The following discussion and analysis of our financial condition and results of operations should be read together with the selected consolidated financial data and our financial statements and the related notes appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those under the heading "Risk Factors."
GENERAL
Integra is a world leader in medical devices focused on limiting uncertainty for surgeons so they can concentrate on providing the best patient care. Integra provides customers with clinically relevant, innovative and cost-effective products that improve the quality of life for patients. We focus on cranial and spinal procedures, small bone and joint injuries, the repair and reconstruction of soft tissue, and instruments for surgery.
We manage our business through a combination of product groups and geography, and accordingly, we report our financial results under five reportable segments
- U.S. Instruments, U.S. Neurosurgery, U.S. Extremities, U.S. Spine and Other (which consists of our U.S. Spine, U.S. Orthobiologics and Private Label businesses) and International. We present revenues in the following three product categories: Orthopedics, Neurosurgery and Instruments. Our orthopedics products group includes specialty metal implants for surgery of the extremities, shoulder and spine, orthobiologics products for repair and grafting of bone, dermal regeneration products and tissue-engineered wound dressings and nerve and tendon repair products. Our neurosurgery products group includes, among other things, dural grafts that are indicated for the repair of the dura mater, ultrasonic surgery systems for tissue ablation, cranial stabilization and brain retraction systems, systems for measurement of various brain parameters and devices used to gain access to the cranial cavity and to drain excess cerebrospinal fluid from the ventricles of the brain. Our instruments products group includes a wide range of specialty and general surgical and dental instruments and surgical lighting for sale to hospitals, outpatient surgery centers, and physician, veterinarian and dental practices. We manufacture many of our products in plants located in the United States, Puerto Rico, France, Germany, Ireland, the United Kingdom and Mexico. We also source most of our handheld surgical instruments and specialty metal and pyrocarbon implants through specialized third-party vendors. In the United States, we have several sales channels. We sell orthopedics products through a large direct sales organization and through specialty distributors focused on their respective surgical specialties. Neurosurgery products are sold through directly employed sales representatives. Instruments products are sold through two sales channels, both directly and through distributors and wholesalers, depending on the customer call point. We sell in the international markets through a combination of a direct sales organization and distributors. We also market certain products through strategic partners in the United States. Our objective is to become a multi-billion dollar diversified global medical technology company that helps patients by limiting uncertainty for medical professionals, and is a high-quality investment for shareholders. We will achieve these goals by delivering on our Brand Promises to our customers worldwide and by becoming a top player in all markets in which we compete. Our strategy includes the following key elements: geographic expansion, disciplined focus and execution, global quality assurance and acquiring or in-licensing products that fit existing sales channels, margin expansion and leveraging platform synergies. We aim to achieve growth in our revenues while maintaining strong financial results. While we pay attention to any meaningful trend in our financial results, we pay particular attention to measurements that are indicative of long-term profitable growth. These measurements include (1) revenue growth (including internal growth and by acquisitions), (2) gross margins on total revenues, (3) operating margins (which we aim to continually expand as we leverage our existing infrastructure), (4) earnings before interest, taxes, depreciation, and amortization, and (5) earnings per diluted share of common stock. We believe that we are particularly effective in the following aspects of our business:
• Regenerative Medicine Platform. We have developed numerous product lines through our proprietary collagen matrix and demineralized bone matrix technologies that are sold through every one of our sales channels.

• Diversification and Platform Synergies. Each of our three selling platforms contributes a different strength to our core business. Orthopedics enables us to grow our top line and increase gross margins. Neurosurgery provides stable growth as a market with few elective procedures. The Instruments business has a strong capacity to generate cash flows. We have unique synergies among these platforms, such as our regenerative medicine technology, instrument sourcing capabilities, and Group Purchasing Organization ("GPO") contract management.

• Unique Sales Footprint. Our sales footprint provides us with a unique set of customer call-points and synergies. Each of our sales channels can benefit from the GPO and Integrated Delivery Network ("IDN") relationships that our Instruments group manages. We have market-leading products for neurosurgeons, many of whom also perform spine surgeries, and we have yet to fully leverage those relationships to sell our spine products. We also have clinical expertise across all of our channels in the United States, and have an opportunity to expand and leverage this expertise in markets worldwide.

• Ability to Change and Adapt. Our corporate culture is truly what enables us to adapt and reinvent ourselves. We have demonstrated that we can quickly and profitably integrate new products and businesses. This core strength has made it possible for us to grow over the years, and is key to our ability to grow into a multi-billion dollar company.

ACQUISITIONS
Our strategy for growing our business includes the acquisition of complementary product lines and companies. Our recent acquisitions of businesses, assets and product lines may make our financial results for the year ended December 31, 2012 not directly comparable to those of the corresponding prior-year period. See Note 3, "Acquisitions and Pro Forma Results" to our consolidated financial statements for a further discussion.
From January 2010 through December 2012, we acquired the following businesses, assets and product lines:
In September 2011, we acquired Ascension Orthopedics, Inc. ("Ascension") for $66.0 million, which includes amounts paid for working capital adjustments of $0.2 million less amounts received from our escrow of $0.7 million. Ascension, based in Austin, Texas, develops and distributes a range of implants for the shoulder, elbow, wrist, hand, foot and ankle. In particular, Ascension adds a significant number of new and differentiated products to our extremities portfolio and access to the shoulder market.
In May 2011, we acquired SeaSpine, Inc. ("SeaSpine") for approximately $88.7 million, which includes amounts paid for working capital adjustments of $0.3 million and indemnification holdbacks totaling $7.4 million, all of which was released to the seller prior to December 31, 2012. SeaSpine, based in Vista, California, offers spinal fusion products to customers across the U.S. and in select markets in Europe. The addition of the SeaSpine business effectively doubled our distribution footprint and customer base in the U.S. spine hardware market.
In September 2010, we acquired certain assets as well as the distribution rights for our extremity reconstruction product lines in Australia from Culley Investments Pty. Ltd. ("Culley") for approximately $1.6 million (1.7 million Australian dollars) in cash. For eight years, Culley had been our distributor of these products in Australia. The acquisition provides us with the ability to sell orthopedic products directly to our Australian customers. In May 2010, we acquired certain assets and liabilities of the surgical headlight business of Welch Allyn, Inc. ("Welch") for approximately $2.4 million in cash and $0.2 million of working capital adjustments. The acquired assets have furthered our goal of expanding our reach into the surgical headlight market.
FACILITY OPTIMIZATION ACTIVITIES
As a result of our ongoing acquisition strategy and significant growth in recent years, we have undertaken cost-saving initiatives to consolidate manufacturing and distribution facilities and transfer activities, implement a global enterprise resource planning system, eliminate duplicative positions, realign various sales and marketing activities, and to expand and upgrade production capacity for our regenerative medicine products.
While we expect a positive impact from ongoing restructuring, integration and manufacturing transfer and expansion activities, such results remain uncertain.
MANAGEMENT CHANGES
On December 20, 2011, the Company's Board of Directors approved the following changes that went into effect on January 3, 2012: (i) Peter Arduini was promoted from the role of President and Chief Operating Officer to the role of President and Chief Executive Officer ("CEO"), and was appointed to the Board of Directors, (ii) Stuart Essig was appointed Executive Chairman of the Board of Directors, and (iii) Richard Caruso, the former Chairman of the Board of Directors, remained as a director of the Company.

On June 7, 2012, Stuart Essig terminated his employment with the Company and ceased to serve as Executive Chairman of the Board of Directors and as an officer or employee of the Company and its subsidiaries and affiliates. Mr. Essig continues to serve as Chairman of the Board of Directors and as a non-employee member of the Board.

RESULTS OF OPERATIONS
Executive Summary
Net income in 2012 was $41.2 million, or $1.44 per diluted share, as compared to $28.0 million, or $0.95 per diluted share in 2011 and $65.7 million, or $2.17 per diluted share in 2010.
Revenues over the past three years increased approximately $50.0 million each year, which generated approximately $20.0 to $35.0 million of additional gross margin. Costs and expenses increased sequentially as new headcount, especially in selling general and administrative, joined the Company either through acquisitions or new hires. Costs and expenses in 2011 included an incremental stock-based compensation expense of $13.3 million related to our former CEO's employment agreement and the accelerated vesting of awards upon appointment of our new CEO. These items result in our operating income declining from 2010 to 2011 and increasing from 2011 to 2012.
Changes in income before taxes result from the operating items described above and changes in interest expense, which increased in 2011 and decreased in 2012 as our 2012 convertible notes matured and a portion of our interest cost was capitalized in our construction in progress balance. See Note 2 "Summary of Significant Accounting Policies - Out-of-Period Adjustment" to our consolidated financial statements for a further discussion.
Income tax expense declined sharply in 2011 and increase again in 2012 in response to significant changes in U.S. income. These items result in our net income declining from 2010 to 2011 and increasing from 2011 to 2012. Special Charges
Income before taxes includes the following special charges:

                                                         Years Ended December 31,
SPECIAL CHARGES                                     2012            2011           2010
                                                              (In thousands)
Plainsboro, New Jersey manufacturing facility
remediation costs                               $     7,939     $    5,830     $        -
Global ERP implementation charges                    16,384         17,068          3,462
Facility optimization charges                        10,098          2,956          1,676
Certain employee termination charges                  1,356          2,705          1,498
Discontinued product lines charges                    1,368          3,926            506
Acquisition-related charges                           2,808          5,253          2,509
Impairment charges                                      141          2,648            856
European entity restructuring charges                     -            378          1,329
Convertible debt non-cash interest (1)                8,520         10,521          7,125
Certain executive compensation charges                    -         13,391          2,188
Financing charges                                         -            790              -
Total                                           $    48,614     $   65,466     $   21,149

(1) The 2012 amount has been reduced by $1.6 million, representing the non-cash interest that was capitalized as a component of the historical cost of assets constructed for the Company's own use. See Note 2 "Summary of Significant Accounting Policies" for more information.

The items reported above are reflected in the consolidated statements of operations as follows:

                                         Years Ended December 31,
                                       2012        2011        2010
                                              (In thousands)
Cost of goods sold                  $  16,425    $ 13,418    $  3,642
Research and development                    -         669         102
Selling, general and administrative    23,669      37,420       9,424
Intangible asset amortization               -       2,648         856
Interest expense                        8,520      11,311       7,125
Total                               $  48,614    $ 65,466    $ 21,149

We typically define special charges as items for which the amounts and/or timing of such expenses may vary significantly from period to period, depending upon our acquisition, integration and restructuring activities, and for which the amounts are non-cash in nature, or for which the amounts are not expected to recur at the same magnitude as we implement certain tax planning strategies. We believe that given our ongoing strategy of seeking acquisitions, our continuing focus on rationalizing our existing manufacturing and distribution infrastructure and our continuing review of various product lines in relation to our current business strategy, some of the special charges discussed above could recur with similar materiality in the future. In 2010 we began investing significant resources in the global implementation of a single enterprise resource planning system. We began capitalizing certain costs for the project starting in 2011 and continued to do so in 2012.
We believe that the separate identification of these special charges provides important supplemental information to investors regarding financial and business trends relating to our financial condition and results of operations. Investors may find this information useful in assessing comparability of our operating performance from period to period, against the business model objectives that management has established, and against other companies in our industry. We provide this information to investors so that they can analyze our operating results in the same way that management does and to use this information in their assessment of our core business and valuation of Integra. Update on Remediation Activities
Remediation activities in our regenerative medicine facility in Plainsboro, New Jersey affected revenues and gross margin in the year 2012. We received a warning letter from the FDA in December 2011, related to quality systems and compliance issues at that plant. The letter resulted from an inspection held at that facility in August 2011, and did not identify any new observations that were not provided in the Form 483 that followed the inspection. The warning letter did not restrict our ability to manufacture or ship products, nor did it require the recall of any product. In June and July 2012, the FDA again inspected the regenerative medicine facility. The second inspection closed out on July 30, 2012 and a FDA Form 483 Inspectional Observations was issued. We have been addressing the Form 483 observations, warning letter citations and communicating with the FDA on a monthly basis. Our efforts with respect to closing out the warning letter are well along, and we do not expect the FDA to return for another inspection at this facility until some time in 2013. Since August 2011, we have undertaken significant efforts to remediate the observations that the FDA has made and continue to do so, including both capital investment for new equipment, leasehold improvements and incremental spending to improve or revise quality systems. We expensed approximately $7.9 million and $5.8 million in the year ended December 31, 2012 and 2011, respectively. In 2012, the $7.9 million in expenses consisted of $3.2 million of expenses associated with remediation of the Plainsboro, New Jersey collagen device facility and $4.7 million for unplanned idle time and underutilization. In 2011, the $5.8 million in expenses, consisted of $2.1 million of expenses related to remediation and $3.7 million for unplanned idle time and underutilization. The capital expenditures directed to the remediation of our regenerative medicine facility were $5.2 million and $2.3 million for the years ended December 31, 2012 and 2011, respectively. In 2013, we expect to spend between $1.5 million and $2.0 million in the Plainsboro facility and have remediation activities completed by the end of the second quarter.

The FDA inspected our neurosurgery manufacturing facility in Andover, England in June 2012. Subsequently, on November 5, 2012, we received a warning letter from the FDA dated November 1, 2012 related to quality systems issues at the Andover manufacturing facility. The warning letter identified violations related to corrective and preventative actions, process validations, internal quality audits, and internal review of the suitability and effectiveness of the quality system at defined intervals. We filed the FDA warning letter as an exhibit to a Current Report on Form 8-K on November 13, 2012. Since the conclusion of the FDA inspection in June 2012, we have undertaken significant efforts to remediate the observations that the FDA has made and continue to do so. We are providing the FDA with monthly status reports and working cooperatively with the FDA to resolve any outstanding issues.

On February 14, 2013, we received a warning letter from the FDA relating to quality systems issues at our manufacturing facility located in Anasco, Puerto Rico. The letter resulted from an inspection conducted at that facility during October and November 2012. On February 15, 2013 we stopped distribution of our collagen products manufactured in the Anasco facility in order to confirm that we had successfully validated all such products and engaged a third-party consultant having appropriate quality system regulations expertise to confirm such validations. On February 22, 2013 the third-party consultant certified the completeness of such validations and we resumed distribution of collagen products from the Anasco facility. We continue to assess and address warning letter citations and will provide our response to the FDA by March 8, 2013 after which we will provide periodic status reports and work cooperatively with the FDA to resolve any outstanding issues.
Revenues and Gross Margin
Our revenues and gross margin on product revenues were as follows:

                                                      Years Ended December 31,
                                                  2012          2011          2010
                                                           (In thousands)
Orthopedics                                    $ 369,312     $ 328,933     $ 290,274
Neurosurgery                                     277,527       272,538       263,147
Instruments                                      184,032       178,607       178,647
Total revenues                                   830,871       780,078       732,068
Cost of goods sold                               314,427       299,150       268,188
Gross margin on total revenues                 $ 516,444     $ 480,928     $ 463,880
Gross margin as a percentage of total revenues      62.2 %        61.7 %        63.4 %

Revenues by Reportable Segment
Net sales by reportable segment for the three years ended December 31, 2012,
2011 and 2010 are as follows:
                             Years Ended December 31,
                          2012         2011         2010
                                  (In thousands)
U.S. Neurosurgery      $ 171,278    $ 165,652    $ 165,606
U.S. Instruments         162,323      155,833      157,853
U.S. Extremities         122,847       98,109       89,529
U.S. Spine and Other     190,546      174,479      152,274
International *          183,877      186,005      166,806
Total revenues         $ 830,871    $ 780,078    $ 732,068

* The Company attributes revenue to geographic areas based on the location of the customer. There are certain revenues managed by the various U.S. segments above that are generated from non-U.S. customers and therefore included in Europe and the Rest of World revenues. Revenues
Year Ended December 31, 2012 Compared with Year Ended December 31, 2011. For the year ended December 31, 2012, total revenues increased by $50.8 million or 7%, to $830.9 million from $780.1 million during the prior year. Domestic revenues increased by 9% to $642.8 million and were 77% of total revenues for the year ended December 31, 2012. International revenues were essentially flat at $188.1 million as compared to 2011. Foreign exchange fluctuations, arising primarily from a weaker euro throughout the year compared to the U.S. dollar, accounted for a $6.8 million decrease in revenues for the year ended December 31, 2012. On a constant currency basis, our overall revenues increased 7% compared to 2011.
U.S. Neurosurgery revenues were $171.3 million, an increase of 3% from the prior year. The increase resulted from stronger sales of our market-leading duraplasty products and cranial stabilization products and strength in our critical care.

U.S. Instruments revenues were $162.3 million, an increase of 4% from the prior year. We continued to experience strong sales within instruments, largely driven by strength in our acute care sales channel, and continued growth of our LED surgical headlamp product, which was launched in late 2011, and sales to our alternate site customers.
U.S. Extremities revenues were $122.8 million, an increase of 25% from the prior year. This growth resulted primarily from significant increases in sales of our dermal and wound care products. Sales of our metal implants also increased more than 30%, especially products for the foot and ankle and hand and wrist, in part because of the acquisition of Ascension Orthopedics in September 2011. U.S. Spine and Other revenues, which include our Spine hardware, orthobiologics and private label products, were $190.5 million, an increase of 9% from the prior year. We continued double digit growth in our orthobiologics business, led by a strong demand for our EVO3 and Integra Mozaik products. Our sales team has been focusing on signing up new distributors, essential to our incremental growth, and as a result we have seen some increases in sales. Our Spine hardware products also experienced double-digit growth over last year despite continuing price erosion because of increasing competition, in part because of the acquisition of SeaSpine in May 2011.
International segment revenues were $183.9 million, down 1% from the prior year. Foreign currency fluctuations, arising primarily from a weaker euro throughout the year, compared to the U.S. dollar in 2011, accounted for a $6.8 million decrease in the revenue for the year ended December 31, 2012. Our sales in Europe declined 6%, but on a constant currency basis sales would have been in line with prior year. We saw decreases in capital spending as European hospitals continued to control costs and manage their budgets. Our Rest of World markets posted a 5% increase. The Neurosurgery and Extremities product categories posted the strongest performances from a product standpoint. We continue to expand our growth in China as we transition to a new distribution network. With our global reach, we generate revenues in multiple foreign currencies, including euros, British pounds, Swiss francs, Canadian dollars, Japanese yen and Australian dollars. Accordingly, we will experience currency exchange risk with respect to those foreign currency denominated revenues. Year Ended December 31, 2011 Compared with Year Ended December 31, 2010. For the year ended December 31, 2011, total revenues increased by $48.0 million or 7%, to $780.1 million from $732.1 million during the prior year. Domestic revenues increased by 5% to $590.0 million and were 76% of total revenues for the year ended December 31, 2011. International revenues increased $19.4 million to $190.1 million, an increase of 11% compared to 2010. Foreign exchange fluctuations, arising primarily from a stronger euro during the second and third quarters of 2011 and a stronger Australian dollar throughout the year compared to the U.S. dollar than in 2010, accounted for a net $7.9 million increase in revenues for the year ended December 31, 2011. On a constant currency basis, our overall revenues increased 6% compared to 2010.
U.S. Neurosurgery revenues were $165.7 million, in line with the prior year. We experienced strong sales of neuromonitoring devices used in the critical care setting and duraplasty products. During 2010, we had higher than normal sales levels in neurosurgery, especially with our tissue ablation products as the rebound from the early stages of the global economic slowdown in 2009 was realized. The strong comparable from 2010 muted some of the 2011 increases in revenues.
U.S. Instruments revenues were $155.8 million, a slight decrease from the prior year. Our sales growth in surgical lighting was offset by weakness in sales of both hospital and alternate site instruments. In the alternate site channel, our largest distributors purchased fewer instruments in the fourth quarter in order to reduce their inventories at the end of the year. That said, our distributors were selling our instruments to their final customers at consistent levels, and as a result, we believed that we were not losing market share. Normal buying patterns returned in the second half of 2012 once our distributors attained their desired inventory levels. On the acute care side, new ambulatory surgery centers and hospital starts during 2011 had a smaller impact when compared to 2010.
U.S. Extremities revenues were $98.1 million, an increase of 10% from the prior year. The impact of our acquisition of Ascension drove most of this increase in revenue. Sales of engineered regenerative medicine products for skin and wound repair also increased over the full year 2010. Remediation work in our Plainsboro, New Jersey facility resulted in shortages of our regenerative medicine products because the part of the plant that manufactures these products was out of production in December of 2011. . . .