COLLAGEN CORP /DE, PREM14A, 1998-04-29

COLLAGEN CORP /DE
PREM14A, 1998-04-29
ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES

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<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934

Filed by the Registrant [X]

Filed by a Party other than the Registrant [ ]

Check the appropriate box:

[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for the Use of the Commission Only (as permitted by Rule
14a-6(e)(2))

Collagen Corporation
- - - --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)

- - - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)

Payment of Filing Fee (Check the appropriate box):

[ ] No fee required.

[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1) Title of each class of securities to which transaction applies:

Common Stock, par value $0.001 per share, of Cohesion Technologies, Inc.

(2) Aggregate number of securities to which transaction applies:

8,951,227
------------------------------------------------------------------------

(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

1/50th of 1% of the book value as of December 31, 1997 of the assets
of Cohesion Technologies, Inc., all shares of which are to be
distributed to the stockholders of Collagen Corporation pursuant to
the transactions defined in the Preliminary Proxy Statement.
------------------------------------------------------------------------

(4) Proposed maximum aggregate value of transaction:

$55,306,000
------------------------------------------------------------------------

<PAGE> 2

(5) Total fee paid:

$11,100
------------------------------------------------------------------------

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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

(2) Form, Schedule or Registration Statement No.:

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

(3) Filing Party:

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

(4) Date Filed:

-2-
<PAGE> 3

[COLLAGEN LETTERHEAD LOGO]

, 1998

Dear Stockholder:

As you know, we are proposing a spinoff transaction to divide Collagen
Corporation (the "Company") into two separate publicly traded companies,
Collagen Aesthetics, Inc. ("Aesthetics") and Cohesion Technologies, Inc.
("Cohesion") by distributing the outstanding shares of Cohesion common stock
("Cohesion Common Stock") to the Company's stockholders (the "Spinoff"). The
Company plans to continue operations under the name Collagen Aesthetics, Inc.
These operations will include the Company's long-time medical franchises in
plastic surgery, dermatology and aesthetic medicine and focus on cosmetic and
reconstructive medical technology products. References to the Company following
the Spinoff mean the operations of Aesthetics. The spun-out entity, Cohesion,
will primarily focus on the development of proprietary surgical biomaterial
products designed to address clinical requirements in the field of tissue repair
and regeneration. Prior public reports filed by the Company have referred to
these two entities as the Aesthetic Technologies Group and the Collagen
Technologies Group, respectively. Before completing the Spinoff, we are seeking
your approval as a stockholder of several matters at a special meeting of
stockholders to be held on , 1998 at Cohesion's principal offices
located at 2500 Faber Place, Palo Alto, California 94303 (the "Special
Meeting"). The meeting will start at 10:00 a.m. Pacific Time. If the Spinoff is
completed, you will receive one share of Cohesion Common Stock for each share of
common stock of the Company ("Company Common Stock") that you own on the record
date for the Spinoff.

Although the proposed Spinoff has been reported in the media and the
operations of Aesthetics and Cohesion have been explained in our 1996 and 1997
annual reports, it bears repeating that the Boards of Directors of the Company
(the "Company's Board") and Cohesion (the "Cohesion Board") believe this Spinoff
will be beneficial to both the Aesthetics and Cohesion enterprises. The Company
believes these are distinct businesses with differences in their markets,
products, research needs, investment needs, employee retention and compensation
plans and plans for growth. We believe that the potential and valuation of both
companies can best be optimized by operating them independently.

At the Special Meeting, we will ask you to vote on (1) the Spinoff and its
principal elements, (2) the change of the Company's name to Collagen Aesthetics,
Inc., (3) the amendment of the Company's 1994 Stock Option Plan, (4) the
adoption of the 1998 Employee Stock Purchase Plan for the Company and (5) the
adoption of the 1998 Directors' Stock Option Plan for the Company.

The Spinoff is subject to certain governmental approvals, including the
receipt of a ruling from the Internal Revenue Service ("IRS") that the Spinoff
will not result in recognition of taxable income or loss by the Company or
stockholders for United States ("U.S.") federal income tax purposes.

Details of these proposals and other important information, including a
description of the business and management of the Company and Cohesion following
the Spinoff are included in the accompanying proxy statement.

We hope you will give serious consideration to these matters. THE COMPANY'S
BOARD HAS UNANIMOUSLY APPROVED THE ABOVE PROPOSALS AND RECOMMENDS THAT YOU VOTE
FOR THESE PROPOSALS.

Whether or not you plan to attend the Special Meeting and regardless of the
number of shares that you own, please complete, sign, date and return the
enclosed proxy card promptly in the enclosed envelope. You may, of course,
attend the Special Meeting and vote in person, even if you have previously
returned your proxy card.

Sincerely,

--------------------------------------
Gary S. Petersmeyer
President and Chief Executive Officer
<PAGE> 4

NOTICE OF
SPECIAL MEETING OF STOCKHOLDERS
, 1998

To Our Stockholders:

A Special Meeting of Stockholders of Collagen Corporation (the "Company")
will be held on , 1998, at 2500 Faber Place, Palo Alto, California
94303, at 10:00 a.m. Pacific Time (the "Special Meeting"), to consider and vote
on the following proposals:

(1) The approval of the spinoff of Cohesion Technologies, Inc.
("Cohesion") into a separate company, including the following principal
elements:

(a) the distribution, on a one-for-one basis, of all of the
outstanding shares of Cohesion Common Stock to the Company's
stockholders (the "Distribution");

(b) the ratification of the Cohesion 1998 Stock Option Plan;

(d) the ratification of the Cohesion 1998 Directors' Stock Option
Plan;

(2) The amendment of the Company's Certificate of Incorporation as
described in the accompanying Proxy Statement to change the Company's name
to Collagen Aesthetics, Inc.;

(3) The amendment of the Company's 1994 Stock Option Plan to increase
the number of shares of Company Common Stock reserved for issuance
thereunder by 70,000 shares from 1,150,000 to 1,220,000 shares;

(4) The adoption of the Company's 1998 Employee Stock Purchase Plan
and the reservation of 125,000 shares of Company Common Stock for issuance
thereunder; and

(5) The adoption of the Company's 1998 Directors' Stock Option Plan
and the reservation of 250,000 shares of Company Common Stock for issuance
thereunder.

The record date for determining stockholders entitled to notice of and to
vote at the Special Meeting or any adjournment or postponement thereof is
, 1998 (the "Special Meeting Record Date"). No business other than
the proposals described in this notice will be considered at the Special Meeting
or any adjournment or postponement thereof.

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE TO
APPROVE THE FIVE PROPOSALS LISTED ABOVE, WHICH ARE DESCRIBED IN DETAIL IN THE
ACCOMPANYING PROXY STATEMENT.

WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY CARD AND PROMPTLY MAIL IT IN THE ENCLOSED
STAMPED ENVELOPE. This proxy statement is being mailed to our stockholders
beginning on or about , 1998.

--------------------------------------
Craig W. Johnson
Secretary
Palo Alto, California
, 1998
<PAGE> 5

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... 1
TRADEMARKS.................................................. 1
SUMMARY OF CERTAIN INFORMATION.............................. 2
The Special Meeting....................................... 2
The Proposals............................................. 2
What Company Stockholders Will Receive in the Spinoff..... 2
Cohesion Capitalization................................... 3
Businesses of the Company and Cohesion After the
Spinoff................................................ 3
Conditions to the Spinoff................................. 5
U.S. Federal Income Tax Consequences...................... 5
No Appraisal Rights....................................... 5
Accounting Treatment...................................... 5
Management of Cohesion Following the Spinoff.............. 5
Market for the Company Common Stock....................... 6
Dividends After the Spinoff............................... 6
Listing of Cohesion Common Stock.......................... 6
Vote Required to Approve the Proposals.................... 7
THE SPECIAL MEETING......................................... 8
Purpose of the Special Meeting............................ 8
Record Date, Voting Rights and Proxy Information.......... 8
No Appraisal Rights....................................... 9
Solicitation of Proxies................................... 9
RISK FACTORS................................................ 10
Lack of Operating History as Separate Companies........... 10
Division of Financial Resources of the Company Following
the Spinoff; No Assurance of Additional Funding........ 10
Dependence of Cohesion on Boston Scientific Stock to
Finance Operations..................................... 11
No Current Public Market for Cohesion Common Stock;
Changes in Trading Prices of Company Common Stock...... 11
Risk that the Company or Cohesion Will be Unable to
Satisfy Indemnification Obligations.................... 12
History of Operating Losses; Uncertainty Of Future
Profitability.......................................... 12
Uncertainties Related To Early Stage Of Commercialization
And Development........................................ 12
Lack Of Marketing And Sales Capabilities.................. 13
Relationship Between the Company and Cohesion............. 13
Certain Federal Income Tax Risks of the Spinoff........... 13
Possible Antitakeover Effects of the Cohesion Amended and
Restated Certificate of Incorporation.................. 14
Dividend Policies......................................... 14
The Company's Lack of Research and Development Resources
Following the Spinoff.................................. 14
</TABLE>

i
<PAGE> 6

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROPOSAL NO. 1: THE SPINOFF................................. 15
Background and Reasons for the Spinoff.................... 15
Required Vote............................................. 16
Recommendation of the Company's Board..................... 16
Fairness Opinion.......................................... 16
Manner of Effecting the Spinoff........................... 18
Allocation of Assets and Liabilities...................... 19
Treatment of Stock Options Outstanding as of the
Distribution Date...................................... 20
Employee Stock Purchase Plan.............................. 21
Ratification of Cohesion Plans............................ 22
Certain Federal Income Tax Consequences of the Spinoff.... 22
Description of Cohesion Common Stock...................... 24
Description of Cohesion Preferred Stock...................
Certain Anti-Takeover Effects of Cohesion Certificate of
Incorporation and Bylaw Provisions..................... 24
Liability and Indemnification of Officers and Directors... 24
Listing and Trading of Company Common Stock and Cohesion
Common Stock........................................... 26
Regulatory Approvals...................................... 26
Accounting Treatment...................................... 26
Conditions; Termination................................... 26
Interests of Certain Persons.............................. 27
BUSINESS AND PROPERTIES OF THE COMPANY AFTER THE SPINOFF.... 28
Overview.................................................. 28
Industry Background....................................... 28
Strategy.................................................. 29
Products.................................................. 30
Recent Developments....................................... 32
Sales and Marketing....................................... 33
Competition............................................... 34
Manufacturing............................................. 35
Product Development....................................... 36
Patents and Proprietary Technology........................ 36
Government Regulation..................................... 37
Employees................................................. 40
Executive Officers and Directors.......................... 40
Director Compensation..................................... 43
Board Committees.......................................... 43
Human Resources Committee Interlocks and Insider
Participation.......................................... 43
Executive Compensation.................................... 44
Certain Relationships and Related Transactions............ 46
Security Ownership of Certain Beneficial Owners of Company
Common Stock........................................... 50
SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA............................................ 52
Cohesion Selected Historical Consolidated Financial
Data................................................... 52
Collagen Corporation Selected Historical Consolidated
Financial Data......................................... 54
Cohesion Selected Unaudited Pro Forma Consolidated
Financial Data......................................... 56
Collagen Corporation Selected Unaudited Pro Forma
Consolidated Financial Data............................ 58
</TABLE>

ii
<PAGE> 7

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF COHESION..................... 59
Overview.................................................. 59
Results of Operations..................................... 60
Liquidity and Capital Resources........................... 62
Investments, Acquisitions and Licensing Agreements........ 63
Year 2000................................................. 64
BUSINESS AND PROPERTIES OF COHESION AFTER THE SPINOFF....... 65
Overview.................................................. 65
Products and Development Programs......................... 65
Objectives and Strategy................................... 66
DESCRIPTION OF COHESION CAPITAL STOCK....................... 67
Cohesion Common Stock..................................... 67
Cohesion Preferred Stock.................................. 68
Delaware Law and Certain Provisions of the Certificate of
Incorporation.......................................... 68
RELATIONSHIP BETWEEN THE COMPANY AND COHESION AFTER THE
SPINOFF................................................... 68
Separation and Distribution Agreement..................... 69
Supply Agreements......................................... 69
Assignment and License Agreement.......................... 69
Research and Development Agreement........................ 70
Benefits Agreement........................................ 70
Tax Allocation and Indemnity Agreement.................... 70
Services Agreement........................................ 71
PROPOSAL NO. 2: THE COMPANY NAME CHANGE..................... 72
Required Vote............................................. 72
Recommendation of the Company's Board..................... 72
PROPOSAL NO. 3: AMENDMENT OF THE COMPANY 1994 STOCK OPTION
PLAN...................................................... 73
General................................................... 73
Purpose................................................... 73
Administration............................................ 74
Eligibility............................................... 74
Terms of Options.......................................... 75
Restricted Stock Purchase Rights.......................... 76
Adjustments Upon Changes in Capitalization................ 76
Amendment and Termination of the Plan..................... 76
Tax Information........................................... 76
Required Vote............................................. 77
Recommendation of the Company's Board..................... 77
</TABLE>

iii
<PAGE> 8

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROPOSAL NO. 4: ADOPTION OF THE COMPANY 1998 EMPLOYEE STOCK
PURCHASE PLAN............................................. 78
General................................................... 78
Purpose................................................... 78
Administration............................................ 78
Eligibility and Participation............................. 78
Grant and Exercise of Option.............................. 79
Purchase Price............................................ 79
Payroll Deductions........................................ 79
Termination of Employment................................. 80
Adjustments Upon Changes in Capitalization................ 80
Amendment and Termination of the Plan..................... 80
Tax Information........................................... 80
Required Vote............................................. 81
Recommendation of the Company's Board..................... 81
PROPOSAL NO. 5: ADOPTION OF THE COMPANY 1998 DIRECTORS'
STOCK OPTION PLAN......................................... 82
General and Purpose....................................... 82
Grant and Exercise of Options............................. 82
Exercise Price and Term of Options........................ 83
Plan Benefits............................................. 83
Merger or Sale of Assets.................................. 83
Amendment and Termination of the Plan..................... 83
Tax Information........................................... 84
Required Vote............................................. 84
Recommendation of the Company's Board..................... 84
APPENDIX A: Lehman Brothers' Fairness Opinion............... A-1
APPENDIX B: Proxy Card...................................... B-1
INDEX TO CONSOLIDATED FINANCIAL INFORMATION................. F-1
</TABLE>

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<PAGE> 9

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). These reports, proxy statements and other
information can be inspected and copied at the public reference room of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the public reference facilities in the New York Regional Office, 75 Park Place,
New York, New York 10007, and the Chicago Regional Office, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can be obtained at
prescribed rates by writing to the Commission, Public Reference Section,
Washington, D.C. 20549. These reports and other information may also be
inspected without charge at a Website maintained by the Commission. The address
of such site is http://www.sec.gov. The Company will provide without charge to
each person to whom the Proxy Statement is delivered, upon written or oral
request of any such person, additional copies of the 1997 Annual Report to
Stockholders on Form 10-K and the Quarterly Reports on Form 10-Q. Requests for
such copies should be addressed to: Assistant Secretary, Collagen Corporation,
1850 Embarcadero Road, Palo Alto, CA 94303. For additional information about the
Company, please visit the Company's Website at http://www.collagen.com. For
additional information about Cohesion, please see the Cohesion Registration
Statement on Form 10, containing an Information Statement to stockholders
enclosed with this Proxy Statement. The Cohesion Form 10 is subject to
completion or amendment following filing with the Commission.

TRADEMARKS

Zyderm(R), Zyplast(R), Contigen(R), Collagen Replacement Therapy(R),
SoftForm(R) and Trilucent(R) are registered trademarks of the Company and
Refinity(TM) is a trademark of the Company.

This Proxy Statement also includes trade names and trademarks of companies
other than the Company. Their use in this Proxy Statement is an editorial
fashion only, and to the benefit of the owner thereof, with no intention of
commercial use or infringement of such trade name or trademark.

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<PAGE> 10

SUMMARY OF CERTAIN INFORMATION

This proxy statement (the "Proxy Statement") is being furnished to
stockholders of the Company, in connection with the solicitation of proxies by
the Company's Board of Directors (the "Company's Board") for use at the Special
Meeting of Stockholders of the Company to be held on , 1998, at
10:00 a.m. Pacific Time, at Cohesion's principal offices located at 2500 Faber
Place, Palo Alto, California 94303, and at any adjournment or postponement
thereof (the "Special Meeting").

This summary highlights selected information from this document and may not
contain all of the information that is important to you. To better understand
the Spinoff and for a more complete understanding of the legal terms of the
Spinoff and the other proposals to be presented at the Special Meeting, you
should read this entire document carefully, as well as those additional
documents referred to in this summary and elsewhere. See "Additional
Information."

THE SPECIAL MEETING

We will hold the Special Meeting at Cohesion's principal offices located at
2500 Faber Place, Palo Alto, California 94303 at 10:00 a.m. Pacific Time, on
, 1998.

THE PROPOSALS

At the Special Meeting, stockholders will consider and vote on the
following proposals (collectively, the "Proposals"):

(1) The Spinoff of Cohesion into a separate company, including the
following principal elements (the "Spinoff Proposal"):

(a) the distribution, on a one-for-one basis, of all of the
outstanding shares of Cohesion Common Stock to the Company's
stockholders;

(b) the ratification of the Cohesion 1998 Stock Option Plan;

(d) the ratification of the Cohesion 1998 Directors' Stock Option
Plan;

(2) The amendment of the Company's Certificate of Incorporation as
described in this Proxy Statement to change the Company's name to Collagen
Aesthetics, Inc. (the "Company Name Change Proposal");

(4) The adoption of the Company's 1998 Employee Stock Purchase Plan
and the reservation of 125,000 shares of Company Common Stock for issuance
thereunder (the "Employee Stock Purchase Plan Proposal"); and

(5) The adoption of the Company's 1998 Directors' Stock Option Plan
and the reservation of 250,000 shares of Company Common Stock for issuance
thereunder (the "Directors' Stock Option Plan Proposal").

WHAT COMPANY STOCKHOLDERS WILL RECEIVE IN THE SPINOFF

In the Spinoff, Company stockholders will receive one share of Cohesion
Common Stock for each share of Company Common Stock that they own on the record
date for the Spinoff. The shares of Cohesion Common Stock distributed in the
Spinoff represent a continuing interest in Cohesion.

The Company currently intends to use a book entry system to distribute
shares in the Spinoff. In a book entry system, ownership of stock is recorded in
the records maintained by Cohesion's transfer agent (The

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Bank of New York), but physical certificates are not issued unless the
stockholder requests a physical certificate. Following the Spinoff, each
stockholder of record on the Spinoff record date will receive a statement of the
Cohesion shares credited to the stockholder's account. Stockholders may request
physical certificates instead of participating in the book entry system.

COHESION CAPITALIZATION(1)

<TABLE>
<CAPTION>
PRE-SPINOFF POST-SPINOFF
------------------------ ---------------------------
AUTHORIZED OUTSTANDING AUTHORIZED OUTSTANDING(2)
---------- ----------- ---------- --------------
<S> <C> <C> <C> <C>
SECURITY
Common Stock................................... 10,000,000 0 15,000,000 8,951,227
Preferred Stock................................ 5,000,000 10 5,000,000 0
---------- -- ---------- ----------
Total:............................... 15,000,000 10 20,000,000 8,951,227
---------- -- ---------- ----------
</TABLE>

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

(1) Information is as of March 31, 1998, assumes a 1:1 distribution ratio and
assumes the conversion of all Cohesion Preferred Stock into Cohesion Common
Stock prior to the Spinoff.

(2) Excludes, as of March 31, 1998, a total of approximately 2,477,000 shares of
Cohesion Common Stock issuable upon exercise of options which Cohesion may
issue under Cohesion's stock option plans on or shortly after the Spinoff,
as a result of (i) new option grants to employees (including officers) and
directors of Cohesion, (ii) the restructure and exchange of options to
purchase Company Common Stock held by former employees (including officers)
and directors of the Company and (iii) offers Cohesion may make to exchange
options held by former employees and directors of Cohesion Corporation (as
defined hereafter) for options to purchase Cohesion Common Stock. See
"Treatment of Stock Options Outstanding as of the Distribution Date".

BUSINESSES OF THE COMPANY AND COHESION AFTER THE SPINOFF

Following the Spinoff, the Company will be divided into two separate
publicly traded entities. The Company will continue to operate its long-time
medical franchises in plastic surgery, dermatology and aesthetic medicine and
will focus primarily on cosmetic and reconstructive medical technology products.
Cohesion will focus on the development of a distinct, but complementary platform
of proprietary technologies designed to address clinical requirements in the
field of tissue repair and regeneration.

The Separation and Distribution Agreement (the "Distribution Agreement"),
effective as of January 1, 1998, entered into by and between the Company and
Cohesion provides, among other things, for the allocation

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of assets and liabilities between the Company and Cohesion. The allocation of
the principal assets and liabilities of the Company is summarized below.

<TABLE>
<CAPTION>
THE COMPANY COHESION
----------- --------
<S> <C>
- - - - Fixed assets (including the principal - Fixed assets**
manufacturing facility)*
- - - - Inventories as of January 1, 1998 allocated - Finished goods inventories of Collagraft,
to the Company Vitrogen, Cell Prime and Zygen as of
January 1, 1998
- - - - Accounts receivable as of January 1, 1998 - Accounts receivable as of January 1, 1998
for the Company's product lines for Cohesion's product lines
- - - - $10.9 million of cash, cash equivalents and - All cash, cash equivalents and short-term
short-term investments(1) investments excluding the $10.9 million
allocated to the Company
- - - - Equity investments and all associated - Equity investments and all associated
rights in LipoMatrix, Incorporated, rights in Boston Scientific Corporation,
Cosmetic Therapeutics, Inc., Cosmederm Innovasive Devices, Inc., Pharming B.V.,
Technologies, Inc. and Collagen Cemax-Icon, Inc., Medarex, Inc., Cohesion
International, Inc. Corporation and CollOptics, Inc.
- - - - Trilucent breast implant technology - All technology (with the exception of
breast implant technology)(2)
- - - - All CE marks existing as of January 1, 1998 - All regulatory approvals and filings with
and all regulatory approvals and filings respect to Collagraft
with respect to Zyderm, Zyplast, Contigen,
Trilucent and human placental collagen
- - - - Accounts payable as of January 1, 1998* - Accounts payable as of January 1, 1998**
- - - - Existing contracts, licenses and other - Existing contracts, licenses and other
agreements* agreements**
- - - - Product liability litigation related to the - Product liability litigation related to
Company Cohesion
- - - - Employment-related claims and lawsuits - Employment-related claims and lawsuits
related to employees of the Company(3) related to employees of Cohesion(3)
- - - - All future environmental claims related to - All future environmental claims related to
the buildings located at 1850 Embarcadero the buildings located at 2500 Faber Place and
Road and the Fremont manufacturing facility 2455 Faber Place, Palo Alto, California
</TABLE>

- - - ---------------
* Based on the businesses of the Company

** Based on the businesses of Cohesion

(1) Calculated after intercompany eliminations for cash as of January 1, 1998 in
subsidiaries retained by the Company.

(2) All technology has been licensed back, on an exclusive, worldwide basis, to
the Company for use in the fields of (i) Company products and treatments
including, without limitation, soft tissue augmentation products and
treatments and non-surgical aesthetic treatments, (ii) urinary incontinence
products and treatments and (iii) ostomy products; but excluding all other
fields, including without limitation products for fecal incontinence, dental
and ophthalmic applications, or drug or cell delivery.

(3) Employment-related claims and lawsuits not involving employees of either
entity will be jointly assumed by the Company and Cohesion as set forth in
the Distribution Agreement, effective as of January 1, 1998.

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<PAGE> 13

CONDITIONS TO THE SPINOFF

The Spinoff is subject to several conditions, including the following:

(1) Approval by the Company's stockholders of the Spinoff;

(2) Receipt by the Company of an Internal Revenue Service ("IRS")
ruling that, for United States ("U.S.") federal income tax purposes, the
Spinoff will not result in recognition of taxable income or loss by the
Company or stockholders of the Company;

(3) Receipt of any necessary government approvals or third party
consents;

(4) The absence of any pending order, injunction or decree preventing
the consummation of the distribution; and

(5) The absence of any event that, in the judgment of the Company's
Board, would result in the Spinoff having a material adverse effect on the
Company, its affiliates or its stockholders.

The Company's Board does not intend to waive any of these conditions. If
the Company does not receive the requested ruling from the IRS and the Board of
Directors decides to waive the condition requiring such a ruling, the Company
will circulate a revised proxy statement and resolicit proxies. The Company's
Board also has the right to cancel or defer the Spinoff even if the stockholders
approve the Spinoff and the other conditions to the Spinoff are met.

U.S. FEDERAL INCOME TAX CONSEQUENCES

The Company has applied to the IRS for a ruling that the Spinoff will not
result in recognition of taxable income or loss to the Company and the Company's
stockholders for U.S. federal income tax purposes.

NO APPRAISAL RIGHTS

Under Delaware law, Company stockholders have no right to an appraisal of
the value of their shares in connection with the Spinoff.

ACCOUNTING TREATMENT

The Company will record the Spinoff as a distribution to stockholders based
on the historical book value of the assets distributed. The Company's
consolidated financial statements will not include the assets, liabilities or
results of operations of Cohesion subsequent to the date of the Spinoff. The
historical financial statements of the Company prior to the date of the Spinoff
will not be restated for the Distribution. The Company has prepared unaudited
pro forma financial data as of December 31, 1997 and for the year ended June 30,
1997 and the six months ended December 31, 1997 assuming the Spinoff occurred
prior to July 1, 1996 for purposes of the statement of operations data, and on
December 31, 1997 for purposes of the balance sheet data. (See "Selected
Historical and Unaudited Pro Forma Consolidated Financial Data -- Collagen
Corporation Selected Unaudited Pro Forma Consolidated Financial Data" and
"Collagen Corporation Unaudited Pro Forma Consolidated Financial Information").
In the separate financial statements of Cohesion, the assets and liabilities
contributed to Cohesion are recorded at the Company's historical basis, and
Cohesion's results of operations prior to the date of the Spinoff reflect the
historical operations of the Cohesion businesses contributed by the Company.

MANAGEMENT OF COHESION FOLLOWING THE SPINOFF

Prior to completing the Spinoff, the Company, as the sole stockholder of
Cohesion, elected the following persons to the Board of Directors of Cohesion
(the "Cohesion Board"): John R. Daniels, M.D., Frank DeLustro, Ph.D., Reid W.
Dennis, David J. Foster and Craig W. Johnson. Dr. Daniels and Messrs. Dennis and
Johnson are currently directors of the Company. These individuals or their
successors will stand for

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<PAGE> 14

re-election at the first annual meeting of the Cohesion stockholders following
the Spinoff. Following the Spinoff, Cohesion plans to seek additional
independent directors for the Cohesion Board.

Dr. Daniels and Messrs. Dennis and Johnson will resign as directors of the
Company as of the Spinoff.

Those individuals who were elected as executive officers of Cohesion in
December 1997 plan to remain in management positions following the Spinoff. Mr.
Foster will serve as Chief Executive Officer of Cohesion. Prior to his promotion
to Chief Executive Officer of Cohesion in December 1997, Mr. Foster was Senior
Vice President, General Manager, Collagen Technologies Group. Mr. Foster will
continue to serve as Senior Vice President, General Manager, Collagen
Technologies Group until the Spinoff. Dr. DeLustro will serve as President and
Chief Operating Officer of Cohesion. Dr. DeLustro was appointed as President and
Chief Operating Officer of Cohesion in December 1997. See "Business and
Properties of Cohesion After the Spinoff."

MARKET FOR THE COMPANY COMMON STOCK

The shares of the Company Common Stock are listed on the Nasdaq National
Market ("Nasdaq"). The following table sets forth the high and low sales prices
of the Company Common Stock for each quarter of fiscal 1996 and 1997 and through
March 31, 1998:

<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
--------------
HIGH LOW
---- ----
<S> <C> <C>
1996
First Quarter............................................. $21 1/4 $15 13/16
Second Quarter............................................ 21 1/8 17 1/2
Third Quarter............................................. 23 1/4 19 1/2
Fourth Quarter............................................ 22 3/8 19
1997
First Quarter............................................. 20 16 9/16
Second Quarter............................................ 20 3/4 18 1/4
Third Quarter............................................. 23 3/4 18 1/2
Fourth Quarter............................................ 19 1/4 14 1/8
1998
First Quarter............................................. 19 7/8 16 5/8
Second Quarter............................................ 20 7/8 18
Third Quarter............................................. 22 1/8 16 3/4
</TABLE>

DIVIDENDS AFTER THE SPINOFF

Neither the Company nor Cohesion anticipate paying dividends after the
Spinoff.

LISTING OF COHESION COMMON STOCK

The shares of Cohesion Common Stock to be issued in the Spinoff are
expected to be listed on the Nasdaq under the symbol CSON. However, there is
currently no public trading market for these shares.

6
<PAGE> 15

VOTE REQUIRED TO APPROVE THE PROPOSALS

<TABLE>
<CAPTION>
PROPOSAL VOTE REQUIRED
-------- -------------
<S> <C>
1. Spinoff While the Company's Board is seeking a
stockholder vote on the proposal, the
Company does not believe that such a vote is
required under Delaware law.
2. Amendment to Company's Certificate of Affirmative vote of majority of shares
Incorporation outstanding on , 1998.
3. Amendment of the Company's 1994 Stock Affirmative vote of majority of shares
Option Plan entitled to vote on the subject matter that
are present in person or represented by
proxy and voting on this proposal.
4. Adoption of the Company's 1998 Employee Affirmative vote of majority of shares
Stock Purchase Plan entitled to vote on the subject matter that
are present in person or represented by
proxy and voting on this proposal.
5. Adoption of the Company's 1998 Directors' Affirmative vote of majority of shares
Stock Option Plan entitled to vote on the subject matter that
are present in person or represented by
proxy and voting on this proposal.
</TABLE>

7
<PAGE> 16

THE SPECIAL MEETING

This Proxy Statement is being furnished to stockholders of the Company, in
connection with the solicitation of proxies by the Company's Board for use at
the Special Meeting to be held on , 1998, at 10:00 a.m. Pacific
Time, at Cohesion's principal offices located at 2500 Faber Place, Palo Alto,
California 94303, and at any adjournment or postponement thereof. Following the
Spinoff, the Company's principal executive offices will be located at 1850
Embarcadero Road, Palo Alto, California 94303. The Company's telephone number at
such address will continue to be (650) 856-0200. Following the Spinoff, the
principal executive offices of Cohesion, which is currently a wholly owned
subsidiary of the Company, will be located at 2455 Faber Place and 2500 Faber
Place, Palo Alto, California 94303. Cohesion's telephone number will be
(650)354-4300.

PURPOSE OF THE SPECIAL MEETING

At the Special Meeting, holders of shares of Company Common Stock, will be
asked to consider and vote upon the following Proposals:

(1) The Spinoff Proposal, including the following principal elements:

(a) the distribution, on a one-for-one basis, of all of the
outstanding shares of Cohesion Common Stock to the Company's
stockholders;

(b) the ratification of the Cohesion 1998 Stock Option Plan;

(d) the ratification of the Cohesion 1998 Directors' Stock Option
Plan;

(2) The Company Name Change Proposal;

(3) The Stock Option Plan Proposal;

(4) The Employee Stock Purchase Plan Proposal; and

(5) The Directors' Stock Option Plan Proposal.

Completion of the Spinoff is conditioned upon, among other things,
stockholder approval of the Spinoff Proposal. The Company's Board has retained
discretion, even if stockholders approve the Spinoff Proposal and the other
conditions to the Spinoff are satisfied, to cancel or defer the Spinoff.

RECORD DATE, VOTING RIGHTS AND PROXY INFORMATION

Only holders of record of shares of Company Common Stock as of the close of
business on , 1998 (the "Special Meeting Record Date") will be
entitled to receive notice of and to vote at the Special Meeting. Except for
shares owned by the Company or its subsidiaries, each share of Company Common
Stock outstanding on such Special Meeting Record Date will be entitled to one
vote. The presence, either in person or by properly executed proxy, of the
holders of a majority of the shares of Company Common Stock outstanding on the
Special Meeting Record Date is necessary to constitute a quorum at the Special
Meeting.

As of the Special Meeting Record Date, there were shares of
Company Common Stock outstanding and entitled to vote at the Special Meeting.

For purposes of the voting, votes cast against a proposal will be counted
for purposes of determining (i) the presence or absence of a quorum for the
transaction of business and (ii) the total number of shares of Company Common
Stock present in person or represented by proxy at the Special Meeting and
"entitled to vote on the subject matter," with respect to a proposal ("Votes
Cast"). While there is no definitive statutory or case law authority in Delaware
as to the proper treatment of abstentions in the counting of votes with respect
to a proposal such as the adoption of the 1998 Employee Stock Purchase Plan or
the 1998 Directors' Stock Option Plan, the Company believes that abstentions
should be counted for purposes of determining both (i) the presence or absence
of a quorum for the transaction of business and (ii) the total number of Votes

8
<PAGE> 17

Cast with respect to the proposal. In the absence of controlling precedent to
the contrary, the Company intends to treat abstentions in this manner.
Accordingly, abstentions will have the same effect as a vote against the
proposal. In a 1988 Delaware case, Berlin v. Emerald Partners, the Delaware
Supreme Court held that, while broker non-votes may be counted for purposes of
determining the presence or absence of a quorum for the transaction of business,
broker non-votes should not be counted for purposes of determining the number of
Votes Cast with respect to the particular proposal on which the broker has
expressly not voted. Accordingly, broker non-votes with respect to a proposal
will not be counted as Votes Cast.

All shares of Company Common Stock that are represented at the Special
Meeting by properly executed proxies received prior to or at the Special Meeting
and not revoked will be voted at the Special Meeting in accordance with the
instructions indicated in such proxies. If no instructions are indicated, such
proxies will be voted for approval of the Spinoff Proposal, the Company Name
Change Proposal, the Stock Option Plan Proposal, the Employee Stock Purchase
Plan Proposal and the Directors' Stock Option Plan Proposal. No business other
than the above Proposals will be considered at the Special Meeting.

In the event that a quorum is not present at the time the Special Meeting
is convened, or if for any other reason the Company believes that additional
time should be allowed for the solicitation of proxies, the Company may adjourn
the Special Meeting with or without a vote of the stockholders. If the Company
proposes to adjourn the Special Meeting by a vote of the stockholders, the
persons named in the enclosed form of proxy will vote all shares of Company
Common Stock for which they have voting authority in favor of such adjournment.

A stockholder who wishes to give a proxy to someone other than the proxy
solicitor may strike out the names appearing on the enclosed form of proxy,
write in the name of any other person, sign the proxy, and deliver it to the
person whose name has been substituted.

Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted.

NO APPRAISAL RIGHTS

Stockholders of the Company will not be entitled to appraisal rights under
Delaware law in connection with any of the Proposals.

SOLICITATION OF PROXIES

The Company will bear the expense of preparing, printing and mailing this
proxy material, as well as the cost of any required solicitation. The Company
has engaged Corporate Investor Communications, Inc., a proxy solicitation firm,
to assist by mail or telephone, in person or otherwise in the solicitation of
proxies. The fee is expected to be approximately $6,000 plus expenses. A few
regular employees of the Company may also participate in the solicitation,
without additional compensation. In addition, the Company will reimburse banks,
brokerage firms and other custodians, nominees and fiduciaries for reasonable
expenses incurred in forwarding proxy materials to beneficial owners of the
Company Common Stock and obtaining their proxies.

9
<PAGE> 18

RISK FACTORS

Stockholders should consider the following factors, as well as the other
information set forth in the Proxy Statement, before voting on the Proposals.
Additionally, for a full discussion of the risk factors associated with Cohesion
as a separate company following the Spinoff, stockholders should refer to the
Cohesion Registration Statement on Form 10.

We also caution you that this Proxy Statement includes forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Exchange Act. All
statements regarding the Company's or Cohesion's expected future financial
position, results of operations, cash flows, dividends, financing plans,
business strategy, budgets, projected costs and capital expenditures,
competitive positions, growth opportunities for existing products, benefits from
new technology, plans and objectives of management for future operations, and
markets for stock are forward-looking statements. Although the Company believes
its expectations reflected in such forward-looking statements are based on
reasonable assumptions, no assurance can be given that such expectations will
prove to have been correct. Important factors that could cause actual results to
differ materially from the expectations reflected in the forward-looking
statements herein include, among others, those set forth below as well as
general economic and business and market conditions, customer acceptance of new
products, efficacy of new technology, changes in U.S. and non-U.S. laws and
regulations, costs or difficulties relating to the establishment of Cohesion as
an independent entity and increased competitive and/or customer pressure.

LACK OF OPERATING HISTORY AS SEPARATE COMPANIES

Upon completion of the Spinoff, the Company will own and operate the
business of Aesthetics Technologies Group and Cohesion will own and operate the
business of the Collagen Technologies Group. Neither of these businesses has an
operating history as a separate company, and each has historically been able to
rely on the earnings, assets and cash flows of the other. In addition, Cohesion
has not operated as an independent public company. As is the case with many
spinoffs, the preparation for and completion of the Spinoff may result in some
temporary dislocation of, and inefficiencies in the business, operations,
organization and personnel structure of the Company and Cohesion. The Company is
not required to provide assistance or services to Cohesion, except as described
in certain agreements entered into between the Company and Cohesion,
collectively, (the "Intercompany Agreements"), effective January 1, 1998, and it
is incumbent upon Cohesion to establish an identity separate from the Company.
Although Cohesion intends to invest substantial resources in the future to
increase capital market and industry awareness of its activities, there can be
no assurance that such investment will actually increase such awareness, and
failure to achieve such awareness could have a material adverse effect on
Cohesion. Cohesion has not operated as a public company, and following the
Spinoff it will continue to incur increasing costs and expenses associated with
being a public company. See "-- No Current Public Market for Cohesion Common
Stock; Changes in Trading Prices of Company Common Stock;" "-- Risk that the
Company or Cohesion will be Unable to Satisfy Indemnification Obligations;"
"Business and Properties of Cohesion After the Spinoff;" "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Cohesions" and "Relationship Between the Company and Cohesion After the
Spinoff."

DIVISION OF FINANCIAL RESOURCES OF THE COMPANY FOLLOWING THE SPINOFF; NO
ASSURANCE OF ADDITIONAL FUNDING

The Spinoff will result in a division of the Company's financial resources.
Pursuant to the Intercompany Agreements, Cohesion received $1.8 million and
1,207,860 shares of Boston Scientific Corporation ("Boston Scientific") stock,
and the Company received $10.9 million of cash, cash equivalents and short-term
investments. Cohesion will require substantial funds to conduct the necessary
research and development and clinical trials of its bioresorbable hemostatic
devices and biosealants for tissue repair and regeneration. In the event that
Cohesion is unable to raise additional funds, it may be required to delay, scale
back or severely curtail its development efforts or clinical trials, which could
have a material adverse effect on its business, financial condition and results
of operations. Also, growth, if any, of the Company's operations may require
additional funds. There can be no assurance that that either the Company or
Cohesion could obtain additional

10
<PAGE> 19

financing or that the terms of any financing, if obtained, would be advantageous
to such company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Cohesion."

DEPENDENCE OF COHESION ON BOSTON SCIENTIFIC STOCK TO FINANCE OPERATIONS

Historically, the Company has used sales of Boston Scientific stock to fund
operations and investments, and, pursuant to the terms of the Distribution
Agreement, the Company transferred to Cohesion, effective January 1, 1998, its
equity interest in Boston Scientific. As of March 31, 1998, the Company owned
approximately 1.1 million shares of Boston Scientific common stock, valued at
$75.5 million, based on a market price of $67.50 per share on such date as
reported on the New York Stock Exchange. Cohesion has implemented a "protect"
strategy based on purchases of put options and sales of call options in
combination, commonly known as an "equity collar," covering 650,000 shares of
its Boston Scientific holdings. While the strategy is designed to minimize
downside risk of loss should the stock price decline below approximately $63.00
and allow for limited upside participation should the stock price rise above
approximately $98.00, there can be no assurance that Cohesion will be able to
sell the remaining unhedged shares of Boston Scientific common stock at
attractive prices if, when and as needed. Failure to achieve such sales could
jeopardize Cohesion's ability to fund its operations and require it to engage in
additional financing alternatives, some of which might be dilutive. The market
price of Boston Scientific common stock is highly volatile and, as a medical
device manufacturer, Cohesion believes that Boston Scientific is subject to a
number of the same factors affecting its operations as Cohesion. Readers are
encouraged to review the Boston Scientific reports filed by Boston Scientific
with the Commission for a detailed description of the nature of Boston
Scientific's business and the risks and uncertainties associated with it. Any
significant downward fluctuation in the market price for Boston Scientific
common stock could adversely impact Cohesion's earnings due to lower amounts
realized on any sales by Cohesion of such stock and would decrease the value of
Cohesion's total assets as stated on its balance sheet resulting from a lower
carrying value for the Boston Scientific investment, which as of March 31, 1998,
represented approximately 79% of the value of Cohesion's total assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Cohesion."

NO CURRENT PUBLIC MARKET FOR COHESION COMMON STOCK; CHANGES IN TRADING PRICES OF
COMPANY COMMON STOCK

Prior to the Spinoff, there has been no public market for the Cohesion
Common Stock. There can be no assurance that an active trading market will
develop or be sustained after the Spinoff, that sufficient market support will
be obtained or sustained or that the market price of the Cohesion Common Stock
will not decline below the price on the Distribution Date or shortly thereafter.

It is expected that Company Common Stock will continue to be listed and
traded on Nasdaq after the Spinoff. As a result of the Spinoff, Company Common
Stock is expected to trade at prices lower than the trading prices of Company
Common Stock immediately prior to the Spinoff, although the receipt of the
shares of Cohesion Common Stock should mitigate this effect. The combined
trading prices of Company Common Stock and Cohesion Common Stock held by
stockholders after the Spinoff may be less than, equal to or greater than the
trading price of Company Common Stock prior to the Spinoff. See "Proposal No. 1:
The Spinoff -- Listing and Trading of Company Common Stock and Cohesion Common
Stock."

In recent years, the stock market in general, and the stock prices of life
sciences companies in particular, have experienced extreme price fluctuations,
sometimes without regard to the operating performance of particular companies.
Factors such as quarterly clinical trial results, market acceptance of the
Company's or Cohesion's products, fluctuations of actual or anticipated
operating results, announcements of technological innovations or new products by
the Company or Cohesion or its competitors, U.S. Federal Drug Administration
(the "FDA") and international regulatory actions, actions with respect to
reimbursement matters, developments with respect to patents or proprietary
rights, public concern as to the safety of products developed by the Company or
Cohesion or others, changes in health care policy in the U.S. and
internationally, changes in earnings estimates by analysts, market conditions in
the industry, announcements by competitors, regulatory actions or approvals and
general economic conditions may have a significant effect on the market price of
either the Company Common Stock or the Cohesion Common Stock. Following a
11
<PAGE> 20

fluctuation in the market price of a corporation's securities, securities class
action litigation has often resulted. There can be no assurance that such
litigation will not occur in the future with respect to either the Company or
Cohesion. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse impact
on the Company's or Cohesion's business, financial condition and results of
operations, respectively. See "Proposal No. 1: The Spinoff -- Listing and
Trading of Company Common Stock and Cohesion Common Stock."

RISK THAT THE COMPANY OR COHESION WILL BE UNABLE TO SATISFY INDEMNIFICATION
OBLIGATIONS

The Distribution Agreement and various other agreements entered into by the
Company and Cohesion allocate responsibility between them for various
liabilities and obligations. The Distribution Agreement provides that Cohesion
will indemnify the Company for the liabilities assumed by Cohesion pursuant to
these agreements and the Company will indemnify Cohesion for the liabilities
retained by the Company. However, the availability of such indemnities will
depend upon the future financial strength of Cohesion and the Company. No
assurance can be given that the relevant company will be in a position to fund
such indemnities. See "Relationship Between the Company and Cohesion After the
Spinoff."

HISTORY OF OPERATING LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY

Cohesion's historical results of operations discussed in this Proxy
Statement and contained in Cohesion's financial statements and related notes,
included in this Proxy Statement, reflect the historical operations of the
businesses contributed by the Company to Cohesion. The financial statements of
Cohesion included herein may not necessarily reflect the results of operations,
financial position and cash flows of the businesses transferred from the Company
to Cohesion had Cohesion been operated as an independent entity during the
periods presented. Cohesion has incurred operating losses in each of the past
five years, including operating losses of $4.6 million, $9.2 million, $16.4
million and $20.0 million in fiscal 1995, 1996, 1997 and for the six-month
period ended December 31, 1997, respectively. Cohesion's operating losses have
resulted primarily from expenses incurred in connection with Cohesion's research
and development activities, including preclinical and clinical trials,
development of manufacturing processes and general and administrative expenses.
Cohesion expects that such expenses will continue to increase for the
foreseeable future. Cohesion's ability to achieve and sustain operating
profitability is highly dependent upon obtaining regulatory approval for its
products, in a timely and efficient fashion, successfully commercializing its
products in development, particularly the CoStasis atraumatic hemostatic device
("CoStasis") and the CoSeal surgical sealant ("CoSeal"), and developing sales
and marketing capabilities for its products, in Europe, the United States and
other markets. There can be no assurance that Cohesion will obtain required
regulatory approvals in a timely fashion, if at all, or successfully develop,
manufacture, commercialize and market products or that Cohesion will ever record
significant product revenues or achieve operating profitability. Operating
profitability, if achieved, may not be sustained. See "-- Lack of Operating
History as Separate Companies;" "Lack of Marketing Sales Capabilities;" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Cohesion."

UNCERTAINTIES RELATED TO EARLY STAGE OF COMMERCIALIZATION AND DEVELOPMENT

Except for Collagraft, Cohesion's orthopedic implant product,
("Collagraft") which is currently being marketed by Zimmer Inc., a division of
Bristol-Myers-Squibb Company ("Zimmer") and Cohesion's Vitrogen, Cell Prime,
Zygen, Angiostat and other bulk collagen products (the "Intermediate Products"),
all of Cohesion's products are in research or preclinical or clinical
development. Cohesion has not received marketing approval for any of its
products from the FDA or any other international regulatory body, other than for
Collagraft. The development and commercialization of new products are highly
uncertain as is the timing associated with these activities. Among other things,
potential products that appear to Cohesion to be promising may not reach the
market for a number of reasons, including the possibilities that such products
will be found ineffective, cause harmful side effects during preclinical testing
or clinical trials, will fail to receive necessary regulatory approvals, will be
difficult to manufacture on a commercial scale, will be uneconomical, will fail
to achieve market acceptance or will be precluded from commercialization by the
proprietary rights of third parties. No assurance can be given that any of
Cohesion's development programs will be successfully

12
<PAGE> 21

completed, that clinical trials will generate anticipated results or that such
trials will commence or be completed as planned. Additionally, there can be no
assurance that Cohesion will be able to obtain CE Mark in Europe on a timely
basis, if at all, or that any premarket approval ("PMA") application will be
accepted or ultimately approved by the FDA on a timely basis, if at all, or that
any products for which approval is obtained will be commercially successful. If
any of Cohesion's development programs are not successfully completed in a
timely fashion required regulatory approvals are not obtained in a timely
fashion or products for which approvals are obtained are not commercially
successful, Cohesion's business, financial condition and results of operations
would be materially and adversely affected.

LACK OF MARKETING AND SALES CAPABILITIES

Cohesion currently has no experience in marketing or selling its products
under development and does not have a significant marketing and sales staff. In
order to achieve commercial success for any product approved by the FDA,
Cohesion must either develop a marketing and sales force or enter into
arrangements with third parties to market and sell its products. If Cohesion
develops its own marketing and sales capabilities, it will compete with other
companies that currently have experienced and well-funded marketing and sales
operations. To the extent that Cohesion enters into co-promotion or other
marketing and sales arrangements with other companies, any revenues to be
received by Cohesion will be dependent on the efforts of others, and there can
be no assurance that such efforts will be successful. Additional factors in
achieving market acceptance may include Cohesion's ability to address
competition from domestic and foreign medical device, pharmaceutical and
biopharmaceutical companies, develop a marketing and sales force, form strategic
partnerships and manufacture price- and cost-effective products.

RELATIONSHIP BETWEEN THE COMPANY AND COHESION

Conflicts of interest may arise between the Company and Cohesion in a
number of areas relating to their past and ongoing relationships, including tax
and employee benefit matters and indemnity arrangements.

The Company and Cohesion have entered into a number of agreements for the
purpose of defining certain relationships between them, including the
Distribution Agreement, certain supply agreements (the "Supply Agreements"), an
assignment and license agreement (the "Assignment and License Agreement") and a
research and development agreement (the "Research and Development Agreement"),
each effective as of January 1, 1998. The terms of such agreements may limit the
Company's operating flexibility. The Company and Cohesion may also enter into
material transactions and agreements in the future. There can be no assurance
that any such arrangements and transactions will be at least as favorable as
could be obtained from third parties. See "Relationship Between the Company and
Cohesion After the Spinoff."

CERTAIN FEDERAL INCOME TAX RISKS OF THE SPINOFF

The Spinoff is conditioned upon the Company's receipt of a ruling from the
IRS to the effect, among other things, that the Spinoff will qualify as a
reorganization under Sections 355 and 368 of the Internal Revenue Code of 1986,
as amended (the "Code"), and, consequently, will not result in recognition of
taxable income or loss by the Company or its stockholders for federal income tax
purposes. See "Proposal No. 1: The Spinoff -- Certain Federal Income Tax
Consequences of the Spinoff." Such a ruling, while normally binding upon the
IRS, is subject to the accuracy of certain factual representations and other
information provided by the Company. If these factual representations and other
information were incorrect in any material respect, the ruling could be
jeopardized. The Company is not aware of any facts or circumstances which would
cause such representations and other information to be untrue. In addition,
Cohesion has agreed to indemnify the Company in the event that it takes certain
specified actions in the future that cause the Spinoff to fail to be tax-free to
the Company. However, such tax liability would be substantial, and there is no
assurance that Cohesion would be able to satisfy its indemnification obligation.
If the Company does not receive the ruling from the IRS, and the Company's Board
decides to waive the tax-ruling condition to the Spinoff, the Company will
distribute revised proxy materials and resolicit proxies. See "Risk
Factors -- Risk that the Company or Cohesion will be Unable to Satisfy
Indemnification Obligations" and "Relationship Between the Company and Cohesion
After the Spinoff -- Tax Allocation and Indemnity Agreement."

13
<PAGE> 22

If the Spinoff were to fail to qualify as a recognization under Sections
355 and 368 of the Code, then, in general, the Company would recognize taxable
gain equal to the excess of (1) the aggregate fair market value of Cohesion
Common Stock distributed in the Spinoff, over (2) the adjusted basis of such
Cohesion Common Stock. Under certain limited circumstances, Cohesion has agreed
to indemnify the Company for any tax liabilities attributable to the Spinoff
failing to qualify as a tax-free reorganization due to certain future actions by
Cohesion. See "Relationship Between the Company and Cohesion After the
Spinoff -- Tax Allocation and Indemnity Agreement." In addition, under the
federal consolidated return regulations, each member of the federal consolidated
group (including Cohesion) is severally liable for such tax liability.

Furthermore, if the Spinoff were not to qualify as a reorganization under
Sections 355 and 368 of the Code, then each holder of Company Common Stock who
receives shares of Cohesion Common Stock in the Spinoff would be treated as if
such stockholder received a taxable distribution in an amount equal to the fair
market value of Cohesion Common Stock received by such stockholder. Such
distribution would be treated as a dividend to the extent paid out of the
Company's current or accumulated earnings and profits, including earnings and
profits from the Spinoff itself as described in the preceding paragraph.

POSSIBLE ANTITAKEOVER EFFECTS OF THE COHESION AMENDED AND RESTATED CERTIFICATE
OF INCORPORATION

Cohesion's Amended and Restated Certificate of Incorporation (the "Cohesion
Certificate of Incorporation") does not provide for cumulative voting in the
election of directors. In addition, the Cohesion Board may issue shares of
Cohesion preferred stock ("Cohesion Preferred Stock") without stockholder
approval on such terms as the Cohesion Board may determine. Cohesion's Bylaws
require advance notice of matters of business to be brought before meetings of
Cohesion stockholders. The Cohesion Certificate of Incorporation prohibits
stockholders from acting by written consent. The rights of the holders of
Cohesion Common Stock will be subject to, and may be adversely affected by, the
rights of the holders of any Cohesion Preferred Stock that may be issued in the
future. Further, Cohesion is subject to Section 203 of the Delaware General
Corporation Law ("DGCL") which, subject to certain exceptions, restricts certain
transactions and business combinations between a corporation and a stockholder
owning 15% or more of the corporation's outstanding voting stock (an "interested
stockholder") for a period of three years from the date the stockholder becomes
an interested stockholder. See "Proposal No. 1: The Spinoff -- Certain
Antitakeover Effects of Cohesion Certificate of Incorporation and Bylaws
Provisions" and "Description of Cohesion Capital Stock."

DIVIDEND POLICIES

Neither the Company nor Cohesion anticipate paying dividends after the
Spinoff.

THE COMPANY'S LACK OF RESEARCH AND DEVELOPMENT RESOURCES FOLLOWING THE SPINOFF

Historically, the Company has primarily depended upon the research and
development support provided by Cohesion for its continued product development
and extension efforts. As a result of the Spinoff, the majority of the Company's
existing research and development resources will be allocated to Cohesion. Under
the terms of the Research and Development Agreement, Cohesion will continue to
collaborate with the Company on certain projects including the joint development
of human recombinant collagen technology and as such will continue to benefit to
a limited extent from Cohesion's research and development resources. The Company
will, however, be required over time to sustain independent research and
development operations to stay competitive in its field. There can be no
assurance that the loss of research and development support previously provided
to the Company by Cohesion will not have a material adverse affect on the
Company's business, financial condition and results of operations. In addition,
there can be no assurance that the Company will be able to build the independent
research and development effort which will be required to sustain the Company's
growth.

14
<PAGE> 23

PROPOSAL NO. 1: THE SPINOFF
(PROXY ITEM NO. 1)

BACKGROUND AND REASONS FOR THE SPINOFF

The Spinoff is designed to separate the aesthetic and reconstructive
cosmetic products business of the Company from the surgical tissue repair and
regeneration business of Cohesion. The Spinoff will result in the formation of
two publicly traded companies, each of which will be able to pursue an
independent strategic path. The Company's Board believes the separation will
offer both new entities the opportunity to pursue strategic objectives
appropriate to different business objectives and to create targeted incentives
for their management and key employees. In addition, the Spinoff is expected to
offer each entity the financial flexibility to raise capital on a more cost
effective basis. The Company's Board considered the following in making its
decision to approve the Spinoff:

Business and Market Rationale

The Spinoff will enable two companies with distinct strategic, financial,
and operating goals to adopt strategies and pursue objectives appropriate to
their respective core businesses. The Spinoff will allow each entity to pursue
its corporate objectives independent of the operations and policies of the
other. Following the Spinoff, the Company will continue to focus on its
aesthetic and reconstructive cosmetic business. This business is expected to be
cash flow positive and focused on further product development and
commercialization. The Company plans to implement a strategy which will maintain
its leadership in the intensely competitive aesthetic and reconstructive product
market. This strategy will focus on extending the Company's market penetration,
building a development platform and continuing to develop the innovative
products which have been a historical source of the Company's growth. Cohesion,
in turn, will focus on the development, clinical testing and market launch of
bioresorbable hemostatic devices and biosealants for tissue repair and
regeneration in surgical markets, as well as activities relating to the
marketing of Collagraft and the Intermediate Products.

Cost of Equity Capital

Following the Spinoff, both Cohesion and the Company may elect to raise
additional capital to facilitate growth. As independent publicly traded
entities, the Company and Cohesion will each have greater flexibility in their
equity capital raising efforts and will be able to more efficiently pursue their
respective capital raising strategies in both the private and public markets.
Moreover, the Spinoff will enable both Cohesion and the Company to lower the
effective cost of equity capital borne by current Company stockholders.

Management Focus and Employee Incentives

The Spinoff will enable both companies to own and focus on their respective
businesses. The Company's aesthetic and reconstructive products business and
Cohesion's biocompatible materials business are sufficiently distinct in terms
of technology, stage of product development and commercialization, market focus
and other factors such that it is more advantageous for both to operate and be
managed as separate entities. The Spinoff is expected to allow management and
employees of each company to focus on their respective paths of innovation in
product development and marketing, thereby enhancing the ability of each to
optimize productivity and growth. In addition, the Spinoff is intended to allow
each company to provide both management and employees with targeted equity
compensation arrangements thereby optimizing the economic incentives each entity
will be able to provide its respective employees.

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<PAGE> 24

REQUIRED VOTE

While the Board of Directors is seeking stockholder approval of the Spinoff
at the Special Meeting, the Company does not believe that a stockholder vote is
required under Delaware law for approval of the Spinoff Proposal.

RECOMMENDATION OF THE COMPANY'S BOARD

THE COMPANY'S BOARD HAS APPROVED THE SPINOFF PROPOSAL AND RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THE SPINOFF PROPOSAL.

FAIRNESS OPINION

Opinion of the Company's Financial Advisor

Lehman Brothers has served as financial advisor to the Company in
connection with the Spinoff and delivered a written opinion (the "Lehman
Opinion") to the Company's Board dated April 16, 1998, to the effect that, as of
the date of the Lehman Opinion and based on and subject to the assumptions,
limitations and qualifications set forth therein, from a financial point of
view, the Distribution is fair to the stockholders of the Company.

THE FULL TEXT OF THE LEHMAN OPINION IS ATTACHED AS APPENDIX A TO THIS PROXY
STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. THE COMPANY STOCKHOLDERS MAY
READ THE LEHMAN OPINION FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND OTHER
MATTERS CONSIDERED BY LEHMAN BROTHERS. THE SUMMARY OF THE LEHMAN OPINION SET
FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE
LEHMAN OPINION.

No limitations were imposed by the Company on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
its opinion, except that Lehman Brothers was not authorized to solicit, and did
not solicit, any indications of interest from any third party with respect to
the purchase of all or part of the Company's or Cohesion's business. In arriving
at its opinion, Lehman Brothers did not ascribe a specific range of values to
the Company, but rather made its determination as to the fairness of the
Distribution to the Company stockholders, from a financial point of view, on the
basis of the financial and comparative analyses described below. The Lehman
Opinion is for the use and benefit of the Company's Board and was rendered to
the Company's Board in connection with its consideration of the Spinoff. The
Lehman Opinion is not intended to be and does not constitute a recommendation to
any holder of the Company Common Stock as to how such stockholder should vote
with respect to the Spinoff. Lehman Brothers was not requested to opine as to,
and its opinion does not address, the Company's underlying business decision to
proceed with or effect the Distribution.

In arriving at its opinion, Lehman Brothers reviewed and analyzed: (1) the
specific terms of the Company's Distribution, (2) the Proxy Statement, the
Company's annual report on Form 10-K for the year ended June 30, 1997 and such
other publicly available information concerning the Company that Lehman Brothers
believed to be relevant to its analysis, (3) financial and operating information
with respect to the business, operations and prospects of the Company and
Cohesion furnished to Lehman Brothers by the Company, (4) a trading history of
the Company Common Stock and a comparison of that trading history with those of
other companies that Lehman Brothers deemed relevant, (5) a comparison of the
historical financial results and present financial condition of the Company with
those of other companies that Lehman Brothers deemed relevant, and (6) a
comparison of the historical financial results and present financial condition
of Cohesion with those of other companies that Lehman Brothers deemed relevant.
In addition, Lehman Brothers had discussions with the management of the Company
concerning the businesses, operations, assets, financial conditions and
prospects of the Company and Cohesion (including on a pro forma basis) and
undertook such other studies, analyses and investigations as it deemed
appropriate.

In arriving at its opinion, Lehman Brothers assumed and relied upon the
accuracy and completeness of the financial and other information used by it
without assuming any responsibility for independent verification of such
information and further relied upon the assurances of management of the Company
that they were not aware of any facts or circumstances that would make such
information inaccurate or misleading. With respect

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<PAGE> 25

to the financial projections of the Company and Cohesion following the
Distribution, upon advice of the Company, Lehman Brothers assumed that such
projections were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of the Company as to the
future financial performance of the Company and Cohesion and that the Company
and Cohesion will perform substantially in accordance with such projections. In
arriving at its opinion, Lehman Brothers did not conduct physical inspection of
the properties and facilities of the Company or Cohesion and did not make or
obtain any evaluations or appraisals of the assets or liabilities of the Company
or Cohesion. Lehman Brothers has assumed that the Distribution will be a
tax-free transaction to the stockholders of the Company. The Lehman Opinion
necessarily is based upon market, economic and other conditions as they exist
on, and can be evaluated as of, the date of the Lehman Opinion.

The process by which securities trading markets establish a market price
for any security is complex, involving the interaction of numerous factors, and
market prices will fluctuate with changes of, among other factors, the financial
condition, business and prospects of the issuer and comparable companies and
economic and financial market conditions. In addition, trading in shares of
Cohesion will likely be characterized by a period of redistribution among
stockholders of the Company who receive such shares in the Distribution, which
may temporarily depress the market price of such shares during such period.
Accordingly, Lehman Brothers expresses no opinion as to the prices at which
shares of Cohesion Common Stock or Company Common Stock actually will trade
following the consummation of the Distribution. The Lehman Opinion should not be
viewed as providing any assurances that the combined market value of the shares
of Company Common Stock after consummation of the Distribution and the shares of
the Cohesion Common Stock to be received by a stockholder of the Company
pursuant to the Distribution will be in excess of the market value of the shares
of Company Common Stock owned by such stockholder at any time prior to
announcement of consummation of the Distribution.

The following is a summary of certain financial and comparative analyses
performed by Lehman Brothers and presented to the Company's Board.

Lehman Brothers compiled financial and stock market statistics for a number
of comparable medical technology and healthcare companies for both the Company
and Cohesion. For the Company, these companies were divided into: (i) medical
technology companies: Biomatrix, Inc., EMPI, Inc., Lifecore Biomedical, Inc.,
ReSound Corporation, UroMed Corporation, VISX, Inc. and Vivus, Inc.; (ii)
cosmetic laser companies: Coherent, Inc. and Palomar Medical Technologies, Inc.;
and (iii) medical collagen technology companies: Integra Lifesciences
Corporation, Kensey Nash Corporation and Perclose, Inc. No single company or
group of companies is directly comparable to the Company's business. Based on
publicly available information and various assumptions and estimates as
published by IBES, Lehman Brothers calculated various arithmetic and statistical
comparisons, including market values, price earnings ratios and price earning
ratios divided by each company's respective 5-year median growth rate.

A separate comparable company analysis was developed for Cohesion. These
comparable companies were divided into: (i) tissue repair and wound healing
companies: Advanced Tissue Sciences, Inc., Creative Biomolecules, Inc., Genzyme
Corporation (Tissue Repair), Integra Lifescience Corporation, Lifecore
Biomedical, Inc. and Organogenesis, Inc.; (ii) orthopedic related companies:
Innovasive Devices, Inc. ("Innovasive"), Orthologic Corporation and Osteotech,
Inc.; and (iii) surgical wound healing and tissue repair companies: Anika
Corporation, Closure Medical Corporation, Cryolife, Inc., Focal, Inc., Fusion
Medical Technologies, Inc., Gliatech, Inc. and ThermoGenesis Corporation. Based
on publicly available information and various assumptions and estimates as
published by IBES, Lehman Brothers calculated various arithmetic and statistical
comparisons, including market values, technology values and a comparison of
technology platforms.

Lehman Brothers also analyzed the Company's historical stock price
performance on an absolute basis and compared to its comparable companies and
the Standard & Poor's 400 index. The analysis indicated that the market price of
the Company's Common Stock has underperformed the comparable companies relative
to most of the ratios and comparisons analyzed.

The preparation of a fairness opinion involves various determinations as to
the most appropriate and

17
<PAGE> 26

relevant methods of financial and comparative analysis and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. Furthermore, in arriving at its
opinion, Lehman Brothers did not attribute any particular weight to any analysis
or factor considered by it, but rather made qualitative judgements as to the
significance and relevance of each factor and analysis. Accordingly, Lehman
Brothers believes that its analyses must be considered as a whole and that
considering any portion of such analyses and factors, without considering all
analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, Lehman Brothers made numerous
assumptions with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond the control of the
Company. Any estimates contained in these analyses are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
reflect the prices at which businesses actually may be sold.

Lehman Brothers is an internationally recognized investment banking firm
and, as part of its investment banking activities, is regularly engaged in the
evaluation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Company's Board selected Lehman
Brothers because of its expertise, reputation and familiarity with the Company
in particular and the medical technology industry and overall heathcare industry
in general and because its investment banking professionals have substantial
experience in transactions similar to the Spinoff.

As compensation for its services in connection with the Spinoff, Lehman
Brothers has a signed engagement letter from the Company which includes a fee of
$350,000 upon the delivery of its fairness opinion, which will be credited
against a success fee of $500,000 based upon the consummation of the Spinoff. In
addition, the Company has agreed to reimburse Lehman Brothers for its reasonable
expenses incurred in connection with its engagement and to indemnify Lehman
Brothers and certain related persons for certain liabilities that may arise out
of its engagement by the Company and the rendering of the Lehman Opinion.

In the ordinary course of its business, Lehman Brothers may actively trade
in the equity securities of the Company for its own account and for the accounts
of Lehman Brothers' customers and, accordingly, may at any time hold a long or
short position in such securities.

MANNER OF EFFECTING THE SPINOFF

In the event that the Company's stockholders approve the Spinoff Proposal
and all other conditions to the Spinoff are satisfied, it is expected that the
distribution of shares of Cohesion Common Stock will be made on or shortly after
, 1998 (the "Distribution Date") on a pro rata basis to holders of
record of issued and outstanding Company Common Stock on the date selected by
the Company's Board (the "Distribution Record Date"). The Company currently
intends to use a direct registration system to implement the distribution of
shares of Cohesion Common Stock in the Spinoff. On the Distribution Date, a
certificate representing all issued and outstanding shares of Cohesion Common
Stock will be delivered by the Company to Bank of New York, as the distribution
agent (the "Distribution Agent"). As soon as practicable thereafter, an account
statement will be mailed to each stockholder stating the number of shares of
Cohesion Common Stock received by such stockholder in the Spinoff. Following the
Spinoff, stockholders may request physical certificates for their shares of
Cohesion Common Stock. No fractional shares will be issued, and stockholders who
would be entitled to receive a fractional share will instead receive a whole
share. Holders of record of Company Common Stock as of the Distribution Record
Date will receive shares of Cohesion Common Stock on the basis of the
distribution ratio of one share of Cohesion Common Stock for every one share of
Company Common Stock held on the Distribution Record Date (the "Distribution
Ratio"). All shares of Cohesion Common Stock issued in the Spinoff will be fully
paid and nonassessable and the holders thereof will not be entitled to
preemptive rights. See "Proposal No. 1: The Spinoff -- Description of Cohesion
Common Stock."

No holder of Company Common Stock will be required to pay any cash or other
consideration for shares of Cohesion Common Stock received in the Spinoff or to
surrender or exchange shares of Company Common Stock in order to receive shares
of Cohesion Common Stock.

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<PAGE> 27

Certificates representing outstanding shares of Company Common Stock will
continue to represent rights to purchase shares of the Company's Series A
Preferred Stock pursuant to the Rights Agreement dated as of November 28, 1994
between the Company and The Bank of New York as Rights Agent.

ALLOCATION OF ASSETS AND LIABILITIES

Following the Spinoff, the Company will be divided into two separate
publicly traded entities. The Company will continue to operate its long-time
medical franchises in plastic surgery, dermatology and aesthetic medicine and
will focus on cosmetic and reconstructive medical technology products. Cohesion
will focus primarily on the development of a distinct, but complementary
platform of proprietary technologies designed to address clinical requirements
in the field of tissue repair and regeneration.

The Distribution Agreement provides, among other things, for the allocation
of assets and liabilities between the Company and Cohesion. The allocation of
the principal assets and liabilities of the Company is summarized below.

<TABLE>
<CAPTION>
THE COMPANY COHESION
----------- --------
<S> <C>
- - - - Fixed assets (including the principal - Fixed assets**
manufacturing facility)*
- - - - Inventories as of January 1, 1998 allocated - Finished goods inventories of Collagraft,
to the Company Vitrogen, Cell Prime and Zygen as of January
1, 1998
- - - - Accounts receivable as of January 1, 1998 - Accounts receivable as of January 1, 1998
based upon the product lines that generated for Cohesion's product lines
the receivable
- - - - $10.9 million of cash, cash equivalents and - All cash, cash equivalents and short-term
short-term investments(1) investments excluding the $10.9 million
allocated to the Company
- - - - Equity investments and all associated - Equity investments and all associated
rights in LipoMatrix, Incorporated, rights in Boston Scientific Corporation,
Cosmetic Therapeutics, Inc., Cosmederm Innovasive Devices, Inc., Pharming B.V.,
Technologies, Inc. and Collagen Cemax-Icon, Inc., Medarex, Inc., Cohesion
International, Inc. Corporation and CollOptics, Inc.
- - - - Trilucent breast implant technology - All technology (with the exception of
breast implant technology)(2)
- - - - All CE marks existing as of January 1, 1998 - All regulatory approvals and filings with
and all regulatory approvals and filings respect to Collagraft
with respect to Zyderm, Zyplast, Contigen,
Trilucent and human placental collagen
- - - - Accounts payable as of January 1, 1998* - Accounts payable as of January 1, 1998**
- - - - Existing contracts, licenses and other - Existing contracts, licenses and other
agreements* agreements**
- - - - Product liability litigation related to the - Product liability litigation related to
Company Cohesion
- - - - Employment-related claims and lawsuits - Employment-related claims and lawsuits
related to employees of the Company(3) related to employees of Cohesion(3)
- - - - All future environmental claims related to - All future environmental claims related to
the buildings located at 1850 Embarcadero the buildings located at 2500 Faber Place and
Road and the Fremont manufacturing facility 2455 Faber Place, Palo Alto, California
</TABLE>

- - - ---------------
* Based on the businesses of the Company

** Based on the businesses of Cohesion

(1) Calculated after intercompany eliminations for cash as of January 1, 1998
in subsidiaries retained by the Company.

(2) All technology has been licensed back, on an exclusive, worldwide basis, to
the Company for use in the fields of (i) Company products and treatments
including, without limitation, soft tissue augmentation products and
treatments and non-surgical aesthetic treatments, (ii) urinary incontinence
products and treatments and (iii) ostomy products; but excluding all other
fields including without limitation products for fecal incontinence, dental
and ophthalmic applications, or drug or cell delivery.

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<PAGE> 28

TREATMENT OF STOCK OPTIONS OUTSTANDING AS OF THE DISTRIBUTION DATE

Options held by Employees and Consultants

Each employee (including officers) and consultant of the Company or any
subsidiary of the Company who, immediately prior to the Distribution Date, holds
a vested stock option to purchase shares of Company Common Stock will, in
connection with the Distribution, receive two new options in replacement of the
original option, one to acquire shares of Company Common Stock and the other to
acquire shares of Cohesion Common Stock. Each new option will give the holder
the right to purchase a number of shares equal to the number of shares in the
original option.

Each employee (including officers) and consultant of the Company or any
subsidiary of the Company who, immediately prior to the Distribution Date, holds
an unvested stock option to purchase shares of Company Common Stock will, in
connection with the Distribution, receive a new option in replacement of the
original option to acquire the same number of shares of Common Stock of the
entity (the Company or Cohesion) for which such optionee shall be employed or
retained as a consultant following the Distribution.

The exercise price of each new option will be determined in accordance with
Emerging Issues Task Force Issue 90-9 as to be agreed upon by the Company's
Board and the Cohesion Board (or any committee thereof), after consultation with
legal and accounting advisors. The exercise price of each new option received by
employees and consultants is expected to generally preserve any spread between
the exercise price of the replaced option and the fair market value of the
Company's stock on the Distribution Date. The exercise price, as adjusted in
light of the above considerations, is not intended to result in any compensation
expense to the Company or Cohesion. All other terms of the new options other
than the exercise price will be the same as those of the original options;
provided, however, that service as an employee or consultant of Cohesion Corp.
or Cohesion shall be equivalent to providing service as an employee or
consultant of the Company. At the option of the Company's Board or the Cohesion
Board, out-of-the-money options may be treated differently.

Following the Distribution, the Company's Board and the Cohesion Board may,
at their discretion, grant additional options to their respective employees
(including officers) and consultants at such time or times and having such terms
as are determined by the respective Board.

Cohesion Corporation Options

Following the Distribution and approval by the Cohesion Board, Cohesion
anticipates offering to exchange or substitute the outstanding options of its
subsidiary Cohesion Corporation ("Cohesion Corp."), for options to acquire
Cohesion Common Stock. The new options are expected to have an exercise price
substantially less than the fair market value of Cohesion's shares at the time
of such exchange, based on an anticipated exchange ratio of 1.67 to 1, which
ratio will be determined by the Cohesion Board. Assuming such offers are
accepted by the Cohesion Corp. option holders and assuming an expected fair
value of $10.00 per share at the date of the exchange, Cohesion expects to
record compensation expense of approximately $1.5 million at the date of the
exchange in connection with vested options and an additional $4.5 million of
deferred compensation to be amortized during the next three fiscal years.

Options for Non-Employee Directors

Each non-employee director of the Company who, immediately prior to the
Distribution Date, holds a vested but not exercised option to purchase shares of
Company Common Stock will, in connection with the

20
<PAGE> 29

Distribution, receive two new options in replacement of the original option, one
to acquire shares of Company Common Stock and the other to acquire shares of
Cohesion Common Stock. Each new option will give the holder the right to
purchase a number of shares equal to the number of shares in the original
option. Each non-employee director of the Company who, immediately prior to the
Distribution Date, holds an unvested stock option to purchase shares of Company
Common Stock, will, in connection with the Distribution, receive a new option in
replacement of the original option to acquire the same number of shares of
Common Stock of the entity (the Company or Cohesion) for which such optionee
will serve as a director following the Distribution.

The exercise price of each new option will be determined in accordance with
Emerging Issues Task Force Issue 90-9 as to be agreed upon by the Company's
Board and the Cohesion Board (or any committee thereof), after consultation with
legal and accounting advisors. The exercise price of each new option received by
non-employee directors is expected to generally preserve any spread between the
exercise price of the replaced option and the fair market value of the Company's
stock on the Distribution Date. The exercise price, as adjusted in light of the
above considerations, is not intended to result in any compensation expense to
the Company or Cohesion. All other terms of the new options will be the same as
those of the original options; provided, however, that service as a director of
Cohesion Corp. or Cohesion shall be equivalent to providing service as a
director of the Company. At the option of the Company's Board or the Cohesion
Board, out-of-the-money options may be treated differently.

Following the Distribution, each non-employee director of the Company and
Cohesion will be eligible to participate in the 1998 directors' stock option
plan adopted by the company for which he or she serves as a director and to
receive automatic annual option grants pursuant to such plan. The exercise price
of all other options granted under either directors' plan shall be equal to the
fair market value of the underlying stock on the date of grant of the option.
Options granted under either directors' plan will have a term of ten years.

EMPLOYEE STOCK PURCHASE PLAN

The Company's Board has named Cohesion as a "designated subsidiary" under
the Company's 1985 Employee Stock Purchase Plan (the "1985 Purchase Plan").
Accordingly, Cohesion employees will be eligible to continue to participate in
the 1985 Purchase Plan until the Distribution. The 1985 Purchase Plan and the
offering period that commenced on January 1, 1998 under such plan will terminate
one week prior to the Distribution Record Date and all employee contributions
through such date will be used to purchase shares of Company Common Stock. Each
of the Company and Cohesion have adopted new employee stock purchase plans and
the initial offering periods under each such plan shall commence on the later of
July 1, 1998 or the Distribution Date. See "Proposal No. 1: The
Spinoff -- Ratification of Cohesion Plans -- 1998 Cohesion Employee Stock
Purchase Plan" and "Proposal No. 4: Adoption of the Company 1998 Employee Stock
Purchase Plan."

RATIFICATION OF COHESION PLANS

In order to attract and retain employees, consultants and non-employee
directors, the Cohesion Board has adopted, and the Company as the sole
stockholder of Cohesion in April 1998, approved the 1998 Cohesion Stock Option
Plan, the 1998 Cohesion Employee Stock Purchase Plan and the 1998 Cohesion
Directors' Stock Option Plan (collectively, the "Cohesion Plans"). Approval of
the Spinoff Proposal will also include ratification of the adoption of the
Cohesion Plans and the reservation of 2,607,000 shares, 250,000 shares and
268,000 shares of Cohesion Common Stock for issuance on or after the
Distribution, under the 1998 Cohesion Stock Option Plan, the 1998 Cohesion
Employee Stock Purchase Plan and the 1998 Cohesion Directors' Stock Option Plan,
respectively.

1998 Cohesion Stock Option Plan

Options granted under the 1998 Cohesion Stock Option Plan may be either
"incentive stock options" within the meaning of Section 422 of the Code, or
nonstatutory stock options at the discretion of the Company's Board and as
reflected in the written terms of the option agreement.

21
<PAGE> 30

1998 Cohesion Employee Stock Purchase Plan

The 1998 Cohesion Employee Stock Purchase Plan will be implemented by a
series of offering periods of twenty-four months duration commencing on January
1 and July 1 of each year, or at such other time or times as may be determined
by the Cohesion Board, with the first day of each offering period being
designated an offering date. Each offering period consists of four six-month
purchase periods, with the last day of each period being designated a purchase
date. The 1998 Cohesion Employee Stock Purchase Plan is intended to qualify
under Section 423 of the Code.

1998 Cohesion Directors' Stock Option Plan

The 1998 Cohesion Directors' Stock Option Plan provides for the grant of
nonstatutory stock options to nonemployee directors to continue to serve on the
Cohesion Board. It is designed to work automatically and not require
administration; however, to the extent administration is necessary, it will be
provided by the Cohesion Board.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE SPINOFF

The following discussion summarizes the U.S. federal income tax
consequences resulting from the Spinoff that materially affect the Company and
its stockholders. This discussion is based on current provisions of the Code,
existing and proposed Treasury Regulations thereunder and current administrative
rulings and court decisions, all of which are subject to change. This discussion
does not deal with all federal income tax considerations that may be relevant to
particular Company stockholders in light of their particular circumstances, such
as Company stockholders who are dealers in securities, tax-exempt entities,
foreign persons, or who acquired their shares upon exercise of stock options or
in other compensatory transactions. Furthermore, no foreign, state or local tax
considerations are addressed herein nor are federal tax consequences other than
income tax consequences addressed. ACCORDINGLY, ALL COMPANY STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES TO THEM OF THE SPINOFF.

In November 1997, the Company filed with the IRS a request for a ruling to
the effect that the Spinoff will qualify as a reorganization under Sections 355
and 368 of the Code. Under Sections 355 and 368 of the Code, in general:

(1) Holders of shares of Company Common Stock will not recognize any
income, gain or loss as a result of the receipt of Cohesion Common Stock in
the Spinoff.

(2) Holders of Company Common Stock will apportion the tax basis of
their Company Common Stock among such Company Common Stock and any Cohesion
Common Stock received or deemed received by such holder in the Spinoff in
proportion to the relative fair market values of such stock on the
Distribution Date. Such allocation must be calculated separately for each
block of shares of Company Common Stock (i.e., shares of the Company Common
Stock purchased at different times or at different costs) with respect to
which Cohesion Common Stock is received.

(3) The holding period for the Cohesion Common Stock received in the
Spinoff by a holder of Company Common Stock will include the period during
which such holder held Company Common Stock with respect to which such
Cohesion Common Stock was distributed, provided that such Company Common
Stock is held as a capital asset by such holder on the Distribution Date.

(4) No gain or loss will be recognized by the Company or Cohesion upon
the Spinoff, including upon the transfer of the Cohesion business to
Cohesion in exchange for stock of Cohesion prior to and in connection with
the Spinoff.

The receipt of a ruling from the IRS confirming the foregoing consequences
is a condition to the Spinoff. As of the date hereof, the IRS has not yet issued
the ruling requested and there can be no assurance that the IRS will issue a
favorable ruling. If the Company does not receive the IRS ruling, and the
Company's Board decides to waive the condition, the Company will distribute
revised proxy materials and resolicit proxies.

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<PAGE> 31

Such a ruling, while normally binding upon the IRS, is subject to the
accuracy of certain factual representations and other information provided by
the Company in its ruling request. If such factual representations and other
information were incorrect in a material respect, such ruling could become
invalid. The Company is not aware of any facts or circumstances which would
cause such representations and other information to be untrue. In addition,
Cohesion has agreed to indemnify the Company in the event that it takes certain
specified actions in the future that cause the Spinoff to fail to be tax-free to
the Company. However, such tax liability would be substantial, and there is no
assurance that Cohesion would be able to satisfy its indemnification obligation.
See "Risk Factors -- Risk That the Company or Cohesion Will Be Unable to Satisfy
Indemnification Obligations" and "Relationship Between the Company and Cohesion
After the Spinoff -- Tax Allocation and Indemnity Agreement."

If the Spinoff were to fail to qualify as a reorganization under Sections
355 and 368 of the Code, then the fair market value of the shares of Cohesion
Common Stock received by the Company's stockholders would be taxable as a
dividend to the extent paid out of the Company's current or accumulated earnings
and profits (including earnings and profits of the Company attributable to the
Spinoff). In that event, the tax basis of the shares of Company Common Stock
held by the Company's stockholders after the Spinoff would not change, the tax
basis of the shares of Cohesion Common Stock received in the Spinoff would equal
their fair market value on the Distribution Date and the holding period of
Company stockholders in the Cohesion Common Stock would not include the period
for which the Company Common Stock was held. In addition, the Company would
recognize gain equal to the difference between the fair market value of the
shares of Cohesion Common Stock distributed to its stockholders and the
Company's adjusted basis in such shares.

For a description of the Tax Allocation and Indemnity Agreement (as defined
hereafter) which the Company and Cohesion have entered into in contemplation of
the Spinoff and pursuant to which the Company and Cohesion will provide for
various tax matters, see "Relationship Between the Company and Cohesion After
the Spinoff -- Tax Allocation and Indemnity Agreement."

DESCRIPTION OF COHESION COMMON STOCK

As of December 31, 1997, there were 10 million authorized shares of
Cohesion Common Stock, $0.001 par value, of which no shares were issued and
outstanding. The holders of Cohesion Common Stock are entitled to one vote for
each share held of record on all matters submitted to a vote of the
stockholders. In the event of liquidation, dissolution or winding up of
Cohesion, the holders of Cohesion Common Stock are entitled to share ratably in
all assets remaining after payment of liabilities. The Cohesion Common Stock has
no preemptive or other subscription rights.

DESCRIPTION OF COHESION PREFERRED STOCK

As of December 31, 1997 there were 5 million authorized shares of Cohesion
Preferred Stock, $0.001 par value, of which 10 shares were issued and
outstanding. The Cohesion Board is authorized to issue Cohesion Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the Cohesion stockholders.
There are currently 10 shares of Cohesion Preferred Stock outstanding, all of
which will be converted into Cohesion Common Stock prior to the Spinoff.

CERTAIN ANTI-TAKEOVER EFFECTS OF COHESION CERTIFICATE OF INCORPORATION AND BYLAW
PROVISIONS

Cohesion's Certificate of Incorporation and its Bylaws after the Spinoff
will provide, among other things, that any action required or permitted to be
taken by the stockholders of Cohesion may be taken only at a duly called annual
or special meeting of the stockholders and may not be effected by a consent in
writing. In addition, special meetings of the stockholders of Cohesion may be
called only by the Cohesion Board, the Chairman of the Board, the President of
Cohesion or by any person or persons holding shares representing at least 10% of
the outstanding capital stock. The Bylaws also establish procedures, including
advance notice

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<PAGE> 32

procedures with regard to the nomination, other than by or at the direction of
the Cohesion Board, of candidates for election as directors.

Cohesion is subject to the provisions of Section 203 of the DGCL, an
anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from effecting a "business combination" with an interested
stockholder for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or transaction resulting in
a financial benefit to the interested stockholder, and an interested stockholder
is a person who, together with affiliates and associates, owns (or within three
years prior, did own) 15% or more of the corporation's voting stock.

The foregoing provisions could have the effect of making it more difficult
for a third party to effect a change in the control of the Cohesion Board. In
addition, these provisions could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of the outstanding voting stock of Cohesion. See "Risk
Factors -- Possible Antitakeover Effects of the Cohesion Amended and Restated
Certificate of Incorporation."

LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS

Limitation of Liability of Cohesion Directors

The Cohesion Certificate of Incorporation provides that a director of
Cohesion will not be personally liable to Cohesion or its stockholders for
monetary damages for breach of fiduciary duty as a director, except for
liability (1) for any breach of the director's duty of loyalty to Cohesion or
its stockholders, (2) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (3) under Section 174 of
the DGCL, which concerns unlawful payments of dividends, stock purchases or
redemptions, or (4) for any transaction from which the director derived an
improper personal benefit.

While the Cohesion Certificate of Incorporation provides directors with
protection from awards for monetary damages for breaches of their duty of care,
it does not eliminate such duty. Accordingly, the Cohesion Certificate of
Incorporation has no effect on the availability of equitable remedies such as an
injunction or rescission based on a director's breach of his or her duty of
care. The provisions of the Cohesion Certificate of Incorporation described
above apply to an officer of Cohesion only if he or she is a director of
Cohesion and is acting in his or her capacity as director, and do not apply to
officers of Cohesion who are not directors.

Indemnification of Directors and Officers

The Cohesion Certificate of Incorporation provides that each person who is
or was or has agreed to become a director or officer of Cohesion, or each such
person who is or was serving or has agreed to serve at the request of Cohesion
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, will be indemnified by Cohesion, in
accordance with the Cohesion Bylaws, to the fullest extent permitted from time
to time by the DGCL, as the same exists or may hereafter be amended or any other
applicable laws as presently or hereafter in effect. Cohesion may be required to
indemnify any person seeking indemnification in connection with a proceeding (or
part thereof) initiated by such person only if such proceeding (or part thereof)
was authorized by the Cohesion Board or is a proceeding to enforce such person's
claim to indemnification pursuant to the rights granted by the Cohesion
Certificate of Incorporation or otherwise by Cohesion. In addition, Cohesion may
enter into one or more agreements with any person providing for indemnification
greater than or different from that provided in the Cohesion Certificate of
Incorporation.

The Cohesion Bylaws provide that each person who was or is made a party or
is threatened to be made a party to or is involved in any action, suit, or
proceeding, whether civil, criminal, administrative or investigative (a
"Proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative is or was a director, officer or employee of
Cohesion or any such person who is or was serving at the request of

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<PAGE> 33

Cohesion as a director, officer, employee or agent of another corporation or of
a partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such Proceeding is
alleged action in an official capacity as a director, officer or employee or in
any other capacity while serving as a director, officer or employee, will be
indemnified and held harmless by Cohesion to the fullest extent authorized by
the DGCL as the same exists or may in the future be amended against all expense,
liability and loss (including attorneys' fees, judgments, fines, Employee
Retirement Income Security Act of 1974, as amended, excise taxes or penalties
and amounts paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith; provided, however, except as described in
the next paragraph with respect to Proceedings to enforce rights to
indemnification, Cohesion will indemnify any such person seeking indemnification
in connection with a Proceeding (or part thereof) initiated by such person only
if such Proceeding (or part thereof) was authorized by the Cohesion Board.

Pursuant to the Cohesion Bylaws, if a claim is not paid in full by Cohesion
within 30 days after a written claim has been received by Cohesion, the claimant
may at any time thereafter bring suit against Cohesion to recover the unpaid
amount of the claim and, if successful in whole or in part, the claimant will
also be entitled to be paid the expense of prosecuting such claim. The Cohesion
Bylaws provide that it will be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
Proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to Cohesion) that the claimant has not met
the standard of conduct which makes it permissible under the DGCL for Cohesion
to indemnify the claimant for the amount claimed, but the burden of proving such
defense will be on Cohesion.

The Cohesion Bylaws provide that the right to indemnification conferred
therein is a contract right and includes the right to be paid by Cohesion the
expenses incurred in defending any Proceeding in advance of its final
disposition, subject to certain exceptions and conditions.

The Cohesion Bylaws provide that the right to indemnification and the
payment of expenses incurred in defending a Proceeding in advance of its final
disposition conferred in the Cohesion Bylaws will not be exclusive of any other
right which any person may have or may in the future acquire under any statute,
provision of the Cohesion Certificate of Incorporation, the Cohesion Bylaws,
agreement, vote of stockholders or disinterested directors or otherwise.

LISTING AND TRADING OF COMPANY COMMON STOCK AND COHESION COMMON STOCK

It is expected that Company Common Stock will continue to be listed and
traded on Nasdaq after the Spinoff. There is currently no public market for
Cohesion Common Stock. Prices at which Cohesion Common Stock may trade prior to
the Spinoff on a "when-issued" basis or after the Spinoff cannot be predicted.
Until the Cohesion Common Stock is fully distributed and an orderly market
develops, Cohesion Common Stock prices may fluctuate significantly. Cohesion
Common Stock prices will be determined by the marketplace and may be influenced
by many factors, including, among others, the depth and liquidity of the market
for Cohesion Common Stock, investor perception of Cohesion and its industry, and
general economic and market conditions. In addition, the combined trading prices
of Company Common Stock and Cohesion Common Stock held by stockholders after the
Spinoff may be less than, equal to or greater than the trading price of Company
Common Stock prior to the Spinoff.

Cohesion will file an application to list Cohesion Common Stock and
Cohesion Rights on Nasdaq. Cohesion initially will have approximately 826
stockholders of record based upon the number of stockholders of record of the
Company as of March 31, 1998. For certain information regarding options to
purchase Cohesion Common Stock that will be outstanding after the Spinoff, see
"Proposal No. 1: The Spinoff -- Treatment of Stock Options Outstanding as of the
Distribution Date;" "-- Ratification of Cohesion Plans" and "Relationship
Between the Company and Cohesion After the Spinoff -- Benefits Agreement."

Shares of Cohesion Common Stock distributed to the Company's stockholders
in the Spinoff will be freely transferable, except for securities received by
persons who may be deemed to be "affiliates" of Cohesion pursuant to the
Securities Act. Persons who may be deemed to be "affiliates" of Cohesion after
the Spinoff generally include individuals or entities that control, are
controlled by, or are under common control with

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<PAGE> 34

Cohesion and may include certain officers and directors of Cohesion as well as
principal stockholders of Cohesion, if any. Persons who are affiliates of
Cohesion will be permitted to sell their shares of Cohesion Common Stock only
pursuant to an effective registration statement under the Securities Act or an
exemption from the registration requirements of the Securities Act.

REGULATORY APPROVALS

The Company does not believe that any material U.S. federal or state or
foreign regulatory approvals will be required by law in connection with the
Spinoff.

ACCOUNTING TREATMENT

CONDITIONS; TERMINATION

The Spinoff is conditioned upon the satisfaction of the following
conditions: (1) approval by the Company's stockholders of the Spinoff; (2)
receipt by the Company of an IRS ruling that, for U.S. federal income tax
purposes, the Spinoff will not result in recognition of taxable income or loss
by the Company or stockholders of the Company; (3) receipt of any necessary
material government approvals or third party consents; (4) no pending order,
injunction or decree preventing the consummation of the distribution; and (5) no
event shall have occurred that, in the judgment of the Company's Board, would
result in the Spinoff having a material adverse effect on the Company, its
affiliates or its stockholders.

The Company's Board does not intend to waive any of the conditions. If the
Company does not receive the ruling from the IRS, and the Company's Board
decides to waive the tax-ruling condition to the Spinoff, the Company will
distribute revised proxy materials and resolicit proxies. Even if all the above
conditions are satisfied, the Company and Cohesion may cancel or defer the
Spinoff and the related transactions described in this Proxy Statement at any
time prior to the Distribution Date. See "Relationship Between the Company and
Cohesion After the Spinoff -- Separation and Distribution Agreement."

INTERESTS OF CERTAIN PERSONS

As of March 31, 1998, six of the members of the Company's Board and eight
executive officers of the Company beneficially held outstanding shares of
Company Common Stock. Each such member will therefor benefit from and have a
direct or indirect interest in the approval of the transactions described in
this Proxy Statement.

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BUSINESS AND PROPERTIES OF THE COMPANY AFTER THE SPINOFF

The following description of the Company's business should be read in
conjunction with the information included elsewhere in this Proxy Statement.
References to the Company following the Spinoff mean the operations of
Aesthetics. Certain statements contained in this Proxy Statement are
forward-looking statements, which statements involve risks and uncertainties.
Actual results and performance could differ materially from those projected in
the forward-looking statements as a result of factors set forth below and
elsewhere in this Proxy Statement.

OVERVIEW

The Company designs, develops, manufactures and markets on a worldwide
basis high quality biocompatible products for the treatment of defective,
diseased, traumatized or aging human tissues with the goal of superior physician
and patient satisfaction for its products. The Company has grown by identifying
medical applications for its technology, developing innovative products and
building markets with respected healthcare professionals, either directly or
with marketing and technology partners. The Company's core products are
principally used in aesthetic and reconstructive applications.

INDUSTRY BACKGROUND

The market for aesthetic and reconstructive products and treatments
includes surgical and non-surgical therapies to remedy aging and defective soft
tissues of the face. These products are used by healthcare professionals,
including plastic surgeons and dermatologists, in an office environment and by
consumers in the home. Many of these treatments are elective and are pursued by
patients for cosmetic effects rather than due to medical necessity.

The worldwide market for aesthetic and reconstructive products has
experienced significant growth over the past several years. The Company believes
this growth is primarily attributable to the following factors:

(i) rapid growth in the consumer population demanding aesthetic and
reconstructive products and treatments;

(ii) an affluent consumer base that is more able to afford elective
cosmetic and reconstructive products and treatments than previous
generations;

(iii) growing consumer desire to challenge the natural aging process;
and

(iv) increasingly innovative aesthetic and reconstructive products
which have broadened the range of alternatives available to the
consumer.

The above factors driving the growth of the market for aesthetic and
reconstructive products and treatments in the U.S. are primarily attributable to
the aging "baby boomer" population. Every eight seconds, a member of the "baby
boom" generation, comprising seventy-five million individuals born in the U.S.
between 1946 and 1964, turns 50 years of age. The Company believes that growth
of the market, both within the U.S. and internationally, can be attributed to
changing social conventions which encourage consumers to explore products and
treatments to make them look and feel younger. As demand has grown for aesthetic
and reconstructive products and treatments, cost containment pressures imposed
by managed care have induced many healthcare providers to offer additional
services that are less dependent on reimbursement and are paid for by the
consumer. The Company believes that the needs of physicians and patients have
created a demand for more innovative aesthetic products, a wider selection of
alternatives, and products that are safer, more affordable and longer lasting
than existing products and treatments.

Facial Enhancement

There is a wide range of products available in the aesthetic and
reconstructive product market that are designed to resurface skin, repair fine
lines, deep folds and scars, enhance the vermilion (lip) border and surgically
contour the face. Demand for products that address aesthetic and reconstructive
facial enhancement has increased significantly over the past several years.
Given the growing demand for facial enhancement

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<PAGE> 36

products, there is a significant market opportunity for products that are safer,
more cost-effective, and that cause less discomfort and trauma as compared to
traditional products.

Urinary Incontinence

Urinary incontinence, the involuntary loss of urine from the bladder,
affects a large population of individuals. The Company believes that the
incidence of incontinence is significantly underreported, due to patient
embarrassment and the social stigma attached to incontinence, as well as the
shortage of effective treatments for the condition. Effective, emerging
therapies that treat incontinence in a less invasive manner may increase the
number of patients seeking treatment, expanding the potential market size. The
incidence of incontinence generally increases with age, and the Company believes
that as the population grows older, the market for incontinence treatments will
increase.

STRATEGY

The Company's strategy consists of the following principal elements:

Continued Innovation and Expansion of Existing Product Lines

O Develop and market novel aesthetic and reconstructive products which will
meet the changing needs and desires of current customers and offer an even
broader range of products which will appeal to a diverse population of new
patients and users.

O Acquire and in-license products, new technologies and product distribution
rights, allowing the Company to market additional complimentary products and
technologies that can provide effective, safe and innovative solutions to
meet the needs of patients.

Strengthened Business Relationships

O Connect with physician customers by introducing new means of using
aesthetic products to meet the needs of patients.

O Utilize physician feedback to develop new products, enhance existing
products and design training programs which will improve physician's
practice economics and increase patient satisfaction.

Scientific Leadership

O Establish collaborations with leading experts in aesthetic and cosmetic
therapies who will advise the Company about scientific development and
clinical needs for new products, provide counsel for the design of clinical
trials and evaluate potential new products.

O Continue to market and distribute aesthetic and reconstructive products
supported by scientific research and cutting edge clinical data.

Improved Operating Margins

O Leverage existing worldwide distribution network to market and sell
through multiple channels allowing the rapid effective launch of new
products and creating increased operating efficiencies.

O Implement strategic alliances with selected distributors where such
alliances may complement and expand the Company's sales and marketing
capabilities.

O Develop infrastructure that has the additional capacity to effectively
increase operating profits.

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PRODUCTS

<TABLE>
<S> <C>
Zyderm/Zyplast........... Soft tissue augmentation Gold Standard
Hylaform................. Immediacy, minimal sensitivity concerns
SoftForm................. Permanent but removable material
Refinity................. Efficacy with comfort
Contigen................. Out-patient procedure
</TABLE>

The Company offers products for soft tissue reconstruction and
augmentation, skin care and stress urinary incontinence. In the U.S., the
Company markets a line of collagen-based injectable products, Zyderm I implant
and Zyderm II implant (collectively, "Zyderm implants") and Zyplast implant
("Zyplast implant"), for soft tissue augmentation of the face. The Company has
launched, in the U.S., a new product for subdermal soft tissue reconstruction
and augmentation, the SoftForm implant, made of ePTFE, expanded
polytetrafluoroethylene, a non-resorbable material, and is currently launching
the SoftForm implant in certain international markets. Internationally, the
Company markets its Zyderm and Zyplast injectable implants for the face and
Hylaform gel, an injectable gel for facial wrinkles and scars that does not
require a skin sensitivity test. The Company currently plans to introduce
Refinity skin solutions, a line of alpha hydroxy acid ("AHA") based skin care
products, in the U.S. in 1998 and in international markets at a later date. In
addition, the Company's product for stress urinary incontinence, Contigen Bard
collagen implant ("Contigen implant"), is currently marketed on a worldwide
basis through the Company's marketing partner, C.R. Bard ("Bard").

Facial Enhancement Products

Zyderm and Zyplast Implants

The Company's collagen-based injectable product line for the treatment of
skin contour defects includes Zyderm implants and Zyplast implant. The Company
markets its Zyderm and Zyplast implant products worldwide to dermatologists,
plastic surgeons, and other physicians. The Company estimates that over one
million patients worldwide have been treated with a collagen-based injectable
product of the Company, of which approximately 920,000 patients are in the U.S.
and Canada and approximately 575,000 are in international markets.

Zyplast implant is a collagen product molecularly cross-linked with
glutaraldehyde. Zyderm and Zyplast implant treatments replenish the skin's
natural collagen support layer, smooth facial lines and many types of scars, and
can produce an immediate visible difference in the appearance of a patient's
skin. The implants are dispersed in a saline solution containing a small amount
of lidocaine, a local anesthetic, and injected with a fine gauge needle into
depressed layers of skin to elevate the area to the level of the surrounding
skin surface. As a result, Zyderm and Zyplast implants can minimize lines and
scars. Depending on the need and the product (or product combination) used, many
patients can achieve correction of wrinkles or scars in one treatment session.
The implants take on the texture and appearance of human tissue and are subject
to similar stresses and aging processes. Consequently, supplemental treatments
are necessary after initial treatment, depending on the location and original
cause of the skin deformity. On average, patients require two to four treatments
per year to maintain the desired result.

Zyderm implants were formulated especially for people with small or
superficial contour defects. These implants are particularly effective in
smoothing delicate frown and smile lines and fine creases that develop at the
corners of the eyes and above and below the lips, and can also help correct
certain kinds of shallow scars. Zyplast implants, which are the most persistent
of the collagen-based implants, are cross-linked with glutaraldehyde, are
designed to treat depressions requiring a stronger material and can be used for
more pronounced contour problems (such as deeper scars, lines and furrows) and
for areas upon which more force is exerted (such as the corners of the mouth).
Zyderm and Zyplast implants may be used alone or in conjunction with one
another.

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Hylaform Gel

The Company has extended its injectable product line with Hylaform gel, a
product which can be used without a skin sensitivity test. The Company has
acquired exclusive distribution rights in certain international markets from
Biomatrix, Inc. ("Biomatrix") to sell Hylaform gel for facial wrinkles and
scars. Hylaform is a viscoelastic product made from hylan B, a biopolymer
created by cross linking hyaluronan molecules. Hyaluronan is the elastoviscous
polysaccharide present in the intercellular matrix of nearly all human tissues.
Hyaluronan plays an important role in the skin's hydration and viscoelasticity.
Over time, the hyaluronan content in skin decreases, contributing to the aging
appearance of skin. Due to its unique cross-linking to hylan B, Hylaform gel has
a higher water content and greater elastic properties than other
hyaluronan-derived products.

Since hyaluronan is neither tissue-specific nor species-specific, Hylaform
gel can be used without a skin test. In addition, Hylaform gel has a chemical
structure that is completely different from bovine collagen and does not contain
any bovine protein. Hylaform gel allows same day treatment of facial wrinkles
and scars, giving patients and doctors an additional treatment option.

Biomatrix received CE Mark for Hylaform gel in December 1995, allowing this
product to be marketed throughout Europe. The Company began marketing Hylaform
gel in several European countries in fiscal 1997. The Company holds exclusive
marketing and distribution rights to Hylaform gel in certain markets outside the
U.S. and has the option to acquire the U.S. distribution rights in the future.
The exclusivity of the license will terminate if the Company fails to meet
certain sales goals. The Company plans to introduce Hylaform gel in additional
international markets following receipt of required regulatory approvals or
clearances. Hylaform gel is not currently marketed in the U.S. There can be no
assurance that Hylaform gel will be marketed in the U.S. in the near future, or
at all.

SoftForm Implant

The Company has acquired exclusive worldwide distribution rights from
Tissue Technologies, Inc. ("Tissue Technologies") to market SoftForm implant,
for subdermal soft tissue reconstruction and augmentation. SoftForm implant is a
non-resorbable yet removable facial implant for the treatment of deep facial
furrow and creases such as nasolabial folds (creases between the nose and
corners of the mouth), deep frown lines and definition of the vermilion border.
SoftForm implant comes preloaded in a self-contained delivery system enabling
precise placement without requiring physicians to handle the implant prior to
placement. Treatment with SoftForm implant consists of a simple in-office
procedure performed under a local anesthetic. The implant is inserted below the
surface of the skin through two small incisions. The procedure generally takes
less than 30 minutes, but treatment times will vary depending on the number of
implants used. Microporous material limits tissue ingrowth through the surface
of the implant, allowing easy removal of SoftForm implant. The removability of
SoftForm implant provides physicians with the option of adjusting or removing
the implant as desired. The Company believes that SoftForm implant is more
easily removable than other non-resorbable facial implants.

SoftForm implant is a soft, tube-shaped implant made of the biocompatible
polymer ePTFE. SoftForm implant has a hollow configuration designed to provide
stability by promoting fibrous tissue ingrowth through the inside of the tube.
The Company believes that SoftForm implant demonstrates greater stability and
less likelihood of extrusion through the skin's surface with the hollow
configuration of SoftForm implant as compared to competitive products. The ePTFE
polymer used in the SoftForm implant has been used for more than 20 years in a
variety of medical applications, including replacement of deteriorated blood
vessels, hernia repair, abdominal wall reinforcement and soft tissue
augmentation of the face.

SoftForm implant received marketing clearance from the FDA in April 1996
under a 510(k) application and the Company introduced SoftForm implant to a
panel of six physician advisors in December 1996. The Company launched SoftForm
in the U.S. in 1997. The product is currently approved for usage in Canada and
has received CE Mark in the European Community ("EC"). SoftForm implant is
currently being launched in certain international markets.

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<PAGE> 39

The Company's facial enhancement products have been designed to provide a
full complement of corrective products to the Company's customers. SoftForm
implant is designed to complement Zyderm and Zyplast implants as well as
Hylaform gel by offering a sub-dermal (under the skin), persistent treatment to
patients with deep furrows.

Refinity Skin Solutions

The Company has acquired exclusive worldwide rights from Cosmederm
Technologies, Inc. ("Cosmederm") to distribute Refinity skin solutions, a line
of AHA skin care products being developed by the Company and Cosmederm. Refinity
skin solutions products contain a patented anti-irritant developed by Cosmederm.
The Company believes that these cosmetic products diminish the appearance of
fine lines and wrinkles and give the skin a smoother texture while minimizing or
eliminating the itching, burning and stinging traditionally associated with AHA
products. The Company plans to introduce Refinity skin solutions in the U.S. in
1998 and in certain international markets in the future.

The Company plans to distribute its Refinity skin care products through
physicians' offices to leverage the Company's existing distribution network. In
order to develop a higher level AHA product which produces minimal adverse
effects, Cosmederm is developing the Refinity skin solutions product line
exclusively for the Company utilizing Cosmederm's patented anti-irritant,
COSMEDERM-7. Because Refinity skin solutions products contain significantly
higher levels of active ingredients than currently available alternative
products, the Company believes that they can achieve more effective results. The
Refinity skin solutions product line will include home use products with an AHA
concentration of 15% (compared with other physician dispensed products with
concentrations generally ranging from 8-12%), as well as a physician in-office
peel product with a higher concentration of AHA.

Contigen Implant

Contigen implant injections are designed to treat incontinence due to
intrinsic sphincter deficiency ("ISD"). Contigen implant is a sterile, highly
purified bovine dermal collagen that is crosslinked and dispersed in a saline
solution. Contigen implant is injected into the submucosal tissues of the
urethra and/or bladder neck, and into the tissues adjacent to the urethra. The
injection of Contigen implant creates increased tissue bulk and subsequent
joining of the urethral lumen. After injection, the suspended collagen forms a
soft cohesive network of fibers and over time, the implant takes on the
appearance of human tissue. The treatment cycle of Contigen implant may require
multiple injections at the start of treatment and may require supplementary
injections over time.

The Company obtained PMA to market Contigen implant in September 1993 for
the treatment of ISD. Under the terms of a distribution agreement with Bard, the
Company sells Contigen implant to Bard and the Company receives a royalty on end
market sales of Contigen implant. Bard has exclusive worldwide marketing and
distribution rights to Contigen implant. Bard has received reimbursement codes
for Contigen implant and is expected to commence marketing in the United
Kingdom, France and Japan.

RECENT DEVELOPMENTS

On April 8, 1998, the Company announced plans to divest its LipoMatrix,
Incorporated ("LipoMatrix") subsidiary, manufacturer of the Trilucent breast
implant, thereby allowing the Company to dedicate further resources to its
aesthetic operations which include products for soft tissue reconstruction and
augmentation, skin care and stress urinary incontinence.

As announced, the significant on-going expenses associated with the
Trilucent implant coupled with the distant prospect of U.S. marketing clearance
have caused the Company to seek to divest this business.

As previously reported, the Company's Aesthetic Technologies Group
unaudited historical income from operations for the first half of fiscal 1998
was $5.3 million. It is estimated that the Trilucent breast implant business
contributed losses of approximately $2.5 million during this six-month period.
While the Company pursues the divestiture, all Trilucent implant-related
operations and service to the Company's physician

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<PAGE> 40

customers will continue as usual. The timing of the divestiture of the
LipoMatrix business is dependent upon identifying interested parties in the
medical device industry business.

SALES AND MARKETING

The Company has developed a worldwide distribution network, comprised of a
direct sales force in the United States and certain international markets. The
Company's sales force consists of over 100 sales representatives and agents
worldwide, distributors in certain international markets and a marketing
partner, Bard for Contigen implant. This distribution network is experienced in
selling technologically advanced products for aesthetic and reconstructive
applications, thereby enabling the Company to introduce more rapidly and
effectively newly developed, acquired and in-licensed products. The Company
believes that the increased utilization of the existing distribution network
will lead to increased operating efficiencies.

The Company markets its Zyderm and Zyplast implants directly to
dermatologists, plastic surgeons and other physicians in the U.S. and several
European countries, Canada, Australia and New Zealand and through distributors
in certain other international markets. The Company has historically distributed
Zyderm and Zyplast implants in Japan through Lederle Japan but anticipates that
in 1998 it will begin using its own subsidiary to market these products
directly. The Company has launched SoftForm implant and is marketing the
SoftForm product through its direct sales force. When introduced
internationally, the Company expects to market SoftForm implants both directly
with its established sales force and through its international distributors. The
Company expects to launch Refinity skin solutions in the U.S. in 1998. Hylaform
gel is currently sold in several European countries through the Company's direct
sales force and its international distributors, but is not approved for
marketing in the U.S. Contigen implant is marketed worldwide through Bard, the
Company's marketing partner.

The Company utilizes a variety of methods to promote its aesthetic and
reconstructive products to patients and physicians. To stimulate demand at the
patient level, the Company conducts consumer marketing awareness programs,
including public relations events, health and beauty magazine advertising,
direct mailing campaigns and patient seminars. The Company's marketing efforts
to physicians consist of on-going training, education and promotional
activities. Examples of physician marketing activities include in-office
training and education, presence at medical meetings, and direct mail campaigns.
The Company has emphasized physician education to ensure proper training in the
use of its products and timely communication of clinical and product use
information.

The Company is committed to optimizing patient satisfaction through various
initiatives aimed at meeting the patient's cosmetic needs while making the
Company's products more affordable. Market research sponsored by the Company and
conducted during fiscal 1996 revealed that many patients were not receiving
enough collagen material per treatment to provide for full correction of soft
tissue defects and that existing prices for the product discouraged patients
from purchasing more collagen. As a result, the Company introduced syringes with
larger fill volumes, offering more collagen material with a minimal increase in
cost and injection time and an opportunity for more complete correction. The
Company benefits from this strategy due to increased patient satisfaction. In
addition to larger syringes, the Company has also introduced programs to further
encourage more complete correction at the initial treatment and on an ongoing
basis.

The Company has instituted a new patient program in an effort to attract
new patients and increase existing patient satisfaction. The Company's program
offers all patients special pricing options that make full and ongoing
correction more affordable. In addition, the Company has initiated the Collagen
Specialist Program to train nurses to administer collagen proficiently, which
the Company believes may increase collagen-based injectable revenues of both the
Company and its physician customers while maintaining patient satisfaction. The
Company believes this program may improve physicians' practice economics while
providing for continued high quality patient care.

For the uncertainties or risk factors that exist surrounding the marketing
and distribution of the Company's cosmetic and reconstructive products and its
stress urinary incontinence product.

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<PAGE> 41

COMPETITION

The Company believes that the primary competitive factors in the market for
aesthetic and reconstructive medical products are safety, efficacy, reliability,
cost-effectiveness, patient recovery time, absence of significant side effects,
availability of third-party reimbursement, and physician and public awareness of
the existence and efficacy of products. The medical device industry is
characterized by rapid and significant technological change. The length of time
required for product development and regulatory approval plays an important role
in a company's competitive position. Consequently, the Company's success will
depend in part on its ability to respond quickly to medical and technological
changes through the development, acquisition or in-licensing and
commercialization of new products. The Company believes that it competes
favorably with respect to these factors, although there can be no assurance that
it will continue to do so.

Several companies and institutions are engaged in the development of
collagen-based and other materials, techniques, procedures and products for use
in aesthetic and reconstructive applications anticipated to be addressed by the
Company's products. Some of these companies and institutions may have
substantially greater capital resources, research and development staffs and
facilities, experience in conducting clinical trials and obtaining regulatory
approvals, and manufacturing and marketing products than the Company. There can
be no assurance that the Company's competitors will not succeed in developing
technologies and products that are more effective than any products that have
been or may be developed by the Company or that would render the Company's
technology and products obsolete or noncompetitive, or that the Company will be
able to compete effectively against such competitors based on its abilities to
manufacture, market and sell its products. There can be no assurance that such
potential competition will not have a material adverse effect on the business,
operating results or financial condition of the Company.

The market for aesthetic and reconstructive products and treatments is
characterized by rapidly evolving technology and increasing competition
resulting from recent changes in the health care environment. The Company faces
competition in each of its target product markets.

Facial Enhancement

The Company faces direct and indirect competition for its Zyderm and
Zyplast implant products. At the present time, the Company is aware of a
commercial product marketed in the U.S. and Canada that competes directly with
Zyderm and Zyplast implants. This product is a gelatin-based (denatured
collagen) product for soft tissue augmentation. The Company also competes with
products derived from human tissue. Collagenesis, Inc. produces a product
requiring a biopsy of the patient's tissue, which tissue is then used to
generate an injectable material. Fat injections require surgical removal of the
patient's fatty tissue. Implantable cadaver tissue obtained through tissue banks
is sold under the brand name Alloderm and competes directly with SoftForm
implant. Internationally, the direct competitors in the injectable product
segment are primarily derived from collagen, hyaluronic acid and silicone. The
Company is aware of one foreign company that is marketing internationally a
collagen-based material for soft tissue augmentation. The Company is aware of a
hyaluronic acid-based product called Restylane that is competitive with Hylaform
gel. In addition, W.L. Gore, Inc. markets an ePTFE product that is directly
competitive with SoftForm implant. The Company's injectable products also
compete in the dermatology and plastic surgery markets with substantially
different treatments, such as laser treatments, chemical peels, fat injections,
dermabrasion, botulinum toxin injections and face lifts. In addition, several
companies are engaged in research and development activities examining the use
of collagen and other biomaterials for the correction of soft tissue defects.
Although the Company believes it has a leadership position in the injectable
product segment of the soft tissue augmentation market, there can be no
assurance that the Company will not face increased direct and indirect
competition in such a market.

Refinity skin solutions, once introduced, will compete in the competitive
segment of the AHA product market which includes products distributed through
physicians' offices. Physician dispensed AHA products represent approximately 6%
to 7% of the $1.6 billion per year AHA market. Physicians dispense a significant
number of private label in-office peel and take-home AHA products to their
patients, making the in-office distribution channel increasingly profitable for
companies which offer their physician customers highly efficacious AHA products.
During the last two years, several large pharmaceutical companies with high

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<PAGE> 42

product profiles within the dermatology market have purchased or agreed to
distribute AHA skin care lines. Should such pharmaceutical companies begin
dispensing AHA products through physicians' offices, there can be no assurance
that the Company will be able to compete effectively in this market.

Contigen Implant

At the present time, autologous fat, silicone micro-implants and
polytetrafluoroethylene (Teflon paste, or PTFE) are directly competing or will
compete with the Contigen implant for the treatment of stress incontinence due
to ISD. Neither silicone micro-implants nor PTFE have been approved by the FDA
for use in the U.S. Contigen implant also competes with other methods of
treatment or amelioration of ISD including absorbent products (diapers, pads and
other drip and collection devices), drugs and estrogen therapy, behavior
modification (kegel exercises, electrical stimulation, and biofeedback), surgery
(artificial urinary sphincter, sling procedures, bladder neck suspension and
bone anchors), and bulking agents (Urethrin, Macroplastique, inert materials and
fat).

MANUFACTURING

The Company manufactures its collagen-based injectable products utilizing
readily available chemicals and enzymes. The source of its collagen is bovine
dermis. The Company uses a patented viral inactivation process for its
collagen-based products to promote both their safety and quality. Since 1987,
the hides have been sourced from a closed herd, in an effort to prevent diseases
such as Bovine Spongiform Encephalopathy ("BSE"), from contaminating its
collagen-based products. Maintaining a closed herd requires the physical
separation of the herd from other herds, the tracking of the lineage of each
animal and the maintenance of each animal under a veterinary program. The
Company believes that the supply of raw materials and processing materials for
its manufacturing operations is and will continue to be adequate for the
foreseeable future and that such materials can be available from other sources.

The Company's principal collagen-based products have refrigerated shelf
lives of 36 months. The Company typically ships products to physicians as orders
are received on an express delivery basis, and has no material backlog. It is
the Company's policy to maintain levels of finished goods inventory adequate to
allow for the expeditious handling of orders received. The Company believes its
physician customers typically purchase products on an as-needed basis, while
distributor customers purchase products based on inventory stocking levels.

The Company manufactures Zyderm and Zyplast implant products and Contigen
implant products, as well as Collagraft bone graft products for Cohesion, in its
Fremont, California facility. This facility is used primarily for bulk
processing, aseptic filling and packaging of finished goods. While the Company
has not experienced any disruptions in its manufacturing schedule during the
last two fiscal years, there can be no assurance that the Company will not
experience disruptions in its manufacturing schedule in the event that it
attempts to manufacture products in larger quantities and with new process
improvements. In addition to the Company's in-house inspection teams which work
to promote the quality and consistency of the Company's products, the Company's
manufacturing facilities are subject to regulatory requirements and periodic
inspection by regulatory authorities, such as the FDA in the U.S. In June 1995,
the Company's quality system was audited by TUV Product Services, Munich ("TUV")
to ensure that the Company's products conform to the provisions of the European
Medical Devices Directive. After the completion of the audit and review of the
technical documentation, the Company was granted permission to affix CE Mark on
its Zyderm and Zyplast implant product packages and to sell these products in
the EC. An annual surveillance audit of the Company's quality system was
performed by TUV in June 1997 and March 1998.

Hylaform gel, SoftForm implant and Refinity skin solutions products,
distributed or expected to be distributed by the Company, are manufactured by
third parties. The Company is dependent on these third parties to manufacture
and supply products to the Company as required. While the Company has supply
agreements with these third parties, there can be no assurances that these third
parties will manufacture and supply high quality products on a timely basis or
in adequate quantities. Inventory shortages or quality issues

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<PAGE> 43

could adversely affect the Company's sales of these products and as a result,
could adversely affect the Company's business, financial condition and results
of operations.

PRODUCT DEVELOPMENT

Most of the research and development efforts previously conducted by the
Company have been assumed by Cohesion. In connection with the Spinoff, the
Company has entered into a Research and Development Agreement with Cohesion,
effective as of January 1, 1998. The Company's research and development efforts
will also focus on those products that are in-licensed or acquired and require
additional development. In addition, the Company will continue independent
research and development activities, primarily focused on enhancement of its
manufacturing processes. Pro forma research and development expenses for the
Company (giving effect to the Spinoff and the Research and Development Agreement
with Cohesion) totaled $10.5 million in fiscal 1997 and $5.1 million in the six
months ended December 31, 1997 representing approximately 14.9% and 12.0%
respectively, of product sales in those periods.

Under the terms of the Research and Development Agreement, the Company is
collaborating with Cohesion to develop an alternative to bovine sourced
collagen. Research efforts are focused on the development of recombinant human
collagen through transgenic animals and yeast. Cohesion has made an equity
investment in and is actively collaborating with Pharming for the purpose of
developing recombinant human collagen through transgenic animals. In addition,
Cohesion has a collaborative agreement with Genotypes, Inc. of South San
Francisco, California, to develop recombinant human collagen through yeast. See
"Relationship Between the Company and Cohesion After the Spinoff -- Research and
Development Agreement."

PATENTS AND PROPRIETARY TECHNOLOGY

The Company has historically depended substantially upon its proprietary
technological expertise in the extraction, purification, and formulation of
collagen-based materials and other biomaterials into biomedical products. The
Company has sought patents on inventions concerning novel manufacturing
processes, composition of matter, and applications for its proprietary
biomaterials. In connection with the Spinoff, the Company and Cohesion have
entered into an Assignment and License Agreement pursuant to which a large
portion of the Company's technology and intellectual property (including patents
and trade secrets), other than technology relating to the breast implant
technology, has been assigned to Cohesion. Cohesion has granted back to the
Company an exclusive, worldwide, perpetual, fully paid-up license to such
assigned technology and intellectual property for use in the Company's field of
business. See "Relationship Between the Company and Cohesion After the
Spinoff -- Assignment and License Agreement."

Patent-related litigation is a risk in the medical device industry. There
can be no assurance the Company will be successful in the future in obtaining
patents or license rights, that patents will be issued for the Company's current
patent applications, that the Company will develop additional proprietary
technology that is patentable, that any issued patents will provide the Company
with any competitive advantages or will not be challenged by third parties, or
that patents of others will not have an adverse effect on the Company. No
assurance can be given that the processes or products of the Company or its
licensors, including Cohesion, will not infringe patents or proprietary rights
of others or that any licenses required under any such patents or proprietary
rights would be made available on terms acceptable to the Company. If the
Company does not obtain such licenses, it could encounter delays in product
introductions while it attempts to design around such patents, or it could find
that the manufacture, sale or use of products requiring such licenses could be
enjoined. In addition, the Company could incur substantial costs in defending
itself in suits brought against the Company on such patents or in bringing suits
to protect the Company's patents against infringement.

The Company relies upon trade secret protection for certain unpatented
aspects of its proprietary technology. There can be no assurance that others
will not independently develop or otherwise acquire substantially equivalent
proprietary information or techniques, that others will not otherwise gain
access to the Company's proprietary technology or disclose such technology, or
that the Company can meaningfully protect its trade secrets.

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<PAGE> 44

The Company requires its employees and consultants to execute appropriate
confidentiality and proprietary information agreements upon the commencement of
employment or consulting relationship with the Company. These agreements
generally provide that all confidential information developed or made known to
the individual by the Company during the course of the individual's relationship
with the Company is to be kept confidential and not disclosed to third parties,
except in specific circumstances. The agreements generally provide that all
inventions conceived by the individual in the course of rendering services to
the Company shall be the exclusive property of the Company; however, certain of
the Company's agreements with consultants, who typically are employed on a
full-time basis by academic institutions or hospitals, do not contain assignment
of invention provisions. There can be no assurance, however, that these
agreements will provide meaningful protection or adequate remedies for the
Company in the event of unauthorized use, transfer or disclosure of such
information or inventions.

The Company holds several registered trademarks in the U.S. and a number of
foreign countries and vigorously pursues the protection of its trademarks and
service marks, whether registered or not.

GOVERNMENT REGULATION

The Company's manufacturing activities and most products sold in the U.S.
are subject to extensive and rigorous regulations by the FDA and by comparable
agencies in certain other countries where these products are manufactured and/or
distributed. The FDA regulates the manufacture, clinical research and sale of
medical devices, including labeling, advertising and recordkeeping. Before a new
device can be introduced into the market, generally the manufacturer must obtain
FDA approval of a PMA or clearance of a 510(k) notification submission. A PMA
application must be filed if a proposed device is not substantially equivalent
to a legally marketed Class I or Class II device, or if it is a Class III device
for which the FDA has called for PMAs. The PMA application must contain the
results of clinical trials, the results of all relevant bench tests, laboratory
and animal studies, a complete description of the device and its components, and
a detailed description of the methods, facilities and controls used to
manufacture the device. The FDA's review of a PMA application generally takes
one to two years from the date the PMA is accepted for filing, but it may take
significantly longer. The review time is often significantly extended by FDA
requests for additional information or clarification of information already
provided in the submission. Modifications to a device that is the subject of an
approved PMA, its labeling or manufacturing process may require approval by the
FDA of PMA supplements or new PMAs. The PMA process can be expensive, uncertain
and lengthy, and a number of devices for which FDA approval has been sought by
other companies have never been approved for marketing.

If human clinical trials of a device are required in order to obtain
adequate safety, performance and/or efficacy data, and the device presents a
"significant risk" to the patient, the sponsor of the trial (usually the
manufacturer or the distributor of the device) will have to file an
Investigational Device Exemption ("IDE") application prior to commencing human
clinical trials. The IDE application must be supported by data, typically
including the results of animal and laboratory testing. If the IDE application
is approved by the FDA and the study protocol is approved by one or more
appropriate Institutional Review Boards ("IRBs"), human clinical trials may
begin at a specific number of investigational sites with a specific number of
patients, as approved by the FDA. If the device presents a "nonsignificant risk"
to the patient, a sponsor may begin the clinical trial after obtaining approval
for the study by one or more appropriate IRBs without the need for FDA approval.
Sponsors of U.S. clinical trials are permitted to sell investigational devices
distributed in the course of the study provided that compensation does not
exceed recovery of the costs of manufacture, research, development and handling.
An IDE supplement must be submitted and approved by the FDA and appropriate
IRB(s) before a sponsor or investigator may make a change to the investigational
plan that may affect its scientific soundness or the rights, safety or welfare
of human subjects.

A 510(k) clearance will be granted if the submitted information establishes
that the proposed device is "substantially equivalent" to a legally marketed
Class I or Class II medical device or a Class III medical device for which the
FDA has not called for PMAs. The FDA recently has been requiring more rigorous
demonstration of substantial equivalence than in the past, including, in some
cases, requiring submission of clinical trial data. The FDA may determine that
the proposed device is not substantially equivalent to a

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<PAGE> 45

predicate device, or that additional information is needed before it is deemed
substantially equivalent to a predicate device or that additional information is
needed before a substantial equivalence determination can be made.

The majority of the Company's products are classified as Class III medical
devices, which require pre-market approval from the FDA. All of the Company's
products described in "Business and Properties of the Company After the
Spinoff -- Products," other than Hylaform gel, have been approved or cleared for
sale in the U.S. Refinity skin solutions are regulated as cosmetic products in
the U.S. Products for which medical market applications have not yet been
approved by the FDA may only be exported from the U.S. with the appropriate
regulatory approval(s). There can be no assurance that the FDA will choose to
designate future products as medical devices or cosmetics rather than drugs,
biologics or combination products. Any such change in FDA designation would
potentially lengthen and increase the cost and complexity of the approval
process.

The Company's clinical research program for medical devices has been and
remains subject to the IDE regulations of the FDA. These regulations govern many
important aspects of the clinical investigation of medical products, including
obtaining informed consent from clinical subjects, securing the approval of an
IRB and maintaining required documentation relating to the conduct of the
investigational study. In addition, these regulations may require that the
Company obtain approval from the FDA prior to the commencement of clinical
investigations of new products or of expanded applications of commercially
available products.

Compliance with the current Quality Systems Regulations ("QSR"), formerly
Good Manufacturing Practices, is necessary to receive FDA approval to market new
products and to continue to market current products. Manufacturers of medical
devices for marketing in the U.S. are required to adhere to applicable
regulations setting forth detailed QSR requirements, which include testing,
control and documentation requirements. Manufacturers must also comply with
Medical Device Reporting ("MDR") requirements that a company report to the FDA
any incident in which its product may have caused or contributed to a death or
serious injury, or in which its product malfunctioned and, if the malfunction
were to recur, would be likely to cause or contribute to death or serious
injury. Labeling and promotional activities are subject to scrutiny by the FDA
and, in certain circumstances, by the Federal Trade Commission. FDA enforcement
policy prohibits the marketing of approved medical devices for unapproved uses.

The Company is registered with the FDA as a manufacturer of medical
devices. The Company is subject to routine inspection by the FDA and certain
state agencies for compliance with QSR requirements, MDR requirements and other
applicable regulations. The Company's facilities and manufacturing processes
have been inspected periodically by the State of California and other agencies,
and remain subject to audit from time to time. The Company believes that it is
in substantial compliance with all applicable federal and state regulations.
Nevertheless, there can be no assurance that the FDA or a state agency will
agree with the Company's position, or that its QSR compliance will not be
challenged at some subsequent point in time. Enforcement of QSR has increased
significantly in the last several years and the FDA has stated publicly that
compliance will be scrutinized more strictly. In the event that the Company is
determined to be in noncompliance with FDA regulations, to the extent that the
Company is unable to convince the FDA or state agency of the adequacy of its
compliance, the FDA or state agency has the power to assert penalties or
remedies, including injunction or temporary suspension of shipment until
compliance is achieved. Noncompliance may also lead to a recall of product. Such
penalties or remedies could have a materially adverse effect on the Company's
business, financial condition and results of operations.

The continuing trend of more stringent FDA oversight in product clearance
and enforcement activities has caused medical device manufacturers to experience
longer approval cycles, more uncertainty, greater risk and higher expenses.
Failure to obtain, or delays in obtaining, the required regulatory approvals for
new products, could adversely affect the Company, as could product recalls. In
addition, there can be no assurance that the FDA will give approval to the
Company to market its current products for broader or different applications, or
that it will grant approval with respect to separate product applications which
represent extensions of the basic collagen technology, or that existing
approvals will not be withdrawn.

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<PAGE> 46

In the U.S., health care providers that purchase medical devices, such as
Contigen implant, generally rely on third-party payors, principally federal
Medicare, state Medicaid and private health insurance plans to reimburse all or
part of the cost of the procedure in which the device is used. Such
reimbursement is typically made at a fixed rate. Changes in reimbursement
policies could have an economic impact on the purchase and use of medical
devices. Although the Company's aesthetic products are not generally subject to
reimbursement, a material decrease in current reimbursement levels for treatment
of ISD could have a material adverse effect on sales of Contigen implant and on
the Company's business.

Sales of medical devices outside the U.S. are subject to regulatory
requirements that vary widely from country to country. The time required to
obtain clearance required by countries may be longer or shorter than that
required for FDA clearance, and requirements for such clearances may differ
significantly from FDA requirements. Some countries have historically permitted
human studies earlier in the product development cycle than regulations in the
U.S. permit. Other countries, such as Japan, have requirements similar to those
of the U.S. This disparity in the regulation of medical devices may result in
more rapid product clearance in certain countries than in others.

The primary regulatory environment in Europe is that of the EC which
consists of more than 15 countries encompassing most of the major countries in
Europe. Certain other countries, such as Switzerland, have voluntarily adopted
laws and regulations that mirror those of the EC with respect to medical
devices. The EC has adopted numerous directives and standards regulating the
design, manufacture, clinical trial, labeling, and adverse event reporting for
medical devices. The principal directives prescribing the laws and regulations
pertaining to medical devices in the EC are found in the European Medical
Devices Directive, 93/42/EC.

Devices that comply with requirements of a relevant directive will be
entitled to bear CE conformity marking, indicating that the device conforms with
the essential requirements of the applicable directive and, accordingly, can be
commercially distributed throughout the EC. The method of assessing conformity
varies depending on the class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment
by a Notified Body. This third-party assessment may consist of an audit of the
manufacturer's quality system, review of a technical file and specific testing
of the manufacturer's products. An assessment by a Notified Body in one country
within the EC is required in order for a manufacturer to commercially distribute
the product throughout the EC. Medical products must obtain by mid-1998 the
right to affix CE Mark. Failure to obtain the right to affix CE Mark may
prohibit the Company from selling its products in member countries in the EC.
There can be no assurance that the Company will be successful in meeting the
European quality standards or other certification requirements. The Company's
Zyderm implants and Zyplast implant received CE Mark on June 23, 1995, Contigen
implant received CE Mark on October 26, 1995, Hylaform gel received CE Mark on
November 2, 1995 and SoftForm received CE Mark in September 1997.

While no additional pre-market approvals for individual EC countries are
required prior to the marketing of a device bearing CE Mark, practical
complications with respect to market introduction may occur. For example
differences among countries have arisen with regard to labeling requirements.

Unapproved devices subject to the PMA requirements generally must receive
prior FDA export approval unless they are approved for use by any member country
of the EC and certain other countries, including Australia, Canada, Israel,
Japan, New Zealand, Switzerland and South Africa, in which case they can be
exported to any country without prior FDA approval upon meeting certain
requirements. Exports of products subject to the 510(k) notification
requirements, but not yet cleared to market, are permitted without FDA export
approval provided certain requirements are met. However, the Company must, among
other things, notify the FDA and meet the importing country's requirements.
There can be no assurance that the Company will receive FDA export approval when
such approval is necessary, or that countries to which the devices are to be
exported will approve the devices for import. Failure of the Company to receive
import approval from other countries, or to obtain Certificates for Products for
Export when required, or to meet FDA's export requirements or to obtain FDA
export approval when required to do so, could have a material adverse effect on
the Company's business, financial condition and results of operations.

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EMPLOYEES

As of March 31, 1998, the Company employed 350 employees, of whom 35 were
engaged in research and development, 25 of whom were engaged in medical affairs
and regulatory affairs, 107 of whom were engaged in sales and marketing, 96 of
whom were involved in production and quality control and 87 of whom were engaged
in finance and administration. None of the Company's employees is covered by a
collective bargaining agreement. The Company also has a Board of Scientific
Advisors which currently consists of five scientists, each of whom is prominent
in his or her field. The Company has a consulting agreement with each scientific
advisor which ranges from two to three years.

EXECUTIVE OFFICERS AND DIRECTORS

The following table sets forth the names, ages and positions of the
executive officers and directors of the Company as of March 31, 1998:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Gary S. Petersmeyer..................... 51 President, Chief Executive Officer and
Director
Deborah Webster*........................ 38 Vice President, Human Resources and
Administrative Services
Jean-Pierre Capdevielle................. 47 Vice President and Managing Director,
International
David J. Foster*........................ 40 Senior Vice President and General
Manager, Collagen Technologies Group
Charlene Andros Friedman................ 40 Vice President, General Counsel
Norman L. Halleen....................... 45 Vice President, Finance and Chief
Financial Officer
Reinhard Koenig, M.D.................... 37 Vice President, Medical Affairs,
Worldwide
Rebecca A. Stirn........................ 45 Vice President, North American Marketing
Strategy
Jane A. Moffitt***...................... 44 Vice President, Worldwide Regulatory
Affairs
Anne L. Bakar........................... 40 Director
John R. Daniels, M.D.**................. 59 Director
William G. Davis........................ 65 Director
Reid W. Dennis**........................ 71 Director
Craig W. Johnson**...................... 50 Director
</TABLE>

- - - ---------------
* Resigning as an executive officer of the Company following the Spinoff.

** Resigning from the Company's Board following the Spinoff.

*** Ms. Moffit resigned from the Company effective April 1, 1998.

Mr. Petersmeyer joined the Company as President, Chief Operating Officer
and a director of the Company in February 1995. In February 1997, Mr.
Petersmeyer became the Company's Chief Executive Officer. Prior to joining the
Company, Mr. Petersmeyer was employed by Syntex Corporation, a manufacturer of
pharmaceutical products, from 1991 to January 1995, where he served as Vice
President of Managed Health Care from March 1993 to January 1995, as well as
serving at various times as National Sales Director and Director of Corporate
Development. From 1986 to 1990, he served as President and Chief Executive
Officer of Beta Phase, Inc., a medical device manufacturer, and from 1982 to
1986, he was the Executive Vice President and General Manager, Ophthalmic
Products Division, of CooperVision, Inc., a manufacturer and distributor of
ophthalmic products. Following the Spinoff, Mr. Petersmeyer will continue as
President, Chief Executive Officer and a director of the Company.

Ms. Webster joined the Company as a member of the finance staff in February
1982 and served in various Human Resource positions. In 1991, Ms. Webster was
promoted to Vice President, Human Resources and Administrative Services of the
Company. In December 1997, Ms. Webster was appointed Vice President and Chief
Administrative Officer of Cohesion, with responsibility for Administration,
Finance, Information

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<PAGE> 48

Technology and Human Resources. Following the Spinoff, Ms. Webster will continue
as Vice President and Chief Administrative Officer of Cohesion.

Mr. Capdevielle joined the Company as Vice President and Managing Director,
International in February 1997. Prior to joining the Company, Mr. Capdevielle
was employed by Sofamor Danek Group, a medical device company, from March 1993
to February 1997, where he served as Executive Vice President for International
Operations. From 1989 to February 1993, Mr. Capdevielle served as Director of
Continental Europe and President of German, French and Spanish operations for
Smith & Nephew Richards, a medical device company. Following the Spinoff, Mr.
Capdevielle will continue as Vice President and Managing Director, International
of the Company.

Mr. Foster joined the Company as Financial Analyst in November 1984 and
served in various positions in the Company. In 1992, Mr. Foster was appointed
Chief Financial Officer. In February 1997, Mr. Foster was appointed Senior Vice
President and General Manager, Collagen Technologies Group. In December 1997,
Mr. Foster was appointed Chief Executive Officer and director of Cohesion. From
1979 to 1984, Mr. Foster was employed by Brown, Vence and Associates, an energy
and environmental consulting firm, as Engineering Project Manager. Mr. Foster
serves on the Board of Directors of Pharming, CollOptics, Inc. and Innovasive,
and previously served on the Board of Prograft Medical Inc. Following the
Spinoff, Mr. Foster will resign as an executive officer of the Company, and will
continue as Chief Executive Officer and as a director of Cohesion.

Ms. Friedman joined the Company as General Counsel and Assistant Secretary
in February 1996. In November 1997, Ms. Friedman was promoted to Vice President,
General Counsel. Prior to joining the Company, Ms. Friedman practiced law for
thirteen years, representing corporate and individual clients in the litigation
of product liability, commercial and general liability cases. From October 1995
to January 1996, Ms. Friedman was employed by the law firm of Lillick and
Charles in San Francisco, California. From July 1993 to May 1995, she practiced
with Warner & Stackpole in Boston, Massachusetts. From September 1983 through
July 1993, Ms. Friedman practiced at Murphy, DeMarco & O'Neill, Boston. She is a
member of the California and Massachusetts bars. Following the Spinoff, Ms.
Friedman will continue as Vice President, General Counsel and Assistant
Secretary of the Company.

Mr. Halleen joined the Company as Vice President, Finance and Chief
Financial Officer in February 1997. From July 1989 to January 1997, Mr. Halleen
ran his own business as a finance consultant in Hong Kong. In addition, from
October 1993 through June 1996, he served as Chief Financial Officer of the
Dutra Group, a privately held company in the construction/marine dredging
business. Subsequent to Mr. Halleen leaving the Dutra Group, the Dutra Group
filed an application for reorganization under Chapter 11 under the U.S.
Bankruptcy Court, Northern District of California in January 1997. Prior to July
1989, he was employed for 10 years with Syntex Corporation, serving in various
positions, including Regional Director of Finance for the Asia/Pacific region.
Following the Spinoff, Mr. Halleen will continue as Vice President, Finance and
Chief Financial Officer of the Company.

Dr. Koenig joined the Company as Vice President, Medical Affairs, Worldwide
in October 1996. From May 1995 until October 1996, he was employed by Genentech,
Inc., a manufacturer of biotechnology products as the Director, Medical
Information and Drug Experience. From January 1989 until May 1995, Dr. Koenig
was employed by Boehringer Mannheim Therapeutics in Germany and the U.S. in
various positions in medical affairs and clinical research, including the
position of Director, Medical Affairs. Following the Spinoff, Dr. Koenig will
continue as Vice President, Medical Affairs, Worldwide of the Company.

Ms. Stirn joined the Company as Vice President, Global Marketing Strategy
in January 1996. In January 1998, Ms. Stirn became Vice President, North
American Marketing Strategy. Prior to joining the Company, Ms. Stirn provided
consulting services to the Company from March 1995 to December 1995. From
January 1988 to February 1995, Ms. Stirn consulted and served on the board of
directors for several non-profit institutions. From September 1986 to December
1987, Ms. Stirn served as Vice President of Marketing at CEMAX, Inc., a company
engaged in three-dimensional medical imaging and computer-aided design of custom
implants. From June 1981 to October 1985, Ms. Stirn was employed by
CooperVision, Inc. While employed by CooperVision, Inc., Ms. Stirn served as
Vice President of Marketing, Optics Division and in

40
<PAGE> 49

various other marketing positions. Following the Spinoff, Ms. Stirn will
continue as Vice President, North American Marketing Strategy of the Company.

Ms. Moffitt joined the Company as Vice President, Regulatory Affairs,
Worldwide in January 1997. From August 1996 to January 1997, Ms. Moffitt
consulted for several corporations. Prior to joining the Company, she was
employed by Amsco International as Vice President Regulatory Affairs/Quality
Assurance from January 1993 through July 1996. From October 1982 to December
1992, Ms. Moffitt was employed at Allergan, Inc. where she held the positions of
Assistant General Counsel and Director, Regulatory Affairs-Allergan
Pharmaceuticals. Ms. Moffitt resigned from the Company effective April 1, 1998.

Ms. Bakar has been a director of the Company since 1993. Ms. Bakar has been
President and Chief Executive Officer of Telecare Corporation, the largest
private provider of psychiatric services in the state of California, since 1987.
Previously, Ms. Bakar spent seven years in the investment banking industry.
Following the Spinoff, Ms. Bakar will continue as a director of the Company.

Dr. Daniels is Associate Professor of Medicine/Oncology at the University
of Southern California. Dr. Daniels was a Vice President of the Company from
September 1975 to September 1979. Dr. Daniels is Chairman of the Board and Chief
Financial Officer of Balance Pharmaceuticals, Inc., a developer of
pharmaceutical products, and has served on the Company's Board since 1977. He
served as President of Target Therapeutics, Inc. from June 1985 to April 1989,
and as a director from June 1985 to May 1990. Dr. Daniels is also the President,
Chief Executive Officer and a director of Regional Therapeutics, Inc., a
developer of collagen-based medical products. Dr. Daniels was a cofounder of
Collagen Corporation, Balance Pharmaceuticals and Target Therapeutics, Inc. Dr.
Daniels is currently Chairman of the Cohesion Board and will continue to serve
on the Cohesion Board following the Spinoff.

Mr. Davis has been a director of the Company since 1984. Mr. Davis was
associated with Eli Lilly and Company from 1957 to 1984, where he served as
Executive Vice President, Eli Lilly International Corporation, from 1972 to
1975, Executive Vice President, Pharmaceutical Division, from 1975 to 1982 and
President, Medical Instrument Systems Division, from 1982 until his retirement
in 1984. Mr. Davis is also a director of Alza Corporation, CardioVascular
Dynamics, Inc. and Endosonics, Inc. Following the Spinoff, Mr. Davis will
continue as a director of the Company.

Mr. Dennis has been a director of the Company since 1975. Mr. Dennis served
as President of the Company from February 1976 to March 1978, as Chairman of the
Company's Board from March 1978 to February 1995, and has served as Chairman
Emeritus of the Company's Board since February 1995. Mr. Dennis is the General
Partner of various partnerships associated with Institutional Venture Partners
(venture capital partnerships). Mr. Dennis will is currently a director of
Cohesion and will continue to serve on the Cohesion Board following the Spinoff.

Mr. Johnson has been a director of the Company since 1991. Mr. Johnson has
been a Director of Venture Law Group, A Professional Corporation, principal
outside counsel to the Company, and a partner of its predecessor partnership
since February 1993. From 1980 to February 1993, Mr. Johnson was a member of the
law firm of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation,
principal outside counsel to the Company during such period. He was appointed
Secretary of the Company in August 1986. Mr. Johnson served as Assistant
Secretary of the Company for ten years prior to his appointment as Secretary.
Mr. Johnson is also a director of Retix. Mr. Johnson is currently a director of
Cohesion and will continue to serve on the Cohesion Board following the Spinoff.

The Company currently has authorized six directors. The Company's Bylaws
provide that the number of directors of the Company may be changed by an action
of the Company's Board or the stockholders. Each director is elected for a
period of one year at the Company's annual meeting of stockholders and serves
until the next annual meeting or until his or her successor is duly elected and
qualified. The executive officers serve at the discretion of the Company's
Board. There are no family relationships among any of the directors and/or
executive officers of the Company.

41
<PAGE> 50

DIRECTOR COMPENSATION

The Company currently pays each director who is not an employee (currently
five persons) a monthly retainer of $1,000, ($1,500 in the case of the Chairman
Emeritus), a fee of $1,000 ($1,500 in the case of the Chairman Emeritus) for
each meeting of the Board attended by such director, a fee of $250 for each
telephonic meeting of the Board in which such director participates and a fee of
$500 for each committee meeting attended by such director on a date not
coinciding with a meeting of the Board. Each nonemployee director participates
in the Company's 1990 Directors' Stock Option Plan, pursuant to which
nonemployee directors are automatically granted options to purchase shares of
Company Common Stock on the terms and conditions set forth in such plan. On July
1, 1997, each of the Company's nonemployee directors on such date were granted
an option to purchase 3,000 shares of Company Common Stock at an exercise price
of $19.25 per share, all pursuant to the terms of the Company's 1990 Directors'
Stock Option Plan. The 1990 Directors' Stock Option Plan will be terminated on
the Distribution Date, when the 1998 Directors' Stock Option Plan becomes
effective.

BOARD COMMITTEES

In October 1981, the Board established the Audit Committee and Human
Resources Committee (formerly, the Compensation Committee). The Audit Committee
recommends engagement of the Company's independent auditors, reviews the scope
of the audit, considers comments made by the independent auditors with respect
to the Company's internal control structure, including systems, procedures and
internal accounting controls and the consideration given thereto by management,
and reviews the Company's internal control structure, including systems,
procedures and internal accounting controls, with the Company's financial and
accounting staff. The Board's Audit Committee currently consists of directors
Bakar and Johnson. The Human Resources Committee provides guidance and
commentary for all corporate compensation, benefits, perquisite and employee
(and director) equity programs. It reviews and makes recommendations to the
Board regarding such matters as the Company's compensation of its officers, all
employee equity plans and individual equity grants and bonus plans and bonus
payments. The Human Resources Committee currently consists of directors Davis
(Chairman), Bakar and Dennis.

HUMAN RESOURCES COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Human Resources Committee of the Company's Board are
currently directors Davis (Chairman), Bakar and Dennis. None of the members of
the Human Resources Committee has at any time been an officer or employee of the
Company or any subsidiary of the Company.

42
<PAGE> 51

EXECUTIVE COMPENSATION

The following Company Summary Compensation Table shows the compensation
received by (i) the two individuals who served as Chief Executive Officer of the
Company during the fiscal year ended June 30, 1997 and (ii) the four other most
highly compensated executive officers of the Company (the "Company Named
Executive Officers") serving at the end of the fiscal year ended June 30, 1997,
and the compensation received by each such individual for the Company's two
prior fiscal years. Each of such executives will continue as a senior executive
of the Company following the Spinoff, with the exception of David J. Foster who
will serve as Chief Executive Officer of Cohesion, Deborah Webster who will
serve as Vice President and Chief Administrative Officer of Cohesion, and
Michael I. Levitt and Howard D. Palefsky, who have resigned as officers.

COMPANY SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- ------------
SECURITIES ALL
OTHER ANNUAL UNDERLYING OTHER
FISCAL COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS ($)(1) (#)(2) (3)
--------------------------- ------ -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gary S. Petersmeyer(4)......... 1997 $262,777 $108,000 -- 150,000 $ 2,238
President, Chief Executive 1996 $213,956 $ 29,025 -- 25,000 $ 36,301
Officer and director 1995 $ 83,335 -- -- 60,000 $ 508
Deborah Webster(5)............. 1997 $148,187 $ 41,620 -- 6,000 $ 4,608
Vice President, Human 1996 $139,600 $ 18,842 -- 8,000 $ 301
Resources and 1995 $135,650 $ 18,293 -- -- $ 291
Administrative Services
David J. Foster(6)............. 1997 $160,263 $ 47,600 -- 6,000 $ 453
Senior Vice President and 1996 $144,306 $ 24,575 -- 10,000 $ 314
General Manager, 1995 $136,650 $ 18,227 -- -- $ 288
Collagen Technologies Group
Michael I. Levitt(7)........... 1997 $163,248 $ 57,313 -- 6,000 $ 19,243
Vice President, Operations 1996 $153,878 $ 20,757 -- 6,000 $ 20,084
1995 $143,750 $ 20,250 -- 30,000 $139,876
Rebecca A. Stirn(8)............ 1997 $149,484 $ 42,014 -- 3,000 $ 505
Vice President, 1996 $ 95,053 $ 8,550 -- 25,000 $ 74,990
Global Marketing Strategy 1995 -- -- -- -- $ 3,000
Howard D. Palefsky(9).......... 1997 $231,819 $650,000 -- 15,000 $ 1,769
Former Chairman and 1996 $309,103 $ 41,817 -- 20,000 $ 1,935
Chief Executive Officer 1995 $294,270 $ 39,826 -- -- $ 1,862
</TABLE>

- - - ---------------
(1) The value of perquisites or personal benefits is not included in the amounts
disclosed if, in the aggregate for any named individual, they did not exceed
the lesser of either $50,000 or ten percent of total salary and bonus
reported for such individual in the Summary Compensation Table.

(2) This table does not reflect options granted subsequent to the close of
fiscal 1997, which may represent grants partially in recognition of fiscal
1997 performance.

(3) Stated amounts represent (a) a hiring bonus to Mr. Petersmeyer, (b) a
15-year service award to Ms. Webster, (c) a mortgage assistance payment, a
goods and services allowance and a discretionary bonus paid to Mr. Levitt in
fiscal 1997, a mortgage assistance payment to Mr. Levitt in fiscal 1996 and
payments for a hiring bonus, mortgage assistance and the reimbursement of
relocation expenses to Mr. Levitt in fiscal 1995 and (d) fees for consulting
services provided by Ms. Stirn in fiscal 1996 and fiscal 1995, prior to her
commencement of employment with the Company. Remaining amounts represent
insurance premiums paid by the Company for term life insurance under the
Company's group life insurance employee benefit.

(4) Mr. Petersmeyer commenced employment with the Company in February 1995.
Following the Spinoff, Mr. Petersmeyer will continue as President, Chief
Executive Officer of the Company, and member of the Company's Board.

(5) Following the Spinoff, Ms. Webster will continue to serve as Vice President
and Chief Administrative Officer of Cohesion.

(6) Following the Spinoff, Mr. Foster will continue to serve as Chief Executive
Officer and member of the Cohesion Board.

(7) Mr. Levitt resigned as Vice President, Operations of the Company in November
1997.

(8) Ms. Stirn commenced employment with the Company in January 1996. Following
the Spinoff, Ms. Stirn will continue as Vice President, North American
Marketing Strategy of the Company.

43
<PAGE> 52

(9) Mr. Palefsky resigned as Chief Executive Officer of the Company in February
1997 and as a director of the Company in June 1997.

The following table sets forth information for the Company Named Executive
Officers with respect to grants to purchase Company Common Stock made during the
fiscal year ended June 30, 1997. As a result of the Spinoff, each option granted
to the Company Named Executive Officers listed below will be replaced with
either a new option to purchase shares of Company Common Stock, a new option to
purchase shares of Cohesion Common Stock or new options to purchase shares of
both Company Common Stock and Cohesion Common Stock, as provided in the Benefits
Agreement and, as a result, their value may depend, in part, on the future value
of Company Common Stock as well as the future value of Cohesion Common Stock.
See "Relationship Between the Company and Cohesion After the Spinoff -- Benefits
Agreement."

COMPANY STOCK OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1) POTENTIAL
-------------------------------------------------- REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE 10-YEAR OPTION TERM($)(3)
OPTIONS IN FISCAL PRICE EXPIRATION --------------------------
GRANTEE NAME GRANTED(#) YEAR(2) $/SH. DATE 5% 10%
------------ ---------- ---------- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gary S. Petersmeyer....... 20,000 4.62% $16.75 08/09/06 $ 210,680 $ 533,904
130,000 30.04% $19.50 02/07/07 $1,594,248 $ 4,040,137
Deborah Webster........... 6,000 1.39% $16.75 08/09/06 $ 63,204 $ 160,171
David J. Foster........... 6,000 1.39% $16.75 08/09/06 $ 63,204 $ 160,171
Michael I. Levitt(4)...... 6,000 1.39% $16.75 08/09/06 $ 63,204 $ 160,171
Rebecca A. Stirn.......... 3,000 0.69% $16.75 08/09/06 $ 31,602 $ 80,086
Howard D. Palefsky........ 15,000 3.47% $16.75 08/09/06 $ 158,010 $ 400,428
All Employee Optionees.... 432,750 100% $18.39(5) (5) $5,004,915 $12,683,437
</TABLE>

- - - ---------------
(1) Consists of stock options granted pursuant to the Company's stock option
plans, which generally become exercisable at a rate of two percent of the
shares subject to the option per month for 50 months as long as the optionee
remains an employee with, consultant to or director of the Company. The
maximum term of each option granted is ten years from the date of grant. The
exercise price is equal to the fair market value of the stock on the grant
date.

(2) Out of a total of 432,750 options granted during the last fiscal year to
purchase Company Common Stock.

(3) These amounts represent certain assumed rates of appreciation for a given
exercise price only. Actual gains, if any, on stock option exercises and
Company Common Stock holdings are dependent on the future performance of the
Company Common Stock. There is no assurance that the amounts reflected will
be realized.

(4) Mr. Levitt resigned as Vice President, Operations of the Company in
November, 1997.

(5) Represents the weighted average exercise price of options granted during
fiscal 1997. Options granted during fiscal 1997 will generally expire on the
date in fiscal 2007 equal to ten years from the date of grant.

44
<PAGE> 53

The following table sets forth information for the Company Named Executive
Officers with respect to exercises of options to purchase Company Common Stock
in the fiscal year ended June 30, 1997. As a result of the Spinoff, each option
granted to the Company Named Executive Officers listed below will be replaced
with either a new option to purchase shares of Company Common Stock, a new
option to purchase shares of Cohesion Common Stock or new options to purchase
shares of both Company Common Stock and Cohesion Common Stock, as provided in
the Benefits Agreement (as defined hereafter) and, as a result, their value may,
in part, depend on the future value of Company Common Stock as well as the
future value of Cohesion Common Stock. See "Relationship Between the Company and
Cohesion After the Spinoff -- Benefits Agreement."

AGGREGATED COMPANY OPTION EXERCISES IN LAST FISCAL YEAR
AND COMPANY OPTION VALUES ON JUNE 30, 1997

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL AT FISCAL YEAR-END
SHARES YEAR-END(#) ($)(1)
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISABLE/
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE) UNEXERCISABLE)
---- ----------- ----------- ---------------------- --------------------
<S> <C> <C> <C> <C>
Gary S. Petersmeyer................ -- -- 57,800/177,200 $ 8,500/$19,000
Deborah Webster.................... 41 $ 400 41,610/11,340 $ 44,491/ $5,840
David J. Foster.................... -- -- 36,340/12,460 $ 3,100/ $6,400
Michael I. Levitt.................. -- -- 24,240/17,760 $ 2,220/ $5,280
Rebecca A. Stirn................... -- -- 8,600/19,400 $ 450/ $1,800
Howard D. Palefsky................. 54,000 $535,250 169,300/28,700 $688,400/$14,600
</TABLE>

- - - ---------------
(1) The fair market value of the Company Common Stock at the close of business
on June 30, 1997 was $17.50 per share.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In December 1992, the Company purchased 800,000 shares of preferred stock
of CollOptics, Inc. ("CollOptics") for an aggregate of $500,000. In addition,
the Company granted to CollOptics a license to use the Company's technology in
the field of refractive surgery for long-term vision correction and entered into
certain other technology-related agreements with CollOptics. In September 1995,
the Company purchased an additional 1,000,000 shares of CollOptics preferred
stock for an aggregate of $500,000. During fiscal 1997, CollOptics made certain
payments to the Company, primarily for research and development services and the
reimbursement of expenses paid by the Company, totaling $500,000. As of June 30,
1997, CollOptics owed the Company $769,981 for research and development services
and the reimbursement of expenses paid by the Company. David J. Foster, Chief
Executive Officer of Cohesion and Dr. Frank DeLustro, President and Chief
Operating Officer of Cohesion, are directors of CollOptics. As of June 30, 1997,
the Company held a 47% equity interest in CollOptics. In connection with the
Spinoff, all outstanding shares of CollOptics owned by the Company and all
agreements between the Company and CollOptics were transferred to Cohesion
effective January 1, 1998.

In November 1993, the Company purchased from Cohesion Corp., for
approximately $65,000, 50,000 shares of Preferred Stock ("Cohesion Corp.
Preferred Stock") and 200,000 shares of Common Stock ("Cohesion Corp. Common
Stock"). In April 1994, the Company purchased 95,238 shares of Cohesion Corp.
Preferred Stock for approximately $86,000, and in July 1994, the Company
purchased 104,762 shares of Cohesion Corp. Preferred Stock for approximately
$94,000. Cohesion Corp. was formerly known as Otogen Corporation ("Otogen") and
Dr. Rodney Perkins, a director of the Company at that time, was the majority
stockholder, Chairman and President. In addition to the purchase of shares, the
Company granted to Cohesion Corp. a license to use the Company's technology in
the fields of otology and neurosurgical applications, in return for which the
Company was granted an additional 50,000 shares of Cohesion Corp. Common Stock.
Between April 1994 and May 1996, the Company made an additional equity
investment in Cohesion Corp. of $180,000 and loaned to Cohesion Corp. an
aggregate of approximately $1,540,000. In May 1996, the

45
<PAGE> 54

Company purchased an additional aggregate of 875,000 shares of Cohesion Corp.
Common Stock and Cohesion Corp. Preferred Stock from Cohesion Corp. for an
aggregate of approximately $5.1 million (including conversion of Cohesion
Corp.'s outstanding indebtedness to the Company) and purchased 275,000 shares of
Cohesion Corp. Common Stock and Cohesion Corp. Preferred Stock from Dr. Perkins
for an aggregate of $1,452,500. The Company also granted to Cohesion Corp. a
license to use certain of the Company's technology in the fields of tissue
adhesion and anti-adhesion technology, excluding ophthalmic applications, in
return for which the Company was granted an additional 75,000 shares of Cohesion
Corp. Preferred Stock. In addition, the Company agreed to loan Cohesion Corp. up
to $5,000,000 in the form of convertible debt, which loan, drawn upon at the
direction of the President of Cohesion Corp., bore interest at an annual rate of
the greater of the prime lending rate or 10% and will be due and payable five
years after the date of the first disbursement, subject to acceleration under
certain circumstances. In connection with the loan transaction, Dr. Perkins
granted the Company an option to purchase up to 125,000 additional shares of
Cohesion Corp. Common Stock held by Dr. Perkins, which option becomes
exercisable as to 25,000 shares for each $1,000,000 of the loan commitment that
is disbursed. In each of May 1997, August 1997 and October 1997 the Company
loaned $1,000,000 to Cohesion Corp. under the loan commitment and purchased
25,000 shares of Cohesion Corp. Common Stock from Dr. Perkins. In addition, in
connection with this transaction, the Company agreed to grant Dr. Perkins an
option to purchase up to 77,500 shares of the Company's Common Stock in
connection with his continued participation on the Cohesion Corp. Board of
Directors. In connection with the May 1996 stock purchase transactions, Craig W.
Johnson, a director and Secretary of the Company, and an investment partnership
in which he holds a beneficial interest purchased an aggregate of 25,000 shares
of Cohesion Corp. Common Stock and Cohesion Corp. Preferred Stock for an
aggregate of $127,750. In June 1996, Dr. John R. Daniels, a director of the
Company, was appointed to Cohesion Corp.'s Board of Directors. As of June 30,
1997, the Company held an 81% equity interest in Cohesion Corp. and in December
1997 increased its ownership position to 99%. Effective January 1, 1998, the
Company contributed all of its holdings of the Cohesion Corp. capital stock and
its research and development programs for sealant and adhesion barriers to
Cohesion.

In October 1995, Ross Erickson, then an executive officer of the Company
and currently an executive officer of Cohesion and Cohesion Corp., borrowed
$120,000 from the Company pursuant to a secured promissory note. This debt was
secured by real property purchased by Mr. Erickson and all shares of the
Company's stock issued to Mr. Erickson pursuant to the exercise of stock
options. In May 1997, all amounts due to the Company under such loan were repaid
through the assumption of the loan by Cohesion Corp. In October 1997 and
December 1997 Ross Erickson repaid to Cohesion Corp. all amounts owing on such
promissory note.

In October 1995, the Company purchased 844,000 shares of preferred stock of
Innovasive for $4,100,000. In connection with this investment, the Company
entered into Research and Development, Distribution and Manufacturing and Supply
Agreements with Innovasive with respect to tissue fixation devices manufactured
from collagen-based materials using the Company's proprietary technology.
Shortly following its investment in Innovasive, the Company purchased from
Howard D. Palefsky, the former Chairman and Chief Executive Officer of the
Company, all of his holdings of Innovasive capital stock (30,303 shares) for an
aggregate of $63,552. During fiscal 1997, pursuant to the terms of the Research
and Development Agreement, Innovasive made payments to the Company totaling
$698,665 for research and development services and reimbursement of expenses
paid by the Company. As of June 30, 1997, Innovasive owed the Company $289,243
for research and development services and the reimbursement of expenses paid by
the Company. The Company is entitled to elect one member of Innovasive's Board
of Directors so long as it holds five percent of Innovasive's capital stock on a
fully diluted basis. Mr. Foster is the Company's current designee on the
Innovasive Board of Directors. As of December 31, 1997, the Company held
approximately nine percent of Innovasive's outstanding capital stock. In
connection with the Spinoff, all outstanding shares of Innovasive owned by the
Company and all agreements between the Company and Innovasive were transferred
to Cohesion.

Since February 1993, the Company has retained as its principal outside
legal counsel Venture Law Group, A Professional Corporation, a law firm of which
Craig W. Johnson, a director of the Company, is a director. Prior to such time,
the Company had retained Wilson, Sonsini, Goodrich & Rosati, Professional

46
<PAGE> 55

Corporation ("WSG&R"), as its principal outside legal counsel since 1977. From
1980 until February 1993, Mr. Johnson was a member of WSG&R. In connection with
the Spinoff, Mr. Johnson, who has been elected to the Cohesion Board, will
resign from the Company's Board.

In August 1994, June 1995 and December 1995, Mr. Palefsky borrowed an
aggregate of $475,000 from the Company pursuant to promissory notes secured by
all shares of the Company's capital stock held by Mr. Palefsky while such debt
is outstanding, and bearing an annual interest rate equal to the lesser of 10%
or the prime rate at the close of each quarter for which interest accrues. In
February 1996, Mr. Palefsky borrowed an additional $1,080,000 from the Company
on an unsecured basis pursuant to a promissory note bearing an annual interest
rate equal to the lesser of 10% or the prime rate at the close of each quarter
for which interest accrues.

In March 1997, Mr. Palefsky entered into an agreement with the Company in
connection with the severance of his employment relationship with the Company.
At the same time, Mr. Palefsky entered into a consulting relationship with the
Company, which has been assigned to Cohesion pursuant to the Separation and
Distribution Agreement. Under the consulting agreement, the Company agreed to
pay Mr. Palefsky a consulting fee of $29,167 during each of the first 24 months
of his consultancy. As additional compensation for services during his
consultancy and for Mr. Palefsky's execution and adherence to a noncompetition
agreement with the Company, the Company agreed to: (i) pay Mr. Palefsky a bonus
of $650,000, (ii) conditioned on completion of the first year of his consultancy
and noncompetition, pay Mr. Palefsky a bonus of $225,000 on the first
anniversary date of the agreement and forgive $425,000 of the principal and any
accrued interest thereon of outstanding loans totaling $475,000 in principal
amount, made to Mr. Palefsky by the Company and (iii) conditioned on completion
of the second year of Mr. Palefsky's consultancy, the Company agreed to forgive
the balance of the principal and any accrued interest thereon of the above loans
and also to forgive the entire principal balance and any accrued interest
thereon of the loan in the principal amount of $1,080,000 made by the Company in
February 1996 to Mr. Palefsky. During his consultancy, Mr. Palefsky is also
entitled to reimbursement for his reasonable expenses incurred in connection
with rendering consulting services to the Company. Mr. Palefsky's options to
purchase stock of the Company shall continue to vest during his period of
consultancy and shall, in any event, be fully vested on conclusion of the
consultancy.

In July 1996, Reid W. Dennis, Chairman Emeritus and a director of the
Company, borrowed $1,000,000 from the Company on an unsecured basis pursuant to
a promissory note bearing an annual interest rate of 8.25%. Mr. Dennis repaid
the entire balance of principal and accrued interest on this note on September
11, 1996.

In February 1997, the Company entered into an employment agreement with
Gary S. Petersmeyer, the Company's President and Chief Executive Officer,
containing arrangements pursuant to which Mr. Petersmeyer is entitled to
receive, in the event of his involuntary termination (other than for cause) by
the Company (apart from a change of control), a lump sum payment of 12 months
base salary, a lump sum payment equal to Mr. Petersmeyer's scheduled bonus, and
accelerated vesting of any options previously granted to and held by Mr.
Petersmeyer as of the termination date, to the extent that such options would
have vested during the 12 months following the termination date. In the event of
his involuntary termination (other than for cause) by the Company within 24
months following a "change of control," Mr. Petersmeyer is entitled to a lump
sum payment of 24 months base salary, a lump sum payment equal to two times Mr.
Petersmeyer's scheduled bonus, and accelerated vesting of any options previously
granted to and held by Mr. Petersmeyer as of the termination date, to the extent
that such options would have vested during the 24 months following the
termination date.

In December 1997, Charles Williams, Vice President, Operations of Cohesion,
borrowed $150,000 from Cohesion Corp., pursuant to a promissory note bearing an
annual interest rate of 8.5%, secured by certain real property owned by Mr.
Williams and all shares of Cohesion Corp. Common Stock issued to Mr. Williams
upon exercise of stock options currently held or acquired following the date of
the loan by Mr. Williams while the loan amount is outstanding.

47
<PAGE> 56

The Company and Cohesion entered into certain "change of control"
agreements with certain of their respective officers pursuant to which all
options granted to such executive officers to purchase Company Common Stock
shall immediately vest to the extent that such options would have vested during
the 24 months following the termination date, and all options granted to such
executive officers to purchase Cohesion Corp. Common Stock, shall immediately
vest to the extent that such options would have vested during the 24 months
following a "change of control," in the event that such officer's employment is
involuntarily terminated without cause within a specified period of time
following a change of control of the Company or Cohesion. Events constituting a
change of control include (i) any person acquiring 50% or more of the total
voting power represented by the Company's or Cohesion's then outstanding voting
securities without the approval of the Company's Board or the Cohesion Board,
respectively; (ii) any person acquiring 50% or more of the total voting power
represented by the Company's or Cohesion's then outstanding voting securities
without the approval of the Company's Board or the Cohesion Board, respectively;
(iii) any merger, sale of assets or liquidation of the Company or Cohesion in
which the Company's or Cohesion's outstanding voting securities prior to the
transaction cease to represent at least 50% of the total voting power
represented by the voting securities of the Company or Cohesion, respectively or
of the surviving entity after the transaction; or (iv) replacing a majority of
the Company's Board or the Cohesion Board.

48
<PAGE> 57

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF COMPANY COMMON STOCK

By Management

Information is set forth below regarding beneficial ownership of Company
Common Stock by (1) each person who is a director of the Company; (2) each
Company Named Executive Officer; (3) each known beneficial owner of more than 5%
of Company Common Stock and (4) all directors and executive officers as a group.
Except as otherwise noted, each person has sole voting and investment power as
to his or her shares. All information is as of March 31, 1998.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)
5% STOCKHOLDERS, DIRECTORS -----------------------
COMPANY NAMED EXECUTIVE OFFICERS AND PERCENT OF
DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP NUMBER TOTAL(2)
------------------------------------------- --------- ----------
<S> <C> <C>
Wellington Management Company(3)............................ 1,195,500 13.4%
75 State Street
Boston, MA 02109
Heartland Advisors, Inc.(4)................................. 1,079,800 12.1%
790 North Milwaukee Street
Milwaukee, WI 53202
T. Rowe Price Associates, Inc.(5)........................... 727,400 8.1%
100 East Pratt Street
Baltimore, MD 21202
Dimensional Fund Advisers, Inc.(6).......................... 504,050 5.63%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
Reid W. Dennis(7)........................................... 700,043 7.8%
3000 Sand Hill Road
Building 2, Suite 290
Menlo Park, CA 94025
Anne L. Bakar(8)............................................ 24,000 *
John R. Daniels, M.D.(8).................................... 143,327 1.6%
William G. Davis(8)......................................... 31,000 *
Craig W. Johnson(8)......................................... 83,000 *
Gary S. Petersmeyer(8)...................................... 115,988 1.3%
Deborah Webster(8).......................................... 51,356 *
David J. Foster(8).......................................... 52,170 *
Rebecca A. Stirn(8)......................................... 17,428 *
All directors and executive officers as a group (14
persons)(8)............................................... 1,264,267 13.5%
</TABLE>

- - - ---------------
* Less than 1 percent.

(1) The persons named in this table have sole voting and investment power with
respect to all shares of Company Common Stock shown as beneficially owned by
them, subject to community property laws where applicable and the
information contained in the other footnotes to this table.

(2) As of March 31, 1998, 8,951,227 shares were issued and outstanding,
exclusive of shares held by the Company as treasury stock.

(3) Wellington Management Company ("WMI") is an investment advisor registered
with the Commission under the Investment Advisors Act of 1940, as amended.
WMI may be deemed to beneficially own the stated shares by virtue of its
status as a registered investment advisor to its various investment advisory
clients. Of such amount, WMI may be deemed to have shared voting power with
respect to 594,400 shares and shared dispositive power with respect to
1,195,500 shares. The information presented is based upon information filed
with the Commission on Schedule 13G by the stockholder.

(4) Heartland Advisors, Inc., America's Value Investor(R) ("Heartland Advisors")
is an investment advisor registered with the Commission under the Investment
Advisors Act of 1940, as amended. Heartland Advisors may be deemed to
beneficially own the stated shares by virtue of its status as a registered
investment advisor to its various investment advisory clients. Of such
amount, Heartland Advisors may be deemed to have sole voting power with
respect to 1,069,300 shares and sole dispositive power with respect to
1,079,800 shares. The information presented is based upon information filed
with the Commission on Schedule 13G by the stockholder.

(5) T. Rowe Price Associates, Inc. may be deemed to beneficially own the stated
shares by virtue of its status as a registered investment advisor to its
various investment advisory clients. Of such amount, T. Rowe Price
Associates, Inc. may be deemed to have sole voting power with respect to
253,300 shares and sole dispositive power with respect to 727,400 shares.
The information presented is based upon information filed with the
Commission on Schedule 13G by the stockholder.

49
<PAGE> 58

(6) Dimensional Fund Advisors, Inc. ("DFA") is an investment advisor registered
under the Investment Advisors Act of 1940. DFA may be deemed to beneficially
own the stated shares by virtue of its status as a registered investment
advisor to its various investment advisory clients. Of such amount, DFA may
be deemed to have sole voting power with respect to 339,650 shares and sole
dispositive power with respect to 504,050 shares. The information presented
is based upon information filed with the Commission on Schedule 13G by the
stockholder.

(7) Includes 27,000 shares issuable upon exercise of options exercisable within
60 days of March 31, 1998; excludes 1,500 shares held by Mr. Dennis as
trustee for Suzanna Weaver Dennis, in which he disclaims any beneficial
ownership.

(8) Includes the following number of shares issuable upon exercise of options
exercisable within 60 days of March 31, 1998: Ms. Bakar 24,000; Dr. Daniels
27,000; Mr. Davis 27,000; Mr. Johnson 33,000; Mr. Petersmeyer 113,400; Ms.
Webster 44,310; Mr. Foster 43,550; Ms. Stirn 15,240; all directors and
officers as a group 400,230.

50
<PAGE> 59

SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The following financial information is provided to assist you in your
consideration of the proposed Spinoff and includes selected historical and
unaudited pro forma financial data for each of the Company and Cohesion. The
unaudited pro forma financial data for the Company assumes Cohesion's business
had been spun-off prior to July 1, 1996 for purposes of the statement of
operations data, and on December 31, 1997 for purposes of the balance sheet
data. The unaudited pro forma financial data for Cohesion presents Cohesion as
though it had already become a separate company prior to July 1, 1996 for
purposes of the statement of operations data, and on December 31, 1997 for
purposes of the balance sheet data. The unaudited pro forma financial data
includes certain additions and adjustments to the historical results related to
(i) transfer price arrangements under Cohesion's supply agreements with the
Company, and (ii) research and development expenses associated with the
reimbursement of costs under Cohesion's development arrangements with the
Company. You should not rely on the unaudited pro forma data as being indicative
of what the historical results would have been for the Company or Cohesion or as
predictive of the future results of either company.

COHESION SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The tables below set forth selected historical financial data of Cohesion.
This information has been prepared from the audited consolidated financial
statements of Cohesion as of June 30, 1996 and 1997 and for each of the three
years in the period ended June 30, 1997 and the unaudited consolidated financial
statements as of December 31, 1997 and for the six months ended December 31,
1996 and 1997 included herein. Financial information as of June 30, 1993, 1994
and 1995 and for each of the two years in the period ended June 30, 1994, has
been prepared from unaudited consolidated financial statements not included
herein. During these periods, Cohesion has been wholly owned by the Company. The
historical financial information may not reflect Cohesion's future performance
or the future financial position or results of operations of Cohesion, nor does
it provide or reflect data as if Cohesion had actually operated as a separate,
stand-alone entity during the periods covered. Per share data has not been
presented as no common shares are outstanding and such information would not be
meaningful.

The selected historical financial data should be read in conjunction with
the consolidated financial statements and related notes and "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Cohesion," included elsewhere in this Proxy Statement. In the opinion of
Cohesion's and the Company's management, the unaudited consolidated financial
statements as of June 30, 1993, 1994 and 1995 and as of December 31, 1997, for
the years ended June 30, 1993 and 1994 and for the six months ended December 31,
1996 and 1997, contain all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position and results of
operations for these periods.

51
<PAGE> 60

SELECTED HISTORICAL AND UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL DATA (CONTINUED)

COHESION SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------------------------------------- -----------------------
1993 1994 1995 1996 1997 1996 1997
----------- ----------- ----------- -------- -------- -------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- product sales.............. $ 1,198 $ 4,302 $ 3,546 $ 3,612 $ 2,527 $ 1,357 $ 1,234
Costs and expenses:
Cost of sales....................... 539 1,991 1,961 2,404 2,105 1,077 692
Research and development............ 2,957 3,284 3,416 4,268 9,627 6,071 7,402
General and administrative.......... 2,627 2,815 2,726 3,120 7,153 1,871 2,591
Purchased in-process research and
development....................... -- -- -- 3,000 -- -- 10,530
-------- -------- -------- -------- -------- -------- -----------
Total costs and expenses..... 6,123 8,090 8,103 12,792 18,885 9,019 21,215
-------- -------- -------- -------- -------- -------- -----------
Loss from operations.................. (4,925) (3,788) (4,557) (9,180) (16,358) (7,662) (19,981)
Other income (expense):
Net gain on investments, principally
Boston Scientific (Target
Therapeutics, Inc. ("Target")
prior to April 1997).............. 20,323 -- 5,110 82,093 9,063 9,222 8,775
Net gain on sale of investment in
Prograft Medical, Inc............. -- -- -- -- 15,395 -- --
Equity in earnings of Target(1)..... 1,455 1,675 2,417 1,430 -- -- --
Equity in losses of other
affiliates........................ (83) (762) (1,230) (1,824) (813) (598) (9)
Interest income..................... 29 25 25 378 566 343 236
Interest expense.................... (2,647) (1,530) (2,113) (2,532) (377) (188) --
-------- -------- -------- -------- -------- -------- -----------
Income (loss) before provision for
income taxes, minority interest and
cumulative effect of change in
accounting for income taxes......... 14,152 (4,380) (348) 70,365 7,476 1,117 (10,979)
Provision for income taxes............ 6,004 (475) 553 31,718 3,162 480 --
Minority interest..................... -- -- -- (27) (667) (235) --
Cumulative effect of change in
accounting for income taxes......... 959 -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -----------
Net income (loss)..................... $ 7,189 $ (3,905) $ (901) $ 38,674 $ 4,981 $ 872 $ (10,979)
======== ======== ======== ======== ======== ======== ===========
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
----------- ----------- ----------- -------- -------- ------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments......................... $ 575 $ 497 $ 491 $ 11,074 $ 13,798 $ 1,832
Working capital (deficiency).......... (19,803) (25,802) (30,530) 8,463 12,033 2,695
Investment in Boston Scientific
(Target prior to 1997)(1)(2)........ 15,823 17,499 17,570 65,841 83,874 66,815
Total assets.......................... 27,979 30,328 32,915 97,916 114,604 87,449
Long-term liabilities................. 6,859 7,413 8,206 27,260 35,131 28,023
Total stockholder's and parent company
equity (net capital deficiency)..... (750) (5,732) (8,560) 59,545 74,005 55,306
</TABLE>

- - - ---------------
(1) The first five months in fiscal 1996 and the 1993, 1994 and 1995 financial
information is presented with Target accounted for under the equity method.

(2) Includes $11,404 receivable from Cohesion's equity collar investment at
December 31, 1997.

52
<PAGE> 61
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA (CONTINUED)

COLLAGEN CORPORATION SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA

The tables below set forth selected historical financial data of the
Company. This information has been prepared from the audited consolidated
financial statements of the Company as of and for each of the five years in the
period ended June 30, 1997 and the unaudited consolidated financial statements
of the Company as of December 31, 1997 and for the six months ended December 31,
1996 and 1997 not included herein. The financial data below includes Cohesion.

This selected historical financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Collagen Corporation Consolidated Financial Statements and
related notes in the Company's Annual Report on Form 10-K for the year ended
June 30, 1997 and the Company's Quarterly Report on Form 10-Q for the six months
ended December 31, 1997. See "Available Information."

In the opinion of management of the Company, the unaudited consolidated
financial statements as of December 31, 1997 and for the six months ended
December 31, 1996 and 1997 included in the Company's Quarterly Report on Form
10-Q for the six months ended December 31, 1997, contain all adjustments
consisting only of normal recurring adjustments, necessary to present fairly the
financial position and results of operations for these interim periods.

Financial information for any given period should not be relied upon as
indicative of results for future periods.

53
<PAGE> 62
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA (CONTINUED)

COLLAGEN CORPORATION SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- -------- -------- ------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Product sales..................... $49,743 $64,552 $71,560 $ 68,730 $ 71,812 $35,842 $ 42,953
Other............................. -- 1,000 1,000 2,000 -- -- --
------- ------- ------- -------- -------- ------- --------
Total revenue.............. 49,743 65,552 72,560 70,730 71,812 35,842 42,953
Costs and expenses:
Cost of sales..................... 15,659 18,940 18,584 19,312 20,308 10,466 14,037
Research and development.......... 8,767 9,366 9,943 12,170 18,840 8,686 11,493
Selling, general and
administrative.................. 29,176 28,639 32,179 39,040 43,576 19,328 21,555
Purchased in-process research and
development..................... -- -- -- 17,800 -- -- 10,530
------- ------- ------- -------- -------- ------- --------
Total costs and expenses... 53,602 56,945 60,706 88,322 82,724 38,480 57,615
------- ------- ------- -------- -------- ------- --------
Income (loss) from operations....... (3,859) 8,607 11,854 (17,592) (10,912) (2,638) (14,662)
Other income (expense), net......... 22,171 241 4,346 82,047 24,126 9,054 9,129
------- ------- ------- -------- -------- ------- --------
Income (loss) before provision for
income taxes, minority interest
and change in accounting for
income taxes...................... 18,312 8,848 16,200 64,455 13,214 6,416 (5,533)
Provision for income taxes.......... 8,580 3,928 7,440 37,985 6,607 3,400 901
Minority interest................... -- -- -- (182) (764) (302) (27)
Cumulative effect of change in
accounting for income taxes....... (989) -- -- -- -- -- --
------- ------- ------- -------- -------- ------- --------
Net income (loss)................... $ 8,743 $ 4,920 $ 8,760 $ 26,652 $ 7,371 $ 3,318 $ (6,407)
======= ======= ======= ======== ======== ======= ========
Basic net income (loss) per
share(1).......................... $ 0.88 $ 0.51 $ 0.94 $ 2.99 $ 0.84 $ 0.38 $ (0.72)
Shares used in computing basic net
income (loss) per share(1)........ 9,957 9,592 9,270 8,915 8,804 8,827 8,857
Diluted net income (loss) per
share(1).......................... $ 0.85 $ 0.50 $ 0.93 $ 2.94 $ 0.83 $ 0.37 $ (0.72)
Shares used in computing diluted net
income (loss) per share(1)........ 10,267 9,896 9,460 9,075 8,930 8,963 8,857
</TABLE>

<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------------- DECEMBER 31,
1993 1994 1995 1996 1997 1997
------- ------- ------- -------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments............ $19,630 $12,736 $ 9,384 $ 25,367 $ 23,598 $ 12,732
Working capital..................... 24,557 16,227 14,396 27,574 32,242 24,194
Investment in Boston Scientific,
Inc. (Target Therapeutics, Inc.
prior to 1997)(2)................. 15,823 17,499 17,570 65,841 83,874 66,815
Total assets........................ 76,206 74,505 76,906 163,007 184,911 158,977
Long-term liabilities, excluding
minority interest................. 8,784 9,507 9,972 31,118 39,243 29,941
Total stockholders' equity.......... 54,936 49,082 47,920 103,001 119,897 103,475
</TABLE>

- - - ---------------
(1) As restated for the adoption of Financial Accounting Standards Board
Statement No. 128, "Earnings Per Share."

(2) Includes $11,404 receivable from the Company's equity collar investment at
December 31, 1997.

54
<PAGE> 63
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA (CONTINUED)

COHESION SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The tables below set forth selected unaudited pro forma consolidated
financial data of Cohesion. The pro forma information presented is theoretical
in nature and not necessarily indicative of the future results of operations or
financial position of Cohesion or the results of operations and financial
position which would have resulted had Cohesion been a stand-alone company
during the periods presented. The pro forma financial data reflects the effects
of the January 1, 1998 contribution by the Company to Cohesion under the terms
of the Distribution Agreement and includes certain additions and adjustments to
the historical results related to (i) transfer price arrangements under
Cohesion's supply agreements with the Company, and (ii) research and development
expenses associated with the reimbursement of costs under Cohesion's development
arrangements with the Company. The pro forma statement of operations data
assumes that the Spinoff occurred prior to July 1, 1996. The pro forma balance
sheet data assumes that the Spinoff occurred on December 31, 1997. This
information has been prepared from the unaudited pro forma consolidated
financial information of Cohesion included elsewhere in this Proxy Statement.

The pro forma financial data should be read in conjunction with the
unaudited pro forma consolidated financial information and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of Cohesion" included elsewhere in this Proxy Statement.

55
<PAGE> 64
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA (CONTINUED)

COHESION SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1997
------------------------------------ ------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- product sales............... $ 2,527 $ -- $ 2,527 $ 1,234 $ -- $ 1,234
Costs and expenses:
Cost of sales........................ 2,105 (589) 1,516 692 48 740
Research and development............. 9,627 (1,313) 8,314 7,402 (1,015) 6,387
General and administrative........... 7,153 -- 7,153 2,591 -- 2,591
Purchased in-process research and
development........................ -- -- -- 10,530 -- 10,530
-------- ------- -------- -------- ------- --------
Total costs and expenses...... 18,885 (1,902) 16,983 21,215 (967) 20,248
-------- ------- -------- -------- ------- --------
Loss from operations................... (16,358) 1,902 (14,456) (19,981) 967 (19,014)
Other income (expense):
Net gain on investments, principally
Boston Scientific Corporation...... 9,063 -- 9,063 8,775 -- 8,775
Net gain on sale of investment in
Prograft Medical, Inc.............. 15,395 -- 15,395 -- -- --
Equity in losses of other
affiliates......................... (813) -- (813) (9) -- (9)
Interest income...................... 566 -- 566 236 -- 236
Interest expense..................... (377) -- (377) -- -- --
-------- ------- -------- -------- ------- --------
Income (loss) before provision for
income taxes and minority interest... 7,476 1,902 9,378 (10,979) 967 (10,012)
Provision for income taxes............. 3,162 723 3,885 -- -- --
Minority interest...................... (667) -- (667) -- -- --
-------- ------- -------- -------- ------- --------
Net income (loss)...................... $ 4,981 $ 1,179 $ 6,160 $(10,979) $ 967 $(10,012)
======== ======= ======== ======== ======= ========
Basic net income (loss) per share(1)... $ 0.70 $ (1.13)
======== ========
Diluted net income (loss) per
share(1)............................. $ 0.69 $ (1.13)
======== ========
Shares used in computing basic net
income (loss) per share(1)........... 8,804 8,857
======== ========
Shares used in computing diluted net
income (loss) per share(1)........... 8,930 8,857
======== ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
BALANCE SHEET DATA: -----------------
<S> <C>
Cash, cash equivalents and short-term investments........... $ 1,832
Working capital............................................. 2,695
Investment in Boston Scientific(2).......................... 66,815
Total assets................................................ 87,449
Long-term liabilities....................................... 28,023
Total stockholder's and parent company equity............... 55,306
</TABLE>

- - - ---------------
(1) See Note 5 of Notes to Unaudited Pro Forma Consolidated Financial
Information for a description of the basis of determining net income (loss)
per share information.

(2) Includes $11,404 receivable from Cohesion's equity collar investment.

56
<PAGE> 65
SELECTED HISTORICAL AND UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL DATA (CONTINUED)

COLLAGEN CORPORATION SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA

The tables below set forth selected unaudited pro forma consolidated
financial data of the Company. The pro forma information presented is
theoretical in nature and not necessarily indicative of the future results of
operations or financial position of the Company or the results of operations and
financial position which would have resulted had Cohesion been spun off prior to
the periods presented. The pro forma financial data reflects the effects of the
January 1, 1998 contribution by the Company to Cohesion under the terms of the
Distribution Agreement, and includes certain additions and adjustments to the
historical results related to (i) transfer price arrangements under Cohesion's
supply agreements with the Company, and (ii) research and development expenses
associated with the reimbursement of costs under Cohesion's development
arrangements with the Company. The pro forma statement of operations data
assumes that the Spinoff occurred prior to July 1, 1996. The pro forma balance
sheet data assumes that the Spinoff occurred on December 31, 1997. You should
not rely on the pro forma information as being indicative of the historical
results that the Company would have had if the Spinoff had occurred prior to
July 1, 1996, or the future results that the Company will experience after the
Spinoff. This information has been prepared from the unaudited pro forma
consolidated financial information of the Company included elsewhere in this
Proxy Statement.

The pro forma financial data should be read in conjunction with the
unaudited pro forma consolidated financial information and related notes
included elsewhere in this Proxy Statement. See "Collagen Corporation Unaudited
Pro Forma Consolidated Financial Information" as of December 31, 1997 and for
the year ended June 30, 1997 and the six months ended December 31, 1997.

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 SIX MONTHS ENDED DECEMBER 31, 1997
----------------------------------------- -----------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
(AFTER SPINOFF) ADJUSTMENTS PRO FORMA (AFTER SPINOFF) ADJUSTMENTS PRO FORMA
--------------- ----------- --------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue -- product sales........... $69,285 $ 1,516 $70,801 $41,719 $ 740 $42,459
Costs and expenses:
Cost of sales.................... 18,203 2,105 20,308 13,345 692 14,037
Research and development......... 9,213 1,313 10,526 4,091 1,015 5,106
Selling, general and
administrative................. 36,423 -- 36,423 18,964 -- 18,964
------- ------- ------- ------- ------- -------
Total costs and
expenses................ 63,839 3,418 67,257 36,400 1,707 38,107
------- ------- ------- ------- ------- -------
Income from operations............. 5,446 (1,902) 3,544 5,319 (967) 4,352
Other income (expense):
Equity in losses of other
affiliates..................... (157) -- (157) (140) -- (140)
Interest income.................. 545 -- 545 301 -- 301
Interest expense................. (96) -- (96) (34) -- (34)
------- ------- ------- ------- ------- -------
Income before provision for income
taxes and minority interest...... 5,738 (1,902) 3,836 5,446 (967) 4,479
Provision for income taxes......... 3,445 (723) 2,722 901 -- 901
Minority interest.................. (97) -- (97) (27) -- (27)
------- ------- ------- ------- ------- -------
Net income................ $ 2,390 $(1,179) $ 1,211 $ 4,572 $ (967) $ 3,605
======= ======= ======= ======= ======= =======
Basic net income per share......... $ 0.14 $ 0.41
======= =======
Diluted net income per share....... $ 0.14 $ 0.40
======= =======
Shares used in computing basic net
income per share................. 8,804 8,857
======= =======
Shares used in computing diluted
net income per share............. 8,930 8,968
======= =======
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1997
BALANCE SHEET DATA: -----------------
<S> <C>
Cash, cash equivalents and short-term investments........... $10,900
Working capital............................................. 21,499
Total assets................................................ 71,528
Long-term liabilities, excluding minority interest.......... 1,918
Total stockholders' equity.................................. 48,169
</TABLE>

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<PAGE> 66

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF COHESION

OVERVIEW

The following discussion should be read in conjunction with the
Consolidated Financial Statements of Cohesion and the related notes and the
other information included elsewhere in this Proxy Statement. Certain statements
in this Management's Discussion and Analysis of Financial Condition and Results
of Operations are forward-looking. The forward-looking statements contained
herein are based on current expectations and entail various risks and
uncertainties that could cause actual results to differ materially from those
expressed in such forward-looking statements. For a more detailed discussion of
these and other business risks, see "Risk Factors."

Cohesion is focused on developing and commercializing proprietary surgical
products, including bioresorbable hemostatic devices and biosealants for tissue
repair and regeneration, to increase the effectiveness of and minimize
complications following open and minimally invasive surgeries. CoStasis
atraumatic hemostat, Cohesion's lead hemostatic product, designed for use
initially in cardiothoracic indications, is currently in a multi-site,
randomized, pivotal clinical trial in Europe. In 1998, Cohesion expects to
complete the trial and file for CE Mark. Cohesion has received an IDE from the
FDA and has commenced U.S. pivotal trials targeting cardiac, hepatic, orthopedic
and general surgery indications. CoSeal surgical sealant, Cohesion's lead
biosealant product designed for sealing organs and other tissues resulting from
surgical wounds and incisions, is expected to commence European clinical trials
by the end of 1998. Industry experts estimate that the annual potential
worldwide market for fibrin sealants and surgical adhesives is $850 million.
Industry experts also estimate the annual potential surgical sealant marketplace
is $650 million. Cohesion believes its surgical products will provide several
distinct advantages over currently available technologies, including ease of
preparation and use, novel delivery systems, improved safety profiles and
clinical effectiveness. Cohesion also sells Collagraft implant, an orthopedic
product, and has research and development programs in other orthopedic areas and
in recombinant human collagen and thrombin. Cohesion's products and programs are
based on a platform of proprietary technologies centered around collagen and
hydrophilic polymers that quickly polymerize in vivo and bind to tissue.

Prior to the Spinoff, Cohesion has been a wholly-owned subsidiary of the
Company. In October 1997, the Company announced that it would proceed to
separate its Aesthetic Technologies Group and its Collagen Technologies Group
into two independent, publicly-traded companies. The Spinoff is designed to
separate two distinct businesses with significant differences in their markets,
products, research needs, investment needs, employee retention and compensation
plans and plans for growth. The Company's Board believes the separation into two
independent companies will enhance the ability of each to focus on strategic
initiatives and new business opportunities, improve cost structures and
operating efficiencies and create incentives that are more attractive and
appropriate for the recruitment and retention of key employees. As a
consequence, the Company believes that investors will be able to evaluate better
the merits of the two groups of businesses and their future prospects. In
December 1997, the Company purchased substantially all of the remaining
outstanding shares of Cohesion Corp. Effective January 1, 1998, the Company
contributed Cohesion's businesses to Cohesion pursuant to the terms of the
Distribution Agreement. A description of the assets and liabilities contributed
by the Company to Cohesion is contained in Note 1 of Notes to Consolidated
Financial Statements.

Cohesion's historical financial position and results of operations
discussed in this Proxy Statement and the financial statements and related notes
included in this Proxy Statement reflect the historical operations of Cohesion's
businesses contributed by the Company to Cohesion. Prior to being contributed to
Cohesion by the Company, Cohesion's businesses were part of the Collagen
Technologies Group. In particular, this Management's Discussion and Analysis of
Financial Condition and Results of Operations reflects the historical results of
that operating group for all years presented as if the contribution of
Cohesion's businesses by the Company to Cohesion had occurred on July 1, 1992.
(See Note 1 of Notes to Consolidated Financial Statements).

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<PAGE> 67

RESULTS OF OPERATIONS

Six Months Ended December 31, 1996 and 1997

Revenues were $1.4 million and $1.2 million for the six months ended
December 31, 1996 and 1997, respectively. Sales of Collagraft bone graft
products were $1.0 million and $952,000 for the six months ended December 31,
1996 and 1997, respectively. The decreases were attributed to lower sales of
Collagraft by Zimmer, and therefore, lower sales from Cohesion to Zimmer.
Cohesion expects sales of Collagraft in fiscal 1998 to be at similar levels to
fiscal 1997.

A number of uncertainties exist surrounding the marketing and distribution
of Collagraft bone graft products. Cohesion's primary means of distribution for
the products is through a third party firm, Zimmer. Cohesion's business and
financial results could be adversely affected in the event that Zimmer is unable
to market the product effectively, anticipate customer demand accurately, or
effectively manage industry-wide pricing and cost containment pressures in
health care.

Cost of sales was 79% and 56% of sales for the six months ended December
31, 1996 and 1997, respectively. The decrease in cost of sales as a percentage
of sales primarily was due to lower unit costs.

Research and development ("R&D") spending represents program-specific costs
and other indirect R&D costs related to Cohesion's businesses and allocated to
Cohesion. The allocation of indirect costs is based on headcount associated with
specific R&D programs and specific identifiable costs. R&D spending was $6.1
million and $7.4 million for the six months ended December 31, 1996 and 1997,
respectively. The increase in R&D spending primarily was due to increased
activity in the tissue adhesive and biosealant programs, and the recombinant
human collagen program. Cohesion expects R&D spending in fiscal 1998 to be at
levels higher than fiscal 1997 as a result of increased activities in these
programs.

General and administrative ("G&A) expenses were $1.9 million and $2.6
million for the six months ended December 31, 1996 and 1997, respectively. G&A
costs represent an allocation of the Company's expenses to Cohesion derived
primarily as a function of headcount and specific identifiable costs. The
increase in spending was due to non-recurring costs associated with the Spinoff.
Future levels of G&A spending will depend on various factors, including the
level of product sales.

The charge for purchased in-process research and development ("in-process
R&D") of $10.5 million in the six months ended December 31, 1997 was a
non-recurring charge related to the purchase of substantially all of the
remaining shares in Cohesion Corp., including compensation expense associated
with the purchase of certain vested employee stock options.

Gains on sales of investments were $9.2 million and $8.8 million for the
six months ended December 31, 1996 and 1997, respectively, primarily resulting
from the sale of 330,000 and 157,340 shares of Target Therapeutics, Inc.
("Target") and Boston Scientific common stock, respectively. In April 1997,
Target was acquired by Boston Scientific and, as a result, the Company received
approximately 1,365,200 shares of Boston Scientific common stock. Cohesion may
defer further sales of Boston Scientific common stock over the next few quarters
in an effort to optimize tax planning in connection with the Spinoff, although
decisions concerning prospective Boston Scientific common stock sales will also
be affected by the then-current market price of Boston Scientific common stock.

Interest income was approximately $343,000 and $236,000 for the six months
ended December 31, 1996 and 1997, respectively. The decrease in interest income
primarily was due to lower average cash, cash equivalent, and short-term
investment balances.

The effective tax rate for the six months ended December 31, 1996 was 43%
which considers the tax effects of nondeductible expenses such as equity losses
in affiliates. Cohesion recorded no provision or benefit for income taxes on an
$11.0 million loss before taxes for the six months ended December 31, 1997 based
upon Cohesion's anticipated pre-tax operating loss for the year and excluding
nondeductible expenses, such as equity losses in affiliates and in-process R&D
charges related to the increase in ownership of Cohesion Corp.

Following the Spinoff and approval by Cohesion's Board of Directors,
Cohesion anticipates offering to exchange or substitute the outstanding options
of Cohesion Corp. for options to acquire approximately

59
<PAGE> 68

620,000 shares of Cohesion Common Stock. The new options are expected to have an
exercise price substantially less than the fair market value of Cohesion's
shares at the time of such exchange, based on an assumed exchange ratio of 1.67
to 1 as anticipated and to be determined by the Cohesion Board. Assuming such
offers are accepted by the Cohesion Corp. option holders and assuming an
expected fair value of $10.00 per share at the date of the exchange, Cohesion
expects to record a non-cash compensation expense of approximately $1.5 million
at the date of the exchange in connection with vested options and an additional
$4.5 million of deferred compensation to be amortized during the next three
fiscal years.

Fiscal Years Ended June 30, 1995, 1996 and 1997

Revenues were $3.5 million, $3.6 million and $2.5 million for fiscal years
1995, 1996 and 1997, respectively. Sales of Collagraft bone graft products in
fiscal 1996 increased $100,000 from fiscal 1995 sales of $3.0 million. Sales of
Collagraft in fiscal 1997 were $1.9 million, a decrease of $1.2 million or 39%
from fiscal 1996 sales of $3.1 million. The $1.2 million decrease in fiscal 1997
over fiscal 1996 was due to lower sales of Collagraft by Zimmer and the
consequent decrease in sales from Cohesion to Zimmer.

Cost of sales as a percentage of sales was 55%, 67%, and 83% for fiscal
years 1995, 1996 and 1997, respectively. The increase in cost of sales as a
percentage of sales in fiscal 1996 over 1995 and fiscal 1997 over 1996 was due
primarily to higher unit costs.

R&D expenses increased by $852,000 or 25% in fiscal 1996 over fiscal 1995
primarily due to increased spending in the recombinant human collagen program.
R&D spending was $9.6 million in fiscal 1997, compared with $4.3 million in
fiscal 1996, an increase of $5.3 million or 126%. This increase was primarily
attributable to the inclusion of a full year of R&D expenses for the tissue
adhesive and biosealant programs as a result of the Company increasing its
ownership percentage in Cohesion Corp. to 81% in May 1996, and, to a lesser
extent, efforts in the recombinant human collagen and orthopedic programs in
fiscal 1997.

G&A expenses were $2.7 million, $3.1 million and $7.2 million in fiscal
1995, 1996, and 1997, respectively. G&A expenses increased $394,000 or 14% from
fiscal 1995 to fiscal 1996, due primarily to the Matrix Pharmaceuticals, Inc.
("Matrix") lawsuit legal fees and the addition of a Chief Operating Officer. G&A
expenses increased $4.1 million or 129%, from fiscal 1996 to fiscal 1997, due
primarily to payments made to the Company's former Chief Executive Officer,
Howard Palefsky, in accordance with Mr. Palefsky's separation agreement and
costs associated with existing loans to Mr. Palefsky, which payments were
allocated to Cohesion pursuant to the Distribution Agreement. By agreement, Mr.
Palefsky will continue to serve as a consultant to Cohesion during the next two
years, and as a result, Cohesion will make cash payments to Mr. Palefsky during
fiscal 1998 and 1999 totaling $575,000 and $233,000, respectively. Cohesion has
agreed to forgive all indebtedness owed by Mr. Palefsky to the Company (and
assigned to Cohesion effective January 1, 1998) subject to certain conditions.
(See Note 1 of Notes to Consolidated Financial Statements.) The increase in
fiscal 1997 spending was also attributed to legal expenses incurred in
connection with a lawsuit with Matrix. In May 1997, the Company settled its
lawsuit with Matrix, which had been pending since December 1994. The lawsuit
involved the Company's claims of trade secret misappropriation against Matrix
and two former Company employees hired by Matrix in 1992, as well as
cross-complaints against the Company by Matrix and the two employees for
defamation and violation of state unfair competition law. The Company granted
Matrix a nonexclusive license to certain intellectual property (which was
transferred to Cohesion effective January 1, 1998) for certain nonmonetary
consideration. The lawsuit was settled and dismissed with prejudice. All claims
by and against all parties have been released. G&A expenses are expected to
remain relatively constant in fiscal 1998 due to reductions in costs associated
with the Spinoff, and expenses associated with Mr. Palefsky, offset by
anticipated increased expenses associated with operating as a public company.

The charge for purchased in-process R&D of $3.0 million in fiscal 1996
related to the increase in ownership in Cohesion Corp. from approximately 40% to
81%.

Gains on sales of investments were $5.1 million, $82.1 million and $24.5
million in fiscal 1995, 1996 and 1997, respectively. In fiscal 1995, Cohesion
sold 245,000 shares of common stock of Target and recorded a net pre-tax gain on
investments of $5.1 million (after the recording of a $925,000 reduction in the
carrying value

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<PAGE> 69

of certain equity investments due to a decline in value determined to be other
than temporary.) In fiscal 1996, Cohesion recorded a net pre-tax gain on
investments of $82.1 million (after the recording of a $4.0 million reduction in
the carrying value of certain equity investments due to a decline in value
determined to be other than temporary), resulting primarily from the sale of
1,792,000 shares of Target common stock. In fiscal 1997, Cohesion's net pre-tax
gain on investments of $24.5 million, primarily resulted from the sale of
330,000 shares of Target common stock and the sale of Cohesion's holdings in
Prograft Medical, Inc. ("Prograft") to W.L. Gore and Associates, Inc.

Equity in earnings of Target were $1.4 million in fiscal 1996 compared to
$2.4 million in fiscal 1995. Equity in Target's earnings decreased in fiscal
1996 over fiscal 1995 due to the Company's ownership percentage falling from
approximately 29% at June 30, 1995 to approximately 11% in June 30, 1996. In
December 1995, when the Company's ownership interest fell below 20%, the Company
changed from the equity to the cost method of accounting for its investment in
Target.

Equity in losses of other affiliate companies were $1.2 million, $1.8
million and $813,000 for fiscal 1995, 1996 and 1997, respectively. Equity losses
in other affiliate companies increased in fiscal 1996 over fiscal 1995 due to
higher Cohesion Corp. losses. The decrease in equity losses in fiscal 1997 was
due to the elimination of equity losses from Cohesion Corp. as a result of the
Company increasing its ownership percentage to 81% in May 1996 and such losses
being consolidated thereafter.

Interest income was $25,000, $378,000 and $566,000 in fiscal 1995, 1996 and
1997, respectively. The increases were due primarily to higher average cash,
cash equivalent, and short-term investment balances and higher interest rates.

Interest expense was $2.1 million, $2.5 million, and $377,000 in fiscal
1995, 1996 and 1997, respectively. Interest expense in fiscal 1995 represents
interest on parent company borrowings. Interest expense in fiscal 1996 related
primarily to borrowings under the Company's $15.0 million revolving credit
facility, which was paid in full and canceled in June 1997, and interest on
parent company borrowings. Interest expense in fiscal 1997 related only to
borrowings under the Company's $15.0 million revolving credit facility. The
revolving line of credit was allocated to Cohesion because the credit facility
was secured by shares of Target Common Stock, which were also allocated to
Cohesion.

Cohesion recorded an income tax provision of $0.6 million for fiscal 1995
on a pretax loss of $0.3 million. The provision for income taxes relates
primarily to equity losses in affiliates which are not deductible for tax
purposes. Cohesion's effective income tax rate was approximately 42% for fiscal
1997 compared to 45% for fiscal 1996. The higher effective tax rate in fiscal
1996 primarily was due to the impact of non-deductible items such as equity
losses in affiliates and in-process research and development charges related to
the increase in ownership of Cohesion Corp.

LIQUIDITY AND CAPITAL RESOURCES

On January 1, 1998, the Company contributed to Cohesion, cash, cash
equivalents and short-term investments of $1.8 million, certain equity
investments, including Boston Scientific common stock and Innovasive common
stock, as well as the agreement with Zimmer regarding the distribution of
Collagraft. Cohesion expects to rely upon proceeds from the sale of these
investments, as well as revenues from the sale of Collagraft, for future working
capital, capital expenditures and other corporate purposes. Cohesion had a $5.0
million loan outstanding on a $15 million revolving credit facility during
fiscal 1996 and 1997, however, the balance was paid in full and canceled in June
1997.

For the six months ended December 31, 1997, cash used in investing
activities primarily related to the acquisition of substantially all of the
remaining outstanding shares of Cohesion Corp. totaling $10.5 million, capital
expenditures and investments in and loans to affiliates of $866,000, and the
purchases of short-term investments of $3.6 million, partially offset by
proceeds of $9.4 million (net of taxes paid) from the sale of 157,340 shares of
common stock of Boston Scientific, proceeds of $4.6 million received from the
sale of short-term investments, and proceeds of approximately $704,000 from the
sale of shares in affiliates. Subsequent to

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December 31, 1997 and through March 31, 1998, Cohesion sold 90,000 shares of
Boston Scientific stock which provided cash proceeds of $5.4 million.

At June 30, 1997, cash, cash equivalents and short-term investments were
$13.8 million compared to $11.1 million at June 30, 1996. Net cash used in
operating activities was $6.5 million and $6.1 million for fiscal 1996 and
fiscal 1997, respectively.

For fiscal 1997, the $6.1 million used in operating activities was mainly
attributable to a $7.3 million net loss after adjusting for depreciation and
amortization expense, equity in losses of affiliate companies, and gain on
investments (net of taxes paid), partially offset by a $1.6 million decrease in
receivables primarily related to the sales of Target common stock. The principal
sources of cash for investing and financing activities in fiscal 1997 were the
proceeds of $5.6 million (net of taxes paid) from the sale of 330,000 shares of
Target common stock and proceeds of $9.8 million from the sale of holdings in
Prograft, partially offset by the repayment of the line of credit of
approximately $5.0 million and capital and intangible asset expenditures and
additional investments in and loans to affiliates of approximately $1.6 million.
Cohesion anticipates capital expenditures, equity investments in, and loans to
affiliate companies to be approximately $4.0 million in fiscal 1998.

Cohesion's principal sources of liquidity include sales of Boston
Scientific stock, and its cash, cash equivalents and short-term investments.
During fiscal 1995, 1996 and 1997, Cohesion sold an aggregate of 3,312,500
shares of Target common stock (adjusted for a two-for-one stock split) for an
aggregate pre-tax gain of approximately $101.1 million ($116.6 million proceeds
less cost basis of $15.5 million). As a result of the acquisition of Target by
Boston Scientific in April 1997, the Company received approximately 1,365,200
shares of Boston Scientific common stock in exchange for the Company's 1,275,888
shares of Target common stock. Cohesion anticipates that stock sales will be
made from time to time, with the objective of generating cash for, among other
things, further investments in both current and new affiliate companies.
Cohesion may defer further sales of Boston Scientific common stock during fiscal
1998 for tax planning purposes, although decisions concerning prospective Boston
Scientific common stock sales will also be affected by the then-current market
price of Boston Scientific common stock. As another source of financing,
Cohesion may establish a credit facility in the future, although there can be no
assurance that a line of credit will be available to Cohesion on acceptable
terms, if at all.

Cohesion's capital requirements will depend on numerous factors, including
the progress of Cohesion's clinical research and product development programs,
the extent to which Cohesion enters into collaborative relationships with third
parties and the scope of Cohesion's obligations in such relationships, the
receipt of, and the time required to obtain, regulatory clearances and
approvals, the resources required to protect Cohesion's intellectual property
and other factors. The timing and amount of such capital requirements cannot be
accurately predicted.

Cohesion believes that its current sources of liquidity should be adequate
to fund its anticipated capital requirements through at least the next two
years. However, during this period and thereafter, Cohesion may require
additional financing. Cohesion does not anticipate significant capital
expenditures in the near term, however, it may make investments in businesses
and technologies that are necessary to support its objectives. There can be no
assurance that additional financing will be available to Cohesion on acceptable
terms, if at all.

INVESTMENTS, ACQUISITIONS AND LICENSING AGREEMENTS

The Company increased its ownership position in Cohesion Corp. from
approximately 40% to 81% in May 1996 and from 81% to approximately 99% in
December 1997. In connection with the Company's May 1996 and December 1997
investments and purchases of Cohesion Corp. shares, $3.0 million and $10.5
million, respectively, of the purchase prices were allocated to in-process
research and development, which was expensed at the time of the purchases,
including compensation amounts associated with the purchase of employee stock
options in December 1997.

Cohesion determined the amounts to be allocated to in-process technology
for Cohesion Corp. based on whether technological feasibility had been achieved
and whether there was any alternative future use for the technology. Cohesion
concluded that the in-process technology had no alternative future use after
taking into

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<PAGE> 71

consideration the potential for both usage of the technology in different
products and for resale of the technology. Such studies are still preliminary
and are subject to revision.

Seeking to capitalize on technical success in expressing recombinant
collagen in mouse milk, in February 1996, the Company made an additional equity
investment of approximately $4.5 million in Pharming B.V. of The Netherlands
("Pharming"), which brought the Company's ownership percentage in Pharming to
approximately 12%. At December 31, 1997 the Company's ownership position in
Pharming was approximately 10%, which included an additional $500,000 invested
during the quarter ended December 31, 1997. Pharming is dedicated to the
development and worldwide commercialization of human health care products
produced in transgenic animals. Cohesion and Pharming will attempt to produce
collagen in the milk of transgenic cattle.

In October 1995, the Company purchased approximately 844,000 shares of
common stock, representing approximately 9% of the outstanding capital stock of
Innovasive for $4.1 million and entered into a collaborative product development
agreement. Innovasive develops, manufactures and markets tissue and bone
reattachment systems that are particularly relevant to the sports medicine and
arthroscopy segments of the orthopedic surgery market. Cohesion, pursuant to the
Distribution Agreement, assumed the Company's relationship and obligations with
Innovasive. Cohesion and Innovasive are collaborating to develop certain
resorbable mechanical tissue-fixation devices utilizing collagen-based
biomaterials for applications in orthopedic tissue repairs. Cohesion is
performing development activities in accordance with a project plan and
Innovasive is reimbursing Cohesion for such activities in accordance with the
project budget. Accordingly, over the next several years, the collaboration will
require Cohesion's expertise with collagen-based biomaterials and a small
percentage of Cohesion's R&D expenditures. In the event that marketable products
are developed as a result of this collaboration, Cohesion will have the right
but not the obligation to manufacture such products.

In June 1997, Cohesion sold its 21% investment in Prograft, a privately
held affiliate, to W.L. Gore and Associates, Inc. and recorded a pre-tax gain of
$15.4 million. Prograft was formed in July 1993 by the Company, Target and
Celtrix Pharmaceuticals, Inc. to develop vascular prostheses, including stents,
grafts, and stent-grafts for the treatment of diseased and damaged blood
vessels.

YEAR 2000

Under the Services Agreement, Cohesion will use the Company's computer
systems until June 30, 1999. Subsequent to June 30, 1999, Cohesion may extend
the terms of the Services Agreement or elect to purchase its own computer
systems. Some of the Company's older computer programs were written using two
digits rather than four to define the applicable year. As a result, those
computer programs have time-sensitive software that recognize a date using "00"
as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar business activity.

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BUSINESS AND PROPERTIES OF COHESION AFTER THE SPINOFF

OVERVIEW

Cohesion is focused on developing and commercializing proprietary surgical
products, including bioresorbable hemostatic devices and biosealants for tissue
repair and regeneration, which increase the effectiveness of and minimize
complications following open and minimally invasive surgeries. CoStasis,
Cohesion's lead hemostatic product candidate, designed for use initially in
cardiothoracic indications, is currently in a multi-site, randomized, pivotal
clinical trial in Europe. In 1998, Cohesion expects to complete the trial and
file for CE Mark. Cohesion has received an IDE from the FDA and has commenced
U.S. pivotal trials of CoStasis targeting cardiac, hepatic, orthopedic and
general surgery indications. CoSeal, Cohesion's lead biosealant product
candidate designed for sealing organs and other tissues resulting from surgical
wounds and incisions, is expected to commence European clinical trials by the
end of 1998. Industry experts estimate that the potential worldwide market for
fibrin sealants and surgical adhesives is $850 million annually. Industry
experts also estimate that the potential surgical sealant marketplace is $650
million annually. Cohesion believes its surgical products will provide several
distinct advantages over currently available technologies, including ease of
preparation and use, novel delivery systems, improved safety profiles and
clinical effectiveness. Cohesion also sells Collagraft, an orthopedic product,
and has research and development programs in other orthopedic areas and in
recombinant human collagen and thrombin. Cohesion's products and programs are
based on a platform of proprietary technologies centered around collagen and
hydrophilic polymers that quickly polymerize in vivo and bind to tissue.

Cohesion's principal subsidiary, Cohesion Corp. was founded in December
1993, initially under the name Otogen, by Rodney Perkins, M.D. and the Company
to focus on the development of medical devices in the fields of otology and
neurosurgery. In January 1996, this focus was shifted primarily to the fields of
hemostasis, biosealants and adhesion prevention devices, and Otogen's name was
changed to Cohesion Corp. In December 1997 the Company increased its interest in
Cohesion Corp. to approximately 99%. Effective January 1, 1998, the Company
contributed to Cohesion all of its holdings of Cohesion Corp. capital stock, its
research and development programs for surgical biomaterials, various orthopedic
and recombinant human collagen projects and its Collagraft bone graft matrix
products. The Company also contributed to Cohesion its equity interests in
Boston Scientific and Innovasive, which had an aggregate market value of $83.9
million at March 31, 1998. Cohesion and the Company entered into the
Intercompany Agreements to govern certain ongoing matters between the two
entities and provide a mechanism for transitioning license, supply,
distribution, research and development, tax, service and other arrangements. See
"Relationship Between the Company and Cohesion After the Spinoff."

PRODUCTS AND DEVELOPMENT PROGRAMS

Hemostatic Devices

The current U.S. market for hemostatic devices, which are used during
surgery to stop diffuse bleeding and seal wounds, is served by a limited range
of collagen-based sponge and powder products which, although widely used, have
limited effectiveness and can be difficult to apply. Outside of the U.S., a
broader range of autologous and homologous fibrin sealant products are used, but
are time-consuming to prepare, difficult to use, and provide less effective
tissue adherence than needed in diverse clinical settings. Fibrin sealants
provide a liquid, atraumatic hemostat which flows across tissue surfaces and
provides a fibrin matrix. Cohesion believes that CoStasis, a collagen based
hemostatic sealant, can offer distinct advantages over fibrin sealants and
currently available products in the U.S., including faster hemostasis, greater
mechanical strength, enhanced product safety and improved preparation, handling
and performance characteristics. In Europe, Cohesion is conducting a multi-site,
randomized, pivotal clinical trial with CoStasis in open heart surgeries with
approximately 100 patients. Cohesion plans to complete these trials and file for
CE Mark by the end of 1998. Cohesion has received approval for its IDE from the
FDA and has commenced U.S. pivotal clinical trials targeting cardiac, hepatic,
orthopedic and general surgery indications.

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Biosealants

Biosealants are used to seal organs to prevent leakage of bodily fluids
through wounds or incisions from surgery. Predominant applications include
sealing the sutured closure (anastomoses) of blood vessels, intestines, and
fallopian tubes, as well as organ incisions in cardiovascular surgery, abdominal
and pelvic surgery, neurosurgery and urology. Although industry experts estimate
the worldwide market for surgical wound closure products to be over $2.0 billion
annually, a relatively small number of biosealants are being widely
commercialized due to limitations inherent in the underlying technology.
Industry experts estimate that 1.5 million surgeries in the U.S. are sealant
candidates. Cohesion is also developing CoSeal, a biosealant based on Cohesion's
proprietary reactive polyethylene-glycol ("PEG")-polymer technology, which
Cohesion believes can offer distinct advantages over current procedures,
including complete resorbability, improved elasticity, sealing strength, general
tissue adherence and greater ease of application. Cohesion is conducting
preclinical studies with CoSeal and has developed a series of prototypes. It
plans to commence European clinical trials by the end of 1998.

Orthopedics

Cohesion's commercialized Collagraft implant product is a collagen-based
bone graft substitute designed to provide a scaffolding around which new bone
can grow, thereby eliminating the need for painful autograft procedures.
Pursuant to the terms of the Intercompany Agreements, Cohesion has agreed to
assume the Company's relationship with the marketing partner for Collagraft,
Zimmer. Cohesion is also developing a collagen-based bone anchor product with
Innovasive. Additionally, Cohesion is conducting research and development
activities in the treatment of osteoarthritis, the most prevalent form of
arthritis in the U.S., and completed a European feasibility study involving 30
patients in 1997.

Other Development Programs

Cohesion is conducting preclinical studies with an adhesion prevention
barrier product, CoStop, based on its proprietary PEG-polymer technology,
designed to prevent the formation of debilitating or painful internal tissue
adhesions after surgery. According to Medical Data International an estimated
4.5 million U.S. surgeries each year are at risk for adhesion formation,
including most abdominal and gynecological surgeries, as well as many
cardiothoracic and orthopedic surgeries. Cohesion also is conducting preclinical
studies with a resorbable sealant for use in vascular catheterization procedures
to prevent post-operative bleeding. Cohesion is also developing recombinant
human collagen and thrombin to serve as an alternative to bovine collagen and
bovine thrombin in its products in an effort to develop a wider range of
innovative surgical products.

OBJECTIVES AND STRATEGY

Cohesion's objective is to develop, manufacture and commercialize
innovative tissue repair and regeneration products, with the initial goal of
rapidly exploiting its proprietary technology in the areas of surgical hemostats
and sealants. Cohesion's strategy consists of the following key elements:

Initial Focus on Large Markets

Cohesion is focusing its near-term resources initially on the commercial
development of hemostatic and sealant products for cardiothoracic and other
surgical procedures. Cohesion estimates that there are approximately 9.3 million
open and minimally invasive cardiovascular, hepatic, orthopedic and general
surgeries performed each year in the U.S. in which hemostatic products may be
used and approximately 1.4 million such surgeries performed each year in the
U.S. in which sealant products may be used. Cohesion believes that hemostatic
and sealant products with cardiothoracic and cardiovascular surgery indications
will represent the largest segment worldwide.

Leverage Competitive Advantages

Cohesion is conducting a 100-patient, multi-center, randomized clinical
trial of CoStasis in Europe, controlled against conventional medical practices,
including fibrin sealants, and expects to differentiate its

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products through ease of preparation, novel delivery systems, clinical
effectiveness and safety. CoStasis uses autologous plasma (derived from the
patient), as opposed to homologous plasma (derived from pooled blood sources),
thereby eliminating the potential contamination risks inherent in the use of
pooled blood-derived products. Cohesion anticipates finishing its European
clinical trial of CoStasis and filing for CE Mark by the end of 1998. Cohesion
has received an IDE from the FDA and expects to complete U.S. pivotal trials of
CoStasis in cardiac, hepatic, orthopedic and general surgery indications by the
end of 1998.

Rapid Commercialization; Focused Marketing

Cohesion believes that CoStasis and CoSeal will be classified as medical
devices in Europe and the U.S., generally requiring less onerous, less costly
and shorter regulatory approval processes than if classified as biological
agents or drugs. Initial distribution in Europe is planned through
geographically focused, specialty cardiovascular distributors with existing
customer relationships and established sales infrastructures. In the U.S.,
Cohesion plans to target the concentrated cardiovascular surgery segment with a
direct sales force to maximize operating margins and plans to consider
additional distribution arrangements for other surgical specialties such as
general surgery, gynecology and orthopedics.

Expand into Other Surgical Markets

Cohesion believes that its technology and initial product formulations may
also be applied to additional, non-cardiac, high-volume procedures. Cohesion is
developing hemostatic and sealant indications in colon-rectal (e.g., colon
resections), hepatic (e.g., liver transplants) and orthopedic (e.g., bone
grafts) surgeries, including both open and minimally invasive surgical
techniques. Cohesion believes that its technology platform is highly scaleable
and will enable it to expand into additional markets over time.

Capitalize on Intellectual Property Portfolio

Cohesion believes it has substantial design, manufacturing and applications
engineering expertise in the development of biomaterials and delivery systems
that, when combined with its intellectual property portfolio, will enable it to
expand into additional markets by cost-effectively addressing unmet surgical
needs for ease of preparation, ease of use, efficacy and safety.

Develop and Maintain Close Relationships with Leading Professionals Worldwide

Cohesion strives to maintain close relationships with leading scientists,
surgeons and other healthcare professionals worldwide who are dedicated to
expanding the use of biomaterials for hemostatic and sealant applications, and
to identify unmet surgical needs. Cohesion plans to actively assist and support
educational and training programs to meet customer needs on the use of hemostats
and sealants worldwide, as well as research efforts into new products.

DESCRIPTION OF COHESION CAPITAL STOCK

Upon the completion of the Distribution, the authorized capital stock of
Cohesion will consist of 15,000,000 shares of Cohesion Common Stock, $0.001 par
value, and 5,000,000 shares of undesignated Cohesion Preferred Stock, $0.001 par
value. The description set forth below is incomplete and qualified by reference
to Cohesion's Amended and Restated Certificate of Incorporation and Bylaws,
which have been filed as exhibits to Cohesion's Registration Statement on Form
10.

COHESION COMMON STOCK

Upon completion of the Distribution, there will be 8,951,227 shares of
Cohesion Common Stock outstanding, held of record by the Company's stockholders.
Cohesion anticipates that options to purchase up to approximately 2,477,000
shares of Cohesion Common Stock may be issued under Cohesion's stock option
plans on or shortly after the Spinoff, as a result of (i) new option grants to
employees (including officers) and directors of Cohesion, (ii) the restructure
and exchange of options to purchase Company Common Stock held

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by former employees (including officers) and directors of the Company and (iii)
offers Cohesion may make to exchange options held by former employees and
directors of Cohesion Corporation (as defined hereafter) for options to purchase
Cohesion Common Stock. See "Treatment of Stock Options Outstanding as of the
Distribution Date."

The holders of Cohesion Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of the Cohesion
stockholders. Subject to preferential rights with respect to any outstanding
Cohesion Preferred Stock, holders of Cohesion Common Stock are entitled to
receive ratably such dividends as may be declared by the Cohesion Board out of
funds legally available therefor. In the event of liquidation, dissolution or
winding up of Cohesion, the holders of Cohesion Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities and
satisfaction of preferential rights of any outstanding Cohesion Preferred Stock.
The Cohesion Common Stock has no preemptive or conversion rights or other
subscription rights. The shares of Cohesion Common Stock to be issued upon
completion of the Distribution will be fully paid and non-assessable.

COHESION PREFERRED STOCK

The Cohesion Board is authorized to issue Cohesion Preferred Stock in one
or more series and to fix the rights, preferences, privileges and restrictions
thereof, including dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation preferences and the
number of shares constituting any series or the designation of such series,
without further vote or action by the stockholders. There are currently 10
shares of Cohesion Preferred Stock outstanding, all of which will be converted
into Cohesion Common Stock prior to the Distribution.

The issuance of Cohesion Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of Cohesion without further action
by the stockholders. The issuance of Cohesion Preferred Stock with voting and
conversion rights may adversely affect the voting power of the holders of
Cohesion Common Stock, including voting rights, of the holders of Cohesion
Common Stock. In certain circumstances, such issuance could have the effect of
decreasing the market price of the Cohesion Common Stock. Cohesion currently has
no plans to issue any additional shares of Cohesion Preferred Stock.

DELAWARE GENERAL CORPORATION LAW AND CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION

Cohesion's Certificate of Incorporation and its Bylaws after the
Distribution will provide, among other things, that any action required to
permitted to be taken by the stockholders of Cohesion may be taken only at a
duly called annual or special meeting of the stockholders and may not be
effected by a consent in writing. In addition, special meetings of the
stockholders of Cohesion may be called only be the Cohesion Board, the Chairman
of the Board, the President of Cohesion or by any person or persons holding
shares representing at least 10% of the outstanding capital stock. The Bylaws
also establish procedures, including advance notice procedures with regard to
the nomination, other than by or at the direction of the Cohesion Board, of
candidates for election as directors.

Cohesion is subject to the provisions of Section 203 of the DGCL, an
anti-takeover law. In general, the statue prohibits a publicly held Delaware
corporation from engineering in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
"business combination" includes a merger, asset sale or three transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
corporation's voting stock.

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RELATIONSHIP BETWEEN THE COMPANY AND COHESION AFTER THE SPINOFF

For the purpose of governing certain of the ongoing relationships between
the Company and Cohesion after the Spinoff and to provide mechanisms for an
orderly transition, the Company and Cohesion have entered into the Intercompany
Agreements described in this section. Certain of the agreements summarized in
this section will be included as exhibits to the Proxy Statement, and the
following summaries are qualified in their entirety by reference to the
agreements as filed.

SEPARATION AND DISTRIBUTION AGREEMENT

The Distribution Agreement provides for, among other things, the principal
corporate transactions required to effect the Spinoff, the allocation of the
assets and liabilities of the Company to Cohesion and the Company after the
Spinoff and the conditions precedent to the Spinoff.

Subject to certain exceptions described below, the Distribution Agreement
contains provisions designed principally to transfer to Cohesion the assets
related to and personnel currently involved in Cohesion's business and financial
responsibility for known and contingent or unknown liabilities of Cohesion's
business. In addition, certain other assets and liabilities of the Company will
be contributed to, or assumed by, Cohesion which include, among others, certain
fixed assets, cash and cash equivalents, stock in third party companies,
including its security holdings in Boston Scientific, which had an aggregate
market value of $75.5 million as of March 31, 1998, accounts receivable,
inventories, accounts payable, existing contracts and ongoing and potential
litigation.

Pursuant to the Distribution Agreement, the Company and Cohesion will
provide each other general indemnities for claims arising from the activities of
the Company prior to the Distribution and the activities of the Company and
Cohesion after the Distribution.

The Distribution may be canceled or certain conditions of the Distribution
may be waived at any time prior to the Distribution. Such conditions include,
among others, the receipt by the Company of a private letter ruling from the IRS
as to the tax-free nature of the Distribution and that no event or development
shall have occurred that in the judgment of the Company's Board would result in
the Distribution having a material adverse effect on the Company or its
stockholders.

SUPPLY AGREEMENTS

The Supply Agreements provide for the supply by the Company to Cohesion of
certain collagen-based products and materials for Cohesion's own use and supply
to third parties for a limited time prior to Cohesion developing its own
manufacturing facilities or locating an alternate manufacturing source. Pursuant
to the Collagraft Supply Agreement, the Company will supply to Cohesion its
requirements for Collagraft in order for Cohesion to fulfill its obligations
under its agreement with Zimmer until the agreement with Zimmer is terminated.
Pursuant to the Supply Agreements, the Company will supply to Cohesion its
requirements for certain collagen-based materials and products for its own use
and for supply to third parties until at least March 15, 2004.

ASSIGNMENT AND LICENSE AGREEMENT

The Assignment and License Agreement, among other things, allocates the
Company's technology and intellectual property between Cohesion and the Company.
Pursuant to the Assignment and License Agreement, all the Company's technology
and intellectual property (including patents, copyrights, trademarks, trade
secrets), other than technology relating to the breast implant technology, has
been assigned to Cohesion, and Cohesion has granted back to the Company an
exclusive, worldwide, perpetual, fully-paid up license to such assigned
technology and intellectual property that is useful in the Company's business.
The Assignment and License Agreement also provides for each of Cohesion and the
Company to obtain certain rights to any improvements made by the other company
prior to March 15, 2004 solely as such improvements relate to its business. In
addition, under the Assignment and License Agreement, each of Cohesion and the
Company covenant to not compete in each other's businesses until March 15, 2004.

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RESEARCH AND DEVELOPMENT AGREEMENT

The Research and Development Agreement provides for the joint development
of human recombinant collagen technology by Cohesion and the Company after the
Distribution Date. The Research and Development Agreement allocates the
obligations and responsibilities of Cohesion and the Company with respect to
research, development and manufacturing development of the recombinant
technology and provides for the sharing of development costs. Pursuant to the
Research and Development Agreement, the resultant recombinant technology and
related intellectual property shall be owned by Cohesion but shall be
exclusively licensed to the Company for uses related to the Company's business,
subject to the payment of royalties by the Company to Cohesion.

BENEFITS AGREEMENT

The Company and Cohesion have entered into a benefits agreement (the
"Benefits Agreement"), effective January 1, 1998, which sets forth the manner in
which assets and liabilities under employee benefit plans and other
employment-related liabilities will be divided between them, and ensures a
smooth transition for employees' benefits in the Spinoff. In general, Cohesion
will be responsible for compensation and employee benefits relating to its
employees and former employees who last worked in Cohesion's business; however,
the Company will provide, at Cohesion's expense, continuing health, life,
disability and other insurance and retirement benefits for Cohesion employees
until Cohesion establishes its own benefit plans.

The Benefits Agreement also provides for the treatment of outstanding
options to purchase Company Common Stock. At the time of the Distribution, such
options will be canceled and replaced by either options to purchase Cohesion
Common Stock, new options to purchase Company Common Stock or a combination of
both, in each case, with adjustments to the respective exercise prices for the
Distribution. These adjustments will be based upon the relative trading values
of Company Common Stock before giving effect to the Distribution, and Cohesion
Common Stock or Company Common Stock after giving effect to the Distribution, as
the case may be. Cohesion will be responsible for delivering shares of Cohesion
Common Stock upon exercise of options to purchase Cohesion Common Stock and the
Company will be responsible for the delivery of the shares of Company Common
Stock upon exercise of any new options to purchase Company Common Stock. See
"Proposal No. 1: The Spinoff -- Background and Reasons for the Spinoff."

TAX ALLOCATION AND INDEMNITY AGREEMENT

The Company and Cohesion have entered into a tax allocation and indemnity
agreement (the "Tax Allocation and Indemnity Agreement"), effective January 1,
1998, which sets forth each party's rights and obligations with respect to
payment and refunds, if any, with respect to taxes for periods before and after
the Distribution Date and related matters such as the filing of tax returns and
the conduct of audits or other proceedings involving claims made by taxing
authorities.

In general, the Company will be responsible for filing consolidated U.S.
federal and consolidated, combined or unitary state income and franchise tax
returns for periods through the Distribution Date, and for paying the taxes
relating to such returns (including any subsequent adjustments resulting from
the redetermination of such tax liability by the applicable taxing authorities).
The Tax Allocation and Indemnity Agreement also allocates liability between the
Company and Cohesion for certain other taxes arising prior to the Distribution
Date and for taxes which may arise in connection with separating Cohesion's
business from the Company's business.

Pursuant to the Tax Allocation and Indemnity Agreement, Cohesion is
required to indemnify the Company for any taxes incurred by it as a result of
the Spinoff being treated as a taxable event to the Company due to Cohesion
engaging in certain transactions for two years following the Distribution Date,
unless Cohesion shall first provide the Company with a ruling from the IRS, or
an opinion of counsel in a form reasonably acceptable to the Company, that the
transaction will not adversely affect the tax consequences of the Spinoff.
Transactions subject to the foregoing indemnity obligations include, among other
things, acquisition of 50% or more of the stock of Cohesion in a transaction
described in Section 355(e)(2) of the Code, certain repurchases or issuances of
Cohesion Common Stock, sale, distribution or other disposition of

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certain assets or stock and the discontinuance of certain businesses. The
Company and Cohesion have agreed that, in general, they will indemnify each
other against any tax liability resulting from breaches of any covenant or
representations made by such party contained in the Tax Allocation and Indemnity
Agreement.

The Tax Allocation and Indemnity Agreement further provides for cooperation
with respect to certain tax matters, allocation of certain Company tax
liabilities arising prior to the formation of Cohesion, the exchange of
information and the retention of records which may affect the income tax
liability of either party.

Though valid as between the parties thereto, the Tax Allocation and
Indemnity Agreement is not binding on the IRS and does not affect the several
liability of the Company, Cohesion and their respective subsidiaries to the IRS
for all U.S. federal taxes of the consolidated group relating to periods prior
to the Distribution Date.

SERVICES AGREEMENT

The Company and Cohesion have entered into a services agreement (the
"Services Agreement"), effective January 1, 1998, pursuant to which (1) the
Company will provide Cohesion with financial and tax, human resources, legal,
administrative, regulatory, quality assurance, medical affairs and manufacturing
and related services, and (2) Cohesion will provide the Company with facilities,
administrative, equipment, research and development, and clinical and regulatory
services (each a "Service" and collectively the "Services"); in each case such
Services to be provided until June 30, 1999. The Services Agreement provides
that (i) up to and including the last day of the calendar quarter in which the
Spinoff is effected, the user of a Service (the "Service User") will pay to the
provider of such Service (the "Service Provider") the actual costs for rendering
such Service; and (ii) thereafter, the Service User will pay the Service
Provider 120% of the salary and related costs for personnel time spent in
providing such Service and 100% of all other costs and expenses incurred in
providing such Service. Either the Company or Cohesion may terminate the
purchase of any Service upon six months prior written notice, and the Services
Agreement may be extended with respect to one or more Services by mutual written
agreement of the Company and Cohesion. The Services Agreement provides that the
Services Agreement shall automatically terminate if, prior to the Spinoff, a
person or organization (other than the Company) or series of related persons or
organizations acquires more than 20% of the voting securities of Cohesion
without the consent of the Company's Board.

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PROPOSAL NO. 2: THE COMPANY NAME CHANGE
(PROXY ITEM NO. 2)

The Company's Board believes that it is advisable to adopt an amendment to
the Company's Certificate of Incorporation to change the Company's name
following the Spinoff to Collagen Aesthetics, Inc., and, accordingly, has
adopted a resolution proposing that such amendment to the Certificate of
Incorporation be presented to the stockholders at the Special Meeting for their
approval. If the corporate name change is approved by the stockholders, it is
anticipated that the Company Common Stock will be traded under the symbol
" ."

The Company desires to change the name of the Company from Collagen
Corporation to Collagen Aesthetics, Inc. in order to identify the Company
specifically with its primary business focus on cosmetic and reconstructive
medical technology products.

Upon consummation of the proposed change of name it will not be necessary
to surrender stock certificates. Instead, when certificates are presented for
transfer, new stock certificates bearing the name Collagen Aesthetics, Inc. will
be issued.

If any action, suit, proceeding or claim has been instituted, made or
threatened relating to the name change, which makes effectuation of the name
change inadvisable in the opinion of the Company's Board or there exists any
other circumstance which would make consummation of the name change inadvisable
in the opinion of the Company's Board, the proposal to amend the Certificate of
Incorporation may be terminated by the Company's Board either before or after
approval of the name change by the stockholders.

REQUIRED VOTE

The affirmative vote of a majority of the shares outstanding on
, 1998 is required for the approval of the Company Name Change
Proposal.

RECOMMENDATION OF THE COMPANY'S BOARD

THE COMPANY'S BOARD HAS APPROVED THE COMPANY NAME CHANGE PROPOSAL AND
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE COMPANY NAME CHANGE PROPOSAL.

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PROPOSAL NO. 3:
AMENDMENT OF THE COMPANY 1994 STOCK OPTION PLAN
(PROXY ITEM NO. 3)

The Company's Board believes that, in order to attract qualified employees
to the Company and to provide incentive to its current employees, it is
necessary to grant options or rights to purchase Company Common Stock to such
employees pursuant to the 1994 Stock Option Plan. Accordingly, stockholders are
being asked to approve an amendment to the 1994 Stock Option Plan at the Special
Meeting to reserve an additional 70,000 shares of Common Stock for issuance
thereunder.

GENERAL

The 1994 Stock Option Plan was adopted by the Company's Board in May 1994
to replace the 1984 Incentive Stock Option Plan which expired in accordance with
its terms in August 1994. The Company's Board initially reserved 750,000 shares
of Company Common Stock for issuance under the 1994 Stock Option Plan. The 1994
Stock Option Plan was approved by the Company's stockholders at the Company's
1994 Annual Meeting of Stockholders held in October 1994. In August 1996, the
Company's Board amended the 1994 Stock Option Plan to increase the number of
shares reserved for issuance thereunder by 400,000 shares to an aggregate of
1,150,000 shares that have been reserved for issuance from time to time under
such Plan. The amendment was approved by the Company's stockholders at the
Company's 1996 Annual Meeting held in October 1996.

Options granted under the 1994 Stock Option Plan may be either "incentive
stock options" within the meaning of Section 422 of the Code, or nonstatutory
stock options at the discretion of the Company's Board and as reflected in the
terms of the written option agreement. The Company's Board, at its discretion,
may also grant rights to purchase Company Common Stock directly, rather than
pursuant to stock options, subject to certain restrictions discussed below.

The 1994 Stock Option Plan is not a qualified deferred compensation plan
under Section 401(a) of the Code, and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974, as amended.

As of March 31, 1998, options for 887,928 shares were outstanding under the
1994 Stock Option Plan, 24,627 shares had been issued pursuant to the exercise
of options granted under such plan and 237,445 shares remained available for
future grants. No stock purchase rights have been granted under the 1994 Stock
Option Plan. Shares not purchased under an option prior to its expiration will
be available for future option grants under the 1994 Stock Option Plan. As of
March 31, 1998, the aggregate fair market value of shares subject to outstanding
options under the 1994 Stock Option Plan was $198,045,897, based upon the
closing price of Company Common Stock as reported on Nasdaq on such date. The
actual benefits, if any, to the holders of stock options issued under the 1994
Stock Option Plan are not determinable prior to exercise as the value, if any,
of such stock options to their holders is represented by the difference between
the market price of a share of Company Common Stock on the date of exercise and
the exercise price of a holder's stock option, as set forth below. Grant
information with respect to options to purchase Company Common Stock granted in
the fiscal year ended June 30, 1997 under the Company's 1994 Stock Option Plan
to all employees and the Company Named Executive Officers is set forth under
"Business and Properties of the Company After the Spinoff -- Executive
Compensation -- Company Stock Option Grants in Last Fiscal Year." Options to
purchase 264,000 shares of Company Common Stock were granted during the fiscal
year ended June 30, 1997 under the Company's 1994 Stock Option Plan to the
Company's executive officers as a group.

PURPOSE

The purposes of the 1994 Stock Option Plan are to attract and retain the
best available personnel for positions of substantial responsibility, to provide
additional incentive to employees and consultants of the Company and to promote
the success of the Company's business.

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ADMINISTRATION

The 1994 Stock Option Plan may be administered by the Company's Board or by
a committee (or subcommittee in certain instances) of the Company's Board. The
1994 Stock Option Plan is currently being administered by the Company's Board
and the Human Resources Committee of the Company's Board. If all members of the
Human Resources Committee do not meet the definition of "outside directors"
under Code Section 162(m), a subcommittee of the Human Resources Committee
consisting of such "outside directors" will have the exclusive authority to
grant stock options and purchase rights and otherwise administer the 1994 Stock
Option Plan with respect to "covered employees" described in Code Section 162(m)
(generally the Company's highest paid executive officers). Members of the
Company's Board receive no additional compensation for their services in
connection with the administration of the 1994 Stock Option Plan. All questions
of interpretation of the 1994 Stock Option Plan are determined by the Company's
Board or its committee and its decisions are final and binding upon all
participants.

ELIGIBILITY

The 1994 Stock Option Plan provides that either incentive stock options or
nonstatutory stock options may be granted to employees (including officers and
directors who are also employees) of the Company or any of its subsidiaries. In
addition, the 1994 Stock Option Plan provides that nonstatutory stock options
may be granted to consultants (not including directors who are not compensated
for their services or are paid only a director's fee by the Company) of the
Company or any of its subsidiaries. The Company's Board or its committee selects
the optionees and determines the number of shares to be subject to each option.
In making such determination, certain factors are taken into account, including
the duties and responsibilities of the optionee, the value of the optionee's
services, the optionee's present and potential contribution to the success of
the Company, and other relevant factors.

The 1994 Stock Option Plan provides that the maximum number of shares of
Company Common Stock which may be granted under options to any one employee
during any fiscal year shall be 150,000, subject to adjustment as provided in
the 1994 Stock Option Plan. There is also a limit on the aggregate market value
of shares subject to all incentive stock options that may be granted to an
optionee during any calendar year.

TERMS OF OPTIONS

Each option is evidenced by a stock option agreement between the Company
and the optionee. Each option is subject to the following additional terms and
conditions:

Exercise of the Option

The Company's Board or its committee determines when options may be
exercised. An option is exercised by giving written notice of exercise to the
Company specifying the number of full shares of Company Common Stock to be
purchased and by tendering payment of the purchase price. The purchase price of
the shares purchased upon exercise of an option shall be paid in consideration
of such form as is determined by the Company's Board or its committee and
specified in the option agreement, and such form of consideration may vary for
each option.

Exercise Price

The exercise price under the 1994 Stock Option Plan is determined by the
Company's Board or its committee and may not be less than 100 percent of the
fair market value of the Company Common Stock on the date the option is granted,
or 85 percent in the case of optionees who are not "covered employees" under
Code Section 162(m). The fair market value per share is equal to the closing
price on Nasdaq of the Company Common Stock on the date of grant. In the case of
an option granted to an optionee who owns more than ten percent of the voting
power of all classes of stock of the Company or any of its subsidiaries, the
exercise price must not be less than 110 percent of the fair market value on the
date of grant.

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Termination of Employment

If the optionee's employment or consulting relationship terminates for any
reason other than disability or death, options under the 1994 Stock Option Plan
may be exercised not later than three months (or such other period of time not
exceeding three months in the case of an incentive stock option or six months in
the case of a nonstatutory stock option as is determined by the Company's Board
or its committee at the time of grant) after such termination and may be
exercised only to the extent the option was exercisable on the date of
termination. In no event may an option be exercised by any person after the
expiration of its term.

Disability

If an optionee is unable to continue his or her employment or consulting
relationship with the Company as a result of his total and permanent disability,
options may be exercised within six months (or such other period of time not
exceeding twelve months as is determined by the Company's Board or its committee
at the time of grant) of termination and may be exercised only to the extent the
option was exercisable on the date of termination, but in no event may the
option be exercised after the expiration of its term.

Death

Under the 1994 Stock Option Plan, if an optionee should die while employed
or retained by the Company or during the three month period (or such other
period of time not exceeding three months as is determined by the Company's
Board or its committee at the time of grant) following termination of the
optionee's employment or consulting relationship, options may be exercised
within six months after the date of death to the extent the options would have
been exercisable (i) on the date of death, in the case of an optionee who dies
while employed or retained by the Company, or (ii) on the date of termination of
employment or consulting relationship, in the case of an optionee who dies
within three months after termination of employment or consulting relationship.

Termination of Options

The 1994 Stock Option Plan provides that options granted under the 1994
Stock Option Plan have the term provided in the option agreement. In general,
these agreements currently provide for a term of ten years. Incentive stock
options granted to an optionee who, immediately before the grant of such option,
owned more than ten percent of the total combined voting power of all classes of
stock of the Company or any of its subsidiaries, may not in any case have a term
of more than five years. No option may be exercised by any person after its
expiration.

Option Not Transferable

An option is nontransferable by the optionee other than by will or the laws
of descent and distribution, and is exercisable only by the optionee during his
or her lifetime or, in the event of the optionee's death, by a person who
acquires the right to exercise the option by bequest or inheritance or by reason
of the death.

Acceleration of Options

In the event of a merger or consolidation in which the Company is not the
surviving entity, the Company's Board is obligated to either accomplish a
substitution or assumption of options or give thirty days' notice of the
acceleration of the optionee's right to exercise his or her outstanding options
as to some or all of the optioned stock at any time within thirty days of such
notice.

Other Provisions

The option agreement may contain such other terms, provisions and
conditions not inconsistent with the 1994 Stock Option Plan as may be determined
by the Company's Board or its committee.

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RESTRICTED STOCK PURCHASE RIGHTS

The 1994 Stock Option Plan permits the granting of rights to purchase
Company Common Stock either alone, in addition to, or in tandem with other
awards made by the Company. Upon the granting of a stock purchase right under
the 1994 Stock Option Plan, the offeree is advised in writing of the terms,
conditions and restrictions related to the offer, including the number of shares
of Company Common Stock that such person is entitled to purchase, the price to
be paid and the period in which such person must accept such offer. The purchase
price for stock purchased pursuant to such rights shall not be less than 85
percent of the fair market value of such shares on the date of grant. Stock
purchase rights granted to persons subject to Section 16 of the Exchange Act
will be subject to any restrictions necessary to comply with Rule 16b-3.

Unless the Administrator of the 1994 Stock Option Plan determines
otherwise, the underlying stock purchase agreement for stock purchased pursuant
to a stock purchase right granted under the 1994 Stock Option Plan will grant
the Company a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with the Company for any reason
(including death or disability). The purchase price for shares repurchased shall
be the higher of the fair market value of the shares at the time of repurchase
or the original purchase price paid by the purchaser.

ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

In the event any change, such as a stock split or dividend, is made in the
Company's capitalization that results in an increase or decrease in the number
of outstanding shares of Company Common Stock without receipt of consideration
by the Company, appropriate adjustment shall be made in the exercise price of
each outstanding option, the number of shares subject to each option, the annual
limitation on grants to employees, as well as the number of shares available for
issuance under the 1994 Stock Option Plan. In the event of the proposed
dissolution or liquidation of the Company, each option will terminate unless
otherwise provided by the Company's Board or its committee.

AMENDMENT AND TERMINATION OF THE PLAN

The Company's Board may amend the 1994 Stock Option Plan at any time or
from time to time or may terminate it without approval of the stockholders;
provided, however, that stockholder approval is required for any amendment to
the 1994 Stock Option Plan that increases the number of shares that may be
issued under the 1994 Stock Option Plan, modifies the standards of eligibility,
modifies the limitation on grants to employees described in the 1994 Stock
Option Plan or results in other changes which would require stockholder approval
to qualify options granted under the 1994 Stock Option Plan as performance-based
compensation under Section 162(m) of the Code, or, so long as the Company has a
class of equity securities registered under Section 12 of the Exchange Act,
materially increases the benefits to participants that may accrue under the 1994
Stock Option Plan. However, no action by the Company's Board or stockholders may
alter or impair any option previously granted under the 1994 Stock Option Plan.
The 1994 Stock Option Plan shall terminate in May 2004, provided that any
options then outstanding under the 1994 Stock Option Plan shall remain
outstanding until they expire by their terms.

TAX INFORMATION

Options granted under the 1994 Stock Option Plan may be either "incentive
stock options," as defined in Section 422 of the Code, or nonstatutory stock
options.

If an option granted under the 1994 Stock Option Plan is an incentive stock
option, under U.S. tax laws the optionee will recognize no income upon grant of
the incentive stock option and incur no tax liability due to the exercise unless
the optionee is subject to the alternative minimum tax. The Company will not be
allowed a deduction for U.S. income tax purposes as a result of the exercise of
an incentive stock option regardless of the applicability of the alternative
minimum tax. Upon the sale or exchange of the shares more than two years after
grant of the option and one year after receipt of the shares by the optionee,
any gain will be treated as long-term capital gain under U.S. tax laws. If these
holding periods are not satisfied, the optionee will recognize ordinary income
under U.S. tax laws equal to the difference between the exercise price and the

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lower of the fair market value of the stock at the date of the option exercise
or the sale price of the stock. The Company will be entitled to a deduction in
the same amount as the ordinary income recognized by the optionee. Any gain
recognized on such a premature disposition of the shares in excess of the amount
treated as ordinary income will be characterized under U.S. tax laws as
long-term capital gain if the sale occurs more than one year after exercise of
the option or as short-term capital gain if the sale is made earlier. Long-term
capital gain is taxed at a maximum rate of 28% if the shares are held for more
than one year but not more than 18 months after exercise, and at a maximum rate
of 20% if the shares are held for more than 18 months after exercise. Capital
losses are allowed under U.S. tax laws in full against capital gains plus $3,000
of other income.

All other options which do not qualify as incentive stock options are
referred to as nonstatutory stock options. An optionee will not recognize any
taxable income under U.S. tax laws at the time he or she is granted a
nonstatutory stock option. However, upon its exercise, the optionee will
recognize ordinary income for tax purposes measured by the excess of the then
fair market value of the shares over the exercise price. In certain
circumstances, where the shares are subject to a substantial risk of forfeiture
when acquired or where the optionee is an officer, director or ten percent
stockholder of the Company, the date of taxation under U.S. tax laws may be
deferred unless the optionee files an election with the IRS under Section 83(b)
of the Code. The income recognized by an optionee who is also an employee of the
Company will be subject to tax withholding by the Company by payment in cash or
out of the current earnings paid to the optionee. Upon resale of such shares by
the optionee, any difference between the sale price and the optionee's tax basis
(exercise price plus the income recognized upon exercise) will be treated under
U.S. tax laws as capital gain or loss, and will qualify for long-term capital
gain or loss treatment if the shares have been held for more than one year.

Stock purchases under the 1994 Stock Option Plan will generally be taxed in
the same manner as the exercise of a nonstatutory stock option.

REQUIRED VOTE

The affirmative vote of a majority of the shares present in person or
represented by proxy at the Special Meeting and voting on the amendment to the
1994 Stock Option Plan is required for its approval.

RECOMMENDATION OF THE COMPANY'S BOARD

THE COMPANY'S BOARD HAS APPROVED THE STOCK OPTION PLAN PROPOSAL AND
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE STOCK OPTION PLAN PROPOSAL AND THE
RESERVATION OF AN ADDITIONAL 70,000 SHARES OF COMPANY COMMON STOCK FOR ISSUANCE
THEREUNDER.

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PROPOSAL NO. 4: ADOPTION OF THE COMPANY 1998 EMPLOYEE
STOCK PURCHASE PLAN
(PROXY ITEM NO. 4)

The Company's Board believes that it is advisable for the Company to adopt
the Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan") and
to reserve 125,000 shares of Company Common Stock for issuance thereunder and,
accordingly, has adopted a resolution proposing that such a plan be presented to
the stockholders at the Special Meeting for their approval. The following is a
summary of principal features of the 1998 Purchase Plan. The summary, however,
does not purport to be a complete description of all the provisions of the 1998
Purchase Plan. Any stockholder of the Company who wishes to obtain a copy of the
actual plan document may do so upon written request to the Assistant Secretary
of the Company at the Company's principal offices.

GENERAL

The Company's 1985 Employee Stock Purchase Plan is being terminated one
week prior to the Distribution Record Date. The Company's Board believes that,
in order to attract qualified employees to the Company and to provide incentives
to its current employees, it is necessary to offer its employees the opportunity
to purchase Company Common Stock pursuant to the 1998 Purchase Plan.
Accordingly, the stockholders are being asked to approve the 1998 Purchase Plan.

The 1998 Purchase Plan will be implemented by a series of offering periods
of twenty-four months duration commencing on January 1 and July 1 of each year,
or at such other time or times as may be determined by the Company's Board, with
the first day of each offering period being designated an offering date. Each
offering period consists of four six-month purchase periods, with the last day
of each period being designated a purchase date. The first offering period
commences on the later of July 1, 1998 or the Distribution Date. The initial
purchase date will occur on December 31, 1998. The 1998 Purchase Plan is
intended to qualify under Section 423 of the Code. The 1998 Purchase Plan is
further deemed to contain, and options granted thereunder shall contain, and the
shares issued upon exercise thereof shall be subject to, any additional
conditions and restrictions as may be required by Rule 16b-3 of the Exchange Act
to qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to 1998 Purchase Plan transactions.

PURPOSE

The purpose of the 1998 Purchase Plan is to provide employees (including
officers and employee directors) of the Company with an opportunity to purchase
Company Common Stock through payroll deductions.

ADMINISTRATION

The 1998 Purchase Plan is to be administered by the Company's Board or a
committee appointed by the Company's Board (the "Administrator"). All questions
of interpretation or application of the 1998 Purchase Plan are determined by the
Administrator.

ELIGIBILITY AND PARTICIPATION

Employees (including officers and employee directors) who are employed for
at least 20 hours per week and more than five months in any calendar year and
who are employed by the Company as of the first business day of each offering
period of the plan (the "Offering Date") are eligible to participate in an
offering under the 1998 Purchase Plan, subject to certain limitations imposed by
Section 423(b) of the Code and limitations on stock ownership as set forth in
the 1998 Purchase Plan. No employee shall be granted an option under the 1998
Purchase Plan if (i) immediately after the grant such employee would own stock
and/or hold outstanding options to purchase stock possessing five percent (5%)
or more of the total voting power or value of all classes of stock of the
Company or its subsidiaries, or (ii) such option would permit such employee to
purchase stock under all employee stock purchase plans of the Company and its
subsidiaries to accrue at a rate

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which exceeds $25,000 of fair market value of such stock for each calendar year
in which such option is outstanding at any time.

Eligible employees become participants in the 1998 Purchase Plan by filing
with the Human Resources Department of the Company a subscription agreement
authorizing payroll deductions prior to the applicable Offering Date, unless a
later time for filing the subscription agreement has been set by the
Administrator. Payroll deductions shall commence on the first payroll following
the Offering Date and shall end on the last payroll paid on or prior to the last
day (the "Purchase Date") of the offering period to which the subscription
agreement is applicable, unless sooner terminated by the participant.

GRANT AND EXERCISE OF OPTION

At the beginning of an offering period, each participant is granted an
option to purchase up to that number of shares determined by dividing such
employee's payroll deductions accumulated prior to the end of each purchase
period and retained in the participant's account as of the end of each purchase
period by the lower of (i) eighty-five percent (85%) of the fair market value of
a share of Company Common Stock at the beginning of the offering period or (ii)
eighty-five percent (85%) of the fair market value of a share of Company Common
Stock on the purchase date; provided that in no event shall a participant be
permitted to purchase more than 1,500 shares during each purchase period, and
provided further that such purchases shall be subject to the limitations set
forth below. The Company may make a pro rata reduction in the number of shares
subject to options if the total number of shares which would otherwise be
subject to options granted at the beginning of an offering period exceeds the
number of remaining available shares in the 1998 Purchase Plan. Unless an
employee withdraws his or her participation in the 1998 Purchase Plan by giving
written notice to the Company of his or her election to withdraw all accumulated
payroll deductions prior to the end of an offering period, the employee's option
for the purchase of shares will be exercised automatically at the end of each
purchase period, and the maximum number of full shares subject to option which
are purchasable with the accumulated payroll deductions in his or her account
will be purchased at the applicable purchase price determined as provided below.

During his or her lifetime, a participant's option to purchase shares under
the 1998 Purchase Plan is exercisable only by him or her. However, a participant
may file a written designation of a beneficiary who is (i) to receive any shares
and cash, if any, from the participant's account under the 1998 Purchase Plan in
the event of such participant's death subsequent to the end of a purchase period
but prior to delivery to him or her of such shares and cash, and (ii) to receive
any cash from the participant's account under the 1998 Purchase Plan in the
event of such participant's death prior to the purchase date of an Offering
Period. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be effective.

PURCHASE PRICE

The purchase price per share at which shares are sold to participating
employees under the 1998 Purchase Plan is the lower of (i) 85% of the fair
market value per share of Company Common Stock at the time the option is granted
at the commencement of the offering period, and (ii) 85% of the fair market
value per share of Company Common Stock at the time the option is exercised on
the applicable purchase date. The fair market value of Company Common Stock on a
given date shall be determined by the Company's Board and will generally be
based upon the closing price of Company Common Stock on Nasdaq.

PAYROLL DEDUCTIONS

The purchase price of the shares to be acquired under the 1998 Purchase
Plan is accumulated by payroll deductions during the offering period. The
deductions may not be less than 1% or more than 15% of a participant's aggregate
compensation during the offering period. A participant may discontinue his or
her participation in the 1998 Purchase Plan or, on one occasion only during an
offering period, may decrease his or her rate of payroll deductions. Payroll
deductions for a participant shall commence on the first payroll

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following the offering date and shall continue until his or her participation is
terminated as provided in the 1998 Purchase Plan.

TERMINATION OF EMPLOYMENT

Termination of a participant's employment for any reason, including
retirement or death, or the failure of the participant to remain in the
continuous employ of the Company for at least 20 hours per week during the
applicable offering period, cancels his or her option and his or her
participation in the 1998 Purchase Plan immediately. In such event, the payroll
deductions credited to the participant's account will be returned to him or her
or, in the case of death, to the person or persons entitled thereto as provided
in the 1998 Purchase Plan.

ADJUSTMENTS UPON CHANGES IN CAPITALIZATION

In the event any change is made in the Company's capitalization in the
middle of an offering period, such as a stock split, stock dividend, combination
or reclassification, that results in an increase or decrease in the number of
shares of Company Common Stock outstanding without receipt of consideration by
the Company, appropriate adjustment shall be made in the purchase price and in
the number of shares subject to options under the 1998 Purchase Plan and in the
number of shares authorized for issuance under the 1998 Purchase Plan.

In the event of a proposed dissolution or liquidation of the Company, the
Offering Period will terminate immediately prior to the consummation of such
proposed action, unless otherwise provided by the Administrator. In the event of
a proposed sale of all or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, each option under the
1998 Purchase Plan shall be assumed or an equivalent substitute option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Administrator elects to shorten the Offering
Period then in progress by setting a new purchase date and notifying the
optionees of the change in their purchase date.

AMENDMENT AND TERMINATION OF THE PLAN

The Company's Board may at any time amend or terminate the 1998 Purchase
Plan without the approval of the stockholders, except that such termination
cannot affect options previously granted nor may an amendment make any change in
an option granted prior thereto which adversely affects the rights of any
participant. No amendment may be made to the 1998 Purchase Plan without approval
of the stockholders of the Company if such approval is required under applicable
law.

The 1998 Purchase Plan shall expire in 2018 unless sooner terminated by the
Administrator, provided that any options then outstanding under the 1998
Purchase Plan shall remain outstanding until they expire by their terms.

TAX INFORMATION

The 1998 Purchase Plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of Sections 421 and 423
of the Code. Under these provisions under U.S. tax laws, no income will be
taxable to a participant until the shares purchased under the 1998 Purchase Plan
are sold or otherwise disposed of. Upon sale or other disposition of the shares,
the participant will generally be subject to tax and the amount of the tax will
depend upon how long the shares have been held by the participant. If the shares
are sold or otherwise disposed of more than two years from the first day of the
offering period and more than one year after the applicable purchase date, the
participant will recognize ordinary income under U.S. tax laws measured as the
lesser of (a) the excess of the fair market value of the shares at the time of
such sale or disposition over the purchase price, or (b) an amount equal to 15%
of the fair market value of the shares as of the first day of the offering
period. Any additional gain will be treated under U.S. tax laws as long-term
capital gain, taxed at a maximum rate of 28% if the shares are held for more
than one year, but not more than 18 months, after the purchase date, and at a
maximum rate of 20% if the shares are held for more than 18 months after the
purchase date. If the shares are sold or otherwise disposed of before the
expiration of

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either of these holding periods, the participant will recognize ordinary income
under U.S. tax laws generally measured as the excess of the fair market value of
the shares on the date the shares are purchased over the purchase price. Any
additional gain or loss on such sale or disposition will be long-term or
short-term capital gain or loss, under U.S. tax laws depending on the holding
period. The Company is not entitled to a deduction for amounts taxed as ordinary
income or capital gain to a participant under U.S. tax laws except to the extent
of ordinary income recognized by participants upon a sale or disposition of
shares prior to the expiration of either of the holding period(s) described
above.

The foregoing is only a summary of the effect of U.S. income taxation upon
the participant and the Company with respect to the shares purchased under the
1998 Purchase Plan. Reference should be made to the applicable provisions of the
Code. In addition, the summary does not discuss the tax consequences of a
participant's death or the income tax laws of any state or other country in
which the participant may reside.

REQUIRED VOTE

The affirmative vote of a majority of the shares present in person or
represented by proxy at the Special Meeting and voting on the Employee Stock
Purchase Plan Proposal is required for its approval.

RECOMMENDATION OF THE COMPANY'S BOARD

THE COMPANY'S BOARD HAS APPROVED THE EMPLOYEE STOCK PURCHASE PLAN PROPOSAL
AND RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE EMPLOYEE STOCK PURCHASE PLAN
PROPOSAL AND THE RESERVATION OF 125,000 SHARES OF COMPANY COMMON STOCK FOR
ISSUANCE THEREUNDER.

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PROPOSAL NO. 5: ADOPTION OF THE COMPANY 1998 DIRECTORS' STOCK OPTION PLAN
(PROXY ITEM NO. 5)

The Company's Board believes that it is advisable to adopt a 1998
Directors' Stock Option Plan (the "Directors' Plan") and to reserve 250,000
shares of Company Common Stock for issuance thereunder, and, accordingly, has
adopted a resolution proposing that such a Directors' Plan be presented to the
stockholders at the Special Meeting for their ratification.

The following is a summary of principal features of the Directors' Plan.
The summary, however, does not purport to be a complete description of all the
provisions of the Directors' Plan. Any stockholder of the Company who wishes to
obtain a copy of the actual plan document may do so upon written request to the
Assistant Secretary of the Company at the Company's principal offices.

GENERAL AND PURPOSE

The Company's 1990 Directors' Stock Option Plan is being terminated upon
the effectiveness of the Spinoff. The Directors' Plan will become effective on
the Distribution Date. The Directors' Plan provides for the grant of
nonstatutory stock options to nonemployee directors of the Company. It is
designed to work automatically and not to require administration; however, to
the extent administration is necessary, it will be provided by the Company's
Board.

The purpose of the Directors' Plan is to provide an incentive for directors
to continue to serve the Company as directors and to assist the Company in
recruiting highly qualified individuals when vacancies occur on the Company's
Board.

GRANT AND EXERCISE OF OPTIONS

The Directors' Plan provides that on the Distribution Date, each
nonemployee director of the Company and of Cohesion shall be automatically
granted a "Vested Restructuring Option" to purchase the number of shares equal
to the number of shares granted to the director under the Company's 1990
Directors' Stock Option Plan (the "1990 Directors' Plan") that are vested but
not exercised as of such date, and each individual who will continue to serve as
a nonemployee director of the Company shall be automatically granted an
"Unvested Restructuring Option" to purchase the number of shares equal to the
number of shares granted to the director under the Company's 1990 Directors'
Stock Option Plan that have not vested as of such date. Each person who first
becomes a nonemployee director after the effective date of the Directors' Plan
shall be automatically granted an "Initial Option" to purchase 10,000 shares of
Company Common Stock on the date on which such person first becomes a
nonemployee director, whether through election by the stockholders of the
Company or appointment by the Board of Directors to fill a vacancy. An "Annual
Option" to purchase 5,000 shares shall be automatically granted to each
nonemployee director, including nonemployee directors who did not receive an
Initial Option, on July 1 of each calendar year, provided that on that date the
nonemployee director has served on the Company's Board for at least six months.

The Directors' Plan provides for neither a maximum nor a minimum number of
shares subject to options that may be granted to any one nonemployee director,
but does provide for the number of shares that may be included in any grant and
the method of making a grant. No option granted under the Directors' Plan is
transferable by the optionee other than by will or the laws of descent or
distribution or pursuant to the terms of a qualified domestic relations order as
defined by the Code, and each option is exercisable, during the lifetime of the
optionee, only by such optionee.

The Directors' Plan provides that the Vested Restructuring Options and the
Unvested Restructuring Options shall be exercisable in accordance with the terms
under which the vested and unvested options to purchase Company Common Stock
were issued pursuant to the 1990 Directors' Plan, provided however that service
as a director of the Company or Cohesion shall be equivalent to providing
service as a director of the Company. The Directors' Plan further provides that
each Initial Option granted thereunder becomes exercisable in installments
cumulatively as to 25% of the shares subject to the Initial Option on each of
the first, second, third and fourth anniversaries of the date of grant of the
Initial Option, and each Annual Option

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granted thereunder becomes exercisable as to 100% of the shares subject to the
Annual Option on the first anniversary of the date of grant of the subsequent
option. The options remain exercisable for up to three (3) months following the
optionee's termination of service as a director of the Company, unless such
termination is a result of death, or total and permanent disability, in which
case the options remain exercisable for up to a six-month period.

EXERCISE PRICE AND TERM OF OPTIONS

The exercise price of the Vested Restructuring Options shall be determined
using a formula to preserve the spread between the exercise price of the vested
option to purchase Company Common Stock and the fair market value of Company
Common Stock prior to the Spinoff, and the exercise price of the Unvested
Restructuring Options shall be determined using a formula to preserve the spread
between the exercise price of the unvested option to purchase Company Common
Stock and the fair market value of Company Common Stock prior to the Spinoff.
The exercise price of all other stock options granted under the Directors' Plan
shall be equal to the fair market value of a share of Company Common Stock on
the date of grant of the option, which is defined to be the closing price of
Company Common Stock on Nasdaq on the date of grant. Options granted under the
Directors' Plan have a term of ten years.

PLAN BENEFITS

The following table sets forth information with respect to the stock
options granted to the nonemployee directors of the Company (five persons) as of
March 31, 1998. As discussed above, the executive officers of the Company and
the employees of the Company are not eligible for grants under the Directors'
Plan.

<TABLE>
<CAPTION>
NUMBER OF SHARES SUBJECT TO WEIGHTED AVERAGE
OPTIONS GRANTED UNDER EXERCISE PRICE
DIRECTOR THE 1990 DIRECTORS' STOCK OPTION PLAN PER SHARE
-------- ------------------------------------- ----------------
<S> <C> <C>
Anne L. Bakar.................................... 27,000 $ 22.40
John R. Daniels, M.D............................. 30,000 $ 18.45
William G. Davis................................. 30,000 $ 18.45
Reid W. Dennis................................... 30,000 $ 18.45
Craig W. Johnson................................. 36,000 $ 22.39
</TABLE>

MERGER OR SALE OF ASSETS

In the event of the dissolution or liquidation of the Company, a sale of
all or substantially all of the assets of the Company, or the merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving corporation or any other capital reorganization in
which more than 50% of the shares of the Company entitled to vote are exchanged,
each nonemployee director shall have a reasonable time within which to exercise
options granted under the Directors' Plan, including any part of the option that
would not otherwise be exercisable, prior to the effectiveness of such
dissolution, liquidation, sale, merger or reorganization, at the end of which
time the option shall terminate, or shall receive a substitute option with
comparable terms, as to an equivalent number of shares of stock of the
corporation succeeding the Company or acquiring its business by reason of such
dissolution, liquidation, sale, merger, consolidation or reorganization.

AMENDMENT AND TERMINATION OF THE PLAN

The Company's Board may at any time amend or terminate the Directors' Plan,
except that such termination cannot affect options previously granted without
the agreement of any optionee so affected.

If not terminated earlier, the Directors' Plan will expire in 2008.

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TAX INFORMATION

The following is a brief summary of the effect of U.S. income taxation upon
the optionee and the Company with respect to the grant and exercise of options
under the Directors' Plan, does not purport to be complete, and does not discuss
the income tax laws of any municipality, state or other country in which an
optionee may reside. The Company advises all eligible directors to consult their
own tax advisors concerning tax implications of option grants and exercises and
the disposition of stock acquired upon such exercises under the Directors' Plan.

Options granted under the Directors' Plan are nonstatutory stock options.
An optionee will not recognize any taxable income at the time he or she is
granted a nonstatutory stock option. However upon its exercise, the optionee
will recognize ordinary income for tax purposes measured by the excess of the
then fair market value of the shares over the option price. Because the optionee
is a director of the Company, the date of taxation (and the date of measurement
of taxable ordinary income) may be deferred unless the optionee files an
election with the IRS under Section 83(b) of the Code. Upon resale of such
shares by the optionee, any difference between the sale price and the exercise
price, to the extent not recognized as ordinary income as provided above will be
treated as capital gain (or loss), and will be long-term capital gain if the
optionee has held the shares more than one year. Under current law, the maximum
U.S. federal income tax rate on long-term capital gains is 28% in the case of
shares held more than one year, but not more than 18 months, after exercise and
20% in the case of shares held more than 18 months after exercise, whereas the
maximum rate on ordinary income is 39.6%. Capital losses for individual
taxpayers are allowed under U.S. tax laws in full against capital gains plus
$3,000 of other income. The Company will be entitled to a tax deduction in the
amount and at the time that the optionee recognizes ordinary income with respect
to shares acquired upon exercise of a nonstatutory stock option.

REQUIRED VOTE

The affirmative vote of a majority of the shares present in person or
represented by proxy at the Special Meeting and voting on the Directors' Stock
Option Plan Proposal is required for its approval.

RECOMMENDATION OF THE COMPANY'S BOARD

THE COMPANY'S BOARD HAS APPROVED THE DIRECTORS' STOCK OPTION PLAN PROPOSAL
AND RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE DIRECTORS' STOCK OPTION PLAN
PROPOSAL AND THE RESERVATION OF 250,000 SHARES OF COMPANY COMMON STOCK FOR
ISSUANCE THEREUNDER.

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APPENDIX A

LEHMAN BROTHERS

April 16, 1998

Board of Directors
Collagen Corporation
2500 Faber Place
Palo Alto, California 94303

Members of the Board:

We understand that Collagen Corporation (the "Company") is proposing to
distribute all of the stock of Cohesion Technologies, Inc. ("Cohesion") to the
Company's stockholders on a pro rata basis so that stockholders of the Company
will receive one share of common stock of Cohesion for each share of common
stock of the Company owned by such stockholder (the "Distribution"). The terms
and conditions of the Distribution are set forth in more detail in the Company's
preliminary proxy statement (the "Proxy Statement").

We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to the
Company's stockholders of the Distribution. We have not been requested to opine
as to, and our opinion does not in any manner address, the Company's underlying
business decision to proceed with or effect the Distribution.

In arriving at our opinion, we reviewed and analyzed: (1) the specific
terms of the Distribution, (2) the Proxy Statement, the Company's annual report
on Form 10-K for the year ended June 30, 1997 and such other publicly available
information concerning the Company that we believe to be relevant to our
analysis, (3) financial and operating information with respect to the business,
operations and prospects of the Company and Cohesion furnished to us by the
Company, (4) a trading history of the Company's common stock and a comparison of
that trading history with those of other companies that we deemed relevant, (5)
a comparison of the historical financial results and present financial condition
of the Company with those of other companies that we deemed relevant, and (6) a
comparison of the historical financial results and present financial condition
of Cohesion with those of other companies that we deemed relevant. In addition,
we have had discussions with the management of the Company concerning the
businesses, operations, assets, financial conditions and prospects of the
Company (including on a pro forma basis) and Cohesion and have undertaken such
other studies, analyses and investigations as we deemed appropriate.

In arriving at our opinion, we have assumed and relied upon the accuracy
and completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information and
have further relied upon the assurances of management of the Company that they
are not aware of any facts or circumstances that would make such information
inaccurate or misleading. With respect to the financial projections of the
Company and Cohesion, following the Distribution, upon advice of the Company we
have assumed that such projections have been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
management of the Company as to the future financial performance of the Company
and Cohesion and that the Company and Cohesion will perform substantially in
accordance with such projections. In arriving at our opinion, we have not
conducted a physical inspection of the properties and facilities of the Company
or Cohesion and have not made or obtained any evaluations or appraisals of the
assets or liabilities of the Company or Cohesion. In addition, you have not
authorized us to solicit, and we have not solicited, any indications of interest
from any third party with respect to the purchase of all or a part of the
business of Cohesion. We have assumed that the Distribution will be a tax-free
transaction to the stockholders of the Company. Our opinion necessarily is based
upon market, economic and other conditions as they exist on, and can be
evaluated as of, the date of this letter.

A-1
<PAGE> 93

The process by which securities trading markets establish a market price
for any security is complex, involving the interaction of numerous factors, and
market prices will fluctuate with changes in, among other factors, the financial
condition, business and prospects of the issuer and comparable companies and
economic and financial market conditions. In addition, trading in shares of
Cohesion will likely be characterized by a period of redistribution among
stockholders of the Company who receive such shares in the Distribution, which
may temporarily depress the market price of such shares during such period.
Accordingly, we express no opinion as to the prices at which shares of common
stock of Cohesion or the Company actually will trade following the consummation
of the Distribution. This opinion should not be viewed as providing any
assurances that the combined market value of the shares of common stock of the
Company after consummation of the Distribution and the shares of the common
stock of Cohesion to be received by a stockholder of the Company pursuant to the
Distribution will be in excess of the market value of the shares of common stock
of the Company owned by such stockholder at any time prior to announcement or
consummation of the Distribution.

Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Distribution is fair to
such stockholders.

We have acted as financial advisor to the Company in connection with the
Distribution and will receive a fee for our services which is contingent upon
the consummation of the Distribution. In addition, the Company has agreed to
indemnify us for certain liabilities that may arise out of the rendering of this
opinion. We also have performed various investment banking services for the
Company in the past and have received customary fees for such services. In the
ordinary course of our business, we may actively trade in the equity securities
of the Company for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.

This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Distribution. This opinion is not intended to be and does
not constitute a recommendation to any stockholder of the Company as to (i) how
such stockholder should vote with respect to the Distribution or (ii) any action
or investment decision which may be taken by such stockholders with respect to
shares of common stock of the company and Cohesion owned or to be received by
them in the Distribution.

Very truly yours,

LEHMAN BROTHERS

By: /s/ Ted Breck

------------------------------------
Managing Director

A-2
<PAGE> 94
APPENDIX B

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

COLLAGEN CORPORATION

SPECIAL MEETING OF STOCKHOLDERS

The undersigned hereby appoints REID W. DENNIS, WILLIAM G. DAVIS and CRAIG
W. JOHNSON, and each of them, with full power of substitution, as proxies, and
authorizes them to represent and to vote, as designated below, all the stock of
COLLAGEN CORPORATION that the undersigned is entitled to vote at the Special
Meeting of Stockholders of COLLAGEN CORPORATION to be held on ____________,
1998, at 10:00 a.m. Pacific Time, at Cohesion's principal offices located at
2500 Faber Place, Palo Alto, California 94303, and at any adjournment or
postponement thereof, as indicated on the reverse side.

THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER(S).

If no direction is made, this proxy will be voted in the manner described
in the Proxy Statement, FOR the proposal to spinoff Cohesion into a separate
company, including the distribution of all of the outstanding shares of Cohesion
Common Stock to the Company's stockholders, the ratification of the Cohesion
1998 Stock Option Plan, the ratification of the Cohesion 1998 Employee Stock
Purchase Plan, and the ratification of the Cohesion 1998 Directors' Stock Option
Plan; FOR the proposal to amend the Company's Certificate of Incorporation as
described in the accompanying Proxy Statement to change the Company's name to
Collagen Aesthetics, Inc.; FOR the proposal to amend the Company's 1994 Stock
Option Plan to increase the number of shares of Company Common Stock reserved
for issuance thereunder by 70,000 shares from 1,150,000 to 1,220,000 shares; FOR
the proposal to adopt the Company's 1998 Employee Stock Purchase Plan and the
reservation of 125,000 shares of Company Common Stock for issuance thereunder;
and FOR the proposal to adopt the Company's 1998 Directors' Stock Option Plan
and the reservation of 250,000 shares of Company Common Stock for issuance
thereunder.

(Continued, and to be dated and signed on the reverse side.)

COLLAGEN CORPORATION
P.O. BOX 11042
NEW YORK, N.Y. 10208-0042

B-1
<PAGE> 95

1. PROPOSAL TO SPINOFF COHESION INTO A SEPARATE COMPANY, INCLUDING THE
DISTRIBUTION OF ALL OF THE OUTSTANDING SHARES OF COHESION COMMON STOCK TO
THE COMPANY'S STOCKHOLDERS; THE RATIFICATION OF THE COHESION 1998 STOCK
OPTION PLAN; THE RATIFICATION OF THE COHESION 1998 EMPLOYEE STOCK PURCHASE
PLAN; AND THE RATIFICATION OF THE COHESION 1998 DIRECTORS' STOCK OPTION
PLAN:

FOR [ ] AGAINST [ ] ABSTAIN [ ]

2. PROPOSAL TO AMEND THE COMPANY'S CERTIFICATE OF INCORPORATION AS
DESCRIBED IN THIS PROXY STATEMENT TO CHANGE THE COMPANY'S NAME TO
COLLAGEN AESTHETICS, INC.:

FOR [ ] AGAINST [ ] ABSTAIN [ ]

3. PROPOSAL TO AMEND THE COMPANY'S 1994 STOCK OPTION PLAN TO INCREASE THE
NUMBER OF SHARES OF COMPANY COMMON STOCK RESERVED FOR ISSUANCE THEREUNDER
BY 70,000 SHARES FROM 1,150,000 TO 1,220,000 SHARES:

FOR [ ] AGAINST [ ] ABSTAIN [ ]

4. PROPOSAL TO ADOPT THE COMPANY'S 1998 EMPLOYEE STOCK PURCHASE PLAN AND THE
RESERVATION OF 125,000 SHARES OF COMPANY COMMON STOCK FOR ISSUANCE
THEREUNDER:

FOR [ ] AGAINST [ ] ABSTAIN [ ]

5. PROPOSAL TO ADOPT THE COMPANY'S 1998 DIRECTORS' STOCK OPTION PLAN AND THE
RESERVATION OF 250,000 SHARES OF COMPANY COMMON STOCK FOR ISSUANCE
THEREUNDER:

FOR [ ] AGAINST [ ] ABSTAIN [ ]

Change of Address and
or Comments Mark Here [ ]

Please sign exactly as name
appears to the left. When shares
are held by joint tenants, both
should sign. When signing as
attorney, executor, administrator,
trustee or guardian, please give
full title as such. If a
corporation, please sign in full
corporate name by President or
other authorized officer. If a
partnership, please sign in
partnership name by authorized
person.

DATED: , 1998
---------------------

---------------------------------
Signature

---------------------------------
Signature if held jointly

PLEASE MARK, SIGN, DATE AND RETURN THE Votes MUST be indicated
PROXY CARD PROMPTLY DURING THE ENCLOSED ( ) is Black or Blue ink.
ENVELOPE.

B-2
<PAGE> 96

INDEX TO CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
COHESION TECHNOLOGIES, INC. CONSOLIDATED FINANCIAL
STATEMENTS:
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of June 30, 1996 and 1997 and
December 31, 1997......................................... F-3
Consolidated Statements of Operations for the years ended
June 30, 1995, 1996 and 1997 and the six months ended
December 31, 1996 and 1997................................ F-4
Consolidated Statements of Stockholder's and Parent Company
Equity (Net Capital Deficiency) for the years ended June
30, 1995, 1996 and 1997 and the six months ended December
31, 1997.................................................. F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1995, 1996 and 1997 and the six months ended
December 31, 1996 and 1997................................ F-6
Notes to Consolidated Financial Statements.................. F-7
COHESION TECHNOLOGIES, INC. UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION:
Description of Unaudited Pro forma Consolidated Financial
Information............................................... F-23
Unaudited Pro forma Consolidated Balance Sheet as of
December 31, 1997......................................... F-24
Unaudited Pro forma Consolidated Statements of Operations
for the year ended June 30, 1997 and the six months ended
December 31, 1997......................................... F-25
Notes to Unaudited Pro forma Consolidated Financial
Information............................................... F-26
COLLAGEN CORPORATION UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION:
Description of Unaudited Pro forma Consolidated Financial
Information............................................... F-27
Unaudited Pro forma Consolidated Balance Sheet as of
December 31, 1997......................................... F-28
Unaudited Pro forma Consolidated Statements of Operations
for the year ended June 30, 1997 and the six months ended
December 31, 1997......................................... F-29
Notes to Unaudited Pro forma Consolidated Financial
Information............................................... F-30
</TABLE>

F-1
<PAGE> 97

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholder
Cohesion Technologies, Inc.

We have audited the accompanying consolidated balance sheets of Cohesion
Technologies, Inc. ("Cohesion"), (a wholly-owned subsidiary of Collagen
Corporation), as described in Note 1 to the consolidated financial statements,
as of June 30, 1996 and 1997, and the related consolidated statements of
operations, stockholder's and parent company equity (net capital deficiency) and
cash flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of Cohesion's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cohesion at
June 30, 1996 and 1997, and the consolidated results of its operations and its
cash flows for each of the three years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Palo Alto, California
March 6, 1998

F-2
<PAGE> 98

COHESION TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
JUNE 30,
------------------- DECEMBER 31,
1996 1997 1997
------- -------- ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $11,074 $ 13,706 $ 500
Short-term investments.................................... -- 92 1,332
Accounts receivable, less allowance for doubtful accounts
($14 at June 30, 1996, $2 at June 30 and December 31,
1997)................................................... 532 97 311
Inventories............................................... 56 56 30
Current deferred taxes.................................... 3,618 2,608 875
Receivable due from sales of Boston Scientific Corporation
stock................................................... 1,866 -- 3,146
Other current assets...................................... 1,840 942 621
------- -------- -------
Total current assets............................... 18,986 17,501 6,815
Property and equipment, net................................. 1,537 1,566 2,045
Intangible assets, net...................................... 1,850 1,491 1,404
Investment in Boston Scientific Corporation (Target
Therapeutics, Inc. in 1996)............................... 65,841 83,874 55,411
Other investments........................................... 7,771 10,041 8,724
Long-term deferred taxes.................................... 35 33 1,396
Loans to officers and employees............................. 1,807 9 159
Receivable from equity collar investment.................... -- -- 11,404
Other assets................................................ 89 89 91
------- -------- -------
$97,916 $114,604 $87,449
======= ======== =======
LIABILITIES AND STOCKHOLDER'S AND PARENT COMPANY EQUITY
Current liabilities:
Accounts payable.......................................... $ 586 $ 627 $ 145
Accrued compensation...................................... 352 625 536
Accrued liabilities....................................... 2,293 1,516 3,074
Income taxes payable...................................... 2,292 2,700 300
Notes payable............................................. 5,000 -- --
Other current liabilities................................. -- -- 65
------- -------- -------
Total current liabilities.......................... 10,523 5,468 4,120
Long-term liabilities:
Deferred income taxes..................................... 27,091 35,052 27,973
Other long-term liabilities............................... 169 79 50
------- -------- -------
Total long-term liabilities........................ 27,260 35,131 28,023
Commitments and contingencies
Minority interest........................................... 588 -- --
Stockholder's and parent company equity:
Preferred stock, $.001 par value, authorized: 5,000,000
shares, issued and outstanding: 10 shares at June 30 and
December 31, 1997 (no shares at June 30, 1996).......... -- -- --
Common stock, $.001 par value, authorized: 10,000,000
shares, issued and outstanding: no shares at June 30,
1996 and 1997 and December 31, 1997..................... -- -- --
Additional paid-in capital................................ 9,621 9,621 9,621
Parent company equity..................................... 15,375 17,315 8,895
Unrealized gain on available-for-sale investments......... 34,549 47,069 36,790
------- -------- -------
Total stockholder's and parent company equity...... 59,545 74,005 55,306
------- -------- -------
$97,916 $114,604 $87,449
======= ======== =======
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-3
<PAGE> 99

COHESION TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------ -------------------
1995 1996 1997 1996 1997
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue -- product sales............... $ 3,546 $ 3,612 $ 2,527 $ 1,357 $ 1,234
Costs and expenses:
Cost of sales........................ 1,961 2,404 2,105 1,077 692
Research and development............. 3,416 4,268 9,627 6,071 7,402
General and administrative........... 2,726 3,120 7,153 1,871 2,591
Purchased in-process research and
development....................... -- 3,000 -- -- 10,530
------- ------- -------- ------- --------
Total costs and expenses..... 8,103 12,792 18,885 9,019 21,215
------- ------- -------- ------- --------
Loss from operations................... (4,557) (9,180) (16,358) (7,662) (19,981)
Other income (expense):
Net gain on investments, principally
Boston Scientific Corporation
(Target Therapeutics, Inc. in 1995
and 1996)......................... 5,110 82,093 9,063 9,222 8,775
Net gain on sale of investment in
Prograft Medical, Inc............. -- -- 15,395 -- --
Equity in earnings of Target
Therapeutics, Inc................. 2,417 1,430 -- -- --
Equity in losses of other
affiliates........................ (1,230) (1,824) (813) (598) (9)
Interest income...................... 25 378 566 343 236
Interest expense..................... (2,113) (2,532) (377) (188) --
------- ------- -------- ------- --------
Income (loss) before provision for
income taxes and minority interest... (348) 70,365 7,476 1,117 (10,979)
Provision for income taxes............. 553 31,718 3,162 480 --
Minority interest...................... -- (27) (667) (235) --
------- ------- -------- ------- --------
Net income (loss)...................... $ (901) $38,674 $ 4,981 $ 872 $(10,979)
======= ======= ======== ======= ========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-4
<PAGE> 100

COHESION TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDER'S AND PARENT COMPANY EQUITY (NET CAPITAL
DEFICIENCY)
YEARS ENDED JUNE 30, 1995, 1996, 1997
AND SIX MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)

<TABLE>
<CAPTION>
TOTAL
STOCK-
UNREALIZED HOLDER'S AND
GAIN/(LOSS) PARENT
PREFERRED ON COMPANY
AND ADDITIONAL PARENT AVAILABLE- EQUITY
COMMON PAID-IN COMPANY FOR-SALE (NET CAPITAL
STOCK CAPITAL EQUITY INVESTMENTS DEFICIENCY)
--------- ---------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1994........... $ -- $9,621 $(15,353) $ -- $ (5,732)
Other advances to Collagen
Corporation...................... -- -- (1,927) -- (1,927)
Net loss........................... -- -- (901) -- (901)
------ ------ -------- -------- --------
Balance at June 30, 1995........... -- 9,621 (18,181) -- (8,560)
Other advances to Collagen
Corporation...................... -- -- (5,118) -- (5,118)
Unrealized gain on
available-for-sale securities.... -- -- -- 34,549 34,549
Net income......................... -- -- 38,674 -- 38,674
------ ------ -------- -------- --------
Balance at June 30, 1996........... -- 9,621 15,375 34,549 59,545
Other advances to Collagen
Corporation...................... -- -- (3,041) -- (3,041)
Unrealized gain on
available-for-sale securities.... -- -- -- 12,520 12,520
Net income......................... -- -- 4,981 -- 4,981
------ ------ -------- -------- --------
Balance at June 30, 1997........... -- 9,621 17,315 47,069 74,005
Other advances from Collagen
Corporation (unaudited).......... -- -- 2,559 -- 2,559
Unrealized loss on
available-for-sale securities
(unaudited)...................... -- -- -- (10,279) (10,279)
Net loss (unaudited)............... -- -- (10,979) -- (10,979)
------ ------ -------- -------- --------
Balance at December 31, 1997
(unaudited)...................... $ -- $9,621 $ 8,895 $ 36,790 $ 55,306
====== ====== ======== ======== ========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-5
<PAGE> 101

COHESION TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------- ------------------
1995 1996 1997 1996 1997
------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ (901) $ 38,674 $ 4,981 $ 872 $(10,979)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Purchased in-process research
and development........................ -- 3,000 -- -- 10,530
Depreciation and amortization............ 568 801 564 635 341
Equity in (earnings) losses of
affiliates............................. (1,188) 393 813 597 9
Gains on investments, net................ (2,952) (42,547) (13,625) (4,051) (8,775)
Deferred income taxes.................... 844 (7,508) 326 5 561
Decrease (increase) in assets:
Accounts receivable.................... 415 188 435 329 (214)
Inventories............................ (17) (37) -- 23 26
Other.................................. (150) (1,331) 1,166 2,711 (3,002)
Increase (decrease) in liabilities:
Accounts payable, accrued liabilities
and other........................... 577 1,177 (463) (1,244) 1,051
Income taxes payable................... 444 78 408 (1,992) (2,400)
Other long-term liabilities............ (4) 611 (679) (237) (28)
------- -------- -------- ------- --------
Total adjustments........................... (1,463) (45,175) (11,055) (3,224) (1,901)
------- -------- -------- ------- --------
Net cash used in operating activities.... (2,364) (6,501) (6,074) (2,352) (12,880)
------- -------- -------- ------- --------
Cash flows from investing activities:
Net proceeds from sales of Boston Scientific
Corporation/Target Therapeutics, Inc.
stock.................................... 6,221 57,950 5,578 5,578 9,362
Net proceeds from sales of other affiliate
stock.................................... -- 1,447 9,771 -- 704
Proceeds from sales and maturities of
short-term investments................... -- -- -- -- 4,571
Purchases of short-term investments......... -- -- -- -- (3,567)
Expenditures for property and equipment..... (1,311) (678) (532) (139) (366)
Increase in intangible and other assets..... (416) (2,042) (824) (14) --
Equity investments and loans to
affiliates............................... (5,737) (14,337) (287) (251) (500)
Acquisition of shares of Cohesion
Corporation, net of cash balances........ -- (1,256) -- -- (10,530)
------- -------- -------- ------- --------
Net cash provided by (used in) investing
activities............................. (1,243) 41,084 13,706 5,174 (326)
------- -------- -------- ------- --------
Cash flows from financing activities:
Proceeds from (repayments of) bank
borrowings............................... -- 5,000 (5,000) -- --
Proceeds from (repayments of) advances from
Collagen Corporation..................... 3,600 (29,000) -- -- --
------- -------- -------- ------- --------
Net cash provided by (used in) financing
activities............................. 3,600 (24,000) (5,000) -- --
------- -------- -------- ------- --------
Net increase (decrease) in cash and
cash equivalents............................ (7) 10,583 2,632 2,822 (13,206)
Cash and cash equivalents at beginning of
period...................................... 498 491 11,074 11,074 13,706
------- -------- -------- ------- --------
Cash and cash equivalents at end of period.... $ 491 $ 11,074 $ 13,706 $13,896 $ 500
======= ======== ======== ======= ========
</TABLE>

The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
F-6
<PAGE> 102

COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Cohesion Technologies, Inc. ("Cohesion") was organized as a Delaware
corporation and a wholly-owned subsidiary of Collagen Corporation ("Collagen")
in June 1997. In October 1997, Collagen announced that it would proceed to
separate its Aesthetic Technologies Group and its Collagen Technologies Group
("CTG") into two independent, publicly-traded companies. In connection with the
separation, Collagen plans to distribute as a dividend to its stockholders, one
share of Cohesion common stock for each share of Collagen common stock
outstanding, (the "Spinoff"). The Spinoff is designed to separate two distinct
businesses with significant differences in their markets, products, research
needs, investment needs, employee retention and compensation plans and plans for
growth. Collagen's Board believes the separation into two independent companies
will enhance the ability of each to focus on strategic initiatives and new
business opportunities, improve cost structures and operating efficiencies and
create incentives that are more attractive and appropriate for the recruitment
and retention of key employees. As a consequence, Collagen believes that
investors will be able to evaluate better the merits of the two groups of
businesses and their future prospects.

In March 1998, the Board of Directors of Collagen approved certain
agreements between Cohesion and Collagen which (i) provided for the transfer,
effective January 1, 1998, of certain assets and liabilities relating to the
businesses previously conducted by Collagen's CTG to Cohesion, and (ii)
established contractual arrangements between Collagen and Cohesion described
below under Note 2. CTG's business activities focused on the design,
development, manufacture and commercialization of innovative resorbable
biomaterials, adhesive technologies, and delivery systems in the fields of
tissue repair and regeneration.

The accompanying consolidated financial statements have been prepared using
Collagen's historical cost basis of the assets and liabilities of the various
division activities that comprise Cohesion. The financial statements of Cohesion
include the operating results of Cohesion Corporation, a developer of
proprietary products for hemostasis and tissue adhesion, biosealants and
adhesion barriers for surgical applications, since the acquisition of Cohesion
Corporation by Collagen in fiscal 1996 (see Note 7, "Acquisitions of Cohesion
Corporation").

The consolidated financial statements reflect the results of operations,
financial condition and cash flows of Cohesion as a component of Collagen and
may not be indicative of the actual results of operations and financial position
of Cohesion under separate ownership. The various assets, liabilities, revenues
and expenses associated with CTG have been allocated to the historical financial
statements of Cohesion in a manner consistent with the Assignment and License
Agreement, and related agreements, discussed below. Management believes that the
consolidated statements of operations include a reasonable allocation of costs
incurred by Collagen which benefit Cohesion. These allocations of corporate
expenses include, in aggregate, approximately 30% to 35% of the general and
administrative expenses of Collagen for the periods presented with the exception
of certain Chief Executive Officer ("CEO") expenses and legal costs related to
Collagen's lawsuit with Matrix Pharmaceutical, Inc. ("Matrix"). (See Notes 1, 8
and 9.) The CEO expenses have been allocated to Cohesion based on the CEO's
level of involvement in Cohesion during each fiscal year presented. All costs
associated with the Matrix lawsuit, which was filed in December 1994 and settled
in May 1997, were allocated based on the focus of the lawsuit during fiscal
1995, 1996 and 1997. Costs and expenses associated with cost of sales and
research and development were generally allocated to Cohesion on a specific
identification basis.

The consolidated financial statements include an allocation of Collagen
corporate debt and interest expense. In connection with the asset transfer
discussed above, $10.9 million of cash, cash equivalents and

F-7
<PAGE> 103
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
short-term investments remained with Collagen and the remaining cash, cash
equivalents and short-term investments were transferred to Cohesion at December
31, 1997. All short-term investments for fiscal years 1997 and prior were
allocated to Collagen. Substantially all investments in affiliates, including
Boston Scientific Corporation of Natick, Massachusetts ("Boston Scientific") and
Innovasive Devices, Inc. of Marlborough, Massachusetts ("Innovasive Devices")
were allocated to Cohesion. Trade receivables, notes receivable, loans to
officers and employees, fixed assets and employee related liabilities were
allocated based on specific identification. All equity accounts, with the
exception of the additional-paid-in-capital related to Target Therapeutics,
Inc., remained with Collagen. For any assets or liabilities where it was not
practical to use the specific identification method, Cohesion was allocated 30%
of these assets and liabilities. The 30% allocation was based on a review of the
characteristics and activity of these assets and liabilities and business
objectives. In those years that Cohesion had negative cash and cash equivalent
balances, a note payable due to Collagen was recorded. Accordingly, interest
expense was accrued annually at 8% and Cohesion was assumed to have repaid the
note payable balance and the accrued interest the following June 30th. The
intercompany receivable/payable balances resulting from Cohesion's participation
in Collagen's central cash management system, after consideration of the
December 31, 1997 contribution of cash, cash equivalents and short-term
investments, is a component of parent company's contributed capital on
Cohesion's balance sheet. The officer separation agreement with Collagen's
former CEO, as described below under Note 8, and the costs associated with the
agreement have been allocated to Cohesion.

Under the terms of the Services and Supply agreements between Cohesion and
Collagen discussed below, Collagen will supply certain products to Cohesion for
a fee. The cost of sales amounts included in the financial statements are based
on historical costs for the periods presented. The intercompany agreements
discussed in Note 2 provide for cost to be determined on a defined formula. If
such prospective arrangements had been in place during the periods presented,
cost of sales would have increased $167,000 in fiscal year 1995, decreased by
$237,000 and $589,000 in fiscal years 1996 and 1997, respectively, and would
have increased by $280,000 and $48,000 in the six months ended December 31, 1996
and 1997, respectively.

Under the terms of the Recombinant Technology and Development License
Agreement between Cohesion and Collagen discussed below, Cohesion and Collagen
will collaborate to develop recombinant human collagen and provide for cost
sharing of the project until certain milestones are met. The research and
development ("R&D") expenses included in the financial statements are based on
historical costs for the periods presented. The intercompany agreements
discussed in Note 2 provide for costs to be equally shared. If such prospective
arrangements had been in place during the periods presented, R&D expenses, net
of reimbursements from Collagen, would have decreased by $273,000, $703,000 and
$1.3 million in fiscal years 1995, 1996 and 1997 and $418,000 and $1.0 million
in the six months ended December 31, 1996 and 1997, respectively.

Principles of Consolidation

The consolidated financial statements include the accounts of Cohesion and
its wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Cohesion operates in one
industry segment focusing on the development and sale of medical devices.
Investments in unconsolidated subsidiaries, and other equity investments in
which Cohesion has a 20% to 50% interest or otherwise has the ability to
exercise significant influence, are accounted for under the equity method.

F-8
<PAGE> 104
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Interim Financial Information

The financial information at December 31, 1997, and for the six months
ended December 31, 1996 and 1997, is unaudited but includes all adjustments
(consisting only of normal recurring adjustments) which Cohesion considers
necessary for a fair presentation of the financial position at such date and of
the operating results and cash flows for those periods. Results of these periods
are not necessarily indicative of results expected for the entire year.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Cash Equivalents, Short-term Investments and Other Investments

Cohesion considers all highly liquid investments with an original maturity
from date of purchase of three months or less to be cash equivalents. Short-term
investments consist principally of bankers acceptances, commercial paper and
master notes and have maturities greater than 90 days, but not exceeding one
year.

Cohesion invests its excess cash in deposits with major banks and in money
market securities of companies with strong credit ratings and from a variety of
industries. These securities are typically short-term in nature and, therefore,
bear minimal risk. Cohesion has not experienced any losses on its money market
investments.

Cohesion determines the appropriate classification of marketable securities
at the time of purchase and re-evaluates such designation as of each balance
sheet date. All of Cohesion's debt and equity securities are classified as
available-for-sale. The carrying value of available-for-sale debt securities
approximates fair value because of the short-term maturity of these investments.
Both realized and unrealized gains and losses on debt securities were immaterial
as of June 30, 1995, 1996 and 1997 and December 31, 1997 and for the years ended
June 30, 1995, 1996 and 1997 and the six months ended December 31, 1996 and
1997. Unrestricted available-for-sale equity securities in which Cohesion has a
less than 20% interest, which includes holdings in Boston Scientific (holdings
in Target Therapeutics, Inc. prior to April 1997) and Innovasive Devices are
carried at fair value with the unrealized gains and losses, net of tax, reported
as a separate component of stockholder's equity. Restricted equity securities in
which Cohesion has less than a 20% interest are carried at cost or estimated
realizable value, if less, and are included in "other investments and assets" in
the accompanying balance sheets. In fiscal 1996, the carrying value of certain
investments were reduced by $4.0 million to estimated net realizable value. The
cost of securities sold is based on the specific identification method.

The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization is included
in interest income. Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in interest
income. Interest and dividends on securities classified as available-for-sale
are included in interest income.

F-9
<PAGE> 105
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Inventories

Inventories, which are purchased from Collagen, are valued at the lower of
cost, determined on a standard cost basis which approximates average cost, or
market.

Property and Equipment

Depreciation and amortization of property and equipment, which is stated at
cost, are provided on the straight-line method over estimated useful lives as
follows:

<TABLE>
<S> <C>
Machinery and equipment..................................... 3 - 7 years
Leasehold improvements...................................... Term of lease
</TABLE>

Intangible Assets

Intangible assets are amortized using the straight-line method. Patents
acquired prior to October 1996 are amortized over a seventeen year period
beginning with the effective date or over the remainder of such period from the
date acquired and patents purchased thereafter are expensed when acquired.
Trademarks acquired prior to fiscal 1996 are amortized over a twenty year period
beginning with the trademark filing dates and trademarks purchased thereafter
are expensed when acquired. The effect of changes in accounting for patents and
trademarks were not material to the accompanying financial statements.

Loans to Officers and Employees

Principal plus accrued interest due from current and former employees,
totaled approximately $161,000, $1.7 million, and $1.8 million at June 30, 1996,
and 1997, and December 31, 1997, respectively, prior to reserves. Principal plus
accrued interest due from officers totaled approximately $1.6 million, $9,000,
and $159,000 at June 30, 1996 and 1997, and December 31, 1997, respectively.

Included within the amounts due from current and former employees at June
30, 1997 and December 31, 1997, and within the amounts due from officers at June
30, 1996, are four promissory notes totaling $1.6 million, prior to reserves,
due from Collagen's former Chairman and Chief Executive Officer, Howard
Palefsky. All such notes are subject to interest at the lower of 10% per annum
or the prime rate. Two loans totaling $450,000 were forgiven on March 15, 1998
and two loans totaling $1.1 million are to be forgiven on March 15, 1999, but
all notes are repayable immediately if Mr. Palefsky discontinues serving as a
consultant to Cohesion prior to the loan forgiveness dates. Loans to Mr.
Palefsky were fully reserved as of June 30, 1997, and the associated expenses
were recognized in fiscal 1997.

Revenue Recognition

Revenue from product sales is recognized at time of shipment, net of
allowances for estimated future returns.

Earnings per Share

Cohesion computes earnings per share in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"). Per share data for each of the three years in
the period ended June 30, 1997 and the six months ended December 31, 1996 and

F-10
<PAGE> 106
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1997 has not been presented as no common shares are outstanding and such
information would not be meaningful.

Concentration of Credit and Other Risk

Cohesion sells its intermediate products (Vitrogen, Cell Prime, Zygen,
Angiostat and other bulk collagen products) to various universities and
institutions and its Collagraft(R) bone graft matrix implant and Collagraft(R)
bone graft matrix strip ("Collagraft bone graft products") to Zimmer, Inc.
("Zimmer"), Cohesion's marketing partner for Collagraft bone graft products.
Cohesion performs ongoing credit evaluations of its customers and generally does
not require collateral. Cohesion maintains reserves for potential credit losses
and such losses have been within management's expectations.

Cohesion allows, on occasion, its customers to return product for credit,
and also allows customers to return defective or damaged product for credit or
replacement. Written authorization from Cohesion is required to return
merchandise. Some domestic and foreign customers are subject to extended payment
terms. These practices have not had a material effect on Cohesion's working
capital.

As of December 31, 1997, Cohesion held 1,207,860 shares of Boston
Scientific common stock, valued at over $55 million (based on a market price of
$45.88 per share on such date). The market price of Boston Scientific's common
stock is highly volatile and, as a medical device manufacturer, Boston
Scientific is subject to a number of the same factors affecting its operations
as Cohesion, as well as additional factors not applicable to Cohesion. Any
significant downward fluctuation in the market price for Boston Scientific
common stock could adversely impact Cohesion's earnings (due to lower returns
per share on sales of such stock) as well as the value of Cohesion's total
assets as stated on its balance sheet (based on a lower carrying value for the
Boston Scientific investment, which as of December 31, 1997, represented
approximately 63% of the value of Cohesion's total assets).

All of Cohesion's research and development activities, its corporate
headquarters, and other critical business functions are located near major
earthquake faults. In addition, all of Cohesion's products are manufactured and
stored at Collagen's manufacturing and warehouse facility with Cohesion
currently maintaining only limited amounts of finished product inventory at
these facilities. Both facilities are located near major earthquake faults.
While Cohesion has some limited protection in the form of disaster recovery
programs and basic insurance coverage, Cohesion's operating results and
financial condition would be materially adversely affected in the event of a
major earthquake, fire or other similar calamity affecting these facilities.

New Accounting Standards

In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income," and Financial Accounting Standard No. 131 ("SFAS 131"), "Disclosures
About Segments of an Enterprise and Related Information," which will be required
to be adopted by Cohesion in fiscal 1999. Adoption of these statements is not
expected to have a significant impact on Cohesion's consolidated financial
position, results of operations or cash flows.

2. CONTRACTUAL AGREEMENTS WITH COLLAGEN

Cohesion has entered into supply, services, research and development,
benefits, tax allocation, and distribution agreements with Collagen effective
January 1, 1998. Under the Collagraft Supply Agreement,
F-11
<PAGE> 107
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

2. CONTRACTUAL AGREEMENTS WITH COLLAGEN (CONTINUED)
Collagen will supply Cohesion's requirements of Collagraft necessary for
Cohesion to fulfill its obligations under its agreement with Zimmer at a price
that is the greater of a percentage of the sales price or a defined multiplier
of Collagen's cost. In accordance with the Collagen Supply Agreement, Collagen
will supply Cohesion products, intermediates and finished materials at a price
equal to a multiplier of Collagen's cost. Under the Services Agreement, which is
effective through June 30, 1999, Cohesion shall provide Collagen with services
in the following areas: facilities, telephone, library, investor relations,
research and development services (to the extent not provided for by the
research and development agreement), and clinical and regulatory. Collagen shall
provide Cohesion with certain services in the following areas: financial and tax
services, health and welfare benefits administration and administration of the
401(k) Savings Plan, administrative, legal, regulatory, quality assurance,
medical affairs, and manufacturing services. Under the Services Agreement with
Collagen, Cohesion will use Collagen's computer systems until June 30, 1999.
Subsequent to June 30, 1999, Cohesion may extend its Services Agreement with
Collagen or elect to purchase its own computer systems. In accordance with the
Recombinant Technology and Development License Agreement, Cohesion and Collagen
will collaborate to develop recombinant human collagen and provide for cost
sharing for the project until certain milestones are met. The Benefits Agreement
provides for the continuation or replacement of benefits for the employees
transferred to Cohesion and employees remaining with Collagen. The Tax
Allocation Agreement provides that Collagen will be responsible for all taxes
prior to the Spinoff date and Cohesion will be responsible for all of its tax
liabilities subsequent to that date. Under the Vitrogen International
Distribution Agreement, Collagen International, Inc., a subsidiary of Collagen,
shall act as Cohesion's distributor in Germany for Vitrogen.

F-12
<PAGE> 108
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

3. BALANCE SHEET INFORMATION

<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1996 1997 1997
------ ------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Other current assets:
Receivables from affiliates........................ $1,482 $ 331 $ 353
Other.............................................. 358 611 268
------ ------ ------
$1,840 $ 942 $ 621
====== ====== ======
Property and equipment:
Machinery and equipment............................ $4,031 $4,733 $4,832
Leasehold improvements............................. 3,442 2,551 3,147
------ ------ ------
7,473 7,284 7,979
Less accumulated depreciation and amortization..... (5,936) (5,718) (5,934)
------ ------ ------
$1,537 $1,566 $2,045
====== ====== ======
Intangible assets:
Patents and trademarks............................. $2,887 $2,464 $2,428
Less amortization.................................. (1,037) (973) (1,024)
------ ------ ------
$1,850 $1,491 $1,404
====== ====== ======
Accrued liabilities:
Accrued liabilities -- research and development,
general and administrative and other............ $2,001 $1,283 $2,945
Legal fees......................................... 138 78 --
Employee related liabilities....................... 154 155 129
------ ------ ------
$2,293 $1,516 $3,074
====== ====== ======
</TABLE>

4. SHORT-TERM INVESTMENTS

Available-for-sale debt securities included short-term corporate
obligations of $92,000 and $1.3 million at June 30 and December 31, 1997,
respectively. During the six months ended December 31, 1997, Cohesion sold
short-term investments with a fair value at the dates of sale of $4.6 million.
Both gross realized and unrealized gains and losses on these securities were
insignificant. Cohesion uses amortized cost as the basis for recording gains and
losses from securities transactions. Contractual maturities of the debt
securities do not exceed one year at December 31, 1997.

5. INVESTMENT IN BOSTON SCIENTIFIC CORPORATION (TARGET THERAPEUTICS, INC.)

Cohesion's investment in Target Therapeutics, Inc. of Fremont, California
("Target") was accounted for under the equity method through November 1995.
During December 1995, Cohesion's ownership interest in Target fell below 20%.
Given that Cohesion did not have the ability to exercise significant influence,
Cohesion began accounting for its investment in Target under the cost method
beginning in December 1995. In fiscal 1996, Cohesion sold 1,792,000 shares of
Target common stock for a pre-tax gain of approximately $85.8 million and in
fiscal 1997, Cohesion sold 330,000 shares of Target common stock for a pre-tax
gain of approximately $9.1 million.

On January 20, 1997, Boston Scientific and Target jointly announced the
signing of a definitive agreement to merge in a tax-free stock-for-stock
transaction. On April 8, 1997, the merger was completed and, as a result,
Cohesion received 1,365,200 shares of Boston Scientific common stock in exchange
for Cohesion's

F-13
<PAGE> 109
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

5. INVESTMENT IN BOSTON SCIENTIFIC CORPORATION (TARGET THERAPEUTICS, INC.)
(CONTINUED)
1,275,888 shares of Target common stock. Pursuant to the merger agreement,
Cohesion was restricted from selling its shares of Boston Scientific common
stock until the expiration of applicable pooling-of-interests restrictions,
which occurred during the first quarter of fiscal 1998. During the six months
ended December 31, 1997, Cohesion sold 157,340 shares of Boston Scientific
common stock for a pre-tax gain of approximately $8.8 million.

Boston Scientific is a leading manufacturer of catheter-based devices that
can be inserted through small body openings and are used in heart surgery and
other operations. Boston Scientific common stock is quoted on the New York Stock
Exchange under the symbol BSX. On December 31, 1997, the closing price of Boston
Scientific common stock was $45.88 per share.

At December 31, 1997, Cohesion's shares of Boston Scientific common stock
are classified as available-for-sale and have been recorded at the estimated
fair value of $55.4 million. The $50.2 million unrealized gain ($55.4 million
estimated fair value less $5.2 million cost) on these available-for-sale
securities has been reported as a separate component of stockholder's equity,
net of tax.

In August 1997, Cohesion entered into certain costless collar instruments
to hedge a portion (650,000 shares) of the Boston Scientific equity securities
against changes in market value. Gains and losses on these instruments are
recorded as an adjustment to unrealized gains and losses on marketable
securities with a corresponding receivable or payable recorded. A costless
collar instrument is a purchased put option and a written call option on a
specific equity security such that the cost of the purchased put and the
proceeds of the written call offset each other; therefore, there is no initial
cost or cash outflow for these instruments.

The fair value of the purchased puts and the written calls were determined
based on quoted market prices at year end. At December 31, 1997, the notional
amount of the put and call options were $41.2 million and $64.1 million,
respectively. The carrying value, which reflects Cohesion's receivable under
these instruments, and the fair value of the equity collars at December 31, 1997
were $11.4 million and $10.6 million, respectively.

6. INVESTMENT IN INNOVASIVE DEVICES, INC.

In October 1995, Cohesion purchased approximately 844,000 shares of common
stock, representing approximately 9% of the outstanding capital stock of
Innovasive Devices for $4.1 million and entered into a collaborative product
development agreement (the "Development Agreement"). Innovasive Devices
develops, manufactures and markets tissue and bone reattachment systems which
are particularly relevant to the sports medicine and arthroscopy segments of the
orthopaedic surgery market. Cohesion, pursuant to the intercompany agreements,
assumed Collagen's relationship and obligations with Innovasive Devices.
Cohesion and Innovasive Devices are collaborating to develop certain resorbable
mechanical tissue-fixation devices utilizing collagen-based biomaterials for
applications in orthopaedic tissue repairs. Pursuant to the terms of the
Development Agreement, Cohesion is performing development activities in
accordance with a project plan and Innovasive Devices is reimbursing Cohesion
for such activities in accordance with the project budget. Accordingly, over the
next several years, the collaboration will require Cohesion's expertise with
collagen-based biomaterials and a small percentage of Cohesion's research and
development expenditures. In the event that marketable products are developed as
a result of this collaboration, Cohesion will have the right (but no obligation)
to manufacture such products.

Prior to October 1996, Cohesion's 844,000 shares of common stock of
Innovasive Devices were valued at cost or $4.1 million due to restrictions which
prevented the sale of any of Cohesion's shares of common stock
F-14
<PAGE> 110
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

6. INVESTMENT IN INNOVASIVE DEVICES, INC. (CONTINUED)
of Innovasive Devices. At December 31, 1997, restrictions were no longer
applicable on 93,000 shares of the common stock which Cohesion held in
Innovasive Devices. Cohesion carries the portion of its investment in Innovasive
Devices which can be sold within one year, as an available-for-sale investment
at market value, or $848,000 at December 31, 1997, reflecting an unrealized gain
of $401,000 ($848,000 estimated fair value less $447,000 cost), which has been
included in a separate component of stockholder's equity, net of tax. The
remaining 751,000 restricted shares of common stock continue to be valued at
cost. The investment in Innovasive is included in "other investments and assets"
in the accompanying balance sheets.

During fiscal 1996 and 1997 and the six months ended December 31, 1997,
Cohesion did not sell any of its shares of common stock of Innovasive Devices.
Innovasive Devices' common stock is quoted on The Nasdaq Stock Market under the
symbol IDEA. The closing price of Innovasive Devices' common stock at December
31, 1997, was $9.13 per share. At December 31, 1997, Cohesion held approximately
a 9% ownership position in Innovasive Devices.

7. ACQUISITIONS OF COHESION CORPORATION

Collagen increased its ownership position in Cohesion Corporation of Palo
Alto, California from approximately 40% to 81% in May 1996 and from 81% to
approximately 99% in December 1997. Cohesion Corporation is a privately-held
company developing novel biomaterials with superior performance characteristics
in the area of hemostats, biosealants, and adhesion prevention barriers for
surgical applications. In connection with Collagen's May 1996 and December 1997
investments and purchases of Cohesion Corporation shares, $3.0 million and $10.5
million, respectively, of the purchase price was allocated to in-process
research and development, which was expensed at the time of the purchases
including compensation amounts associated with the purchase of employee stock
options in December 1997.

Cohesion determined the amounts to be allocated to in-process technology
for Cohesion Corporation based on whether technological feasibility had been
achieved and whether there was any alternative future use for the technology.
Cohesion concluded that the in-process technology had no alternative future use
after taking into consideration the potential for both usage of the technology
in different products and for resale of the technology. Such studies are still
preliminary and are subject to revision. At December 31, 1997, there were
additional unvested options outstanding providing for the purchase of the
remaining shares of Cohesion Corporation common stock. Cohesion is determining
the future activity, if any, it will take with respect to these options (see
Note 14, "Subsequent Events").

The unaudited pro forma results of operations of Cohesion assuming the
acquisitions of Cohesion Corporation shares occurred on July 1, 1995, on the
basis described above with all material intercompany transactions eliminated,
are as follows (in thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
-------------------- ----------------
1996 1997 1996 1997
-------- ------- ----- ------
<S> <C> <C> <C> <C>
Net income (loss)...................................... $41,275 $4,314 $637 $(448)
</TABLE>

The unaudited pro forma net income (loss) amounts above do not include the
charges for in-process research and development aggregating $13.5 million
arising from the acquisitions of shares of Cohesion Corporation. The unaudited
pro forma information is not necessarily indicative of the actual results of
operations had the transaction occurred at the beginning of the periods
indicated, nor should it be used to project Cohesion's results of operations for
any future dates or periods.

F-15
<PAGE> 111
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

8. COMMITMENTS

Minimum lease payments

Future minimum lease payments under noncancelable operating leases at June
30, 1997 are as follows (in thousands for years ended June 30):

<TABLE>
<S> <C>
1998........................................................ $ 988
1999........................................................ 982
2000........................................................ 560
2001........................................................ 558
2002........................................................ 558
Thereafter.................................................. 1,347
------
Total minimum lease payments...................... $4,993
======
</TABLE>

Rental expense was $833,000, $948,000, $722,000, $356,000 and $474,000 in
fiscal 1995, 1996, and 1997 and for the six months ended December 31, 1996 and
1997, respectively.

Revolving Line of Credit Agreement

In November 1994, Collagen entered into a $7.0 million revolving line of
credit with a bank, secured by shares of Target common stock. The terms of this
facility contained certain financial covenants. In December 1995, the $7 million
revolving line of credit was increased to $15.0 million. During fiscal 1996,
$5.0 million was borrowed under this agreement. In June 1997, Collagen repaid
the outstanding balance and canceled the revolving line of credit agreement
prior to its expiration date of November 15, 1997. Interest associated with this
agreement was, at Collagen's option, based on either the prime rate plus 1/2%
or the Eurodollar rate plus the lesser of 1 1/4% or the Alternate LIBOR
applicable margin. Interest was payable monthly. Additionally, Collagen was
required to pay, on a quarterly basis, a commitment fee of 3/8 of 1% per annum
of the unused portion. The weighted average interest rate was 8.1% on the
outstanding short-term borrowings at June 30, 1996. The revolving line of credit
was allocated to Cohesion because the credit facility was secured by shares of
Target common stock, which were also allocated to Cohesion.

Bonus Agreement

In February 1996, Collagen entered into a cash bonus agreement with
Collagen's Chairman and Chief Executive Officer whereby cash bonuses in the
amounts of $325,000, $305,000, $285,000, $265,000 and $245,000 would be paid to
him on February 13 of each of the following five years beginning in 1997,
providing that he continued to serve Collagen on the applicable payment date. On
February 10, 1997, Mr. Palefsky resigned as Chief Executive Officer and
subsequently resigned as Chairman of the Board of Directors on June 20, 1997,
and as a result, the February 13, 1997 payment and future payments were not
required to be paid under this bonus agreement. The bonus agreement was replaced
by the officer separation agreement. Under the officer separation agreement, Mr.
Palefsky will continue to serve as a consultant to Cohesion during the next two
years and as a result, Cohesion will make payments to Mr. Palefsky during fiscal
1998 and fiscal 1999 totaling $575,000 and $233,000, respectively.

9. LEGAL MATTERS

In May 1997, Collagen settled its lawsuit with Matrix, which had been
pending since December 1994. The lawsuit involved Collagen's claims of trade
secret misappropriation against Matrix and two former

F-16
<PAGE> 112
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

9. LEGAL MATTERS (CONTINUED)
Collagen employees hired by Matrix in 1992, as well as cross-complaints against
Collagen by Matrix and the two employees for defamation and violation of state
unfair competition law.

Collagen granted Matrix a nonexclusive license to certain intellectual
property (which was transferred to Cohesion effective January 1, 1998) for
certain nonmonetary consideration. The lawsuit was settled and dismissed with
prejudice. All claims by and against all parties have been released.

Cohesion is involved in other legal actions arising in the ordinary course
of business. While the outcome of such matters is currently not determinable, it
is management's opinion that these matters will not have a material adverse
effect on Cohesion's consolidated financial position or results of its
operations.

10. STOCKHOLDER'S AND PARENT COMPANY EQUITY

Preferred Stock

Cohesion has authorized 5,000,000 shares of preferred stock with a par
value of $0.001 per share. Each share of preferred stock is convertible into one
share of common stock at the option of the holder. Additionally, the preferred
shares automatically convert into common stock concurrent with the closing of an
underwritten public offering of common stock under the Securities Act of 1933 in
which Cohesion receives at least $10,000,000 in gross proceeds.

Preferred stockholders are entitled to noncumulative dividends at an annual
rate of $0.10 per share. Dividends will be paid only when declared by the Board
of Directors out of legally available funds. No dividends have been declared as
of December 31, 1997.

Preferred stockholders are entitled to a liquidation preference of $1.00
per share plus all declared and unpaid dividends. If, upon liquidation, the
assets of Cohesion are insufficient to permit the payment to the preferred
stockholders of the full liquidation preference, the assets of Cohesion will be
distributed ratably among the preferred stockholders. If the assets are more
than sufficient to pay the full preferences, then, following the payment of the
full preferences, the remaining assets of Cohesion shall be distributed ratably
to any holders of common stock.

Stock Options

Each employee (including officers), consultant, and non-employee director
of Collagen or any subsidiary of Collagen who, immediately prior to the Spinoff
date, holds a vested Collagen stock option will, in connection with the Spinoff,
receive two new options in replacement of the original vested Collagen stock
option, one to acquire shares of Collagen's common stock and the other to
acquire shares of Cohesion's common stock.

Each employee (including officers), consultant, and non-employee director
of Collagen or any subsidiary of Collagen who, immediately prior to the Spinoff
date, holds an unvested Collagen stock option will, in connection with the
Spinoff, receive a new option in replacement of the unvested Collagen stock
option to acquire shares of common stock of the entity (Collagen or Cohesion) by
which such optionee shall be employed or retained as an employee, consultant or
non-employee director following the distribution.

F-17
<PAGE> 113
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

10. STOCKHOLDER'S AND PARENT COMPANY EQUITY (CONTINUED)
The exercise price of each new option will be determined in accordance with
Emerging Issues Task Force Issue 90-9 as to be agreed upon by Collagen's Board
and the Cohesion Board (or any committee thereof), after consultation with legal
and accounting advisors. The exercise price of each new option is expected to
generally preserve any spread between the exercise price of the replaced option
and the fair market value of Collagen's stock on the Spinoff date. The exercise
price, as adjusted in light of the above considerations, is not intended to
result in any compensation expense to Collagen or Cohesion.

Stock Purchase Plan

The Board of Directors of Collagen has designated Cohesion and each of
Cohesion's subsidiaries as a designated subsidiary under the Collagen Employee
Stock Purchase Plan ("ESPP") as of January 1, 1998. The Collagen ESPP and the
offering period that commenced on January 1, 1998 under the Collagen ESPP will
terminate one week prior to the record date for the Spinoff and all employee
contributions through such date will be used to purchase shares of Collagen
common stock. As of that date, Collagen and Cohesion expect to have adopted new
employee stock purchase plans having such terms as are approved by the
respective Board of Directors, and the initial offering periods under each such
plan shall commence on or shortly after the Spinoff date (see Note 14,
"Subsequent Events").

Subsidiary Stock Information

Stock Options

In April 1996, the Board of Directors of Cohesion Corporation approved the
adoption of the 1996 Cohesion Corporation Stock Option Plan which authorized the
issuance of 475,000 shares of Cohesion Corporation common stock under the plan.
In May 1997, the Board of Directors of Cohesion Corporation authorized the
issuance of an additional 300,000 shares of Cohesion Corporation stock under the
plan. The Board of Directors of Cohesion Corporation may grant incentive stock
options or non-statutory stock options to officers, directors, key employees and
consultants to purchase Cohesion Corporation's common stock. The options are
granted at no less than the fair market value at the dates of grant and
generally expire after ten years. Incentive stock options have a one-year cliff
period, at which time 25% of the options become vested with monthly vesting
thereafter, not to exceed a four-year vesting period from the vesting
commencement date. Non-statutory stock options become exercisable on a monthly
basis over a three-year period from the date of grant. The shares issued under
the plan are not convertible into shares of Cohesion, and Cohesion does not have
repurchase rights with respect to such shares (see Note 14, "Subsequent
Events").

At December 31, 1997, the total number of shares of common stock reserved
for issuance under the Cohesion Corporation Stock Option Plan was 775,000.

F-18
<PAGE> 114
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

10. STOCKHOLDER'S AND PARENT COMPANY EQUITY (CONTINUED)
Stock option activities under the Cohesion Corporation Stock Option Plan
were as follows:

<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE NUMBER
NUMBER OPTION EXERCISE PRICE PRICE PER OF SHARES
OF SHARES RANGE PER SHARE SHARE EXERCISABLE
--------- --------------------- --------- -----------
<S> <C> <C> <C> <C>
Outstanding at May 1, and June 30, 1996........ 307,000 $0.20 - $0.20 $0.20 39,146
Granted........................................ 133,000 0.70 - 0.70 0.70
-------- ------------ -----
Outstanding at June 30, 1997................... 440,000 0.20 - 0.70 0.35 132,174
Granted........................................ 154,000 0.70 - 0.70 0.70
Exercised...................................... (127,410) 0.20 - 0.70 0.25
Forfeitures or expired......................... (38,437) 0.20 - 0.70 0.57
-------- ------------ -----
Outstanding at December 31, 1997............... 428,153 $0.20 - $0.70 $0.49 188,457
======== ============ =====
Available for grant at December 31, 1997....... 219,437
========
</TABLE>

Stock Compensation

Cohesion and Cohesion Corporation have elected to follow Accounting
Principles Board Statement No. 25 ("APB No. 25") and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards Board Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123") requires the use of option valuation
models that were not developed for use in valuing employees stock options. Under
APB No. 25, because the exercise price of the employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is generally recognized.

Pro forma information regarding net income is required by SFAS 123 and
determined as if Cohesion and its subsidiaries had accounted for the Cohesion
Corporation employee stock options granted subsequent to Cohesion's acquisition
of a majority ownership in Cohesion Corporation in May 1996 under the fair value
method of that statement. The fair value for these options was estimated at the
date of grant using a Black-Scholes option pricing model for the multiple-option
approach, with the following weighted-average assumptions for 1996 and 1997:
risk-free interest rate of 5.38% and 6.05%, respectively; volatility factor of
the expected market price of Cohesion Corporation's Common Stock of 0.43 and
0.49, respectively; no dividend payments; and a weighted-average expected life
of the options of 5 years and 5.5 years, respectively.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the employee stock options.

F-19
<PAGE> 115
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

10. STOCKHOLDER'S AND PARENT COMPANY EQUITY (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to pro forma net income over the options' vesting period.
Cohesion's pro forma information follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------
1996 1997
--------- --------
<S> <C> <C>
Pro forma net income...................................... $38,674 $4,973
</TABLE>

Because SFAS 123 is applicable only to options granted subsequent to May
1996, its pro forma effect will not be fully reflected until 1998. In addition,
such information does not include the effects of the options of Cohesion to be
issued in replacement of existing Collagen stock options in connection with the
expected Spinoff of Cohesion.

The following table summarizes information about Cohesion Corporation stock
options outstanding at June 30, 1997:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- - - ----------------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE NUMBER
WEIGHTED REMAINING EXERCISABLE AS WEIGHTED
RANGE OF NUMBER AVERAGE CONTRACTUAL OF JUNE 30, AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE LIFE 1997 EXERCISE PRICE
- - - --------------- ----------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$0.20 307,000 $0.20 8.76 126,896 $0.20
0.70 133,000 0.70 9.53 5,278 0.70
------- ----- ---- ------- -----
$0.20 - $0.70 440,000 $0.35 9.00 132,174 $0.22
======= ===== ==== ======= =====
</TABLE>

The weighted-average fair value of options granted during the years ended
June 30, 1996 and 1997 were $.10 and $.33 per share, respectively.

11. INTERNATIONAL SALES, MAJOR CUSTOMER, AND PRODUCTS

Export sales, which were in European countries only, were $25,000 in fiscal
1995, $83,000 in fiscal 1996, $124,000 in fiscal 1997 and $102,000 and $51,000
in the six months ended December 31, 1996 and 1997, respectively.

During fiscal years 1995, 1996, 1997 and the six months ended December 31,
1996 and 1997, Cohesion realized product sales from its marketing partner,
Zimmer, of $3.0 million, $3.1 million, $1.9 million, $1.0 million and $1.0
million, respectively, which represented 85%, 86%, 77%, 74% and 77% of product
sales. Zimmer has exclusive marketing rights for Collagraft bone graft products
in the United States and Asia.

12. INCOME TAXES

Cohesion uses the liability method of accounting for income taxes required
by SFAS No. 109. The provision was prepared on the basis that Cohesion filed
separate tax returns in each year.

F-20
<PAGE> 116
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

12. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
Cohesion's deferred tax assets and liabilities as of June 30, 1996 and 1997 are
presented below (in thousands):

<TABLE>
<CAPTION>
JUNE 30,
------------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax liabilities:
Unrealized gain on Boston Scientific (Target) stock....... $23,860 $32,507
Investments............................................... 3,154 2,507
Intangible assets......................................... 64 38
Property, plant & equipment............................... 13 --
------- -------
Total deferred tax liabilities.................... 27,091 35,052
------- -------
Deferred tax assets:
Equity in losses of affiliates............................ 3,336 3,190
State income taxes........................................ 2,523 1,306
Non-deductible accruals................................... 1,000 1,127
Other..................................................... 95 175
Valuation allowance....................................... (3,301) (3,157)
------- -------
Total deferred tax assets......................... 3,653 2,641
------- -------
Net deferred tax liabilities...................... $23,438 $32,411
======= =======
</TABLE>

The valuation allowance increased by $685,000 and $2.1 million in fiscal
1995 and fiscal 1996, respectively and decreased by $144,000 in fiscal 1997.
Significant components of the provision for income taxes are as follows (in
thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1995 1996 1997
----- ------- ------
<S> <C> <C> <C>
Current:
Federal................................................ $(176) $31,085 $1,981
State.................................................. 422 8,141 875
----- ------- ------
Total current.................................. 246 39,226 2,856
----- ------- ------
Deferred:
Federal................................................ -- (6,732) 203
State.................................................. 307 (776) 103
----- ------- ------
Total deferred................................. 307 (7,508) 306
----- ------- ------
$ 553 $31,718 $3,162
===== ======= ======
</TABLE>

F-21
<PAGE> 117
COHESION TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(INFORMATION WITH RESPECT TO THE SIX MONTHS ENDED DECEMBER 31, 1996 AND 1997 AND
AS OF
DECEMBER 31, 1997 IS UNAUDITED)

12. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before taxes. The sources and
tax effects of the differences are as follows (in thousands):

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1995 1996 1997
----- ------- ------
<S> <C> <C> <C>
Income (loss) before income taxes......................... $(348) $70,365 $7,476
===== ======= ======
Expected tax at 35% or 34%................................ $(118) $24,628 $2,617
State income tax, net of federal benefit.................. 93 4,002 725
In-process research and development....................... -- 1,050 --
Equity in losses of affiliates............................ 728 1,863 (278)
Benefit from favorable tax settlement..................... (163) -- --
Other..................................................... 13 175 98
----- ------- ------
$ 553 $31,718 $3,162
===== ======= ======
</TABLE>

13. STATEMENTS OF CASH FLOWS

Supplemental disclosure of cash flow information (in thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------- ----------------
1995 1996 1997 1996 1997
------ ------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Cash paid during the year for:
Interest............................... $2,113 $ 2,532 $ 377 $ 188 $--
Income taxes (net of refunds).......... -- 36,763 2,370 2,350 --
</TABLE>

14. SUBSEQUENT EVENTS (UNAUDITED)

In April 1998, Cohesion's Board adopted, and Collagen, as the sole
stockholder of Cohesion approved, Cohesion's 1998 Stock Option Plan, the 1998
Employee Stock Purchase Plan and the Directors' Stock Option Plan and reserved
2,607,000 shares, 250,000 shares and 268,000 shares of common stock,
respectively, for issuance thereunder.

Following the Spinoff and approval by Cohesion's Board of Directors,
Cohesion anticipates offering to exchange or substitute the outstanding options
of Cohesion Corporation for options to acquire approximately 620,000 shares of
the common stock of Cohesion. The new options are expected to have an exercise
price substantially less than the fair market value of Cohesion's shares at the
time of such exchange, based on an assumed exchange ratio of 1.67 to 1 as
anticipated and to be determined by the Board of Directors. Assuming such offers
are accepted by the Cohesion Corporation option holders and assuming an expected
fair value of $10.00 per share at the date of the exchange, Cohesion expects to
record a non-cash compensation expense of approximately $1.5 million at the date
of the exchange in connection with vested options and an additional $4.5 million
of deferred compensation to be amortized during the next three fiscal years.

F-22
<PAGE> 118

COHESION TECHNOLOGIES, INC.
DESCRIPTION OF UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION

The terms of the Spinoff are described in "Proposal No. 1: The
Spinoff -- Manner of Effecting the Spinoff" included elsewhere in this Proxy
Statement.

The unaudited pro forma balance sheet as of December 31, 1997, and the
unaudited pro forma statements of operations for the year ended June 30, 1997,
and the six months ended December 31, 1997, and the related explanatory notes
are presented to show the effects of the Spinoff and the January 1, 1998
contribution by Collagen under the Separation and Distribution Agreement and
activities under the Collagraft Supply Agreement and the Research and
Development Agreement on the financial position and results of operations of
Cohesion, assuming that the Spinoff has already occurred and that the provisions
of these agreements had been in place as of December 31, 1997, for purposes of
the balance sheet and as of July 1, 1996, for the purposes of the statements of
operations. The pro forma financial information is not necessarily indicative of
the actual results that would have occurred had the contribution by Collagen and
the Spinoff occurred on these dates or of the future results of operations and
financial position of Cohesion.

The pro forma financial information gives effect to the adjustments set
forth in the notes thereto. Management believes that the assumptions used in
preparing the pro forma financial information provide a reasonable basis for
presenting all of the significant effects of the Spinoff and related agreements,
that the pro forma adjustments give appropriate effect to those assumptions and
that the pro forma adjustments are properly applied in the pro forma financial
information.

This pro forma financial information should be read in conjunction with the
separate historical consolidated financial statements of Cohesion included
elsewhere in this Proxy Statement.

F-23
<PAGE> 119

COHESION TECHNOLOGIES, INC.

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................ $ 500 $ -- $ 500
Short-term investments................................... 1,332 -- 1,332
Accounts receivable, less allowance for doubtful accounts
of $2................................................. 311 -- 311
Inventories.............................................. 30 -- 30
Current deferred taxes................................... 875 -- 875
Receivable due from sales of Boston Scientific
Corporation stock..................................... 3,146 -- 3,146
Other current assets..................................... 621 -- 621
------- ------- -------
Total current assets............................. 6,815 -- 6,815
Property and equipment, net................................ 2,045 -- 2,045
Intangible assets, net..................................... 1,404 -- 1,404
Investment in Boston Scientific Corporation................ 55,411 -- 55,411
Other investments.......................................... 8,724 -- 8,724
Long-term deferred taxes................................... 1,396 -- 1,396
Loans to officers and employees............................ 159 -- 159
Receivable from equity collar investment................... 11,404 -- 11,404
Other assets............................................... 91 -- 91
------- ------- -------
$87,449 $ -- $87,449
======= ======= =======
LIABILITIES AND STOCKHOLDER'S AND PARENT COMPANY EQUITY
Current liabilities:
Accounts payable......................................... $ 145 $ -- $ 145
Accrued compensation..................................... 536 -- 536
Accrued liabilities...................................... 3,074 -- 3,074
Income taxes payable..................................... 300 -- 300
Other current liabilities................................ 65 -- 65
------- ------- -------
Total current liabilities........................ 4,120 -- 4,120
Long-term liabilities:
Deferred income taxes.................................... 27,973 -- 27,973
Other long-term liabilities.............................. 50 -- 50
------- ------- -------
Total long-term liabilities...................... 28,023 -- 28,023
Commitments and contingencies
Stockholder's and parent company equity:
Preferred stock; $0.001 par value; 10 shares outstanding
historical and no shares outstanding pro forma........ -- -- --
Common stock; $0.001 par value; no shares outstanding
historical and 8,962,729 shares outstanding pro
forma................................................. -- 9(1) 9
Additional paid-in capital............................... 9,621 8,886(1) 18,507
Parent company equity.................................... 8,895 (8,895)(1) --
Unrealized gain on available-for-sale investments........ 36,790 -- 36,790
------- ------- -------
Total stockholder's and parent company equity.... 55,306 -- 55,306
------- ------- -------
$87,449 $ -- $87,449
======= ======= =======
</TABLE>

The accompanying Notes to Unaudited Pro Forma Consolidated Financial Information
are an integral part of these statements.
F-24
<PAGE> 120

COHESION TECHNOLOGIES, INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997 SIX MONTHS ENDED DECEMBER 31, 1997
------------------------------------ -------------------------------------
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue -- product sales............ $ 2,527 $ -- $ 2,527 $ 1,234 $ -- $ 1,234
Costs and expenses:
Cost of sales..................... 2,105 (589)(2) 1,516 692 48(2) 740
Research and development.......... 9,627 (1,313)(3) 8,314 7,402 (1,015)(3) 6,387
General and administrative........ 7,153 -- 7,153 2,591 -- 2,591
Purchased in-process research and
development.................... -- -- -- 10,530 -- 10,530
-------- ------- -------- -------- ------- --------
Total costs and expenses....... 18,885 (1,902) 16,983 21,215 (967) 20,248
-------- ------- -------- -------- ------- --------
Loss from operations................ (16,358) 1,902 (14,456) (19,981) 967 (19,014)
Other income (expense):
Net gain on investments,
principally Boston Scientific
Corporation.................... 9,063 -- 9,063 8,775 -- 8,775
Net gain on sale of investment in
Prograft Medical, Inc.......... 15,395 -- 15,395 -- -- --
Equity in losses of other
affiliates..................... (813) -- (813) (9) -- (9)
Interest income................... 566 -- 566 236 -- 236
Interest expense.................. (377) -- (377) -- -- --
-------- ------- -------- -------- ------- --------
Income (loss) before provision for
income taxes and minority
interest.......................... 7,476 1,902 9,378 (10,979) 967 (10,012)
Provision for income taxes.......... 3,162 723(4) 3,885 -- --(4) --
Minority interest................... (667) -- (667) -- -- --
-------- ------- -------- -------- ------- --------
Net income (loss)................... $ 4,981 $ 1,179 $ 6,160 $(10,979) $ 967 $(10,012)
======== ======= ======== ======== ======= ========
Basic net income (loss) per
share(5).......................... $ 0.70 $ (1.13)
======== ========
Diluted net income (loss) per
share(5).......................... $ 0.69 $ (1.13)
======== ========
Shares used in calculating basic net
income (loss) per share(5)........ 8,804 8,857
======== ========
Shares used in calculating diluted
net income (loss) per share(5).... 8,930 8,857
======== ========
</TABLE>

The accompanying Notes to Unaudited Pro Forma Consolidated Financial Information
are an integral part of these statements.
F-25
<PAGE> 121

COHESION TECHNOLOGIES, INC.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL INFORMATION

The pro forma information presented is theoretical in nature and not
necessarily indicative of the future results of operations or financial position
of Cohesion Technologies, Inc. ("Cohesion") or the results of operations and
financial position which would have resulted had Cohesion been a stand-alone
company during the periods presented. The pro forma financial information
reflect the effects of the Spinoff and the January 1, 1998 contribution by
Collagen under the Separation and Distribution Agreement, the Collagraft Supply
Agreement, and the Research and Development Agreement between Collagen
Corporation and Cohesion.

PRO FORMA BALANCE SHEET ADJUSTMENTS

1. STOCKHOLDER'S EQUITY

These adjustments have been made as if the January 1, 1998 contribution by
Collagen Corporation under the Separation and Distribution Agreement and the
Spinoff had occurred as of December 31, 1997. The pro forma number of shares
outstanding assumes a one-for-one share distribution in connection with the
Spinoff.

PRO FORMA STATEMENTS OF OPERATIONS ADJUSTMENTS

2. COST OF SALES

This adjustment has been made to cost of sales to reflect the pricing under
the Supply agreements between Cohesion and Collagen as if such prospective
arrangements had been in place during the periods presented.

3. RESEARCH AND DEVELOPMENT

This adjustment has been made to research and development expense to
reflect the reimbursement of project costs under the Recombinant Technology and
Development License agreement between Cohesion and Collagen as if such
prospective arrangements had been in place during the periods presented.

4. INCOME TAXES

This adjustment reflects the necessary change in the income tax provision
that would occur if the Spinoff had occurred on July 1, 1996, considering all
pro forma adjustments as described above. Such pro forma change was
insignificant for the six months ended December 31, 1997.

5. NET INCOME (LOSS) PER SHARE

Pro forma share and per share data has been presented for the year ended
June 30, 1997 and the six months ended December 31, 1997 assuming the
distribution of shares of Cohesion common stock to Collagen's stockholders based
on the number of Collagen common shares and common equivalent shares outstanding
for those periods, assuming a one-for-one exchange ratio in the Spinoff.

F-26
<PAGE> 122

COLLAGEN CORPORATION
DESCRIPTION OF UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION

The terms of the Spinoff are described in "Proposal No. 1: The
Spinoff -- Manner of Effecting the Spinoff" included elsewhere in this Proxy
Statement.

The unaudited pro forma balance sheet as of December 31, 1997, and the
unaudited pro forma statements of operations for the year ended June 30, 1997,
and the six months ended December 31, 1997, and the related explanatory notes
are presented to show the effects of the Spinoff and the January 1, 1998
contribution by Collagen under the Separation and Distribution Agreement and
activities under the Collagraft Supply Agreement and the Research and
Development Agreement on the financial position and results of operations of
Collagen Corporation, assuming that the Spinoff has already occurred and that
the provisions of these agreements had been in place as of December 31, 1997,
for purposes of the balance sheet and as of July 1, 1996, for the purposes of
the statements of operations. The pro forma financial information is not
necessarily indicative of the actual results that would have occurred had the
contribution by Collagen and the Spinoff occurred on these dates or of the
future results of operations and financial position of Collagen Corporation.

This pro forma financial information should be read in conjunction with the
consolidated financial statements and the related notes in Collagen
Corporation's Annual Report on Form 10-K for the year ended June 30, 1997 and
Collagen Corporation's Quarterly Report on Form 10-Q for the six months ended
December 31, 1997.

F-27
<PAGE> 123

COLLAGEN CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
HISTORICAL SPINOFF HISTORICAL PRO FORMA PRO
(BEFORE SPINOFF) ADJUSTMENTS (AFTER SPINOFF) ADJUSTMENTS FORMA
---------------- -------------- --------------- ----------- --------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........... $ 9,076 $ (500) $ 8,576 $-- $ 8,576
Short-term investments.............. 3,656 (1,332) 2,324 -- 2,324
Accounts receivable, less allowance
for doubtful accounts ($462
historical and $460 after spinoff
and pro forma adjustments)........ 12,671 (311) 12,360 -- 12,360
Inventories......................... 12,687 (30) 12,657 -- 12,657
Current deferred taxes.............. 3,412 (875) 2,537 -- 2,537
Other current assets................ 8,233 (3,767) 4,466 -- 4,466
-------- -------- -------- -- --------
Total current assets......... 49,735 (6,815) 49,920 -- 49,920
Property and equipment, net........... 15,453 (2,045) 13,408 -- 13,408
Intangible assets, net................ 13,273 (1,404) 11,869 -- 11,869
Investment in Boston Scientific
Corporation......................... 55,411 (55,411) -- -- --
Other investments..................... 9,831 (8,724) 1,107 -- 1,107
Long-term deferred taxes.............. 2,948 (1,396) 1,552 -- 1,552
Other assets.......................... 12,326 (11,654) 672 -- 672
-------- -------- -------- -- --------
$158,977 $(87,449) $ 71,528 $-- $ 71,528
======== ======== ======== == ========
</TABLE>

LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<S> <C> <C> <C> <C> <C>
Current liabilities:
Accounts payable.................... $ 1,734 $ (145) $ 1,589 $-- $ 1,589
Accrued compensation................ 3,983 (536) 3,447 -- 3,447
Accrued liabilities................. 10,700 (3,074) 7,626 -- 7,626
Income taxes payable................ 9,060 (300) 8,760 -- 8,760
Other current liabilities........... 64 (65) (1) -- (1)
-------- -------- -------- -- --------
Total current liabilities.... 25,541 (4,120) 21,421 -- 21,421
Long-term liabilities:
Deferred income taxes............... 28,179 (27,973) 206 -- 206
Other long-term liabilities......... 1,762 (50) 1,712 -- 1,712
-------- -------- -------- -- --------
Total long-term
liabilities................ 29,941 (28,023) 1,918 -- 1,918
Commitments and contingencies
Minority interest..................... 20 -- 20 -- 20
Stockholders' Equity:
Preferred stock, $.01 par value,
authorized: 5,000,000 shares; none
issued or outstanding............. -- -- -- -- --
Common shares, $.01 par value,
authorized: 28,950,000 shares,
issued: 10,910,629 shares,
outstanding: 8,962,729 shares..... 110 -- 110 -- 110
Additional paid-in capital.......... 68,659 (18,516) (1) 50,143 -- 50,143
Retained earnings................... 40,699 -- 40,699 -- 40,699
Accumulated translation
adjustment........................ (2,017) -- (2,017) -- (2,017)
Unrealized gain on
available-for-sale investments.... 36,790 (36,790) -- -- --
Treasury Stock, at cost, 1,947,900
shares............................ (40,766) -- (40,766) -- (40,766)
-------- -------- -------- -- --------
Total stockholders' equity... 103,475 (55,306) 48,169 -- 48,169
-------- -------- -------- -- --------
$158,977 $(87,449) $ 71,528 $-- $ 71,528
======== ======== ======== == ========
</TABLE>

The accompanying Notes to Unaudited Pro Forma Consolidated Financial Information
are an integral part of these statements.
F-28
<PAGE> 124

COLLAGEN CORPORATION

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1997
----------------------------------------------------------------------------
HISTORICAL SPINOFF HISTORICAL PRO FORMA
(BEFORE SPINOFF) ADJUSTMENTS (AFTER SPINOFF) ADJUSTMENTS PRO FORMA
---------------- ----------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue -- product sales...... $ 71,812 $ (2,527) $69,285 $ 1,516(2) $70,801
Costs and expenses:
Cost of sales............... 20,308 (2,105) 18,203 2,105(2) 20,308
Research and development.... 18,840 (9,627) 9,213 1,313(3) 10,526
Selling, general and
administrative............ 43,576 (7,153) 36,423 -- 36,423
Purchased in-process
research and
development............... -- -- -- -- --
-------- -------- ------- ---------- -------
Total costs and expenses 82,724 (18,885) 63,839 3,418 67,257
-------- -------- ------- ---------- -------
Income (loss) from
operations.................. (10,912) 16,358 5,446 (1,902) 3,544
Other income (expense):
Net gain on investments,
principally Boston
Scientific Corporation.... 9,063 (9,063) -- -- --
Net gain on investment in
Prograft Medical, Inc..... 15,395 (15,395) -- -- --
Equity in losses of other
affiliates................ (970) 813 (157) -- (157)
Interest income............. 1,111 (566) 545 -- 545
Interest expense............ (473) 377 (96) -- (96)
-------- -------- ------- ---------- -------
Income (loss) before provision
for income taxes and
minority interest........... 13,214 (7,476) 5,738 (1,902) 3,836
Provision for income taxes.... 6,607 (3,162) 3,445 (723)(4) 2,722
Minority interest............. (764) 667 (97) -- (97)
-------- -------- ------- ---------- -------
Net income (loss)............. $ 7,371 $ (4,981) $ 2,390 $ (1,179) $ 1,211
======== ======== ======= ========== =======
Basic net income (loss) per
share....................... $ 0.84 $ 0.14
======== =======
Diluted net income (loss) per
share....................... $ 0.83 $ 0.14
======== =======
Shares used in calculating
basic net income (loss) per
share....................... 8,804 8,804
======== =======
Shares used in calculating
diluted net income (loss)
per share................... 8,930 8,930
======== =======

<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------
HISTORICAL SPINOFF HISTORICAL PRO FORMA
(BEFORE SPINOFF) ADJUSTMENTS (AFTER SPINOFF) ADJUSTMENTS PRO FORMA
---------------- ----------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenue -- product sales...... $ 42,953 $ (1,234) $41,719 $ 740(2) $42,459
Costs and expenses:
Cost of sales............... 14,037 (692) 13,345 692(2) 14,037
Research and development.... 11,493 (7,402) 4,091 1,015(3) 5,106
Selling, general and
administrative............ 21,555 (2,591) 18,964 -- 18,964
Purchased in-process
research and
development............... 10,530 (10,530) -- -- --
-------- -------- ------- ------- -------
Total costs and expenses 57,615 (21,215) 36,400 1,707 38,107
-------- -------- ------- ------- -------
Income (loss) from
operations.................. (14,662) 19,981 5,319 (967) 4,352
Other income (expense):
Net gain on investments,
principally Boston
Scientific Corporation.... 8,775 (8,775) -- -- --
Net gain on investment in
Prograft Medical, Inc..... -- -- -- -- --
Equity in losses of other
affiliates................ (149) 9 (140) -- (140)
Interest income............. 537 (236) 301 -- 301
Interest expense............ (34) -- (34) -- (34)
-------- -------- ------- ------- -------
Income (loss) before provision
for income taxes and
minority interest........... (5,533) 10,979 5,446 (967) 4,479
Provision for income taxes.... 901 -- 901 --(4) 901
Minority interest............. (27) -- (27) -- (27)
-------- -------- ------- ------- -------
Net income (loss)............. $ (6,407) $ 10,979 $ 4,572 $ (967) $ 3,605
======== ======== ======= ======= =======
Basic net income (loss) per
share....................... $ (0.72) $ 0.41
======== =======
Diluted net income (loss) per
share....................... $ (0.72) $ 0.40
======== =======
Shares used in calculating
basic net income (loss) per
share....................... 8,857 8,857
======== =======
Shares used in calculating
diluted net income (loss)
per share................... 8,857 8,968
======== =======
</TABLE>

The accompanying Notes to Unaudited Pro Forma Consolidated Financial Information
are an integral part of these statements.

F-29
<PAGE> 125

COLLAGEN CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION

The pro forma information presented is theoretical in nature and not
necessarily indicative of the future results of operations or financial position
of Collagen Corporation or the results of operations and financial position
which would have resulted had Cohesion Technologies, Inc. ("Cohesion") been a
stand-alone company during the periods presented. The pro forma financial
information reflects the effects of the January 1, 1998 contribution by Collagen
under the Separation and Distribution Agreement and activities under the
Collagraft Supply Agreement and the Research and Development Agreement between
Collagen Corporation and Cohesion.

Pro forma Spinoff adjustments under the column "Spinoff Adjustments"
reflect the separation of Cohesion and Collagen as if such separation had
occurred as of December 31, 1997 for purposes of the balance sheet and as of
July 1, 1996 for the purposes of the statements of operations.

PRO FORMA BALANCE SHEET ADJUSTMENTS

1. STOCKHOLDERS' EQUITY

This adjustment has been made as if the contribution of assets and
liabilities to Cohesion and the Spinoff had occurred as of December 31, 1997.

PRO FORMA STATEMENT OF OPERATIONS ADJUSTMENTS

2. PRODUCT SALES AND COST OF SALES

These adjustments have been made to reflect the pricing under the Supply
Agreements between Cohesion and Collagen as if such prospective arrangements had
been in place during the periods presented.

3. RESEARCH AND DEVELOPMENT

This adjustment has been made to research and development expense to
reflect the reimbursement of project costs under the Recombinant Technology and
Development License Agreement between Cohesion and Collagen as if such
prospective arrangements had been in place during the periods presented.

4. INCOME TAXES

This adjustment reflects the necessary change in the income tax provision
that would occur if the Spinoff had occurred on July 1, 1996, considering all
pro forma adjustments. Such pro forma change was insignificant for the six
months ended December 31, 1997.

F-30