 10.1) (12)                                                             
|              | 
|10.23         |  | Amendment, dated May 12, 2003, to Lease, dated February 14, 1997, between AP Southeast Portfolio Partners, L.P. and the Company (Exhibit 10.1) (13)                    
|              | 
|10.24*       |  | Employment Agreement, dated as of December 4, 2004, between Bruce J. Krattenmaker and the Company                                                                      
|              | 
|10.25*       |  | Employment Agreement, dated as of December 19, 2004, between Michael J. Hoban and the Company                                                                          
|              | 
|10.26*       |  | Employment Agreement, dated as of December 19, 2004, between Gabriel N. Szabo and the Company                                                                          
|              | 
|10.27*       |  | Amended and Restated Employment Agreement, dated as of January 12, 2004, between Jeffrey G. Clark and the Company                                                      
|              | 
|10.28*       |  | Employment Agreement, dated as of December 18, 2004, between Benny Ward and the Company                                                                                
|              | 
|10.29*       |  | Employment Agreement, dated as of March 30, 1998, between Debra L. Pawl and the Company                                                                                
|              | 
|23.1*         |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                  
|              | 
|24.1*         |  | Power of Attorney (included on signature page to this Annual Report)                                                                                                   



29



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|              |   |  |                                                                           
|------------- | - |  | --------------------------------------------------------------------------
|ExhibitNumber |   |  | Description                                                               
|31.1          | * |  | Certification of Chief Executive Officer                                  
|              |  
|31.2          | * |  | Certification of Chief Financial Officer                                  
|              |  
|32.1          | * |  | Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350
|              |  
|32.2          | * |  | Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350

---

|     |  |                                                                                                                                                                                                                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*    |  | Filed herewith.                                                                                                                                                                                                                                                                                                         
|    |  | Portions of this exhibit were omitted and filed separately with the Secretary of the Securities and Exchange Commission (the Commission) pursuant to an order of the Commission
granting the Companys application for confidential treatment filed pursuant to Rule 406 under the Securities Act of 1933, as amended.
|    |  | Compensation plans and arrangements for executives and others.                                                                                                                                                                                                                                                          
|(1)  |  | Filed as an exhibit to the Companys Registration Statement on Form S-1 (Registration No. 333-5425) filed with the Commission on June 7, 1996, as amended.                                                                                                                                                              
|(2)  |  | Filed as an exhibit to the Companys Registration Statement on Form S-1 (Registration No. 333-22981) filed with the Commission on March 7, 1997.                                                                                                                                                                        
|(3)  |  | Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1997.                                                                                                                                                                                                                   
|(4)  |  | Filed as an exhibit to the Companys Registration Statement on Form S-8 (Registration No. 333-72339) filed with the Commission on February 12, 1999.                                                                                                                                                                    
|(5)  |  | Filed as an exhibit to the Companys Current Reports on Form 8-K filed June 22, 2001 and November 15, 2001.                                                                                                                                                                                                             
|(6)  |  | Filed as an exhibit to the Companys Current Report on Form 8-K filed July 30, 2001.                                                                                                                                                                                                                                    
|(7)  |  | Filed as an exhibit to the Companys Registration Statement on Form S-8 (Registration No. 333-58456) filed with the Commission on April 6, 2001.                                                                                                                                                                        
|(8)  |  | Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2000.                                                                                                                                                                                                                   
|(9)  |  | Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2001.                                                                                                                                                                                                                   
|(10) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the period ended September 30, 2002.                                                                                                                                                                                                             
|(11) |  | Filed as an exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2002.                                                                                                                                                                                                                   
|(12) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the period ended March 30, 2003.                                                                                                                                                                                                                 
|(13) |  | Filed as an exhibit to the Companys Quarterly Report on Form 10-Q for the period ended September 30, 2003.                                                                                                                                                                                                             



|(d) | Financial Statement Schedules.
|--- | ------------------------------



None.



30



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##### Table of Contents

SIGNATURES



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



|                     |  |  |  |                             |  |     |  |                                      
|-------------------- |  |  |  | --------------------------- |  | --- |  | -------------------------------------
|Date: March 12, 2004 |  |  |  | CLOSURE MEDICAL CORPORATION
|                     |  |  |  |                            
|                     |  |  |  |                             |  | By: |  | /S/  DANIEL A. PELAK                 
|                     |  |  |  |                             |  |     |  | Daniel A. Pelak                      
|                     |  |  |  |                             |  |     |  | President and Chief Executive Officer



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.



Each person in so signing also makes, constitutes and appoints Daniel A.
Pelak, President and Chief Executive Officer of Closure Medical Corporation, and Benny Ward, Vice President of Finance and Chief Financial Officer of Closure Medical Corporation, and each of them acting alone, his true and lawful attorneys-in-fact,
with full power of substitution, in his name, place and stead, to execute and cause to be filed with the Securities and Exchange Commission any or all amendments to this report, and hereby ratifies and confirms all that said attorney-in-fact or his
substitute or substitutes may do or cause to be done by virtue hereof.



|                                          |  |                                                                                                    |  |               
|----------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                 |  | Capacity                                                                                           |  | Date          
|                                          |  |                                                                                                   
|/S/  DANIEL A. PELAKDaniel A. Pelak       |  | President and Chief Executive Officer (principal executive officer) and Director                   |  | March 12, 2004
|                                          |  |                                                                                                   
|/S/  BENNY WARDBenny Ward                 |  | Vice President of Finance and Chief Financial Officer (principal financial and accounting officer) |  | March 12, 2004
|                                          |  |                                                                                                   
|/S/  RONALD A. AHRENSRonald A. Ahrens     |  | Chairman of the Board of Directors                                                                 |  | March 12, 2004
|                                          |  |                                                                                                   
|/S/  J. DANIEL COLEJ. Daniel Cole         |  | Director                                                                                           |  | March 12, 2004
|                                          |  |                                                                                                   
|/S/  RICHARD W. MILLERRichard W. Miller   |  | Director                                                                                           |  | March 12, 2004
|                                          |  |                                                                                                   
|/S/  JAMES E. NIEDELJames E. Niedel       |  | Director                                                                                           |  | March 12, 2004
|                                          |  |                                                                                                   
|/S/  F. WILLIAM SCHMIDTF. William Schmidt |  | Director                                                                                           |  | March 12, 2004
|                                          |  |                                                                                                   
|/S/  ROLF D. SCHMIDTRolf D. Schmidt       |  | Director                                                                                           |  | March 12, 2004
|                                          |  |                                                                                                   
|/S/  STEPHEN I. SHAPIROStephen I. Shapiro |  | Director                                                                                           |  | March 12, 2004
|                                          |  |                                                                                                   
|/S/  RANDY H. THURMANRandy H. Thurman     |  | Director                                                                                           |  | March 12, 2004



31



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CLOSURE MEDICAL CORPORATION



INDEX TO FINANCIAL STATEMENTS



|                                                                                        |  |     
|--------------------------------------------------------------------------------------- |  | ----
|                                                                                        |  | Page
|Report of Independent Accountants                                                       |  | F-2 
|                                                                                        | 
|Financial Statements:                                                                   |  |     
|Balance Sheets as of December 31, 2002 and 2003                                         |  | F-3 
|Statements of Operations for the years ended December 31, 2001, 2002 and 2003           |  | F-4 
|Statements of Cash Flows for the years ended December 31, 2001, 2002 and 2003           |  | F-5 
|Statements of Stockholders Equity for the years ended December 31, 2001, 2002 and 2003 |  | F-6 
|                                                                                        | 
|Notes to Financial Statements                                                           |  | F-7 



F-1



---

##### Table of Contents

Report of Independent Accountants



To the Board of
Directors and Stockholders

of Closure Medical Corporation



In our opinion, the accompanying balance sheets and the related statements of operations, of cash flows and stockholders equity present fairly, in all material
respects, the financial position of Closure Medical Corporation at December 31, 2002 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management; our responsibility is to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



/s/    PricewaterhouseCoopers LLP

Raleigh, North
Carolina

March 2, 2004



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##### Table of Contents

CLOSURE MEDICAL CORPORATION

BALANCE SHEETS

(In thousands, except per share data)



|                                                                                                                       |  |              |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                                                                                       |  | December 31, |        
|                                                                                                                       |  | 2002         |         |   | 2003 |  
|Assets                                                                                                                 |  |              |         |   |      |   |         |  
|Cash and cash equivalents                                                                                              |  | $            | 666     |   |      | $ | 1,403   |  
|Short-term investments                                                                                                 |  |              | 14,060  |   |      |   | 23,614  |  
|Accounts receivable                                                                                                    |  |              | 2,473   |   |      |   | 2,976   |  
|Inventories                                                                                                            |  |              | 1,184   |   |      |   | 1,795   |  
|Prepaid expenses                                                                                                       |  |              | 407     |   |      |   | 698     |  
|Deferred income taxes                                                                                                  |  |              | 3,387   |   |      |   | 5,470   |  
|                                                                                                                       |  |              |         |   |      |   |         |  
|Total current assets                                                                                                   |  |              | 22,177  |   |      |   | 35,956  |  
|Furniture, fixtures and equipment, net                                                                                 |  |              | 5,388   |   |      |   | 5,980   |  
|Intangible assets, net                                                                                                 |  |              | 2,999   |   |      |   | 3,049   |  
|Long-term investments                                                                                                  |  |              | 2,316   |   |      |   | 8,410   |  
|Deferred income taxes                                                                                                  |  |              | 3,867   |   |      |   | 373     |  
|                                                                                                                       |  |              |         |   |      |   |         |  
|Total assets                                                                                                           |  | $            | 36,747  |   |      | $ | 53,768  |  
|                                                                                                                       |  |              |         |   |      |   |         |  
|Liabilities and Stockholders Equity                                                                                   |  |              |         |   |      |   |         |  
|Accounts payable                                                                                                       |  | $            | 1,236   |   |      | $ | 1,889   |  
|Accrued expenses                                                                                                       |  |              | 2,648   |   |      |   | 2,546   |  
|Deferred revenue                                                                                                       |  |              | 1,478   |   |      |   | 547     |  
|                                                                                                                       |  |              |         |   |      |   |         |  
|Total current liabilities                                                                                              |  |              | 5,362   |   |      |   | 4,982   |  
|Other accrued liabilities                                                                                              |  |              | 399     |   |      |   | 171     |  
|Deferred revenue                                                                                                       |  |              | 1,460   |   |      |   | 1,187   |  
|Long-term debt                                                                                                         |  |              | 336     |   |      |   |        |  
|                                                                                                                       |  |              |         |   |      |   |         |  
|Total liabilities                                                                                                      |  |              | 7,557   |   |      |   | 6,340   |  
|                                                                                                                       |  |              |         |   |      |   |         |  
|Commitments and contingencies (See notes 8, 9 and 10)                                                                  |  |              |        |   |      |   |        |  
|Preferred stock, $0.01 par value. Authorized 2,000 shares; none issued or outstanding                                  |  |              |        |   |      |   |        |  
|Common stock, $0.01 par value. Authorized 35,000 shares; issued and outstanding 13,549 and 14,127 shares, respectively |  |              | 135     |   |      |   | 141     |  
|Additional paid-in capital                                                                                             |  |              | 50,341  |   |      |   | 60,762  |  
|Accumulated deficit                                                                                                    |  |              | (21,286 | ) |      |   | (13,475 | )
|                                                                                                                       |  |              |         |   |      |   |         |  
|Total stockholders equity                                                                                             |  |              | 29,190  |   |      |   | 47,428  |  
|                                                                                                                       |  |              |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                             |  | $            | 36,747  |   |      | $ | 53,768  |  
|                                                                                                                       |  |              |         |   |      |   |         |  



The accompanying notes
are an integral part of these financial statements.



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##### Table of Contents

CLOSURE MEDICAL CORPORATION

STATEMENTS OF OPERATIONS

(In thousands, except per share data)



|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                           |  | Years Ended December 31, |       
|                                                           |  | 2001                     |        |   | 2002 |   |        | 2003 | 
|Product sales                                              |  | $                        | 18,405 |   |      | $ | 22,711 |      |  | $ | 33,933 |  
|License and product development revenues                   |  |                          | 768    |   |      |   | 1,020  |      |  |   | 1,054  |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Total revenues                                             |  |                          | 19,173 |   |      |   | 23,731 |      |  |   | 34,987 |  
|Cost of products sold                                      |  |                          | 5,450  |   |      |   | 6,496  |      |  |   | 8,332  |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Gross profit                                               |  |                          | 13,723 |   |      |   | 17,235 |      |  |   | 26,655 |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Research, development and regulatory affairs expenses      |  |                          | 5,622  |   |      |   | 6,436  |      |  |   | 8,134  |  
|General and administrative expenses                        |  |                          | 5,504  |   |      |   | 6,855  |      |  |   | 6,592  |  
|Special charge - voluntary packaging recall (See note 3)   |  |                          | 430    |   |      |   |       |      |  |   |       |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Total operating expenses                                   |  |                          | 11,556 |   |      |   | 13,291 |      |  |   | 14,726 |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Income from operations                                     |  |                          | 2,167  |   |      |   | 3,944  |      |  |   | 11,929 |  
|Interest expense                                           |  |                          | (205   | ) |      |   | (45    | )    |  |   | (4     | )
|Interest income                                            |  |                          | 593    |   |      |   | 360    |      |  |   | 316    |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Income before income taxes                                 |  |                          | 2,555  |   |      |   | 4,259  |      |  |   | 12,241 |  
|Provision (benefit) for income taxes                       |  |                          | 21     |   |      |   | (5,864 | )    |  |   | 4,430  |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income                                                 |  | $                        | 2,534  |   |      | $ | 10,123 |      |  | $ | 7,811  |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Shares used in computation of net income per common share: |  |                          |        |   |      |   |        |      |  |   |        |  
|Basic                                                      |  |                          | 13,468 |   |      |   | 13,535 |      |  |   | 13,758 |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Diluted                                                    |  |                          | 13,852 |   |      |   | 13,783 |      |  |   | 14,457 |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Net income per common share:                               |  |                          |        |   |      |   |        |      |  |   |        |  
|Basic                                                      |  | $                        | 0.19   |   |      | $ | 0.75   |      |  | $ | 0.57   |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  
|Diluted                                                    |  | $                        | 0.18   |   |      | $ | 0.73   |      |  | $ | 0.54   |  
|                                                           |  |                          |        |   |      |   |        |      |  |   |        |  



The accompanying notes
are an integral part of these financial statements.



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##### Table of Contents

CLOSURE MEDICAL CORPORATION

STATEMENTS OF CASH FLOWS

(In thousands)



|                                                                                         |  |                          |        |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                         |  | Years Ended December 31, |       
|                                                                                         |  | 2001                     |        |   | 2002 |   |         | 2003 | 
|Cash flows from operating activities:                                                    |  |                          |        |   |      |   |         |      |  |   |         |  
|Net income                                                                               |  | $                        | 2,534  |   |      | $ | 10,123  |      |  | $ | 7,811   |  
|Adjustments to reconcile net income to net cash provided by operating activities:        |  |                          |        |   |      |   |         |      |  |   |         |  
|Depreciation and amortization expense                                                    |  |                          | 1,027  |   |      |   | 1,294   |      |  |   | 1,236   |  
|Loss on disposals of fixed assets                                                        |  |                          | 58     |   |      |   | 125     |      |  |   | 22      |  
|Loss on disposals of intangible assets                                                   |  |                          | 135    |   |      |   | 340     |      |  |   | 439     |  
|Change in accounts receivable                                                            |  |                          | (663   | ) |      |   | (488    | )    |  |   | (503    | )
|Change in inventories                                                                    |  |                          | (650   | ) |      |   | 62      |      |  |   | (611    | )
|Change in prepaid expenses                                                               |  |                          | 45     |   |      |   | (144    | )    |  |   | (291    | )
|Change in accounts payable and accrued expenses                                          |  |                          | 976    |   |      |   | 622     |      |  |   | 323     |  
|Change in deferred revenue                                                               |  |                          | (243   | ) |      |   | (225    | )    |  |   | (1,204  | )
|Change in deferred taxes                                                                 |  |                          |       |   |      |   | (7,254  | )    |  |   | 1,411   |  
|Tax benefits associated with stock options                                               |  |                          |       |   |      |   | 1,258   |      |  |   | 2,877   |  
|                                                                                         |  |                          |        |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                                |  |                          | 3,219  |   |      |   | 5,713   |      |  |   | 11,510  |  
|                                                                                         |  |                          |        |   |      |   |         |      |  |   |         |  
|Cash flows from investing activities:                                                    |  |                          |        |   |      |   |         |      |  |   |         |  
|Purchases of furniture, fixtures and equipment                                           |  |                          | (623   | ) |      |   | (510    | )    |  |   | (1,703  | )
|Investment in intangible assets                                                          |  |                          | (1,404 | ) |      |   | (748    | )    |  |   | (636    | )
|Purchases of investments                                                                 |  |                          | (7,497 | ) |      |   | (10,734 | )    |  |   | (42,166 | )
|Proceeds from the sale of investments                                                    |  |                          | 7,903  |   |      |   | 4,402   |      |  |   | 26,518  |  
|                                                                                         |  |                          |        |   |      |   |         |      |  |   |         |  
|Net cash used by investing activities                                                    |  |                          | (1,621 | ) |      |   | (7,590  | )    |  |   | (17,987 | )
|                                                                                         |  |                          |        |   |      |   |         |      |  |   |         |  
|Cash flows from financing activities:                                                    |  |                          |        |   |      |   |         |      |  |   |         |  
|Repayment of debt                                                                        |  |                          | (551   | ) |      |   | (600    | )    |  |   | (336    | )
|Net proceeds from the issuance of shares under the stock option and stock purchase plans |  |                          | 806    |   |      |   | 562     |      |  |   | 7,550   |  
|Payments under capital lease obligations                                                 |  |                          | (321   | ) |      |   | (333    | )    |  |   |        |  
|                                                                                         |  |                          |        |   |      |   |         |      |  |   |         |  
|Net cash provided (used) by financing activities                                         |  |                          | (66    | ) |      |   | (371    | )    |  |   | 7,214   |  
|                                                                                         |  |                          |        |   |      |   |         |      |  |   |         |  
|Increase (decrease) in cash and cash equivalents                                         |  |                          | 1,532  |   |      |   | (2,248  | )    |  |   | 737     |  
|Cash and cash equivalents, beginning of year                                             |  |                          | 1,382  |   |      |   | 2,914   |      |  |   | 666     |  
|                                                                                         |  |                          |        |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, end of year                                                   |  | $                        | 2,914  |   |      | $ | 666     |      |  | $ | 1,403   |  
|                                                                                         |  |                          |        |   |      |   |         |      |  |   |         |  



Supplemental cash flow information:



Cash payments for interest during 2001, 2002 and 2003 were approximately
$151, $45 and $4, respectively. Cash payments for income taxes were $17, $80 and $219 during 2001, 2002 and 2003, respectively.



The accompanying notes are an integral part of these financial statements.



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##### Table of Contents

CLOSURE MEDICAL CORPORATION

STATEMENTS OF STOCKHOLDERS EQUITY

Years Ended December 31, 2001, 2002 and 2003

(In thousands)



|                                                                            |  |              |  |        |     |                           |   |                     |  |   |                           |   |  |   |       
|--------------------------------------------------------------------------- |  | ------------ |  | ------ | --- | ------------------------- | - | ------------------- |  | - | ------------------------- | - |  | - | ------
|                                                                            |  | Common Stock |  |        |     |                           |   |                     | 
|                                                                            |  | Shares       |  | Amount |     | AdditionalPaid-in Capital |   | Accumulated Deficit |  |   | TotalStockholders Equity
|Balance at December 31, 2000                                                |  | 13,428       |  | $      | 134 |                           | $ | 47,716              |  | $ | (33,943                   | ) |  | $ | 13,907
|Exercise of stock options, 401(k) match and sale of common stock under ESPP |  | 80           |  |        | 1   |                           |   | 805                 |  |   |                          |   |  |   | 806   
|Net income                                                                  |  |             |  |        |    |                           |   |                    |  |   | 2,534                     |   |  |   | 2,534 
|                                                                            |  |              |  |        |     |                           |   |                     |  |   |                           |   |  |   |       
|Balance at December 31, 2001                                                |  | 13,508       |  |        | 135 |                           |   | 48,521              |  |   | (31,409                   | ) |  |   | 17,247
|Exercise of stock options, 401(k) match and sale of common stock under ESPP |  | 41           |  |        |    |                           |   | 562                 |  |   |                          |   |  |   | 562   
|Income tax benefits from stock option exercises                             |  |              |  |        |     |                           |   | 1,258               |  |   |                           |   |  |   | 1,258 
|Net income                                                                  |  |             |  |        |    |                           |   |                    |  |   | 10,123                    |   |  |   | 10,123
|                                                                            |  |              |  |        |     |                           |   |                     |  |   |                           |   |  |   |       
|Balance at December 31, 2002                                                |  | 13,549       |  |        | 135 |                           |   | 50,341              |  |   | (21,286                   | ) |  |   | 29,190
|Exercise of stock options, 401(k) match and sale of common stock under ESPP |  | 578          |  |        | 6   |                           |   | 7,544               |  |   |                          |   |  |   | 7,550 
|Income tax benefits from stock option exercises                             |  |              |  |        |     |                           |   | 2,877               |  |   |                           |   |  |   | 2,877 
|Net income                                                                  |  |             |  |        |    |                           |   |                    |  |   | 7,811                     |   |  |   | 7,811 
|                                                                            |  |              |  |        |     |                           |   |                     |  |   |                           |   |  |   |       
|Balance at December 31, 2003                                                |  | 14,127       |  | $      | 141 |                           | $ | 60,762              |  | $ | (13,475                   | ) |  | $ | 47,428
|                                                                            |  |              |  |        |     |                           |   |                     |  |   |                           |   |  |   |       



The accompanying notes
are an integral part of these financial statements.



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001, 2002 and 2003

Notes to Financial Statements



|1. | ORGANIZATION AND OPERATIONS
|-- | ---------------------------



Closure Medical Corporation (the Company or Closure) develops and manufactures innovative biomaterial-based medical devices for
wound care and wound closure based on its proprietary cyanoacrylate technology. The Companys medical devices can be used to close and seal wounds and incisions rapidly as well as stop leakage of blood and other bodily fluids from injured
tissue. Our currently marketed products include DERMABOND Topical Skin Adhesive (DERMABOND adhesive), BAND-AID® Brand Liquid Bandage (Liquid Bandage), SOOTHE-N-SEAL®canker sore relief (SOOTHE-N-SEAL®adhesive) and NEXABAND® products.



The Companys lead product DERMABOND adhesiveis a nonabsorbable tissue adhesive that can be used to replace sutures and staples for certain topical wound closure applications. DERMABOND adhesivewas approved for marketing by the United States Food and Drug Administration (FDA) in 1998. The Companys marketing partner, Ethicon, Inc. (Ethicon), a Johnson & Johnson Company, markets and distributes
DERMABOND adhesive.



In 2001, the Company received FDA
clearance to market Liquid Bandage, which was the first cyanoacrylate medical device approved by the FDA for the over-the-counter (OTC) adhesive bandage market. In May 2001, the Company entered into an agreement providing Johnson
& Johnson Consumer Products Company (CPC) with worldwide supply, distribution and development rights to the Liquid Bandage technology. The agreement includes rights to Closures Liquid Bandage and certain future
OTC products, except for SOOTHE-N-SEAL®adhesive.



The Company entered into an agreement in 2000 providing Colgate Oral
Pharmaceuticals, Inc. (Colgate), a subsidiary of Colgate-Palmolive Company, with supply, distribution and development rights to the Companys SOOTHE-N-SEAL® adhesive technology for the treatment of canker sores of the mouth. The Company
received FDA clearance to market SOOTHE-N-SEAL®adhesive in September 1999.
SOOTHE-N-SEAL®adhesive was the first cyanoacrylate adhesive approved by the FDA for the OTC
consumer market.



In 2001, the Company entered into an
agreement providing Abbott Laboratories, Inc. (Abbott) with worldwide supply, distribution and development rights to the NEXABAND® product line. The NEXABAND® adhesive line consists of two products used in veterinary wound closure and wound care. The adhesives are used in cat declaw procedures as well
as spay and neuter procedures. Currently, Abbott is distributing NEXABAND® adhesive products in North America, Australia, Germany, Sweden, Switzerland and the United Kingdom.



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------



Cash and Cash Equivalents



Cash and cash equivalents represent cash and all liquid investments having an original maturity of less than three months.



Investments



Short-term investments consist primarily of short-term money market funds,
commercial paper and corporate bonds having maturities greater than three months but less than or equal to one year. Long-term investments have maturities greater than one year. All investments have been classified as available-for-sale securities.
The fair market value, based on quoted market prices, of all investments approximates amortized cost. Investments are made in accordance with the Companys Investment Policy as established by the Board of Directors.



Inventories



Inventories are stated at the lower of cost (first-in, first-out) or market.
The Company evaluates its inventory for obsolescence on an ongoing basis.



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001 , 2002 and 2003

Notes to Financial Statements



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESContinued
|-- | ----------------------------------------------------



Furniture, Fixtures and Equipment



Furniture, fixtures and equipment are recorded at cost and depreciated using
the straight-line method over their estimated useful lives. Repair and maintenance costs are expensed as incurred.



Intangible Assets



External legal costs, filing fees and other costs paid to third parties to secure patents and obtain licenses are capitalized until either the related
patent or license is issued or obtained, in which case they are amortized over the shorter of its remaining economic or useful life, generally fifteen years for patents, or it is rejected or abandoned, in which case they are written off. On an
ongoing basis, Closure evaluates the adequacy of the patent and license carrying values.



Impairment of Long-Lived Assets



The Company evaluates the net realizable value of its property and equipment and other assets in accordance with Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), relying on a number of factors including operating results, business plans, economic projections and anticipated future cash flows.
SFAS 144 requires the recognition of impairment of long-lived assets in the event the net book value of such assets exceeds the estimated future undiscounted cash flows attributable to such assets or the business to which such intangible assets
relate. There were no impairments of long-lived assets recorded in 2001, 2002 or 2003.



Revenue Recognition



The sales price of DERMABOND adhesive and NEXABAND adhesives is ultimately determined by the sales price of the product to the ultimate customer. For these products, the Company recognizes revenue at an agreed-upon minimum
price at the time these products are shipped. The Companys marketing partners subsequently provide a summary of their sales on a quarterly basis, and at that time, additional revenue, if any, is recognized in an amount derived from the
difference between the previously recognized minimum price at shipment and the average sales price received by the marketing partners. A decrease in the average selling price received by our marketing partner for DERMABOND adhesive, could
ultimately result in a reduced minimum price for future product shipments. In addition, the Company recognizes royalty revenue for DERMABOND adhesive. Revenues from all products are recognized upon shipment to our customer or customers
agent which is when title is transferred. Advance payments received by the Company that relate to future sales of product or future royalties due on these sales are deferred and recorded as revenue as they are earned over future periods. Upon
execution of certain agreements and achievement of certain criteria in accordance with those agreements, Closure may receive license and product development payments from its marketing partners. These payments are deferred and recognized ratably
over the remaining life of the agreement in accordance with Staff Accounting Bulletin (SAB) 101.



During fiscal 2001, 2002 and 2003, one customer accounted for 83%, 94% and 95% of total product sales, respectively. One customer accounted for 98% and
94% of trade accounts receivable at December 31, 2002 and 2003, respectively. Each of the Companys marketing partners are based in the United States, and accordingly, less than one percent of the Companys revenues during 2001, 2002 and
2003 were from outside of North America. However, the majority of the Companys products are marketed on a global basis by its marketing partners.



Research and Development Expenses



Research and development costs are expensed as incurred and include items related to personnel, costs of supplies, clinical trials, facility costs and
fees paid to consultants and outside contractors and providers. The Company has arrangements with certain marketing partners in which it shares certain research, development and regulatory affairs expenses related to approved projects. During 2001,
2002 and 2003 the Company was reimbursed $576,000, $905,000 and $386,000, respectively, in accordance with these cost sharing arrangements.



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001, 2002 and 2003

Notes to Financial Statements



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESContinued
|-- | ----------------------------------------------------



Income Taxes



Income taxes are computed using the asset and liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been recognized in the Companys financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events
other than enactment of changes in tax law or rates. As a result, the Company has recorded a valuation allowance as of December 31, 2002 and 2003, as the Company believes it is more likely than not that some portion of the deferred tax asset may not
be realized.



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 reported amounts as well as disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses
during the reporting period. Areas of the financial statements where estimates may have the most significant effect include the valuation of inventory, lives of tangible and intangible assets, impairment of long-lived assets, realization of deferred
tax assets and provision for income taxes. Changes in the facts or circumstances underlying these estimates could result in material changes and actual results could differ from those estimates.



Related Parties



On January 1, 1998, the Company entered into an agreement with Innocoll
GmbH, of Saal-Donau, Germany, which provided for fees to be paid to Innocoll of $180,000 per year for five years. During 2002, $225,000 was paid to Innocoll and $45,000 was included in accrued expenses at December 31, 2002. Innocoll acted as
Closures authorized representative in Europe under the Medical Device Directive and provided alternative manufacturing space if needed. Two members of the Companys Board of Directors own 99% of the equity of Innocoll. This agreement
expired at December 31, 2002 and was not renewed.



Fair
Value of Financial Instruments



The carrying value of cash
and cash equivalents, accounts receivable, accounts payable and accrued expenses at December 31, 2002 and 2003 approximated their fair value due to the short-term nature of these items.



The fair value of the Companys investments at December 31, 2002 and 2003 approximated their carrying values as these
investments were primarily interest-bearing investment-grade securities with maturities less than 18 months.



The carrying value of the Companys notes payable at December 31, 2002 approximated fair value as the interest rate on this obligation approximated
rates available in the financial market at that date.



Accounting for Stock-Based Compensation



The
Company accounts for stock-based compensation based on the provision of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). In December 2002, the Financial Accounting Standards
Board (FASB) issued Statement No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  an amendment of FASB Statement No. 123 (SFAS 148). This statement amends Statement No. 123,
Accounting for Stock-Based Compensation (SFAS 123) to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on
reported results. The Company has adopted the disclosure requirements of SFAS 123 and SFAS 148.



F-9



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001, 2002 and 2003

Notes to Financial Statements



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESContinued
|-- | ----------------------------------------------------



The Company maintains the Amended and Restated 1996 Equity Compensation Plan (the Plan),
adopted by the Board of Directors on May 28, 1996 and which was most recently amended and restated on June 18, 2002. The Plan provides that a maximum of 6,000,000 stock options may be granted to officers, employees, independent contractors and
consultants, and non-employee directors of the Company. In addition, the Plan provides for grants of restricted stock and stock appreciation rights to participants other than non-employee directors of the Company. The Plan is administered and
interpreted by the compensation committee of the Board of Directors (the Committee). Grants under the Plan may consist of (i) options intended to qualify as incentive stock options (ISOs) within the meaning of section 422 of
the Internal Revenue Code or (ii) so-called nonqualified stock options (NQSOs) that are not intended to so qualify. Independent contractors or consultants to the Company are not eligible to receive ISOs under the Plan. The
option price of any ISO granted under the Plan will not be less than the fair market value of the underlying shares of Common Stock on the date of grant, except that the option price of an ISO granted to an employee who owns more than 10% of the
total combined voting power of all classes of stock of the Company may not be less than 110% of the fair market value of the underlying shares of Common Stock on the date of grant. The option price of a NQSO may be greater than, equal to or less
than the fair market value of the underlying shares of Common Stock on the date of grant. The Committee will determine the term of each option; provided, however, that the exercise period may not exceed ten years from the date of grant, and the
exercise period of an ISO granted to an employee who owns more than 10% of the total combined voting power of all classes of stock of the Company may not exceed five years from the date of grant. Options outstanding at December 31, 2001, 2002 and
2003 generally vest within three to five years.



Had
compensation expense, assuming it was recognized on a straight-line basis over the vesting period for awards under the Plan and in the year of purchase for benefits received under the Employee Stock Purchase Plan, been determined based on the fair
value at the grant date, consistent with the provisions of SFAS 123, the Companys results of operations would have been reduced to the pro forma amounts indicated below:



|                                                                                                                                      |  |      |         |   |      |   |         |       |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ----- |  | - | ------- | -
|                                                                                                                                      |  | 2001 |         |   | 2002 |   |         | 2003* | 
|Net income as reported                                                                                                               |  | $    | 2,534   |   |      | $ | 10,123  |       |  | $ | 7,811   |  
|Less: Pro forma adjustment for stock-based compensation                                                                               |  |      | (10,628 | ) |      |   | (10,829 | )     |  |   | (7,049  | )
|                                                                                                                                      |  |      |         |   |      |   |         |       |  |   |         |  
|Net income (loss) pro forma                                                                                                          |  | $    | (8,094  | ) |      | $ | (706    | )     |  | $ | 762     |  
|                                                                                                                                      |  |      |         |   |      |   |         |       |  |   |         |  
|Basic net income (loss) per common share:                                                                                             |  |      |         |   |      |   |         |       |  |   |         |  
|As reported                                                                                                                           |  | $    | 0.19    |   |      | $ | 0.75    |       |  | $ | 0.57    |  
|                                                                                                                                      |  |      |         |   |      |   |         |       |  |   |         |  
|Pro forma                                                                                                                             |  | $    | (0.60   | ) |      | $ | (0.05   | )     |  | $ | 0.06    |  
|                                                                                                                                      |  |      |         |   |      |   |         |       |  |   |         |  
|Diluted net income (loss) per common share:                                                                                           |  |      |         |   |      |   |         |       |  |   |         |  
|As reported                                                                                                                           |  | $    | 0.18    |   |      | $ | 0.73    |       |  | $ | 0.54    |  
|                                                                                                                                      |  |      |         |   |      |   |         |       |  |   |         |  
|Pro forma                                                                                                                             |  | $    | (0.60   | ) |      | $ | (0.05   | )     |  | $ | 0.05    |  
|                                                                                                                                      |  |      |         |   |      |   |         |       |  |   |         |  
|                                                                                                                                     
|The pro forma amounts discussed above were derived using the Black-Scholes option-pricing model with the assumptions indicated below: | 
|                                                                                                                                      |  |      |        
|                                                                                                                                      |  | 2001 |         |   | 2002 |   |         | 2003  | 
|Average expected life (years)                                                                                                         |  |      | 7.0     |   |      |   | 7.4     |       |  |   | 7.1     |  
|Average interest rate                                                                                                                 |  |      | 4.4-5.3 | % |      |   | 3.7-5.4 | %     |  |   | 2.7-4.2 | %
|Volatility                                                                                                                            |  |      | 84.3    | % |      |   | 80.8    | %     |  |   | 78.1    | %
|Dividend yield                                                                                                                        |  |      | 0.0     | % |      |   | 0.0     | %     |  |   | 0.0     | %



|* | 2003 is presented net of tax as the Company was subject to federal income tax during the entire year.
|- | -----------------------------------------------------------------------------------------------------



F-10



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001, 2002 and 2003

Notes to Financial Statements



|2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESContinued
|-- | ----------------------------------------------------



Segment Reporting



The Company has no separately reportable operating segments as of December 31, 2003.



Recently Issued Accounting Standards



In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). FASB Statements No. 133 Accounting for Derivative Instruments and Hedging Activities (SFAS 133) and No.
138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, establish accounting and reporting standards for derivative instruments including derivatives embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS 149 amends SFAS 133 for certain decisions made by the FASB as part of the Derivatives Implementation Group process. SFAS 149 contains amendments relating to FASB Concepts Statement No. 7, Using
Cash Flow Information and Present Value in Accounting Measurements, and FASB Statements No. 65, Accounting for Certain Mortgage Banking Activities, No. 91 Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases, No. 95, Statement of Cash Flows, and No. 126, Exemption from Certain Required Disclosures about Financial Instruments for Certain Nonpublic Entities.
SFAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company does not participate in the investment activities covered by SFAS 149 and therefore, this
standard did not have a material impact on the Companys financial position or results of operations.



Reclassifications



Certain prior year balances have been reclassified to conform to the current year presentation.



Net Income Per Share



Basic net income per common share is computed using the weighted average
number of shares of common stock outstanding during the period.



Diluted net income per common share is computed using the weighted average number of shares of common and common equivalent shares outstanding during the period. Common equivalent shares consist of stock options using the treasury stock
method. Common equivalent shares from stock options are excluded from the computation if their effect is antidilutive.



|3. | SPECIAL CHARGE
|-- | --------------



In November 2001, the Company initiated a voluntary recall of DERMABOND adhesive due to concern that the packaging seals of three production lots
may have been compromised and the product sterility could not be assured. Distribution of the recalled lots was limited to the United States. The related costs, approximately $430,000, consisted primarily of costs to notify customers, cost of
replacement product and shipping expenses.



|4. | INVENTORIES
|-- | -----------



Inventories included the following (in thousands):



|                |  |              |       |      |   |      
|--------------- |  | ------------ | ----- | ---- | - | -----
|                |  | December 31,
|                |  | 2002         |       | 2003
|Packaging       |  | $            | 433   |      | $ | 995  
|Raw materials   |  |              | 171   |      |   | 236  
|Workinprocess |  |              | 372   |      |   | 547  
|Finished goods  |  |              | 208   |      |   | 17   
|                |  |              |       |      |   |      
|                |  | $            | 1,184 |      | $ | 1,795
|                |  |              |       |      |   |      



F-11



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001, 2002 and 2003

Notes to Financial Statements



|5. | FURNITURE, FIXTURES AND EQUIPMENT
|-- | ---------------------------------



Furniture, fixtures and equipment included the following (in thousands):



|                         |  |              |        |   |                        |   |        |   |  |              
|------------------------ |  | ------------ | ------ | - | ---------------------- | - | ------ | - |  | -------------
|                         |  | December 31, |        |   | Estimated Useful Lives
|                         |  | 2002         |        |   | 2003                   |   |       
|Furniture and computers  |  | $            | 1,336  |   |                        | $ | 1,337  |   |  | 310 years   
|Machinery and equipment  |  |              | 5,765  |   |                        |   | 6,512  |   |  | 510 years   
|Leasehold improvements   |  |              | 3,096  |   |                        |   | 3,200  |   |  | Life of lease
|Constructioninprogress |  |              | 83     |   |                        |   | 714    |   |  |              
|                         |  |              |        |   |                        |   |        |   |  |              
|                         |  |              | 10,280 |   |                        |   | 11,763 |   |  |              
|Accumulated depreciation |  |              | (4,892 | ) |                        |   | (5,783 | ) |  |              
|                         |  |              |        |   |                        |   |        |   |  |              
|                         |  | $            | 5,388  |   |                        | $ | 5,980  |   |  |              
|                         |  |              |        |   |                        |   |        |   |  |              



Depreciation expense
for 2001, 2002 and 2003 was $982, $1,178 and $1,089, respectively.



|6. | INTANGIBLE ASSETS
|-- | -----------------



Intangible assets included the following (in thousands):



|                          |  |              |       |                        |   |       |  |           
|------------------------- |  | ------------ | ----- | ---------------------- | - | ----- |  | ----------
|                          |  | December 31, |       | Estimated Useful Lives
|                          |  | 2002         |       | 2003                   |  
|Trademarks                |  | $            | 57    |                        | $ | 57    |  | 5 years   
|Patents:                  |  |              |       |                        |   |       |  |           
|Approved                  |  |              | 1,092 |                        |   | 1,637 |  | 5-17 years
|Unapproved                |  |              | 1,648 |                        |   | 1,300 |  | *         
|License                   |  |              | 550   |                        |   | 550   |  | 15 years  
|Other                     |  |              | 197   |                        |   | 197   |  | 5 years   
|                          |  |              |       |                        |   |       |  |           
|                          |  |              | 3,544 |                        |   | 3,741 |  |           
|Accumulated amortization: |  |              |       |                        |   |       |  |           
|Trademarks                |  |              | 57    |                        |   | 57    |  |           
|Patents                   |  |              | 236   |                        |   | 346   |  |           
|License                   |  |              | 55    |                        |   | 92    |  |           
|Other                     |  |              | 197   |                        |   | 197   |  |           
|                          |  |              |       |                        |   |       |  |           
|                          |  |              | 545   |                        |   | 692   |  |           
|                          |  |              |       |                        |   |       |  |           
|                          |  | $            | 2,999 |                        | $ | 3,049 |  |           
|                          |  |              |       |                        |   |       |  |           



|* | Patents are not amortized until approved.
|- | -----------------------------------------



Intangible assets are amortized on a straight-line basis over their estimated useful lives, generally fifteen years for patents. Actual aggregate
amortization expense relating to intangible assets recorded in the three most recent fiscal years as well as estimated amortization expense for the next five fiscal years are as follows:



|                                |  |   |    
|------------------------------- |  | - | ---
|(in thousands)                  |  |  
|Actual amortization expense:    |  |   |    
|2001                            |  | $ | 45 
|2002                            |  |   | 116
|2003                            |  |   | 147
|                                | 
|Estimated amortization expense: |  |   |    
|2004                            |  | $ | 136
|2005                            |  |   | 136
|2006                            |  |   | 132
|2007                            |  |   | 132
|2008                            |  |   | 132



F-12



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001, 2002 and 2003

Notes to Financial Statements



|7. | ACCRUED EXPENSES
|-- | ----------------



Accrued expenses consisted of the following (in thousands):



|                             |  |              |       |      |   |      
|---------------------------- |  | ------------ | ----- | ---- | - | -----
|                             |  | December 31,
|                             |  | 2002         |       | 2003
|Accrued payroll and benefits |  | $            | 1,654 |      | $ | 1,814
|CEO transition costs         |  |              | 328   |      |   | 227  
|Other                        |  |              | 666   |      |   | 505  
|                             |  |              |       |      |   |      
|                             |  | $            | 2,648 |      | $ | 2,546
|                             |  |              |       |      |   |      



In September 2002,
the Company recorded a charge of approximately $800,000 related to the transition of the CEO position. The charge included approximately $600,000 related to transition services provided by the Companys former CEO and his entering into a
non-competition agreement, which will be paid to the former CEO over a three year period. The remainder primarily related to taxes and benefits on the transition services and recruitment costs associated with the selection of a new CEO. At December
31, 2002 and 2003, $328,000 and $227,000 was included in short term accrued expenses and $399,000 and $171,000, respectively, remained in long-term other accrued liabilities related to this charge.



|8. | DEBT AND RELATED ACCRUED INTEREST
|-- | ---------------------------------



In May 2002, the Companys equipment term loan and line of credit matured and the outstanding balance of approximately $690,000 was refinanced as a
borrowing within its $3,000,000 line of credit, which was simultaneously renewed for a two-year period. At December 31, 2002, the line of credit outstanding balance was $336,000 and was classified as long-term debt as the agreement did not require
principal payments within one year.



In December 2003, the
Company renewed its $3,000,000 line of credit for a two-year period with more favorable terms including minimal affirmative covenants. There were no borrowings against the line of credit at December 31, 2003.



|9. | LEASES
|-- | ------



The Company leases office and manufacturing space and equipment under operating leases which expire at various dates through 2008. Rent expense related to
operating leases was approximately $569,000, $572,000 and $606,000 for 2001, 2002 and 2003, respectively.



Future minimum lease payments under noncancellable operating leases, primarily for facilities rental, with initial terms of one year or more are as
follows at December 31, 2003 (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|2004                         |  | $ | 762  
|2005                         |  |   | 763  
|2006                         |  |   | 761  
|2007                         |  |   | 769  
|2008                         |  |   | 710  
|Thereafter                   |  |   |     
|                             |  |   |      
|Total minimum lease payments |  | $ | 3,765
|                             |  |   |      



F-13



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001, 2002 and 2003

Notes to Financial Statements



|10. | MAJOR CUSTOMERS
|--- | ---------------



In March 1996, the Company entered into an eight-year supply and distribution agreement providing Ethicon with exclusive worldwide rights to market,
distribute and sell DERMABOND adhesive. The agreement requires Ethicon to make minimum purchases that increase annually and to pay royalties based upon net sales. During December 2003, the agreement was amended to extend the term until March
2005 and to provide that the agreement will automatically renew for consecutive periods of one year unless Ethicon serves notice of termination at least by December 15 of the year preceding the expiration date of the renewal period. The agreement is
terminable upon specified events, including material breach by either party and insolvency of either party. Upon certain events of default by the Company, including failure to provide an adequate supply of product, Ethicon may end its arrangement to
purchase DERMABOND adhesive from the Company, and may manufacture the product itself and pay the Company royalties based on sales. In addition, the agreement allows for the joint collaboration and cost sharing of continuing development
activities.



In May 2001, the Company entered into an
agreement providing CPC with exclusive worldwide supply, distribution and development rights to BAND-AID® Brand Liquid Bandagetechnology. Included in the agreement are rights to certain future OTC products co-developed by the parties, excluding our SOOTHE-N-SEAL® adhesive technology. The agreement requires CPC to
purchase annual minimum quantities during each contract year. The agreement will automatically renew each year for a period of one year after the initial contract term expires unless either party notifies the other at least six months prior of its
intention not to renew. The agreement is terminable upon specified events, including material breach by either party. In addition, the agreement allows for the joint collaboration and cost sharing of continuing development activities. Upon execution
of the agreement and certain milestones achieved by Closure, CPC made payments to the Company in recognition of its previous research and development expenditures. These payments have been deferred and are being recognized ratably over the life of
the agreement. In accordance with the agreement, the Company may receive a future milestone payment, based on achievement of certain criteria.



In December 2000, the Company entered into an exclusive worldwide supply, distribution and development rights agreement for SOOTHE-N-SEAL® adhesivewith Colgate. Under the agreement, Colgate
acquired exclusive worldwide rights to market, sell and distribute SOOTHE-N-SEAL® adhesive and future oral care products, based upon the Companys proprietary cyanoacrylate technology, to both professional and consumer markets. Upon execution of the agreement, Colgate paid Closure
a license fee in consideration for all right, title and interest in the SOOTHE-N-SEAL® adhesive trademark. These payments were deferred and are being recognized ratably over the life of the agreement. The agreement requires Colgate to purchase annual minimum quantities
and, at the end of the seven-year term, may be renewed by agreement of both parties for additional periods. The agreement is terminable upon specified events, including material breach by either party. In addition, the agreement allows for the joint
collaboration and cost sharing of continuing development activities.



In July 2001, the Company entered into an agreement providing Abbott with exclusive worldwide, supply, distribution and development rights to its veterinary NEXABAND® product line. This agreement also grants Abbott rights to future veterinary products
based on the Companys cyanoacrylate technology and co-developed through the collaboration of the parties. The agreement requires Abbott to purchase a minimum dollar amount of product during each contract year. At the end of the contract term,
the agreement may be renewed for additional periods with the consent of both parties. In addition, the agreement allows for the joint collaboration and cost sharing of continuing development activities.



F-14



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001, 2002 and 2003

Notes to Financial Statements



|11. | INCOME TAXES
|--- | ------------



Significant components of the Companys income tax expense (benefit) for the years ended December 31, 2001, 2002 and 2003 were as follows (in
thousands):



|                            |  |              |    |      |   |        |      |  |   |      
|--------------------------- |  | ------------ | -- | ---- | - | ------ | ---- |  | - | -----
|                            |  | December 31,
|                            |  | 2001         |    | 2002 |   |        | 2003
|Current                     |  |              |    |      |   |        |      |  |   |      
|Federal                     |  | $            | 21 |      | $ | (21    | )    |  | $ | 88   
|State                       |  |              |   |      |   | 154    |      |  |   | 53   
|Deferred                    |  |              |    |      |   |        |      |  |   |      
|Federal                     |  |              |   |      |   | (5517  | )    |  |   | 3,779
|State                       |  |              |   |      |   | (480   | )    |  |   | 510  
|                            |  |              |    |      |   |        |      |  |   |      
|Total tax expense (benefit) |  | $            | 21 |      | $ | (5,864 | )    |  | $ | 4,430
|                            |  |              |    |      |   |        |      |  |   |      



Income taxes computed
at the statutory federal income tax rate of 34% were reconciled to the provision for income taxes for the years ended December 31, 2001, 2002 and 2003 as follows (in thousands):



|                                                                           |  |              |      |   |      |   |        |      |  |   |       |  
|-------------------------------------------------------------------------- |  | ------------ | ---- | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                                                           |  | December 31, |     
|                                                                           |  | 2001         |      |   | 2002 |   |        | 2003 | 
|U.S. federal tax at statutory rate                                         |  | $            | 868  |   |      | $ | 1,448  |      |  | $ | 4,162 |  
|State taxes (net of federal benefit)                                       |  |              | 123  |   |      |   | 204    |      |  |   | 588   |  
|Change in valuation allowance                                              |  |              | (513 | ) |      |   | (7,209 | )    |  |   | 100   |  
|Deductions related to stock options not applicable for financial reporting |  |              | (268 | ) |      |   |       |      |  |   |      |  
|Tax credits                                                                |  |              | (360 | ) |      |   | (442   | )    |  |   | (335  | )
|Other                                                                      |  |              | 150  |   |      |   | 156    |      |  |   | (85   | )
|Alternative minimum taxes                                                  |  |              | 21   |   |      |   | (21    | )    |  |   |      |  
|                                                                           |  |              |      |   |      |   |        |      |  |   |       |  
|Provision (benefit) for income taxes                                       |  | $            | 21   |   |      | $ | (5,864 | )    |  | $ | 4,430 |  
|                                                                           |  |              |      |   |      |   |        |      |  |   |       |  



Deferred tax assets
were comprised of the following (in thousands):



|                                         |  |              |       |   |      |   |       |  
|---------------------------------------- |  | ------------ | ----- | - | ---- | - | ----- | -
|                                         |  | December 31, |      
|                                         |  | 2002         |       |   | 2003 |  
|Net operating loss carryforwards         |  | $            | 5,276 |   |      | $ | 4,322 |  
|Tax credit carryforwards:                |  |              |       |   |      |   |       |  
|Federal research and development credits |  |              | 1,987 |   |      |   | 2,189 |  
|Federal alternative minimum tax credits  |  |              |      |   |      |   | 63    |  
|State credits                            |  |              | 324   |   |      |   | 458   |  
|Temporary differences:                   |  |              |       |   |      |   |       |  
|Accruals, reserves and other             |  |              | 398   |   |      |   | 460   |  
|Deferred revenue                         |  |              | 860   |   |      |   | 447   |  
|Fixed assets and depreciation            |  |              | (168  | ) |      |   | (551  | )
|Intangible assets and amortization       |  |              | (953  | ) |      |   | (975  | )
|                                         |  |              |       |   |      |   |       |  
|                                         |  |              | 7,724 |   |      |   | 6,413 |  
|Valuation allowance                      |  |              | (470  | ) |      |   | (570  | )
|                                         |  |              |       |   |      |   |       |  
|Net deferred tax asset                   |  | $            | 7,254 |   |      | $ | 5,843 |  
|                                         |  |              |       |   |      |   |       |  



F-15



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001, 2002 and 2003

Notes to Financial Statements



|11. | INCOME TAXESContinued
|--- | ----------------------



At December 31, 2003, the Company had net operating loss carryforwards for income tax reporting
purposes of approximately $10,668,000 which expire beginning in the year 2012. The Company also has federal research and development tax credit carryforwards of approximately $2,189,000 which will begin to expire in the year 2011 and state tax
credits of approximately $458,000 which begin to expire in 2004. The federal net operating loss carryforwards may be subject to limitation under the rules regarding a change in stock ownership as determined by the Internal Revenue Code. The majority
of the Companys state tax credit carryforwards may be designated for use against either the franchise or state income tax.



Prior to 2002, no deferred provision or benefit for income taxes was recorded because the Company was in a net deferred tax asset position and a full
valuation allowance had been recorded. During the fourth quarter of 2002, the Company re-evaluated the amount of valuation allowance required in light of profitability achieved in recent years and expected in future years. As a result, the Company
reduced the valuation allowance on deferred tax assets to an amount that it believes is more likely than not of being realized based on the Companys assessment of the likelihood of near term operating income coupled with uncertainties with
respect to the impact of future market conditions. At December 31, 2003, the valuation allowance primarily reflected uncertainties involving the realization of state tax credits and loss carryforwards. The valuation allowance was increased by
$100,000 during 2003 to reflect additional uncertainties regarding the realization of certain state tax assets.



|12. | EMPLOYEE BENEFIT PLANS
|--- | ----------------------



The following table summarizes stock option activity under the Plan:



|                                         |  |           |   |  |                                  |       |                             |   |      
|---------------------------------------- |  | --------- | - |  | -------------------------------- | ----- | --------------------------- | - | -----
|                                         |  | Shares    |   |  | WeightedAverage Price Per Share |       | WeightedAverage Fair Value
|Options outstanding at December 31, 2000 |  | 2,935,419 |   |  | $                                | 20.43 |                             |   |      
|Granted                                  |  | 308,200   |   |  |                                  | 20.07 |                             | $ | 15.62
|Exercised                                |  | (53,165   | ) |  |                                  | 10.10 |                             |   |     
|Canceled                                 |  | (51,400   | ) |  |                                  | 24.46 |                             |   |     
|                                         |  |           |   |  |                                  |       |                             |   |      
|Options outstanding at December 31, 2001 |  | 3,139,054 |   |  |                                  | 20.51 |                             |   |      
|Granted                                  |  | 1,003,650 |   |  |                                  | 17.37 |                             |   | 13.43
|Exercised                                |  | (9,975    | ) |  |                                  | 6.64  |                             |   |     
|Canceled                                 |  | (170,650  | ) |  |                                  | 19.80 |                             |   |     
|                                         |  |           |   |  |                                  |       |                             |   |      
|Options outstanding at December 31, 2002 |  | 3,962,079 |   |  |                                  | 19.78 |                             |   |      
|Granted                                  |  | 1,334,250 |   |  |                                  | 21.42 |                             |   | 16.48
|Exercised                                |  | (535,637  | ) |  |                                  | 13.37 |                             |   |     
|Canceled                                 |  | (43,840   | ) |  |                                  | 25.94 |                             |   |     
|                                         |  |           |   |  |                                  |       |                             |   |      
|Options outstanding at December 31, 2003 |  | 4,716,852 |   |  | $                                | 20.96 |                             |   |      
|                                         |  |           |   |  |                                  |       |                             |   |      



F-16



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001, 2002 and 2003

Notes to Financial Statements



|12. | EMPLOYEE BENEFIT PLANSContinued
|--- | --------------------------------



The following table summarizes information about stock options at December 31, 2003:



|                        |  |                     |  |                                |       |                                            |      |                   |           |                                 |   |      
|----------------------- |  | ------------------- |  | ------------------------------ | ----- | ------------------------------------------ | ---- | ----------------- | --------- | ------------------------------- | - | -----
|                        |  | Options Outstanding |  | Options Exercisable           
|Range of Exercise Price |  | NumberOutstanding   |  | WeightedAverageExercise Price |       | WeightedAverageRemaining Contractual Life |      | NumberExercisable |           | WeightedAverage Exercise Price
|$ 5.00$14.56           |  | 726,489             |  | $                              | 12.62 |                                            | 6.91 |                   | 325,979   |                                 | $ | 11.88
|$14.75$24.75           |  | 2,991,003           |  |                                | 19.91 |                                            | 7.55 |                   | 1,663,022 |                                 |   | 20.53
|$25.25$29.81           |  | 633,153             |  |                                | 28.62 |                                            | 5.58 |                   | 539,783   |                                 |   | 29.05
|$30.63$35.00           |  | 366,207             |  |                                | 32.77 |                                            | 7.62 |                   | 162,402   |                                 |   | 32.76
|                        |  |                     |  |                                |       |                                            |      |                   |           |                                 |   |      
|Total                   |  | 4,716,852           |  |                                |       |                                            |      |                   | 2,691,186 |                                 |   |      
|                        |  |                     |  |                                |       |                                            |      |                   |           |                                 |   |      



Options available for
grant at December 31, 2003 totaled 461,377.



Effective
February 1, 1999, the Company established the 1999 Employee Stock Purchase Plan (the ESPP) to allow eligible employees of the Company to purchase shares of Common Stock, at semi-annual intervals, through periodic payroll deductions. The
Company has reserved 1,500,000 shares of Common Stock for issuance under the ESPP. Under the ESPP, employees, subject to certain restrictions, may purchase shares of Common Stock at 85 percent of the lesser of the fair market value at either the
date of enrollment or the date of purchase. During 2002 and 2003, 26,758 and 37,432 shares were issued under the ESPP, respectively. At December 31, 2003, 1,390,749 shares were available for issuance.



The Company maintains a 401(k) Retirement Plan and Trust (the 401(k)
Plan) available to all full-time, eligible employees. Employee contributions are voluntary and are limited to the maximum amount allowable under federal tax regulations and the Company matches contributions on a discretionary basis. Beginning
in 1997, the Company contributed one-half of its matching contribution in the form of cash and one-half in the form of shares of Common Stock of the Company. Shares are issued based on the closing stock price of the Common Stock at the end of each
fiscal quarter, with fractional share amounts carried over to subsequent quarters. At December 31, 2002 and 2003, the 401(k) Plan had a receivable from the Company of 1,447 and 531 shares, respectively, based on a closing stock price of $10.48 and
$34.09 per share, respectively. Employer cash match amounts contributed to the 401(k) Plan during 2002 and 2003 were approximately $73,000 and $80,000, respectively.



F-17



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##### Table of Contents

Closure Medical Corporation

Years Ended December 31, 2001, 2002 and 2003

Notes to Financial Statements



|13. | QUARTERLY FINANCIAL DATA  UNAUDITED
|--- | ------------------------------------



The following tables provide quarterly data for years ended December 31, 2002 and 2003.



|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|----------------------------------------------------- |  | --------------------------------------------------------- | ------ | - | ------- | - | ------ | -------- |  | - | ------- | - |  | - | ------ | -
|                                                      |  | 2002 Quarters Ended (In thousands, except per share data) |       
|                                                      |  | March 31                                                  |        |   | June 30 |   |        | Sept. 30 |  |   | Dec. 31 |  
|Revenues                                              |  | $                                                         | 5,400  |   |         | $ | 5,657  |          |  | $ | 5,901   |   |  | $ | 6,773  |  
|Cost of products sold                                 |  |                                                           | (1,663 | ) |         |   | (1,614 | )        |  |   | (1,472  | ) |  |   | (1,747 | )
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Gross profit                                          |  |                                                           | 3,737  |   |         |   | 4,043  |          |  |   | 4,429   |   |  |   | 5,026  |  
|Research, development and regulatory affairs expenses |  |                                                           | 1,600  |   |         |   | 1,743  |          |  |   | 1,574   |   |  |   | 1,519  |  
|General and administrative expenses                   |  |                                                           | 1,338  |   |         |   | 1,459  |          |  |   | 2,259   |   |  |   | 1,799  |  
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Income from operations                                |  |                                                           | 799    |   |         |   | 841    |          |  |   | 596     |   |  |   | 1,708  |  
|Interest income, net                                  |  |                                                           | 63     |   |         |   | 81     |          |  |   | 82      |   |  |   | 90     |  
|Provision (benefit) for income taxes                  |  |                                                           | 15     |   |         |   | (36    | )        |  |   | 98      |   |  |   | (5,941 | )
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Net income                                            |  | $                                                         | 847    |   |         | $ | 958    |          |  | $ | 580     |   |  | $ | 7,739  |  
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Net income per common share:                          |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Basic                                                 |  | $                                                         | 0.06   |   |         | $ | 0.07   |          |  | $ | 0.04    |   |  | $ | 0.57   |  
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Diluted                                               |  | $                                                         | 0.06   |   |         | $ | 0.07   |          |  | $ | 0.04    |   |  | $ | 0.56   |  
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  



|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|----------------------------------------------------- |  | --------------------------------------------------------- | ------ | - | ------- | - | ------ | -------- |  | - | ------- | - |  | - | ------ | -
|                                                      |  | 2003 Quarters Ended (In thousands, except per share data) |       
|                                                      |  | March 31                                                  |        |   | June 30 |   |        | Sept. 30 |  |   | Dec. 31 |  
|Revenues                                              |  | $                                                         | 8,161  |   |         | $ | 8,481  |          |  | $ | 8,861   |   |  | $ | 9,484  |  
|Cost of products sold                                 |  |                                                           | (1,893 | ) |         |   | (2,048 | )        |  |   | (2,140  | ) |  |   | (2,250 | )
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Gross profit                                          |  |                                                           | 6,268  |   |         |   | 6,433  |          |  |   | 6,721   |   |  |   | 7,234  |  
|Research, development and regulatory affairs expenses |  |                                                           | 1,830  |   |         |   | 2,158  |          |  |   | 2,042   |   |  |   | 2,103  |  
|General and administrative expenses                   |  |                                                           | 1,527  |   |         |   | 1,693  |          |  |   | 1,657   |   |  |   | 1,716  |  
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Income from operations                                |  |                                                           | 2,911  |   |         |   | 2,582  |          |  |   | 3,022   |   |  |   | 3,415  |  
|Interest income, net                                  |  |                                                           | 78     |   |         |   | 69     |          |  |   | 69      |   |  |   | 96     |  
|Provision for income taxes                            |  |                                                           | 1,070  |   |         |   | 980    |          |  |   | 1,140   |   |  |   | 1,240  |  
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Net income                                            |  | $                                                         | 1,919  |   |         | $ | 1,671  |          |  | $ | 1,951   |   |  | $ | 2,271  |  
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Net income per common share:                          |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Basic                                                 |  | $                                                         | 0.14   |   |         | $ | 0.12   |          |  | $ | 0.14    |   |  | $ | 0.16   |  
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  
|Diluted                                               |  | $                                                         | 0.14   |   |         | $ | 0.12   |          |  | $ | 0.13    |   |  | $ | 0.15   |  
|                                                      |  |                                                           |        |   |         |   |        |          |  |   |         |   |  |   |        |  



F-18