INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

Filed Pursuant to Rule 424a
Registration Number 33-58185

$40,000,000 SUBJECT TO COMPLETION

MARCH 23, 1995

[LOGO]

% EXCHANGEABLE SUBORDINATED NOTES DUE 2002

EXCHANGEABLE FOR SHARES OF COMMON STOCK OF

[LOGO]

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

The Notes will be exchangeable at any time after 60 days following initial
issuance thereof and prior to maturity, unless previously redeemed, into Common
Stock of Target Therapeutics, Inc. ("Target") owned by Collagen Corporation
("Collagen"), at an exchange price of $ per share, subject to adjustment
under certain conditions and subject to Collagen's option to pay a cash
equivalent. The Target Common Stock is traded on the Nasdaq National Market
under the symbol "TGET." On March 22, 1995, the last sale price of the Target
Common Stock as reported on the Nasdaq National Market was $36.00 per share.
Interest on the Notes will be payable semi-annually on May 1 and November 1 of
each year, commencing November 1, 1995.

The Notes are not redeemable prior to May 10, 1998. Thereafter, the Notes
are redeemable at the option of Collagen, in whole or in part, at any time and
from time to time, at the redemption prices set forth herein, plus accrued
interest. Upon a Change in Control (as defined) of Collagen, holders of Notes
will have the right, subject to certain conditions and restrictions, to require
Collagen to purchase all or part of their Notes at the principal amount thereof
plus accrued and unpaid interest. See "Description of Notes."

The Notes will be subordinate in right of payment to all existing and future
Senior Indebtedness (as defined) of Collagen. As of March 22, 1995, Collagen had
no Senior Indebtedness outstanding. See "Description of Notes -- Subordination
of Notes." Application has been made for inclusion of the Notes on the Nasdaq
System under the symbol "CGENG."
------------------

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS."
------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
PRICE UNDERWRITING
TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COLLAGEN(3)
--------------------------------------------------------------------------------------------------
Per Note......................... % % %
--------------------------------------------------------------------------------------------------
Total(4)......................... $ $ $
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------

(1) Plus accrued interest, if any, from the date of issuance.

(2) See "Underwriting" for information relating to indemnification of the
Underwriter.

(3) Before deducting expenses payable by Collagen estimated at $525,000.

(4) Collagen has granted to the Underwriter a 30-day option to purchase up to an
additional $5,000,000 in principal amount of Notes on the same terms per
Note solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Collagen will be $ , $ and $ ,
respectively. See "Underwriting."

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

The Notes are offered by the Underwriter, subject to prior sale, when, as
and if delivered to and accepted by the Underwriter, and subject to the right of
the Underwriter to reject any order in whole or in part. It is expected that
delivery of the Notes will be made at the offices of Alex. Brown & Sons
Incorporated, Baltimore, Maryland, on or about , 1995.

ALEX. BROWN & SONS
INCORPORATED

THE DATE OF THIS PROSPECTUS IS APRIL , 1995.
2

AVAILABLE INFORMATION

Collagen Corporation (together with its subsidiaries, unless the context
otherwise requires, "Collagen") and Target Therapeutics, Inc. (together with its
subsidiaries, unless the context otherwise requires, "Target") are subject to
the informational requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith file reports and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy and information statements and other information filed by
Collagen and Target may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. and at certain of its regional offices located at: Seven World
Trade Center, 13th Floor, New York, New York; and 500 West Madison Street, Suite
1400, Chicago, Illinois. Copies of such material can be obtained from the Public
Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Securities of Collagen and the Target Common Stock
are traded on the Nasdaq National Market. Reports and other information
concerning Collagen and Target may be inspected at the National Association of
Securities Dealers, Inc., 1735 K Street, Washington, D.C.

Collagen and Target have filed with the Commission a registration statement
on Form S-3 (herein, together with all amendments and exhibits, referred to as
the "Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the Notes offered hereby and the shares of Target
Common Stock deliverable upon exchange of the Notes. This Prospectus does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is hereby made to the
Registration Statement.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY OR THE TARGET COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER AND OTHER SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN TARGET COMMON STOCK
ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."

2
3

INCORPORATION OF CERTAIN DOCUMENTS OF COLLAGEN BY REFERENCE

The following documents heretofore filed by Collagen with the Commission
pursuant to the Exchange Act are incorporated by reference in this Prospectus:

(1) Annual Report on Form 10-K for the year ended June 30, 1994, including
those portions of the Proxy Statement for the 1994 Annual Meeting of
Stockholders (held on October 25, 1994) incorporated by reference
therein;

(2) Quarterly Reports on Form 10-Q for the quarters ended September 30,
1994, and December 31, 1994; and

(3) Registration Statement on Form 8-A dated November 28, 1994 (relating to
certain preferred stock purchase rights).

All documents subsequently filed by Collagen pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the
termination of the offering of Notes made hereby, shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of the
filing of such documents. Collagen will provide without charge a copy of any and
all of such documents (exclusive of exhibits unless such exhibits are
specifically incorporated by reference therein) without charge to each person to
whom a copy of this Prospectus is delivered, upon written or oral request to
Investor Relations, Collagen Corporation, 2500 Faber Place, Palo Alto, CA 94303
(telephone number: (415) 856-0200).

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any subsequently filed document which also is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.

INCORPORATION OF CERTAIN DOCUMENTS OF TARGET BY REFERENCE

The following documents heretofore filed by Target with the Commission
pursuant to the Exchange Act are incorporated by reference in this Prospectus:

(1) Annual Report on Form 10-K for the year ended March 31, 1994, including
those portions of the Proxy Statement for the 1994 Annual Meeting of
Stockholders (held on August 10, 1994) incorporated by reference
therein;

(2) Quarterly Reports on Form 10-Q for the quarters ended June 30, 1994,
September 30, 1994 and December 31, 1994;

(3) Current Report on Form 8-K dated October 10, 1994, as amended;

(4) Registration Statement on Form 8-A dated January 15, 1992; and

(5) Registration Statement on Form 8-A dated September 21, 1994 (relating
to certain preferred stock purchase rights).

All documents subsequently filed by Target pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to the
termination of the offering of Target Common Stock made hereby, shall be deemed
to be incorporated by reference herein and to be a part hereof from the date of
the filing of such documents. Target will provide without charge a copy of any
and all of such documents (exclusive of exhibits unless such exhibits are
specifically incorporated by reference therein) without charge to each person to
whom a copy of this Prospectus is delivered, upon written or oral request to
Investor Relations, Target Therapeutics, Inc., 47201 Lakeview Boulevard,
Fremont, CA 94538 (telephone number: (510) 440-7700).

Zyderm, Zyplast, Contigen, and the triple helix logo are registered
trademarks of Collagen. Target Therapeutics, Tracker, Soft Stream, Retriever,
Taper, Seeker, Dasher, Stealth, Zephyr, FasTRACKER and GDC are registered
trademarks of Target, and IDC, FasSTEALTH and FasGUIDE are trademarks of Target.
This prospectus also includes trademarks of companies other than Collagen and
Target.

3
4

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Except as otherwise specified, all information in this
Prospectus assumes no exercise of the Underwriter's over-allotment option.

COLLAGEN

Collagen develops, manufactures and markets on a worldwide basis high
quality biocompatible products for the treatment of defective, diseased,
traumatized or aging human tissues. Collagen has developed innovative products
by identifying medical applications for its technology, and building markets
with respected healthcare professionals, either directly or with marketing and
technology partners. Collagen's core products are principally used in cosmetic
and reconstructive applications for the face, the treatment of stress urinary
incontinence, and bone repair. In addition, Collagen has implemented an
"affiliate" program to expand its new product development activities outside of
the areas of its core competence, such as interventional cardiology and
ophthalmology.

RISK FACTORS

The securities offered hereby involve a high degree of risk. See "Risk
Factors."

THE OFFERING

ISSUER OF THE NOTES........ Collagen Corporation, a Delaware corporation. The
Notes are not guaranteed by Target or any other
party.

SECURITIES OFFERED......... $40,000,000 principal amount of % Exchangeable
Subordinated Notes Due 2002 ($45,000,000 principal
amount of Notes if the Underwriter's over-allotment
option is exercised in full). The Notes will mature
on May 1, 2002, unless previously redeemed or
exchanged.

INTEREST PAYMENT DATES..... May 1 and November 1, commencing November 1, 1995.

EXCHANGE RIGHTS AND
COLLAGEN CASH OPTION
ON EXCHANGE.............. The Notes will be exchangeable at the option of the
holder at any time after 60 days following initial
issuance thereof, unless
previously redeemed, into shares of Target Common
Stock at an
exchange price of $ per share, subject to
adjustment under certain conditions and subject to
Collagen's right to pay a cash equivalent.

REDEMPTION AT THE OPTION OF
COLLAGEN................. The Notes are not redeemable prior to May 10, 1998.
Thereafter, the Notes are redeemable at the option
of Collagen, in whole or in part, at any time and
from time to time, at the redemption prices set
forth herein, plus accrued interest.

REDEMPTION AT OPTION OF
HOLDER UPON CHANGE IN
CONTROL OF COLLAGEN...... Upon a Change in Control (as defined) of Collagen,
holders of Notes will have the right, subject to
certain conditions and restrictions, to require
Collagen to purchase all or part of their Notes at
the principal amount thereof plus accrued and
unpaid interest.

4
5

ORIGINAL ISSUE DISCOUNT.... Each Note is being offered with original issue
discount ("OID") for United States federal income
tax purposes equal to the excess of the principal
amount at maturity of the Note over the amount of
the issue price of the Note. For this purpose, a
Note's issue price does not include the portion of
the purchase price of the Note attributable to the
right to exchange the Note for Target Common Stock.
Accrued OID will be includible, periodically, in a
holder's gross income for United States federal
income tax purposes (in addition to the stated
interest) prior to exchange, redemption, other
disposition or maturity of such holder's Note,
whether or not such Notes are ultimately exchanged,
redeemed, sold or paid at maturity. In addition,
the exchange of a Note for Target Common Stock or
other Exchange Property will be treated as a
taxable disposition of the Note. See "Certain
United States Federal Income Tax Considerations."

SUBORDINATION.............. The Notes will be subordinate in right of payment
to all existing and future Senior Indebtedness (as
defined) of Collagen. As of March 22, 1995,
Collagen had no Senior Indebtedness outstanding.
The terms of the Notes do not restrict Collagen
from incurring Senior Indebtedness.

USE OF PROCEEDS............ Additions to working capital; equity and debt
investments in affiliated companies and other
strategic alliances; research and new product
development activities; the purchase or financing
of capital equipment and leasehold improvements;
repurchases of Collagen's Common Stock; other
general corporate purposes; and possibly strategic
acquisition opportunities, although no such
transactions are currently pending. Target will not
receive any of the proceeds from the sale of the
Notes.

TRADING INFORMATION........ Application has been made for inclusion of the
Notes on the Nasdaq SmallCap Market under the
symbol "CGENG." The Target Common Stock is traded
on the Nasdaq National Market under the symbol
"TGET."

5
6

SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF COLLAGEN
(IN THOUSANDS, EXCEPT PER SHARE DATA)

SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------------------------------- -------------------
1990 1991 1992(1) 1993 1994 1993 1994
------- ------- ------- ------- ------- ------- -------

CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues................................ $49,904 $61,382 $67,182 $49,743 $65,552 $31,238 $35,302
Income (loss) from operations........... 12,033 8,657 (6,294) (3,859) 8,607 3,791 5,717
Net gain from investments, principally
Target................................ -- -- 9,439 20,323 -- -- 775
Equity in earnings (losses) of
affiliates............................ -- -- (32) 968 (269) (37) (369)
Minority interest in earnings of
Target................................ 62 132 1,233 -- -- -- --
Income from continuing operations....... 6,873 5,113 1,408 9,732 4,920 2,037 3,552
Net income (loss)....................... 4,095 (4,349) 1,147 8,743 4,920 2,037 3,552
Income per share from continuing
operations............................ $ .77 $ .53 $ .14 $ .95 $ .50 $ .20 $ .37
Net income (loss) per share............. .46 (.45) .11 .85 .50 .20 .37
Shares used in computing per share
information........................... 8,937 9,710 10,232 10,267 9,896 10,031 9,517
Ratio of earnings to fixed charges(2)... 7.8x 4.9x 2.6x 12.1x 6.9x 6.4x 8.5x

DECEMBER 31, 1994
JUNE 30, ---------------------------
1994 ACTUAL AS ADJUSTED(3)
-------- -------- --------------

CONSOLIDATED BALANCE SHEET DATA:
Working capital................................................... $16,227 $ 13,580 $ 51,855
Total assets...................................................... 74,505 73,726 113,726
Long-term obligations............................................. -- -- 40,000
Stockholders' equity.............................................. 49,082 47,872 47,872

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

(1) As a result of the sale of a portion of Collagen's shares of Target in
fiscal 1993, Collagen's ownership position in Target decreased to 34% in
December 1992. Fiscal 1992 and all previous years contain consolidated
results of Target. The fiscal 1993 and 1994 financial information is
presented with Target accounted for under the equity method. See Notes 1
and 3 of Notes to Consolidated Financial Statements of Collagen. Gains from
Collagen's investment in Target contributed $20,323,000 ($1.98 per share)
to fiscal 1993 earnings and $10,239,000 ($1.00 per share) to fiscal 1992
earnings.

(2) The ratios of earnings to fixed charges were calculated by dividing the sum
of (i) consolidated pretax income from continuing operations, (ii)
adjustment to exclude the net equity income or loss of less than 50% owned
affiliates and (iii) fixed charges, by fixed charges. Fixed charges consist
of expensed interest and the estimated interest portion of rent expense.

(3) As adjusted to reflect the sale of the Notes offered hereby. See "Use of
Proceeds" and "Capitalization."

6
7

TARGET

Target develops, manufactures and markets disposable and implantable
medical devices used in minimally invasive procedures to treat vascular diseases
of the brain associated with stroke and other disease sites accessible through
small vessels of the circulatory system. Interventional physicians can navigate
Target's variable stiffness micro-catheters and guidewires through tortuous
blood vessels not accessible using conventional catheters. Target's products are
used to treat diseased, ruptured or blocked blood vessels in the brain
responsible for stroke, the third leading cause of death in the United States.
One of these products, the GDC system, is being used in clinical trials to treat
and prevent the rupture of cerebral aneurysms. Target has recently submitted a
510(k) application to the FDA covering the GDC system. Target's products are
also used in regions of the body other than the brain. Target's products are
used prior to or in lieu of surgery and can significantly reduce procedural
trauma, complexity, risk to the patient, cost and recovery time. Target markets
its products through a direct sales force in North America and internationally
through a network of 30 specialty distributors, its German subsidiary, Target
Therapeutics International GmbH, and its joint venture in Japan with Century
Medical, Inc., a subsidiary of ITOCHU International, Inc.

SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF TARGET
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1993 1994
------- -------- -------- -------- -------- -------- --------

CONSOLIDATED STATEMENT OF INCOME DATA:
Total revenues............................... $ 8,604 $ 12,510 $ 20,449 $ 28,117 $ 35,353 $ 25,453 $ 34,497
Income from operations....................... 876 1,243 3,735 4,421 5,116 2,996 6,320
Net income................................... 583 707 2,500 3,580 4,951 3,241 5,257
Net income per share (1992-pro forma)(1)..... $ .51 $ .51 $ .70 $ .46 $ .73
Shares used in computing net income per share
and pro forma net income per share......... 5,093 7,075 7,103 7,087 7,190

MARCH 31, DECEMBER 31,
1994 1994
--------- ------------

CONSOLIDATED BALANCE SHEET DATA:
Working capital...................................................................... $41,527 $ 43,054
Total assets......................................................................... 57,130 64,884
Long-term obligations................................................................ 124 104
Stockholders' equity................................................................. 49,064 55,060

---------------
(1) See Notes 1 and 6 of Notes to Consolidated Financial Statements of Target
for pro forma information relating to Target's accounting for income taxes
as a separate company.

7
8

RISK FACTORS

In addition to the other information in this Prospectus and documents
incorporated by reference herein, the following factors should be considered
carefully in evaluating an investment in the Notes (and related Target Common
Stock) offered by this Prospectus.

RISK FACTORS RELATING TO THE NOTES

Volatility of Price of Notes. The trading price of the Notes may be
subject to significant volatility based upon, among other factors, the trading
price of Target Common Stock, the prevailing rate of interest and the operating
results and financial condition of both Collagen and Target. The trading price
of Target Common Stock and the operating results and financial condition of
Collagen and Target are affected by a variety of factors. See "-- Risk Factors
Relating to Collagen" and "-- Risk Factors Relating to Target."

Subordination of Notes; No Limitation on Senior Indebtedness. The
indebtedness evidenced by the Notes is subordinate to the prior payment in full
of all Senior Indebtedness of Collagen. By reason of such subordination, in the
event of dissolution, insolvency or bankruptcy of Collagen, holders of the Notes
will be required to pay over their share of any distributions in respect of the
Notes until the holders of Senior Indebtedness have been paid if full. In
addition, the payment of principal, premium, if any, and interest on the Notes,
including the Redemption Price (as defined) and the Change in Control Price (as
defined), may be blocked at such time as there is a default on certain Senior
Indebtedness. The Indenture does not limit the incurrence of indebtedness by
Collagen, including Senior Indebtedness. See "Description of the
Notes -- Subordination of Notes."

Notes Not Secured by Exchange Property. The shares of Target Common Stock
initially deposited with the Exchange Agent, and any other property into which
the Notes may be exchangeable in accordance with their terms (the "Exchange
Property"), have not been pledged to secure the obligations of Collagen under
the Notes, and the holders of the Notes will therefore not be secured creditors
in the event of a bankruptcy, insolvency or liquidation of Collagen.
Accordingly, the right of a Noteholder to exchange Notes for Target Common Stock
or other Exchange Property may be adversely affected in the event of a
bankruptcy, insolvency or liquidation of Collagen. Furthermore, the Exchange
Property would likely be considered property of Collagen, and any attempt by
Noteholders to exchange their Notes for Exchange Property after such a
bankruptcy would be blocked by the automatic stay or other provisions of the
bankruptcy laws. See "Description of the Notes -- Exchange Rights."

Withdrawal of Exchange Property; Tax Effect. In the event of a
reorganization of Target, such as a merger, consolidation, tender or exchange
offer or certain other events, or a distribution to the Target stockholders,
that results in a taxable event to Collagen as a holder of Target Common Stock,
the Indenture provides that Collagen may pay the tax owed by Collagen resulting
from such reorganization or distribution with proceeds from the Exchange
Property. The balance of the Exchange Property, after payment of such taxes,
will be available to the Noteholders upon exchange of the Notes. As a result of
the payment of such taxes from the Exchange Property, the net amount of Exchange
Property received by a holder upon exchanging Notes for such Exchange Property
may be significantly less than the amount of Exchange Property that would have
been received by such holder had the holder exchanged its Notes immediately
prior to such reorganization or distribution. See "Description of the
Notes -- Exchange Rights" and "Certain United States Federal Income Tax
Consequences -- Exchange of Notes for Target Common Stock."

Absence of Prior Public Market. Prior to this offering, there has been no
public market for the Notes. Although application has been made for inclusion of
the Notes in the Nasdaq SmallCap Market, there can be no assurance that a
regular trading market in the Notes will develop or be sustained.

8
9

RISK FACTORS RELATING TO COLLAGEN

Reliance on Key Products. Sales of Collagen's principal collagen-based
injectable products, Zyderm I Collagen Implant ("Zyderm I Implant"), Zyderm II
Collagen Implant ("Zyderm II Implant") and Zyplast Implant, accounted for
approximately 67% and 71% of consolidated product sales for the fiscal year
ended June 30, 1994 and the sixth months ended December 31, 1994, respectively.
Collagen's product sales may continue to consist primarily of sales of these
principal products. Factors such as adverse publicity, adverse rulings by
regulatory authorities, introduction of competitive products by third parties or
other loss of market acceptance for these principal products may significantly
and adversely affect Collagen's business, financial condition and results of
operations. See "Business of Collagen -- Products, Markets and Methods of
Distribution."

Governmental Regulation and Adverse Publicity. Collagen's manufacturing
activities and products sold in the United States are subject to extensive and
rigorous regulation by the U.S. Food and Drug Administration ("FDA") and by
comparable agencies in certain foreign countries where these products are
manufactured or distributed. The FDA regulates the manufacture, clinical
research and sale of medical devices, including labeling, advertising and
recordkeeping. Collagen's primary products are classified as Class III medical
devices, which require pre-market approval from the FDA. All of Collagen's
products described in "Business of Collagen -- Products, Markets and Methods of
Distribution" are approved for sale in the United States. Medical products whose
market applications have not yet been approved by the FDA may only be exported
with the specific approval of the FDA. There can be no assurance that the FDA
will choose to characterize future products as medical devices rather than drugs
or biologics. Any such change in FDA characterization would potentially lengthen
and increase the cost of the approval process. Failure to comply with applicable
regulatory requirements can, among other things, result in fines, suspensions of
regulatory approvals, product recalls, seizure of products, operating
restrictions, injunctions and criminal prosecution. In addition, government
regulations may be established that could prevent or delay regulatory approval
of Collagen's products. Furthermore, compliance with current Good Manufacturing
Practices regulations is necessary to receive FDA approval to market new
products and to continue to market current products.

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 Collagen, as could product recalls. In
addition, there can be no assurance that the FDA will give approval to Collagen
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. Further, changes in governmental reimbursement
systems, pursuant to which hospitals and physicians are reimbursed for medical
procedures at a fixed rate according to diagnosis-related groups or other
reimbursements, could have an economic impact on the purchase and use of medical
devices. A material decrease in current reimbursement levels for Contigen Bard
Collagen Implant ("Contigen Implant") and its application in the treatment of
intrinsic sphincter deficiency ("ISD") could have a material adverse effect on
Collagen's business, financial condition and results of operations.

The collagen used in Collagen's products is derived from cow hides. Bovine
Spongiform Encephalopathy ("BSE") is a disease, initially reported in cattle in
the United Kingdom, characterized by degenerative lesions of the central nervous
system. The source of infections in animals derives from eating infected
sheep-derived feed. The disease has been reported in European countries with
less than one percent of cattle being affected. Collagen is not aware of any
reports of BSE in U.S. cattle to date. Furthermore, U.S. cattle are not fed
sheep-derived protein and the U.S. prohibits all importation of British cattle.
All of Collagen's injectable collagen products are currently derived from the
hides of U.S. cattle. In response to the heightened awareness of BSE in Europe,

9
10

Collagen currently uses "closed herds" that are controlled as to lineage, feed,
and separation from other animals. There can be no assurance that the various
foreign or domestic regulatory authorities will not raise issues regarding BSE
or other matters which may adversely affect Collagen's ability to manufacture,
market or sell its products.

Over the past several years, Collagen has been the subject of legislative
and regulatory investigations relating to, among other things, the safety and
efficacy of its injectable collagen products. There can be no assurance that
legislative and regulatory investigations or negative publicity from such
investigations or from the news media will not result in a material adverse
effect on Collagen's business, financial condition or results of operations. In
addition, significant negative publicity could result in an increased number of
product liability claims. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Collagen" and "Business of
Collagen -- Litigation."

Dependence on Marketing Partners and Third Party Distributors; Effect of
Inventory Fluctuations. Collagen has entered into certain exclusive
arrangements with C.R. Bard, Inc. ("Bard")for the marketing and distribution of
Collagen's Contigen Implant product and with Zimmer, Inc. ("Zimmer"), for the
marketing and distribution of Collagraft Bone Graft Matrix ("Collagraft
Implant") and Collagraft Bone Graft Matrix Strip ("Collagraft Strip") products.
As a result, Collagen's revenues and earnings for these products depend
substantially upon the continuing efforts of these marketing partners.
Collagen's business and financial results could be adversely affected in the
event that either or both of these parties do not effectively market Collagen's
products, accurately anticipate customer demand or effectively manage
industry-wide pricing and cost-containment pressures in health care. Collagen's
revenues and earnings fluctuate based upon the levels of orders placed by these
parties, which are in turn affected by the levels of sales by these distributors
and the levels of their inventories. Under an agreement between Collagen and
Bard, Bard agreed to make certain minimum purchases of Contigen Implant
products, and Bard currently has significant inventory of these products. No
minimum purchases are required under this agreement after June 30, 1995, and
there can be no assurance that Bard's purchases of Contigen Implant will not
decrease thereafter to the extent that Bard seeks to reduce its Contigen Implant
inventory levels. Any significant decrease in such purchases could have a
material adverse effect on Collagen's operating results. In addition, Collagen
depends upon third party distributors to market its other products in a number
of international markets. Difficulties in Collagen's relationship with these
distributors and changes in distribution arrangements may adversely affect
Collagen's business, financial condition and results of operations. See
"Business of Collagen -- Products, Markets and Methods of Distribution."

Undeveloped and Uncertain Markets. Certain of Collagen's products,
including those marketed by its marketing partners, are intended for use in new
markets the size of which are difficult to independently verify. In particular,
the potential market for Collagen's Contigen product is difficult to estimate
because Contigen represents a new method of treatment, and Collagen believes
that most sufferers of stress urinary incontinence do not seek medical
treatment. Furthermore, Contigen is marketed to urologists, whom Collagen
believes generally are not the primary care physician for individuals seeking
treatment for this disorder. Should the markets for such products be more
limited than Collagen or its marketing partners currently estimate, or should
Collagen, its distributors and/or its marketing partners fail to penetrate such
markets to the extent anticipated, Collagen may experience lower than
anticipated revenues and a resulting adverse effect on its business, financial
condition and results of operations.

Risk of Investments in Affiliates. Collagen has made significant equity
and debt investments in affiliated companies that are involved in the
development of complementary or related technologies or products, and Collagen
currently intends to continue to make significant additional investments from
time to time in the future. These affiliated companies typically are in an early
stage of development and may be expected to incur substantial losses. As a
result, Collagen has recorded and expects to continue to record a share of the
losses in such affiliates attributable to Collagen's

10
11

ownership, which losses have had and will continue to have an adverse effect on
Collagen's operating results. Furthermore, there can be no assurance that any
investments in affiliates will result in any return nor as to the timing of such
return, or that Collagen will not lose its entire investment. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Collagen."

Patents and Proprietary Technology. Collagen depends substantially upon
its proprietary technological expertise in the extraction, purification, and
formulation of collagen-based materials and other biomaterials into biomedical
products. Collagen seeks patents on inventions concerning novel manufacturing
processes, compositions of matter, and applications for its proprietary
biomaterials.

Patent-related litigation is an increasing risk in the medical device
industry. There can be no assurance Collagen will be successful in the future in
obtaining patents or license rights, that patents will be issued for Collagen's
current patent applications, that Collagen will develop additional proprietary
technology that is patentable, that any issued patents will provide Collagen
with any competitive advantages or will not be challenged by third parties, or
that patents of others will not have an adverse effect on Collagen. There can be
no assurance that others will not independently develop similar products,
duplicate any of Collagen's products, or design around any patents used by
Collagen. No assurance can be given that Collagen's processes or products 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 Collagen. If Collagen 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, Collagen could
incur substantial costs in defending itself in suits brought against Collagen on
such patents or in bringing suits to protect Collagen's patents against
infringement.

Competition. The medical device industry is characterized by rapidly
evolving technology and increasing competition. At the present time there is a
commercial product in the United States that is directly competitive with Zyderm
and Zyplast Implants, Collagen's collagen-based products for cosmetic and
reconstructive surgery. This product is a gelatin-based (denatured collagen)
product for soft tissue augmentation presently being marketed in the U.S. and
Canada. Collagen is also aware of one foreign company which is marketing
internationally a collagen-based material for soft tissue augmentation. In
addition, several companies are engaged in research and development activities
relating to the use of collagen and other biomaterials for the correction of
soft tissue defects. Collagen's injectable collagen products also compete in the
dermatology and plastic surgery markets with substantially different alternative
treatments, such as surgery and topical applications. In addition, several
companies and institutions are engaged in the development of collagen-based and
other materials, techniques, procedures and products for use in medical
applications anticipated to be addressed by Collagen's Contigen Implant,
Collagraft Implant and Collagraft Strip products. Some of these companies and
institutions may have substantially greater capital resources; research and
development staffs and facilities; and experience in conducting clinical trials,
obtaining regulatory approvals, and manufacturing and marketing products similar
to those of Collagen. These companies and institutions may represent significant
long-term competition for Collagen. There can be no assurance that Collagen's
competitors will not succeed in developing technologies and products that are
more effective than any which have been or may be developed by Collagen or that
would render Collagen's technology and products obsolete or non-competitive.
There can be no assurance that such potential competition will not have an
adverse effect on the future business, financial condition or results of
operations of Collagen. Certain of Collagen's collagen-based products, including
the Zyderm implants, were manufactured and sold pursuant to an exclusive license
from Stanford University under a U.S. patent, which expired in April 1993,
covering the use of native, solubilized collagen for soft-tissue augmentation.
The expiration of this patent may result

11
12

in increased competition in the market for injectable collagen implants if and
as other companies enter that market. See "Business of Collagen -- Competition."

Effect of Reduced Ownership Interest in Target. As of March 15, 1995,
Collagen owned 2,124,194 shares of Target Common Stock, representing
approximately 30% of the outstanding shares of Target Common Stock. Collagen's
earnings have been favorably affected in recent periods by Collagen's equity in
earnings of Target, which represented a benefit to Collagen of approximately
$1.7 million in fiscal 1994 and approximately $1.1 million in the six month
period ended December 31, 1994. Collagen has engaged in regular open-market
sales of its Target Common Stock and expects to continue such sales. Collagen's
ownership of Target may also be further reduced through additional equity
offerings by Target that dilute Collagen's ownership interest, exchanges of
Notes for shares of Target Common Stock or otherwise. As a result of such
reduced ownership, Collagen's equity in any earnings of Target will decrease,
which will have an adverse effect on Collagen's operating results. In addition,
Collagen will not recognize any further equity in earnings or losses of Target
after such time as Collagen ceases to own at least 20% of Target's outstanding
voting stock. See "Beneficial Ownership of Target Common Stock By Collagen and
Certain Other Relationships."

Product Liability; Insurance. Collagen is involved in various legal
actions arising in the ordinary course of business, the majority of which
involve product liability claims. While the outcome of such matters currently is
not determinable it is management's opinion that these matters will not have a
material adverse effect on Collagen's future consolidated financial position and
results of operations.

Collagen faces an inherent business risk of exposure to product liability
claims alleging that the use of Collagen's technology or products has resulted
in adverse effects. Such risks will exist even with respect to those products
that have received or in the future may receive regulatory approval for
commercial sale. There can be no assurance that Collagen will avoid significant
product liability claims and attendant negative publicity. Furthermore, there
can be no assurance that present insurance coverage will be adequate or that
adequate insurance coverage will remain available at acceptable costs, if at
all, or that a product liability claim or recall would not adversely affect the
future business or financial condition of Collagen. In addition, adverse product
liability actions could negatively affect Collagen's ability to obtain and
maintain regulatory approval for its products.

In light of regulatory investigations surrounding product safety, Collagen
announced in September 1991 that it would indemnify physicians against damages
and legal fees arising from lawsuits brought to a jury trial alleging a link
between collagen injections and Polymyositis and Dermatomyositis. To date, the
impact of this indemnification on Collagen's results of operations has not been
significant. There can be no assurance, however, that any future such claims
would not have a material adverse effect on Collagen's operating results.

Impact of Currency Fluctuations; Importance of Foreign
Sales. Approximately 32% and 33% of Collagen's revenues in fiscal year 1994 and
the six month period ended December 31, 1994, respectively, came from its
international operations. Because international sales of Collagen's products
typically are denominated in local currencies, Collagen's results of operations
have been and are expected to continue to be affected by changes in exchange
rates between certain foreign currencies and the United States dollar. Although
the effect of currency fluctuations on Collagen's operating results were
positive during the six month period ended December 31, 1994, there can be no
assurance that Collagen will not experience unfavorable currency fluctuation
effects in future periods, which could have an adverse effect on Collagen's
operating results. Prior to December 1994, Collagen engaged in certain hedging
transactions to mitigate currency exchange exposure. Collagen does not currently
engage in any currency hedging activities. Collagen's operations and financial
results also may be significantly affected by other international factors,
including changes in governmental regulations or import and export restrictions,
and foreign economic and political conditions generally. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Collagen."

12
13

Single Manufacturing Facility. All of Collagen's manufacturing capacity is
located in a single facility. An earthquake, fire or other similar calamity
could result in significant disruptions and delays in Collagen's manufacturing
and distribution process. Collagen currently maintains only limited amounts of
finished product inventory, and Collagen's business, financial condition and
results of operations would be materially adversely affected in such event.

Dependence on Key Personnel. Collagen is dependent upon a limited number
of key management and technical personnel, the loss of any one of which could
have a material adverse effect on Collagen's business. Collagen's future success
will depend in part upon its ability to attract and retain highly qualified
personnel. Collagen competes for such personnel with other companies, academic
institutions, government entities and other organizations. There can be no
assurance that Collagen will be successful in hiring or retaining qualified
personnel. See "Business of Collagen -- Employees."

Third-Party Reimbursement. Certain of Collagen's products, including the
Contigen Implant, Collagraft Implant and Collagraft Strip products, are
purchased by hospitals or physicians, which, in the United States, then bill
various third-party payors including Medicare, Medicaid and private insurers for
the healthcare services provided to patients. Third-party payors are
increasingly challenging the prices charged for medical products and services.
There can be no assurance that the reimbursement of treatments using Collagen's
products will not be subject to such challenges in the future.

RISK FACTORS RELATING TO TARGET

Volatility of Stock Price and Quarterly Fluctuations in Operating
Results. Target's stock price has been and may continue to be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenues or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of Target's Common
Stock in any given period. Furthermore, Target participates in a highly dynamic
industry, which often results in significant volatility of Target's Common Stock
price. The trading price of Target's Common Stock also may vary on the basis of
numerous other factors, including the timing and amount of expenses associated
with expanding Target's operations both domestically and internationally,
increased revenues and expenses in conjunction with Target's recently commenced
German operations, Target's ability to successfully meet new product development
plans, success in achieving regulatory clearance for new products (such as
Target's detachable coil systems) in a timely manner, the acceptance of new
product introductions both in the United States and internationally, the mix
between pilot production of new products and full-scale manufacturing of
existing products, the mix between domestic and export sales, the availability
of complementary products and the effects this may have, particularly on
domestic sales, possible changes in ordering patterns of its customers due to
changes in the business environment or to potential variations in foreign
exchange rates, Target's ability to continue to attract qualified engineers to
further the development of future products, potential future partnering
arrangements, changes in the domestic and foreign health care policies
(including third-party reimbursement issues), increased competitive forces,
developments in Target's ongoing intellectual property litigation, and the
general litigious nature of the medical device industry. Target also believes
that seasonal patterns, including a reduction in the number of procedures
performed by physicians using Target's products during summer and holiday
periods, may affect its quarterly revenue stream. In addition, Target cannot
predict ordering rates by distributors, some of which place infrequent stocking
orders while others order at regular intervals. Although Target has experienced
revenue growth since its inception and has been profitable on a quarterly basis
since the quarter ended December 31, 1990, no assurance can be given that
revenue growth or profitability on a quarterly or annual basis will be
sustained. Target's results of operations have varied significantly from quarter
to quarter, and revenue growth rates have been inconsistent. As a result of
these and other factors, Target expects to continue to experience significant
fluctuations in the trading price of its Common Stock and in its quarterly
operating results.

13
14

Reliance on Future Products and New Applications. Target has an ongoing
and active research and development program pursuant to which it is developing
several new and enhanced versions of its catheters, guidewires and micro-coils.
Target's future success will depend upon, among other factors, its ability to
develop or acquire from third parties, introduce and manufacture new products or
enhanced versions of existing products and to obtain regulatory clearance on a
timely basis for such products or for use of existing products for new
indications. Target is also developing technology that enhances the performance
of its existing catheter and guidewire products. In addition, Target has several
new versions of its micro-coils under development. There can be no assurance
that Target will be able to develop or acquire new products successfully, to
manufacture new products in commercial volumes, to obtain regulatory clearances
on a timely basis to use such products in existing or new clinical applications
or to gain satisfactory market acceptance for such products. Delays in
commercial introduction or acceptance of new products could have a material
adverse effect on Target's business, financial condition and results of
operations. See "Business of Target -- Product Development" and "Business of
Target -- Government Regulation and Product Testing."

Governmental Regulation. The manufacture and marketing of Target's
products are subject to extensive and rigorous federal and state regulation in
the United States and to various regulatory requirements in other countries. The
process of obtaining and maintaining required regulatory clearances is lengthy,
expensive and uncertain. The FDA requires that a new medical device or a new
indication for use of an existing medical device obtain either a 510(k)
premarket notification clearance or an approved Premarket Approval application
("PMA") prior to being introduced into the market. The process of obtaining a
510(k) clearance has recently taken at least six months from the date of filing
of the application and generally requires the submission of supporting data,
which can be extensive and extend the process for a considerable length of time.
In addition, the FDA may require review by an advisory panel as a condition for
510(k) clearances, which can further lengthen the process. The PMA process
generally takes more than two years from initial filing and requires the
submission of extensive supporting data and clinical information. No assurance
can be given that any future products or applications developed by Target will
not require clearance under the more lengthy and expensive PMA process. If
Target is required to obtain clearance for any products pursuant to the PMA
procedure or if the 510(k) process with respect to any products is extended for
a considerable length of time, the commencement of commercial marketing could be
delayed substantially.

Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain clearance required by foreign countries may be longer or
shorter than that required for FDA clearance, and requirements for licensing may
differ significantly from FDA requirements. Some countries have historically
permitted human studies earlier in the product development cycle than
regulations in the United States. Other countries, such as Japan, have standards
similar to those of the FDA. This disparity in the regulation of medical devices
may result in more rapid product clearance in certain countries than in the
United States, while clearance in countries such as Japan may require longer
periods than in the United States. In addition, the European Union has developed
a new approach to the regulation of medical products which may significantly
change the situation in those countries. The receipt or denial of FDA clearance
for a particular product may affect the receipt or denial of regulatory
clearance for that product in certain other countries.

There can be no assurance that Target will obtain timely regulatory
clearance for its future products, or that existing clearances will not be
withdrawn. In particular, there can be no assurance that Target's pending 510(k)
application for the Guglielmi Detachable Coil ("GDC") system, which was filed in
March 1995, will be granted in a timely manner or at all. Target anticipates
that this application, which includes clinical data on approximately 800
patients, will be reviewed by advisory consultants to the FDA, some of whom may
also be members of other FDA panels, which is expected to further extend the
review process. Moreover, regulatory clearances, if granted, may

14
15

include significant limitations on the indicated uses for which a product may be
marketed. Failure to comply with applicable regulatory requirements can, among
other consequences, result in fines, civil penalties, injunctions, suspensions
or losses of regulatory clearances, product recalls, seizure of products,
operating restrictions, refusal of the government to approve product license
applications or allow Target to enter into supply contracts, and criminal
prosecution. In addition, governmental regulations may be established that could
prevent or delay regulatory clearance of Target's products. Delays in receipt
of, or failure to receive, clearances, or the loss of previously received
clearances, could have a material adverse effect on Target's business, financial
condition and results of operations. See "Business of Target -- Government
Regulation and Product Testing."

Product Liability Litigation; Insurance. Target faces the risk of
financial exposure to product liability claims alleging that the use of Target's
products resulted in adverse effects. Target's products are often used in
life-threatening situations and in the brain, where there is a high risk of
serious injury or death. Such risks will exist even with respect to those
products that have received, or in the future may receive, regulatory clearance
for commercial sale. Target is currently a party to several legal actions
involving product liability claims. While Target seeks to maintain product
liability insurance with coverage that Target believes is comparable to that
maintained by companies similar in size and serving similar markets, there can
be no assurance that Target will avoid significant product liability claims and
attendant adverse publicity. Furthermore, there can be no assurance that
Target's product liability insurance will be adequate or that such insurance
coverage will remain available at acceptable costs. A successful claim brought
against Target for which coverage is denied or in excess of its insurance
coverage could have a material adverse effect on Target's business, financial
condition and results of operations. Additionally, it is possible that adverse
product liability actions could negatively affect Target's ability to obtain and
maintain regulatory clearance for its products. See "Business of
Target -- Product Liability Litigation and Insurance."

Concentrated Customer Base and Adoption of Technology. Target believes
that the number of interventional neuroradiologists and neurosurgeons trained to
use its vascular access and delivery products to treat neurovascular disorders
is relatively small, both in the United States and abroad. The growth in the
number of neuro-interventional physicians in the United States is constrained by
the lengthy training programs required to educate these physicians. Target
believes that there are approximately 130 interventional neuro-radiologists in
the United States and that approximately 30 physicians are currently being
trained to perform neuro-interventional procedures in fellowship programs at 15
hospitals in North America. Future growth of the market for Target's
neurovascular micro-catheters will require continued expansion of the number of
trained interventional practitioners. To the extent that physicians do not adopt
micro-catheters for use in treating neurovascular disorders or sufficient
physicians are not trained in the use of Target's products, both in the United
States and abroad, the market for Target's products may remain limited. See
"Business of Target -- Marketing and Sales."

Competition. The medical device industry is characterized by rapidly
evolving technology and competition. Target currently experiences competition in
the interventional neuroradiology market and expects such competition to
increase substantially. Several companies in the United States, including large
companies with resources significantly greater than those of Target, have
introduced products that are being used in the interventional neuroradiology
market. Target is also aware of other companies that may pursue
commercialization of products which may compete with Target's products and may
result in pricing and margin pressures within this market. There can be no
assurance that these companies will not succeed in developing technologies and
products that are more effective than any which have been or are being developed
by Target or that would render Target's technologies or products obsolete or not
competitive.

15
16

technical resources, and experience than Target focusing principally on
cardiovascular and peripheral applications for their catheter technologies. As a
result, Target focuses its product development and marketing strategies on
market segments where Target's small vessel access and delivery systems can be
used in applications not presently addressed by conventional catheter and other
interventional products. There can be no assurance, however, that competitors
will not successfully enter these markets with superior products. In addition,
Target is aware of several other companies that have introduced guidewires to
the marketplace and attributes the slower growth rate of its guidewire product
line to increased competitive pressures. Such competition could have a material
adverse effect on Target's business, financial condition and results of
operations. See "Business of Target -- Competition."

Patents and Proprietary Technology. The medical device market is
characterized by substantial litigation regarding patent and other intellectual
property rights. Target is aware of certain United States patents with which
certain of Target's current or proposed products may be in conflict. Two United
States patents held by third parties may cover certain of Target's
micro-catheter products. With respect to one of these patents, based upon
Target's analysis with the assistance of its patent counsel, Target believes
that such patent is invalid. With respect to the other of these patents,
although Target has not obtained a formal opinion of counsel, Target believes
that it has available defenses to a claim of infringement with respect to such
patent. However, the invalidity of any particular patent and the availability of
Target's defenses must be determined by a court in the event of litigation, and
no assurance can be given that any dispute will be resolved in a manner
satisfactory to Target. With respect to another patent that may cover one
element in the fabrication of a particular guidewire product and one potential
guidewire product, Target has designed a guidewire product that Target believes
avoids the risk of infringement. However, Target has continued and expects to
continue to market the existing guidewire product for the foreseeable future.
The above-described patents are held by large companies, each of which has
substantial resources, and no assurance can be given that such companies will
not be successful in maintaining the validity of their patents. If legal action
is commenced against Target to enforce these patents and the plaintiff in such
action prevails, Target could be prevented from practicing the subject matter
claimed in such patents. In such event or under other appropriate circumstances,
Target may attempt to obtain licenses to such patents or redesign its products.
Target is also aware that certain of its products under development may be
covered by existing patents, in which event Target may be required to obtain
licenses prior to the introduction and commercial shipment of such products.
There can be no assurance that such licenses will be available or, if available,
will be available on terms acceptable to Target, or that Target will be
successful in any attempt to redesign its products or processes to avoid
infringement. Moreover, there can be no assurance that Target has identified all
patents that may pose a risk of infringement by Target's current or proposed
products. Target's business, future operating results and financial condition
could be materially and adversely affected if its products are found to infringe
any of these patents. Target has depended and will continue to depend
substantially on its technological expertise in the development and manufacture
of its current and future products. In addition, Target depends and will likely
continue to depend on trade secret protection and on various patents, such as
its patent covering the variable stiffness shaft design of its micro-catheters,
to strengthen its proprietary position. There can be no assurance that Target
will be successful in the future in obtaining patents or that patents will not
be challenged by third parties. There can be no assurance that measures to
protect trade secrets will be successful, or that others will not independently
develop similar products, duplicate any of Target's products, or design around
any patents owned or licensed by Target. Litigation, which could result in
substantial costs to and diversion of effort by management of Target, may be
necessary to enforce patents issued to Target, to protect trade secrets or
know-how owned by Target or to defend Target against claimed infringement of the
rights of others and to determine the scope and validity of the patents or other
proprietary rights of other entities. The resolution of these claims generally
involves complex legal and factual questions and is highly uncertain. Adverse
determinations in any litigation could subject Target to significant liabilities
to third parties, require Target to seek licenses from third parties and prevent
Target from

16
17

manufacturing and selling its products, any of which could have a material
adverse effect on Target's business, financial condition and results of
operations. See "Business of Target -- Patents, Trade Secrets and Licenses."

The patent which relates to the variable stiffness design of Target's
Tracker micro-catheters (the "Tracker patent") has been the subject of
reexamination proceedings in the United States Patent and Trademark Office
("PTO"). The first such proceeding concluded on November 15, 1994, when the PTO
issued a reexamination certificate and confirmed the patentability of the patent
claims set forth in the certificate. The second reexamination of the patent was
initiated by one of Target's competitors, SciMed Life Systems, Inc. ("SciMed") a
subsidiary of Boston Scientific Corporation, raising new issues of
patentability. A petition for a third reexamination was filed recently by the
same competitor alleging another issue of patentability and requiring the merger
with the second reexamination. Both proceedings are currently pending in the
PTO. No assurance can be given that the PTO will issue a reexamination
certificate confirming the patentability of the patent claims, or that the
patent claims will not be amended in ways that will reduce any competitive
advantages the Tracker patent has provided for Target's products.

During the last half of calendar 1994, Target learned that two of its
United States competitors had commenced sales in the United States of
micro-catheters that Target believes infringe the Tracker patent. On November 9,
1994, Target filed a lawsuit against SciMed and Cordis Endovascular Systems,
Inc. in the United States District Court in San Jose, seeking damages and
preliminary and permanent injunctive relief against further infringing sales.
The defendants responded, challenging the validity of the Tracker patent,
denying infringement, and raising other defenses. The Court has stayed the
lawsuit until the pending reexamination proceedings have been completed in the
PTO. There can be no assurance that Target will be successful in this action or
that even if Target receives a favorable ruling in the pending reexamination,
the defendants will not prevail in this lawsuit.

Target is also aware that at least one competitor in Europe has sold
micro-catheters that may infringe a patent that could issue on Target's patent
application which is pending in the European Patent Office. Target is
investigating its options for enforcement of its rights with respect to such
infringement. The patent which relates to the variable stiffness design of
Target's Tracker micro-catheter is being opposed in Japan by an undisclosed
party.

Importance of Foreign Sales. Export product sales outside of the United
States were 61%, 60% and 69% of product sales, respectively, for the fiscal
years ended March 31, 1993 and 1994 and for the nine months ended December 31,
1994. Target anticipates that product sales to customers in Europe and Japan
will generate a majority of total product sales through at least fiscal year
1996. Fluctuations in the value of foreign currencies relative to the U.S.
dollar could adversely affect Target's sales and results of operations from time
to time. Target's international operations are also subject to certain other
risks common to foreign operations in general, including governmental
regulations and import and export restrictions. Changes in such governmental
regulations or import and export restrictions could adversely affect sales of
Target's products and Target's results of operations.

Third-Party Reimbursement. Target's products are purchased by hospitals,
which, in the United States, then bill various third-party payors including
Medicare, Medicaid and private insurers for the healthcare services provided to
patients. Government agencies reimburse hospitals for medical procedures at a
fixed rate according to diagnosis-related groups. Federal and state laws and
regulations govern reimbursement by such government agencies. Such laws and
regulations also influence reimbursement of medical fees by private insurance
companies. Changes in current policies could reduce or eliminate such
reimbursements and thereby adversely affect future sales of Target's products.
In addition, third-party payors may deny reimbursement if they determine that
the device used in the procedure is unnecessary, inappropriate, not
cost-effective, experimental or for a non-approved indication. Third-party
payors may deny reimbursement for treatments using Target's products, regardless
of the FDA clearance status of such products. Third-party payors are
increasingly challenging the prices charged for medical products and services.
There can be no assurance

17
18

that reimbursement from third-party payors will be available, or if available,
that reimbursement will not be limited, thereby adversely affecting Target's
ability to sell its products profitably. Although Target has not experienced any
problems to date, significant uncertainty exists as to the reimbursement status
of newly approved healthcare products, and there can be no assurance that
adequate third-party coverage will be available to patients. In such event,
sales of Target's products could be adversely affected.

Dependence on Key Personnel. Target is dependent upon a limited number of
key management and technical personnel. Target's future success will depend in
part upon its ability to attract and retain highly qualified personnel. Target
competes for such personnel with other companies, academic institutions,
government entities and other organizations. There can be no assurance that
Target will be successful in hiring or retaining qualified personnel. The loss
of key personnel or the inability to hire or retain qualified personnel could
have a material adverse effect on Target's business, financial condition and
results of operations. See "Business of Target -- Employees."

Control By Collagen. As of March 15, 1995, Collagen owned 2,124,194 shares
of Target Common Stock, representing approximately 30% of the outstanding shares
of Target Common Stock. Prior to any exchange of Notes for Target Common Stock,
Collagen will continue to own the shares of Common Stock issuable upon exchange
of the Notes, and will continue to exercise all rights, including voting rights,
incident to such ownership. Accordingly, Collagen has sufficient voting power to
significantly influence the outcome of matters submitted to Target's
stockholders for approval. As a result, Collagen may have the power to influence
any potential proxy contest, merger, tender offer, open-market repurchase
program or other purchases of Target Common Stock that could result in a change
of the composition of the Exchange Property or give the holders of Target Common
Stock the opportunity to realize a premium over the then prevailing market price
for shares of Target Common Stock. In addition, two members of Target's Board of
Directors, Howard D. Palefsky and William G. Davis, are also directors of
Collagen, and Mr. Palefsky also is an officer of Collagen, and Collagen thereby
may be able to exercise additional control over Target's affairs. See
"Beneficial Ownership of Target Common Stock By Collagen and Certain Other
Relationships" and "Underwriting."

Single Manufacturing Facility. All of Target's manufacturing capacity is
located in a single facility. An earthquake, fire or other similar calamity
could result in significant disruptions and delays in Target's manufacturing and
distribution process. Target currently maintains only limited amounts of certain
finished product inventory, and Target's business, financial position and
results of operations could be materially adversely affected in such event.

Future Sales of Target Common Stock. Future sales of Target Common Stock
in the public market could adversely affect prevailing market prices of the
Target Common Stock and, as a result, the trading price of the Notes offered
hereby. Substantially all of the outstanding shares of Target Common Stock are
freely tradeable in the open market, subject only in the case of affiliates of
Target to the volume and other limitations of Rule 144 under the Securities Act.
Collagen, Target and executive officers and directors of Collagen and Target
have agreed subject to certain limited exceptions not to offer to sell, contract
to sell or otherwise sell or dispose of any shares of Target Common Stock, any
options or warrants to purchase Target Common Stock, or any securities
convertible into or exchangeable for shares of Target Common Stock for a period
of 90 days following the date of this Prospectus, without the prior written
consent of the Underwriter. Collagen has in the past sold and expects to
continue to sell shares of Target Common Stock in the open market or otherwise,
subject to the limitations of Rule 144 and Collagen's agreement with the
Underwriter to refrain from sales of Target Common Stock for a period of 90 days
after the date of this Prospectus. Such sales may have the effect of depressing
the trading price of Target's Common Stock. See "Beneficial Ownership of Target
Common Stock By Collagen and Certain Other Relationships" and "Underwriting."

18
19

USE OF PROCEEDS

The net proceeds to Collagen from the sale of the Notes offered hereby are
estimated to be $38,275,000 ($43,125,000 if the Underwriter's over-allotment
option is exercised in full), after deduction of estimated underwriting
discounts and commissions and estimated offering expenses payable by Collagen.
The net proceeds will be used for additions to working capital, equity and debt
investments in affiliated companies and other strategic alliances, research and
new product development activities, the purchase or financing of capital
equipment and leasehold improvements, and other general corporate purposes.
Collagen also may use a portion of the proceeds to repurchase shares of its
Common Stock in the open-market or otherwise under a stock repurchase program
that has been approved by Collagen's Board of Directors. The actual timing and
amount of such repurchases, if any, have not been determined. In addition,
Collagen may use a portion of the proceeds for the acquisition of technologies
or businesses complementary to Collagen's business, although no such
transactions are currently pending. Pending such uses, Collagen intends to
invest such funds in short-term, interest-bearing obligations. Target will not
receive any of the proceeds from the sale of the Notes.

CAPITALIZATION OF COLLAGEN

The following table sets forth the capitalization of Collagen and its
consolidated subsidiaries at December 31, 1994, and as adjusted to give effect
to the net proceeds from the sale of the Notes offered hereby.

ACTUAL AS ADJUSTED
-------- -----------

(IN THOUSANDS)
Long-term obligations(1):
% Exchangeable Subordinated Notes due 2002..................... $ -- $40,000
Stockholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares authorized, no
shares issued and outstanding.................................. -- --
Common Stock, $0.01 par value, 28,950,000 shares authorized;
10,466,346 shares issued and outstanding(2).................... 105 105
Additional paid-in capital.......................................... 62,837 62,837
Cumulative translation adjustment................................... (839) (839)
Retained earnings................................................... 12,740 12,740
Treasury stock, at cost, 1,200,000 shares........................... (26,971) (26,971)
-------- -----------
Total stockholders' equity........................................ 47,872 47,872
-------- -----------
Total capitalization........................................... $ 47,872 $87,872
========= ==========

---------------
(1) Collagen currently does not have any long-term debt. See Note 4 of Notes to
Consolidated Financial Statements of Collagen for information about
Collagen's commitments.

(2) Does not include approximately 102,000 shares of Common Stock available for
issuance pursuant to Collagen's employee stock purchase plan and up to
approximately 754,000 shares of Common Stock available for issuance pursuant
to Collagen's stock option plans, of which approximately 1,223,000 shares of
Common Stock were issuable upon exercise of options outstanding at December
31, 1994.

19
20

PRICE RANGE OF TARGET COMMON STOCK
AND DIVIDEND POLICY

Target Common Stock has been traded on the Nasdaq National Market under the
symbol "TGET" since Target's initial public offering in January 1992. The
following table presents the high and low closing sale prices reported by Nasdaq
for the calendar quarters indicated. These prices do not include retail markups,
markdowns or commissions and may not reflect actual transactions.

HIGH LOW
------ ------

1992
First Quarter (from January 24, 1992).................................... $31 5/8 $22 3/4
Second Quarter........................................................... 23 16 3/4
Third Quarter............................................................ 28 19 3/4
Fourth Quarter........................................................... 28 18 3/4
1993
First Quarter............................................................ $27 3/4 $18 1/4
Second Quarter........................................................... 24 3/4 17 3/4
Third Quarter............................................................ 25 1/4 21 1/8
Fourth Quarter........................................................... 22 1/4 14
1994
First Quarter............................................................ $26 1/4 $16 1/2
Second Quarter........................................................... 26 1/2 20 1/2
Third Quarter............................................................ 30 1/4 19 3/4
Fourth Quarter........................................................... 32 1/4 23 3/4
1995
First Quarter (through March 22, 1995)................................... $39 1/4 $27 3/8

On March 22, 1995, the last sale price of Target Common Stock on the Nasdaq
National Market was $36.00 per share. As of March 15, 1995, there were
approximately 150 holders of record of Target Common Stock.

Target has not historically paid cash dividends, with the exception of a
$7.0 million dividend to Collagen and other holders of record of Target's
Preferred Stock as of January 15, 1992. Target currently intends to retain any
future earnings for use in its business and does not anticipate paying any
further cash dividends in the foreseeable future. Target's line of credit
prohibits the payment of cash dividends.

20
21

SELECTED CONSOLIDATED FINANCIAL DATA OF COLLAGEN

The consolidated statement of operations data of Collagen set forth below
for the fiscal years ended June 30, 1992, 1993 and 1994 and the consolidated
balance sheet data at June 30, 1993 and 1994 are derived from, and are qualified
by reference to, the audited consolidated financial statements included
elsewhere herein. The consolidated statement of operations data for the fiscal
years ended June 30, 1990 and 1991 and the consolidated balance sheet data at
June 30, 1990, 1991 and 1992 are derived from audited consolidated financial
statements not included in this Prospectus. The consolidated statement of
operations data for the six month periods ended December 31, 1993 and 1994, and
the consolidated balance sheet data at December 31, 1994 have been derived from
unaudited interim condensed financial statements included elsewhere herein and
reflect, in management's opinion, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods. Results of operations for any interim period are
not necessarily indicative of results to be expected for the full fiscal year.

SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------------------------------- -------------------
1990 1991 1992(1) 1993 1994 1993 1994
-------- -------- -------- -------- -------- -------- --------

CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales..................................... $ 49,404 $ 61,282 $ 65,782 $ 49,743 $ 64,552 $ 30,238 $ 34,302
Other............................................. 500 100 1,400 -- 1,000 1,000 1,000
-------- -------- -------- -------- -------- -------- --------
49,904 61,382 67,182 49,743 65,552 31,238 35,302
Costs and expenses:
Cost of sales..................................... 10,878 15,073 22,759 15,659 18,940 8,590 9,216
Research and development.......................... 8,498 8,954 12,023 8,767 9,366 4,565 5,038
Selling, general and administrative............... 18,495 28,698 38,694 29,176 28,639 14,292 15,331
-------- -------- -------- -------- -------- -------- --------
37,871 52,725 73,476 53,602 56,945 27,447 29,585
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations....................... 12,033 8,657 (6,294) (3,859) 8,607 3,791 5,717
Other income (expense):
Net gain from investments, principally Target..... -- -- 9,439 20,323 -- -- 775
Equity in earnings (losses) of affiliates......... -- -- (32) 968 (269) (37) (369)
Interest income................................... 570 1,080 1,586 880 510 283 215
Interest expense.................................. (983) (1,000) (796) -- -- -- (55)
-------- -------- -------- -------- -------- -------- --------
Income before income taxes.......................... 11,620 8,737 3,903 18,312 8,848 4,037 6,283
Provision for income taxes.......................... 4,685 3,492 1,262 8,580 3,928 2,000 2,731
Minority interest in earnings of Target............. 62 132 1,233 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income from continuing operations................... 6,873 5,113 1,408 9,732 4,920 2,037 3,552
Loss from discontinued operations, net of tax....... (2,778) (9,462) (261) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of accounting
change............................................ 4,095 (4,349) 1,147 9,732 4,920 2,037 3,552
Cumulative effect of change in method of accounting
for income taxes.................................. -- -- -- (989) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)................................... $ 4,095 $ (4,349) $ 1,147 $ 8,743 $ 4,920 $ 2,037 $ 3,552
======== ======== ======== ======== ======== ======== ========
Income (loss) per share:
Continuing operations............................. $ .77 $ .53 $ .14 $ .95 $ .50 $ .20 $ .37
Discontinued operations........................... (.31) (.98) (.03) -- -- -- --
Cumulative effect of accounting change............ -- -- -- (.10) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) per share..................... $ .46 $ (.45) $ .11 $ .85 $ .50 $ .20 $ .37
======== ======== ======== ======== ======== ======== ========
Shares used in calculating per share information.... 8,937 9,710 10,232 10,267 9,896 10,031 9,517
======== ======== ======== ======== ======== ======== ========
Cash dividends per share(2)......................... -- -- -- -- $ .10 -- $ .075
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges(3)............... 7.8x 4.9x 2.6x 12.1x 6.9x 6.4x 8.5x
======== ======== ======== ======== ======== ======== ========

JUNE 30,
------------------------------------------------------------- DECEMBER 31,
1990 1991 1992 1993 1994 1994
--------- --------- --------- --------- --------- ------------

CONSOLIDATED BALANCE SHEET DATA:
Working capital............................... $ 28,556 $ 20,264 $ 50,747 $ 24,557 $ 16,227 $ 13,580
Total assets.................................. 70,804 67,591 95,479 76,206 74,505 73,726
Long-term obligations......................... 12,750 9,350 -- -- -- --
Stockholders' equity.......................... 44,207 37,798 57,174 54,936 49,082 47,872

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

(1) As a result of the sale of a portion of Collagen's shares of Target in
fiscal 1993, Collagen's ownership position in Target decreased to 34% in
December 1992. The fiscal 1994 and 1993 financial information is presented
with Target accounted for under the equity method. All previous years contain
consolidated results of Target. See Notes 1 and 3 of Notes to Consolidated
Financial Statements of Collagen. Gains from Collagen's investment in Target
contributed $20,323,000 ($1.98 per share) to fiscal 1993 earnings and
$10,239,000 ($1.00 per share) to fiscal 1992 earnings.

(2) The Board of Directors currently expects to review semiannually the
potential for future dividends.

(3) The ratios of earnings to fixed charges were calculated by dividing the sum
of (i) consolidated pretax income from continuing operations, (ii) adjustment
to exclude the net equity income or loss of less than 50% owned affiliates
and (iii) fixed charges, by fixed charges. Fixed charges consist of expensed
interest and the estimated interest portion of rent expense.

21
22

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

The following discussion should be read in conjunction with Collagen's
consolidated financial statements, notes thereto and discussion thereof
incorporated by reference herein.

OVERVIEW

Collagen's revenues have been derived primarily from the sale of products
principally used in reconstructive and cosmetic applications for the face, the
treatment of stress urinary incontinence, and in bone repair. Collagen markets
its reconstructive and cosmetic products directly and through a network of
international distributors and its stress urinary incontinence and bone repair
products through marketing partners.

IMPACT OF TARGET ON FISCAL 1992 HISTORICAL RESULTS

Collagen reduced its equity interest in Target as a result of the sale of
stock held in Target in January and December 1992. Collagen's ownership
percentage in Target decreased from approximately 87% at June 30, 1991 to
approximately 52% at the end of fiscal 1992 and to approximately 34% by December
31, 1992. As of December 31, 1994, Collagen's ownership percentage in Target was
approximately 32%. Gains from Collagen's investment in Target were $20.3 million
in fiscal 1993 and $10.2 million in fiscal 1992. Beginning in fiscal 1993,
Collagen's investment in Target has been accounted for under the equity method
as a result of the reduced ownership position at December 1992. In fiscal 1992
and prior years, Target was a consolidated subsidiary of Collagen. Target's
product sales in fiscal 1992 were $21.1 million, representing 32% of Collagen's
consolidated 1992 product sales of $65.8 million. Other revenues of $1.4 million
in fiscal 1992 represented payments received by Target under the terms of the
research and development arrangement between Target and Century Medical, Inc.,
Target's joint venture partner in Japan.

Target's contribution to consolidated net income on an equity basis was
approximately $1.0 million in fiscal 1994 and $900,000 in fiscal 1993 (excluding
the gain on the sale of a portion of Collagen's investment). These amounts
compare to a contribution to consolidated net income of $3.2 million in fiscal
1992, when Target was a consolidated subsidiary. See Note 3 of Notes to
Consolidated Financial Statements of Collagen.

22
23

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated certain selected
statement of operations information of Collagen as a percentage of product sales
for the periods indicated.

SIX MONTHS
ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
---------------------------- -----------------
1992 1993 1994 1993 1994
------ ------ ------ ------ ------

Product sales..................................... 100% 100% 100% 100% 100%
Other revenue..................................... -- -- 2 3 3
Cost and expenses:
Cost of sales................................... 34 31 29 28 27
Research and development........................ 15 18 15 15 15
Selling, general and administrative............. 73 59 44 47 45
Income (loss) from operations..................... (22) (8) 13 13 17

COMPARISON OF ANNUAL AND SIX-MONTH RESULTS OF OPERATIONS

Management believes that a comparison of fiscal 1994 and 1993 operating
results to the previously reported fiscal 1992 results excluding Target is more
meaningful. Accordingly, the following discussion and all charts exclude the
results of Target in all areas other than equity in earnings and losses of
affiliate companies.

Product Sales. Product sales of $64.6 million in fiscal 1994 increased
$14.9 million or 30% over prior year sales of $49.7 million, which in turn
increased $5.0 million or 11% over fiscal 1992 sales of $44.7 million. The $14.9
million increase in fiscal 1994 is principally attributable to new products,
primarily Contigen Implant, Collagraft Implant and Collagraft Strip. The $5.0
million increase in fiscal 1993 was principally from $4.4 million of product
sales from shipping initial stocking orders of Contigen Implant. Product sales
of $34.3 million in the six months ended December 31, 1994 increased $4.1
million, or 13%, over the same prior-year period.

Fiscal 1994 worldwide sales of plastic surgery and dermatological products
were $43.5 million or 2% lower than fiscal 1993 sales of $44.2 million, compared
to a 1% increase in fiscal 1993 over fiscal 1992 sales of $43.7 million. U.S.
sales of plastic surgery and dermatological products, representing slightly more
than 50% of worldwide sales, remained relatively flat from year to year.
Collagen believes the lack of growth in demand was primarily due to competition
from alternative cosmetic procedures such as chemical peels, as well as the
lingering effects of adverse publicity in prior years from the news media on
cosmetic procedures in general and to regulatory investigations specific to
Collagen.

For the six months ended December 31, 1994, worldwide sales of plastic
surgery and dermatological products were $24.3 million, up 17% from sales of
$20.9 million for the same prior-year period. U.S. sales of plastic surgery and
dermatological products were $12.7 million for the six-month period ended
December 31, 1994, representing 52% of worldwide sales for such period and an
increase of 15% over U.S. sales of $11 million for the same prior-year period.
The increase in sales in the current fiscal year was primarily due to a price
increase which was effective February 1994 as well as increases in unit sales
which may be attributable to an increase in advertising and public relations
campaigns, and increased physician interest in cosmetic procedures not
reimbursed by third party payors.

International unit sales of plastic surgery and dermatological products
increased approximately 8% in fiscal 1994 over the prior year, while fiscal 1993
unit sales decreased by 6% from fiscal 1992. For the six months ended December
31, 1994, international unit sales of plastic surgery and dermatological
products increased 19% over the same prior-year period. Collagen believes the
turnaround in international unit sales in fiscal 1994 and in the current fiscal
year periods are a result

23
24

of successful marketing and public relations efforts, as well as strong
distributor sales and a recovery from recessionary economic conditions in
Europe. International sales in dollars were negatively impacted by unfavorable
foreign exchange rates in fiscal 1994 by approximately $1.6 million compared to
fiscal 1993, and in fiscal 1993 by approximately $380,000 compared to fiscal
1992; however, international sales in dollars were favorably impacted by
approximately $620,000 in the six months ended December 31, 1994, due to
favorable foreign exchange rates, compared with the same prior-year period. See
" -- Operating Income." Collagen expects growth in future worldwide demand for
its plastic surgery and dermatological products to continue, but at a lower
rate.

In September 1993, Collagen and its marketing partner, Bard, received final
clearance from the FDA to market Contigen Implant, resulting in sales of
Contigen Implant to Bard of $15.9 million and income of $789,000 from Bard's
direct sales to physicians during fiscal 1994 compared to $4.4 million of sales
of Contigen Implant to Bard in fiscal 1993. There were no sales of Contigen
Implant in fiscal 1992. For the six months ended December 31, 1994, product
sales of Contigen Implant to Bard were $8.1 million, which consisted of
shipments of Contigen Implant of $6.6 million and income from Bard's direct
sales of Contigen Implant to physician customers of approximately $1.5 million,
compared with product sales of $8.1 million for the same prior year period,
which consisted of shipments of Contigen Implant only. Collagen did not record
any income from Bard's direct sales of Contigen Implant to physician customers
in the same prior-year periods since Bard's direct sales of the product to
physician customers commenced late in the prior-year second quarter. Under an
agreement between Collagen and Bard, Bard agreed to make certain minimum
purchases of Contigen Implant products, and Bard currently has significant
inventory of these products. No minimum purchases are required under this
agreement after June 30, 1995, and there can be no assurance that Bard's
purchases of Contigen Implant will not decrease thereafter to the extent that
Bard seeks to reduce its Contigen Implant inventory levels. Any significant
decrease in such purchases could have a material adverse effect on Collagen's
operating results. While Collagen intends to pursue further agreements regarding
future shipment levels of Contigen Implant to Bard, there can be no assurances
that such agreements can be reached. During the quarter ended December 31, 1994,
Collagen's share of sales made by Bard to physician customers increased from 5%
to 10%, pursuant to the terms of an agreement between Collagen and Bard. Future
income from Bard's direct sales of Contigen Implant to physician customers is
expected to increase, but is uncertain and may fluctuate significantly due to
market demand.

Fiscal 1994 represented the first full fiscal year of Collagraft Implant
sales. In January 1994, Collagen and its marketing partner, Zimmer, received
clearance from the FDA to market Collagraft Strip, a second-generation product
for the treatment of acute long bone fractures and traumatic osseous (bony)
defects. Combined sales of Collagraft Implant and Collagraft Strip to Zimmer
totaled $2.7 million in fiscal 1994 compared to sales of Collagraft Implant of
$150,000 in fiscal 1993. There were no sales of Collagraft Implant or Collagraft
Strip in fiscal 1992. For the six months ended December 31, 1994, sales of
Collagraft Implant and Collagraft Strip to Zimmer were $1.6 million, compared to
sales of Collagraft Implant of approximately $700,000 to Zimmer in the same
prior-year period. The increase in the current fiscal year was primarily due to
sales of Collagraft Strip in the current fiscal period, whereas there were no
sales of that product during the same prior-year period. Due to higher than
expected shipments to Zimmer in the quarter ended September 30, 1994, Collagen
expects sales of Collagraft Implant and Collagraft Strip in the fiscal quarter
ending March 31, 1995 to be at a level similar to those reported in the quarter
ended December 31, 1994.

A number of uncertainties exist surrounding the marketing and distribution
of Collagen's new products, Contigen Implant, Collagraft Implant and Collagraft
Strip. Collagen's primary means of distribution for these products is through
third party firms, Bard, in the case of Contigen Implant, and Zimmer, in the
case of Collagraft Implant and Collagraft Strip. Collagen's business and
financial results could be adversely affected in the event that either or both
of these parties, or Collagen, are unable to effectively market the products,
accurately anticipate customer demand, or effectively manage industry-wide
pricing and cost containment pressures in health care.

24
25

Other Revenue. Other revenue recorded in fiscal 1994 consisted of a $1.0
million milestone payment from Bard earned upon receipt of clearance from the
FDA to market Contigen Implant. Other revenue in the six months ended December
31, 1994 and 1993 consisted of milestone payments of $1 million each from Bard
in accordance with an agreement between Collagen and Bard. Under the agreement,
Bard is scheduled to pay a final milestone payment of $2 million to Collagen on
September 30, 1995.

Cost of Sales. Cost of sales as a percentage of product sales averaged
29%, 31% and 34% in fiscal 1994, 1993 and 1992, respectively. The decrease in
cost of sales as a percentage of product sales reflected slightly lower unit
costs due to increased production volume, primarily from Contigen Implant. This
was partially offset by the effect of the lower gross margins from sales of
Contigen Implant, which are attributable to the marketing and distribution
arrangement with Bard. Cost of sales as a percentage of product sales was 27%
for the six months ended December 31, 1994, compared with 28% for the same
prior-year period. The lower cost of sales as a percentage of product sales in
the current fiscal year period was primarily due to increased product revenues
resulting from income received from Bard's direct sales of Contigen Implant to
physician customers, which lowered the cost of sales as a percentage of product
sales, as well as the favorable impact of foreign exchange rates on
international product sales. Due to the high fixed costs of Collagen's
manufacturing facility, unit cost of sales is expected to remain highly
dependent on maintaining current level of output at Collagen's manufacturing
facility, which is heavily dependent on production of Contigen Implant. Changes
in cost of sales as a percentage of sales are dependent on the product mix of
future sales for which demand and pricing characteristics may vary.

Research and Development. Research and Development ("R&D") expenses, which
include expenditures for regulatory compliance, were $9.4 million (15% of
product sales) in fiscal 1994, $8.8 million (18% of product sales) in fiscal
1993, and $6.9 million (15% of product sales) in fiscal 1992. The increases in
R&D expenses over the past two years were primarily attributable to Collagen
devoting additional resources to expand its capabilities in collagen-based
technologies through the hiring of additional personnel and the expansion of its
facilities. R&D expenses were $5.0 million for the six months ended December 31,
1994, an increase of 10% over the same prior year period. The increase in R&D
spending in the current fiscal year was primarily attributable to advancements
in soft tissue programs, including clinical trials for Zyplast II Implant, a
concentrated collagen material for soft tissue augmentation. Collagen expects
R&D spending for fiscal 1995 to be at a level slightly higher than that of the
prior year.

Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses totaled $28.6 million in fiscal 1994, $29.2 million in fiscal
1993 and $32.6 million in fiscal 1992, representing 44%, 59% and 73% of product
sales, respectively. The $600,000, or 2%, decrease in fiscal 1994 from fiscal
1993 was primarily due to lower commission expenses related to international
sales and lower promotional expense for the U.S. plastic surgery and
dermatological products, partially offset by increased personnel costs. The $3.4
million, or 11%, decrease in fiscal 1993 from fiscal 1992 was primarily due to
the high level of expenses incurred in the prior year to respond to both
legislative and regulatory investigations, and negative publicity about plastic
surgery and dermatological products and other cosmetic procedures, as well as
costs incurred in connection with product liability lawsuits. SG&A expenses were
$15.3 million for the six months ended December 31, 1994, compared with $14.3
million in, or an increase of 7% over, the same prior-year period. The increase
in the current fiscal year period was primarily due to higher international
spending and an unfavorable impact of foreign exchange rates, partially offset
by lower U.S. advertising and public relation campaign expenses. SG&A expenses
as a percentage of product sales were 45% for the six months ended December 31,
1994, compared to 47% for the same prior-year period. Collagen expects SG&A
spending in the full fiscal 1995 year to be at levels comparable to fiscal 1994.

Operating Income. Operating income was $8.6 million in fiscal 1994,
compared to operating losses of $3.9 million and $9.9 million in fiscal 1993 and
fiscal 1992, respectively. The increase in

25
26

operating income over the past two years is primarily the result of increased
sales of Contigen Implant, Collagraft Implant and Collagraft Strip, as well as
decreased SG&A expenses. Operating income was $5.7 million for the six months
ended December 31, 1994, compared with $3.8 million in, or an increase of 51%
over, the same prior-year period. The increase in operating income in the
current fiscal year period was primarily due to higher product sales, partially
offset by higher operating expenses.

Compared with foreign exchange rates for the same prior-year period, the
impact of foreign exchange rates in the six months ended December 31, 1994 on
operating income was a net increase of $170,000, resulting from an increase of
approximately $620,000 in revenue on equivalent local currency sales, partially
offset by an increase of approximately $450,000 in operating expenses.

Gain on Sale of Target Common Stock. In November 1994, Collagen sold
35,000 shares of the common stock of Target for a pre-tax gain of approximately
$775,000.

Equity in Earnings (Losses) of Affiliate Companies. Equity in losses of
affiliate companies in fiscal 1994 was $269,000 compared to equity in earnings
of affiliates of $968,000 in fiscal 1993. The losses in fiscal 1994 were
primarily due to increased losses from affiliates and increased ownership
percentages in certain of those affiliates, partially offset by increased equity
in earnings of Target. Equity in losses of affiliates in fiscal 1994 consisted
of approximately $1.7 million of earnings from Target, offset by approximately
$2.0 million of losses from other affiliates. The equity earnings in fiscal 1993
were comprised of approximately $1.5 million of earnings from Target, partially
offset by approximately $500,000 equity in losses of other affiliates. In fiscal
1992, Target was accounted for as a consolidated subsidiary and contributed
approximately $3.2 million to Collagen's consolidated net income. For the six
months ended December 31, 1994, equity in losses of affiliate companies was
$369,000, compared with losses of $37,000 in the same prior-year period. The
increase in equity in losses of affiliate companies in the six-month period in
the current fiscal year over the same prior-year period was primarily due to
increased losses recognized by affiliate companies, partially offset by
increased equity in earnings in Target. Collagen currently intends to continue
to make significant additional investments in affiliated companies. These
affiliated companies typically are in an early stage of development and may be
expected to incur substantial losses which in turn will have an adverse effect
on Collagen's operating results. Furthermore, there can be no assurance that any
investments in affiliates will result in any return nor as to the timing of such
return, or that Collagen will not lose its entire investment.

Interest Income and Expense. Interest income was $510,000 in fiscal 1994,
$880,000 in fiscal 1993 and $770,000 in fiscal 1992. The decrease in fiscal 1994
from fiscal 1993 was primarily due to lower average investment balances
resulting primarily from the repurchase of common stock and to lower interest
rates, while the increase in fiscal 1993 over fiscal 1992 was primarily due to
higher average investment balances resulting largely from the sale of a portion
of Collagen's investment in Target, despite lower interest rates during fiscal
1993 compared to fiscal 1992. Fiscal 1992 interest expense of $667,000 related
to interest on a term loan, which Collagen prepaid in March 1992. Interest
income was $215,000 for the six months ended December 31, 1994, compared with
$283,000 for the same prior-year period. The decrease in the current fiscal year
period was primarily due to lower average investment balances resulting from the
repurchase of common stock and additional investments in affiliate companies,
partially offset by slightly higher interest rates. Interest expense of $55,000
in the six months ended December 31, 1994 was related to a $7 million revolving
credit facility, which Collagen finalized with a bank in November 1994.

Provision for Income Taxes. Collagen's effective income tax rate was
approximately 44% for fiscal 1994 compared to 47% for fiscal 1993 and 32% for
fiscal 1992. The decrease in fiscal 1994 from fiscal 1993 was primarily
attributable to a reduction in unbenefited foreign subsidiary losses and the
recognition of tax credits, partially offset by an increase in non-deductible
equity losses of affiliates. The increase in fiscal 1993 over fiscal 1992 was
primarily attributable to a reduction in benefits from tax credits, non-taxable
investment gains, and export sales included in the fiscal 1992 provision. The

26
27

provision for income taxes for the six months ended December 31, 1994 and 1993
was computed by applying the estimated annual income tax rates of approximately
43% and approximately 49%, respectively, to income before income taxes. The
lower effective tax rate in the current fiscal year is primarily due to
increased equity in losses of affiliates which is partially offset by a change
in the mix of anticipated foreign and domestic earnings and a lower effective
state income tax rate. It is expected that the overall effective income tax rate
for fiscal 1995 will be slightly lower than for fiscal 1994. Effective July 1,
1992, Collagen prospectively changed its method of accounting for income taxes
from the deferred method to the liability method required by SFAS No. 109
"Accounting for Income Taxes." The cumulative effect of adopting SFAS No. 109
was a charge to earnings of $989,000 in the first quarter of fiscal 1993.

Impact of Foreign Exchange Rates. The impact of foreign exchange rates
from fiscal 1993 to fiscal 1994 resulted in approximately a $1.6 million
reduction in revenue on equivalent local currency sales and approximately a $1.0
million reduction in operating expenses, resulting in approximately a $600,000
net reduction in operating income on an equivalent local currency basis,
compared to a reduction of approximately $380,000 in revenue, a reduction of
approximately $170,000 in operating expenses and a net reduction of
approximately $210,000 in operating income from fiscal 1992 to fiscal 1993.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1994, Collagen's cash, cash equivalents and short-term
investments were $9.6 million compared to $12.7 million at June 30, 1994. Net
cash provided by operating activities was $3.9 million for the six months ended
December 31, 1994, compared with $5.0 million provided by operating activities
for the same prior-year period. Net cash provided by operating activities was
approximately $10.7 million in fiscal 1994, compared to approximately $9.1
million used in operating activities in fiscal 1993. The improvement in cash
flow from operating activities in fiscal 1994 was primarily due to a turnaround
from an operating loss in fiscal 1993 to operating income in fiscal 1994.
Non-cash items included in net income for fiscal 1993 included the cumulative
effect of the change in accounting for income taxes of $989,000.

The $3.9 million of cash provided by operating activities in the six-month
period in the current fiscal year was primarily offset by $5.5 million used to
repurchase 262,500 shares of Collagen's Common Stock at an average acquisition
price of approximately $21 per share, $2.4 million of additional investments in
affiliate companies and the payment of an aggregate cash dividend of
approximately $943,000, which was declared in June 1994, to Collagen's
stockholders in July 1994. During fiscal 1994, 567,500 shares were repurchased
at an average acquisition cost of approximately $24 per share for a total of
approximately $13.8 million. During fiscal 1993, 370,000 shares were repurchased
at an average acquisition cost of approximately $21 per share for a total of
approximately $7.6 million. Additional significant cash outflows included
capital expenditures of $4.0 million in fiscal 1994, compared to $2.5 million in
fiscal 1993. Cash invested in affiliate companies was $2.4 million in fiscal
1994, compared to $3.0 million in fiscal 1993. In January 1995 Collagen's Board
of Directors authorized the repurchase of up to an additional 300,000 shares of
Collagen Common Stock in the open market.

Collagen currently anticipates capital expenditures, equity investments in,
and loans to affiliate companies to be approximately $10.0 million in fiscal
1995. Approximately $3.8 million of this amount had been expended in the six
months ended December 31, 1994. Collagen paid cash dividends of $0.10 per share
in July 1994 and $0.075 per share in January 1995, totaling $943,000 and
$694,000, respectively. Collagen anticipates that the Board of Directors will
review the possibility of declaring an additional dividend before the end of
fiscal 1995.

Collagen's principal sources of liquidity include cash generated from
operations and its cash, cash equivalents and short-term investments. In
addition, during the fiscal quarter ended September 30, 1994, Collagen's Board
of Directors authorized Collagen to sell portions of its holdings of

27
28

approximately 2.3 million shares of Target Common Stock. On November 1, 1994,
Collagen sold 35,000 shares of its Target Common Stock for a pre-tax gain of
approximately $775,000. The pre-tax sales proceeds were approximately $1.1
million. Collagen anticipates that stock sales pursuant to the authorization
will be made from time to time, under Rule 144, with the objective of generating
cash, for, among other things, further investments in both current and new
affiliate companies. In addition, Collagen established a $7.0 million revolving
credit facility with a bank in November 1994, which Collagen has not used and
intends to terminate shortly after the closing of the sale of the Notes offered
hereby. Collagen believes that the proceeds from the sale of the Notes offered
hereby, together with other available sources of liquidity should be adequate to
fund its anticipated cash needs for the foreseeable future.

28
29

SELECTED CONSOLIDATED FINANCIAL DATA OF TARGET

The consolidated statement of income data of Target set forth below for the
fiscal years ended March 31, 1992, 1993 and 1994 and the consolidated balance
sheet data at March 31, 1993 and 1994 are derived from, and are qualified by
reference to, the audited consolidated financial statements included elsewhere
herein. The consolidated statement of income data for the fiscal years ended
March 31, 1990 and 1991 and the consolidated balance sheet data at March 31,
1990, 1991 and 1992 are derived from audited consolidated financial statements
not included in this Prospectus. The consolidated statement of income data for
the nine month periods ended December 31, 1993 and 1994, and the consolidated
balance sheet data at December 31, 1994 have been derived from unaudited interim
condensed financial statements included elsewhere herein and reflect, in
management's opinion, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of income for such
periods. Results of operations for any interim period are not necessarily
indicative of results to be expected for the full fiscal year.

CONSOLIDATED STATEMENT OF INCOME DATA:
Total revenues............................... $ 8,604 $ 12,510 $ 20,449 $ 28,117 $ 35,353 $ 25,453 $ 34,497
Costs and expenses:
Cost of sales.............................. 3,001 4,558 6,920 9,657 13,368 10,103 11,060
Research and development................... 2,044 3,129 4,347 6,496 7,624 5,468 7,472
Selling, general and administrative........ 2,683 3,580 5,447 7,543 9,245 6,886 9,645
------- -------- -------- -------- -------- -------- --------
Total costs and expenses................. 7,728 11,267 16,714 23,696 30,237 22,457 28,177
------- -------- -------- -------- -------- -------- --------
Income from operations....................... 876 1,243 3,735 4,421 5,116 2,996 6,320
Interest income, net......................... 1 (50) 297 890 954 682 921
Other income................................. -- -- -- 16 515 276 973
------- -------- -------- -------- -------- -------- --------
Income before income taxes and cumulative
effect of change in method of accounting
for income taxes........................... 877 1,193 4,032 5,327 6,585 3,954 8,214
Provision for income taxes................... 294 486 1,532 1,747 2,265 1,344 2,957
------- -------- -------- -------- -------- -------- --------
Income before cumulative effect of accounting
change..................................... 583 707 2,500 3,580 4,320 2,610 5,257
Cumulative effect of change in method of
accounting for income taxes................ -- -- -- -- 631 631 --
------- -------- -------- -------- -------- -------- --------
Net income................................... $ 583 $ 707 $ 2,500 $ 3,580 $ 4,951 $ 3,241 $ 5,257
====== ======== ======== ======== ======== ======== ========

Income per share:
Income before cumulative effect of
accounting change........................ $ .51 $ .61 $ .37 $ .73
Cumulative effect of change in method of
accounting for income taxes.............. -- .09 .09 --
-------- -------- -------- --------
Net income per share....................... $ .51 $ .70 $ .46 $ .73
======== ======== ======== ========
Pro forma net income (unaudited)(1).......... $ 2,599
========
Pro forma net income per share
(unaudited)(1)............................. $ .51
========
Shares used in computing income per share and
pro forma net income per share data........ 5,093 7,075 7,103 7,087 7,190
======== ======== ======== ======== ========

MARCH 31,
------------------------------------------------------ DECEMBER 31,
1990 1991 1992 1993 1994 1994
------- ------- -------- -------- -------- ------------

CONSOLIDATED BALANCE SHEET DATA:
Working capital............................... $ 2,269 $ 2,601 $ 34,602 $ 37,370 $ 41,527 $ 43,054
Total assets.................................. 5,670 7,166 42,103 46,827 57,130 64,884
Long-term obligations......................... 140 169 138 152 124 104
Stockholders' equity.......................... 3,839 4,578 37,983 42,462 49,064 55,060

---------------
(1) See Notes 1 and 6 of Notes to Consolidated Financial Statements of Target
for pro forma information relating to Target's Accounting for Income Taxes
as a separate company.

29
30

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

The following discussion should be read in conjunction with Target's
consolidated financial statements, notes thereto and discussion thereof
incorporated by reference herein.

OVERVIEW

Target's revenues have been derived primarily from the sale of its
micro-catheters, guidewires and micro-coils. Target also derives a portion of
its revenues from the distribution of certain products manufactured by other
companies pursuant to distribution agreements. Target also entered into a
research and development agreement with Century Medical, Inc. ("CMI") in March
1991, under which CMI provided $2.0 million of development funding, of which
$1.4 million was included in revenue in fiscal 1992, to assist Target in the
development of its Stealth balloon angioplasty micro-catheter. In addition,
Target entered into a management agreement, effective in January 1994, with its
Japanese joint venture in which Target was obligated to provide certain
management services for which Target was reimbursed during calendar 1994.

RESULTS OF OPERATIONS

The following table sets forth certain selected statement of income
information of Target as a percentage of product sales for the periods
indicated.

NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
---------------------------- -----------------
1992 1993 1994 1993 1994
------ ------ ------ ------ ------

Product sales..................................... 100% 100% 100% 100% 100%
Other revenue..................................... 7 -- -- -- --
Costs and expenses:
Cost of sales................................... 36 34 38* 40* 32
Research and development........................ 23 23 22 21 22
Selling, general and administrative............. 29 27 26 27 28

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

*Includes $1.5 million charge for costs associated with changes being made to
the Guglielmi Detachable Coil system as described under Cost of Sales below.
Cost of sales, exclusive of this charge, was 34% of product sales for both the
fiscal year ended March 31, 1994 and the nine months ended December 31, 1993.

COMPARISON OF ANNUAL AND NINE-MONTH RESULTS OF OPERATIONS

Revenues. Total revenues for the year ended March 31, 1994 were $35.4
million, an increase of $7.2 million, or 26%, from $28.1 million for the prior
year. Total revenues for the year ended March 31, 1993 increased 37% from $20.4
million in fiscal 1992. Total revenues for the year ended March 31, 1992
included $1.4 million received under the CMI research and development agreement.
Product sales of $28.1 million in fiscal 1993 represented an increase of 48%
over $19.0 million in fiscal 1992. These increases were primarily attributable
to new product introductions and additional unit sales in each of Target's
product lines resulting from an increased number of treatment sites, training of
additional physicians and the continued acceptance of Target's products. During
fiscal 1993, Target implemented a nominal price increase to certain of its
products to both domestic and international customers with the exception of its
distributor in Japan. Target currently intends to increase prices to its
Japanese distributor in fiscal 1996. See "-- Interest and Other Income."

30
31

Revenues for the nine months ended December 31, 1994 were $34.5 million, an
increase of 36% compared to $25.5 million for the prior year period. The
increase was primarily attributable to the continued acceptance of new and
recently enhanced products and additional sales in each of Target's product
lines resulting from an increased number of treatment sites and the training of
additional physicians.

The increase in Target's revenues is also attributable to the growing
market for Target's products in Europe and Japan. Export product sales increased
to $21.1 million in fiscal 1994 from $17.2 million in fiscal 1993 and $10.6
million in fiscal 1992. For the nine months ended December 31, 1994 export
product sales increased to $23.6 million from $15.1 million in the prior year
period. Export product sales as a percentage of total product sales were 60% in
fiscal 1994, 61% in fiscal 1993 and 56% in fiscal 1992. For the nine months
ended December 31, 1994, export product sales as a percentage of total product
sales increased to 69% from 59% in the prior year period. During fiscal 1994 and
1993, Target sold products in Japan through a joint venture formed with CMI.
Sales to the Japanese market in fiscal 1994 and 1993 accounted for approximately
29% and 27%, respectively, of product sales. Sales of Target's products in Japan
through its former distributor accounted for approximately 21% of Target's
product sales in fiscal 1992.

Target's continued revenue growth is subject to a number of factors,
including new product introductions, the availability of suitable alternative
products manufactured by competitors, the timeliness and availability of
regulatory clearance and the continued expansion of its customer base. Target
continues to research and develop new applications for its products in an effort
to expand its practitioner customer base. As more companies become aware of the
market potential of such products, Target anticipates an increase of competitive
forces which may have an adverse effect on revenues of Target. Several companies
in the United States have introduced products that are being used in the
interventional neuroradiology market. Target is also aware of other companies
that may pursue commercialization of products which may compete with Target's
products and may result in future pricing and margin pressures within this
market. Prior to commercialization in the United States, sales of certain of
Target's products, including the Guglielmi Detachable Coil ("GDC") system are
limited to clinical settings pursuant to Investigational Device Exemptions
("IDE"s) granted by the FDA which limit the number of patients treatable with
such products. Target must obtain clearance from the FDA to market these
products for other than clinical investigation, and the overall review time of
such regulatory process has apparently increased. Regulatory requirements vary
in other countries in which Target markets its products. Failure to develop new
products successfully or to obtain regulatory clearance for such products,
including Target's detachable coil systems, in a timely manner may have an
adverse effect on Target's revenues in the future. Target's revenue growth may
also be adversely affected by the limited number of teaching hospitals that
train practitioners in fields in which Target's products are utilized. Target
continues to obtain a significant amount of its revenues from one customer in
Japan. Should this customer continue to represent a significant portion of
revenues, significant changes in this customer's ordering rates will likely
cause similar changes in Target's revenues. It is Target's understanding that
physicians use certain devices, products and materials manufactured by other
companies in conjunction with the use of certain of Target's products.
Reductions in the availability or the elimination of such complementary products
have had and may continue to have an adverse effect on sales of Target's
products. This is believed to have been a contributing factor to the decrease in
the percentage of total revenues derived from domestic sources during the past
several quarters. Currently, products sold commercially in the United States
pursuant to 510(k) clearance by the FDA may generally be marketed in Europe.
However, political and regulatory changes, particularly in Western Europe in
connection with the formation of the European Union, as well as the future
impact of IS09000 standards may adversely affect Target's product sales in
Europe. Similarly, changes in the United States and foreign national health care
policies, including third-party reimbursement issues, may have a significant
adverse effect on revenues of Target. Furthermore, the future rate of Target's
revenue growth, if realized, may be below that experienced in prior annual and
quarterly periods.

31
32

In October 1994, Target acquired certain assets and liabilities of the
former distributor of Target's products in Germany. Target has formed a
subsidiary that is responsible for the direct sales operations of Target in
Germany. As a result, Target anticipates that future sales to end-users in
Germany will be at prices higher than those of sales to the former distributor,
reflecting the markup previously realized only by the distributor. Two months of
such sales activity are reflected in the three month period ended December 31,
1994.

Cost of Sales. Cost of sales as a percentage of product sales was 38% for
fiscal 1994 compared to 34% and 36% for fiscal 1993 and 1992, respectively. For
the nine month period ended December 31, 1994, cost of sales as a percentage of
product sales decreased to 32% from 40% in the prior year period. Included in
cost of sales for fiscal 1994 and the nine months ended December 31, 1993 was a
charge for the estimated costs associated with changes being made to the GDC
system as described below. Excluding the GDC charge, cost of sales was $11.9
million, or 34% of product sales for fiscal 1994 and $8.6 million, or 34% of
products sales for the nine months ended December 31, 1993. Target's increased
manufacturing efficiency, primarily due to increased production volume, was
offset primarily by the commencement of sales of products manufactured by other
companies which are sold by Target at lower gross margins. In addition, the
commencement of the direct sales operation in Germany contributed to the
improvement in cost of sales as a percentage of revenues for the nine months
ended December 31, 1994. Target believes that the reduction in cost of sales as
a percentage of product sales from fiscal 1992 to 1993 is attributable to
several factors, including commencement of sales to CMI at higher gross margins
than had been realized with the prior Japanese distributor, the price increases
discussed above, and increased manufacturing volume as a result of Target's move
to its current facility in fiscal 1993 which resulted in improved productivity.
Generally, there can be no assurance that cost of sales as a percentage of
revenues will show improvement in future periods over current or prior periods
due to the distribution by Target of certain products at lower gross margins,
fluctuation in manufacturing production levels, potential increases in certain
costs associated with the use of third-party technology and potential pressure
on product prices as a result of competition. As a result of the direct sales
operation in Germany described above, a slight improvement in cost of sales as a
percentage of revenues derived from sales in such country will likely be
included in future period results. In addition, although no supply issues have
arisen in the past, there can be no assurance that current or future suppliers
of Target's raw materials will be able to continue to meet the quality and
quantity demands of Target at current suppliers' prices.

Target's GDC system is an investigational device that is currently being
sold to a limited number of clinical investigators pursuant to an IDE. In
October 1993, Target announced that it was pursuing certain changes to the GDC
system as a result of magnetic resonance imaging ("MRI") tests which indicated a
potential for the creation of small metallic particles during the electrolytic
detachment of the coil. Upon completion of certain laboratory tests of these
changes a supplement to the existing IDE was filed with the FDA in January 1994
and approved in March 1994. The revised IDE protocol submitted to the FDA by
Target required commencement of limited clinical trials for the modified GDC
system. Target has exchanged modified product for any original product that
customers still had in their inventory as treatment sites were converted to the
modified product. The limited clinical trials in the United States were
commenced in April 1994. The clinical trials with the modified GDC system have
shown an apparent reduction in both the frequency of the occurrence and the size
of these microscopic particles. The results of these clinical trials were then
included in a new application for 510(k) clearance for the modified GDC system,
which Target submitted in March 1995. Results of the clinical investigations of
both the original GDC system, for which the 510(k) application was withdrawn,
and the modified GDC system were included as supporting data in its March 1995
510(k) application. Target anticipates that this application, which includes
clinical data on approximately 800 patients, will be reviewed by advisory
consultants to the FDA, some of whom may also be members of other FDA panels.
This review may increase the overall length of the regulatory review period.
Regulatory clearance to market the modified product in

32
33

France was obtained during the quarter ended December 31, 1994, and Target is
currently pursuing regulatory clearance in Japan for such product.

Target has provided for the estimated costs of exchanging customer's
inventory and disposition of Target's remaining inventory of original GDC
product. A $1.5 million charge was included in cost of sales for the nine months
ended December 31, 1993. The effect of this charge on net income after benefit
for income taxes was approximately $975,000, or $.14 per share. Although Target
does not anticipate a recurrence of the $1.5 million charge, no assurance can be
given that similar incidents will not occur in the future with respect to the
GDC system or other Target products.

Research and Development. Research and development ("R&D") expense, which
includes expenditures for regulatory compliance and quality assurance, increased
17% to $7.6 million in fiscal 1994 compared to $6.5 million in fiscal 1993. R&D
expense increased 49% in fiscal 1993 from $4.3 million in fiscal 1992. For the
nine months ended December 31, 1994, R&D expense increased 37% to $7.5 million
from $5.5 million in the prior year period. Target attributes the increased
amounts expended for R&D primarily to the expenses incurred in collecting
clinical data, preparing regulatory filings for new products and expansion of
its research activities and pilot manufacturing line. The pilot manufacturing
line was developed to aid in the transition between the new product development
and manufacturing stages of production. As a percentage of product sales, R&D
expense was 22% for fiscal 1994 compared to 23% for both fiscal 1993 and 1992.
This decrease is primarily attributable to increased revenues and a
slower-than-anticipated increase in the number of R&D personnel. R&D expense was
22% and 21% of revenues for the nine-month periods ended December 31, 1994 and
1993, respectively. This increase is primarily attributable to increased
headcount in addition to the factors described above.

Target believes that its investments in product development and engineering
and manufacturing processes are essential to enable it to maintain its
competitive position. Furthermore, Target believes that such investments enhance
its ability to continue to attract qualified engineers which Target believes is
critical to the continued development of future products. Target expects to
continue to make substantial expenditures on new product development and to
continue to increase the dollar amount expended for R&D in the foreseeable
future.

Selling, General and Administrative. Selling, general and administrative
("SG&A") expense for the year ended March 31, 1994 increased to $9.2 million
from $7.5 million and $5.4 million for the years ended March 31, 1993 and 1992,
respectively. For the nine months ended December 31, 1994, SG&A expense
increased to $9.6 million from $6.9 million in the prior year period. As a
percentage of product sales, SG&A expense was 26%, 27% and 29% in fiscal 1994,
1993 and 1992, respectively, and 28% and 27% in the nine months ended December
31, 1994 and 1993, respectively. The increase in the amount expended was
primarily due to additional staffing, including sales and management personnel,
to expand the corporate infrastructure, to support the growth in Target's
product sales and, with respect to the nine months ended December 31, 1994,
expenses associated with the commencement of operations in Germany. Target
currently anticipates that the dollar amount expended will continue to increase
primarily due to the recent commencement of direct operations in Germany as
described above (including costs associated with the additional headcount and
marketing operations and the amortization of purchase price in excess of the
fair value of the net tangible assets acquired), additional expenses associated
with a legal action filed by Target to protect certain of its proprietary assets
and planned increases in sales and support staff to introduce, market and
support anticipated new products for which increased physician training and
education, clinical field work and sales support will be required. These
expenses may also increase as Target pursues the feasibility of additional
operations overseas.

Income from Operations. Income from operations was $5.1 million in fiscal
1994, an increase of 16% from $4.4 million in fiscal 1993. This increase is
attributable to increased product sales and slightly lower R&D and SG&A expenses
as a percentage of product sales over the previous year. These reductions have
been partially offset by the charge to cost of sales for estimated costs
associated with the changes to the GDC system as described above. Income from
operations

33
34

increased to $4.4 million in fiscal 1993 from $3.7 million in fiscal 1992. The
increase was primarily a result of increased revenue in fiscal 1993, a reduction
from 1992 to 1993 in cost of sales as a percentage of product sales and
decreased SG&A expenses as a percentage of product sales. The favorable changes
were partially offset by the absence of revenue from a research partner in
fiscal 1993, while $1.4 million of such revenue was recorded in fiscal 1992.

For the nine-month period ended December 31, 1994 income from operations
increased to $6.3 million compared to $3.0 million for the same period of the
prior year. This increase is primarily attributable to the charge for the GDC
system taken in the prior year as described above, increased revenues and lower
cost of sales as a percentage of revenues compared to the prior year periods as
described above.

Although Target has experienced revenue growth since its inception and has
been profitable on a quarterly basis since the quarter ended December 31, 1990,
no assurance can be given that revenue growth or profitability on a quarterly or
annual basis will be sustained. Target's results of operations have varied
significantly from quarter to quarter, and revenue growth rates have been
inconsistent. Future operating results will depend upon several factors in
addition to those discussed above, including the timing and amount of expenses
associated with expanding Target's operations both domestically and
internationally, increased revenues and expenses in conjunction with Target's
German operations, Target's ability to successfully meet new product development
plans, success in achieving regulatory clearance for new products (including
Target's detachable coil systems) in a timely manner, the acceptance of new
product introductions both in the United States and internationally, the mix
between pilot production of new products and full-scale manufacturing of
existing products, the mix between domestic and export sales, the availability
of complementary products and the effects this may have particularly on domestic
sales, possible changes in ordering patterns of its customers due to changes in
the business environment or to potential variations in foreign exchange rates,
Target's ability to continue to attract qualified engineers to further the
development of future products, potential future partnering arrangements,
changes in the domestic and foreign health care policies (including third-party
reimbursement issues), increased competitive forces, developments in Target's
ongoing intellectual property litigation, increased expenses associated with
protecting Target's proprietary assets and the general litigious nature of the
medical device industry. Target also believes that seasonal patterns, including
a reduction in the number of procedures performed by physicians using Target's
products during summer and holiday periods, may affect its quarterly revenue
stream. In addition, Target cannot predict ordering rates by distributors, some
of which place infrequent stocking orders while others order at regular
intervals. As a result of these and other factors, Target expects to continue to
experience significant fluctuations in its quarterly operating results.

Target's Common Stock price has been and may continue to be subject to
significant volatility, particularly on a quarterly basis. Any shortfall in
revenues or earnings from levels expected by securities analysts could have an
immediate and significant adverse effect on the trading price of Target's Common
Stock in any given period. Finally, Target participates in a highly dynamic
industry, which often results in significant volatility of Target's Common Stock
price.

Interest and Other Income. Net interest income increased to $954,000 in
fiscal 1994 compared to $890,000 in fiscal 1993. For the nine month period ended
December 31, 1994, net interest income increased to $921,000 from $682,000 for
the prior year period. These increases are primarily attributable to increased
amounts of cash generated from operating activities which were available for
investment. The increase in net interest income to $890,000 in fiscal 1993 from
$297,000 in fiscal 1992 is attributable to an increase in cash, cash equivalents
and short-term investments resulting from Target's initial public offering of
its common stock in January 1992, the proceeds of which were invested for only a
portion of fiscal 1992. Target expects that interest rates obtainable in the
remainder of fiscal 1995, for the quality of cash investments it seeks, are
unlikely to exceed

34
35

significantly the rates obtained in recent periods and, therefore, does not
expect significant increases in interest income in the foreseeable future.

Other income increased to $515,000 in fiscal 1994 from $16,000 in fiscal
1993. Target had no other income in fiscal 1992. Other income for the nine month
period ended December 31, 1994 increased to $973,000 from $276,000 in the same
period of the prior year. The increase from fiscal 1993 to 1994 is due, in part,
to $445,000 received in fiscal 1994 pursuant to the management agreement with
the Japanese joint venture whereby Target was required to provide certain
services during calendar 1994 for which the joint venture paid Target a total of
$700,000. The increase in the nine-month data is primarily due to increased
equity earnings in Target's Japanese joint venture and to $85,000 recognized
during each of the first three fiscal 1995 quarters pursuant to the management
agreement described above. Also included in other income is Target's portion of
equity losses in unconsolidated subsidiaries for which Target's interest is less
than 50% and which are accounted for on the equity method. Target anticipates
that other income may decrease during the remainder of fiscal 1995 and the next
fiscal year due to expected lower earnings in Target's Japanese joint venture as
a result of anticipated price increases to Target's Japanese distributor and the
recognition of increased equity losses resulting from anticipated additional
investments by Target in its less than 50% owned subsidiaries to further the
development of these companies' products.

Provision for Income Taxes. Target's combined effective federal and state
tax rate was approximately 34% in fiscal 1994 compared to 33% and 38% in fiscal
1993 and 1992, respectively. The fiscal 1994 and 1993 rates reflect the benefits
derived from Target's foreign sales corporation, research credits and certain
nontaxable investment income. For the nine months ended December 31, 1994 and
1993, Target's income tax provision has been calculated based upon the estimated
annual effective tax rate for the fiscal years ending March 31, 1995 and 1994,
respectively, and reflects the benefits derived from Target's foreign sales
corporation, research credits and certain nontaxable investment income. A
revision of such estimate during the third quarter of fiscal 1995 resulted in a
reduction of the estimated effective rate for fiscal 1995 to 36% from the
previous estimate of 37%. Target anticipates a significant reduction in its
estimated effective rate for fiscal 1995 due to increased benefits derived from
foreign tax credits generated in Japan as a result of certain changes with
respect to Target's ownership of its Japanese joint venture in the fourth
quarter of fiscal 1995.

Effective April 1, 1993, Target adopted Financial Accounting Standards
Board Statement 109, "Accounting for Income Taxes." As permitted by Statement
109, Target elected to report the cumulative effect of the change currently
rather than restate the financial statements of prior years. The positive
cumulative effect of the change in method of accounting for income taxes of
$631,000 was recorded in the first quarter of fiscal 1994. Target has considered
the evidence supporting the realizability of net deferred tax assets at March
31, 1994 including carrybacks, future reversal of temporary differences and
future taxable income exclusive of temporary differences, and has recorded a
valuation allowance of $490,000 to reduce the net deferred tax assets to the
amount that is more likely than not to be realized.

Target's provision for income taxes for periods prior to February 1, 1992,
was determined based upon Tax Allocation Agreements with Collagen. Such
provision may not reflect Target's actual tax rate had it not been consolidated
with Collagen for tax purposes. Consequently, Target has presented on the face
of Target's statement of income unaudited pro forma net income and pro forma net
income per share for fiscal 1992 assuming Target filed its tax returns on a
separate company basis. For the period February 1, 1992 through March 31, 1994,
Target's federal and state income tax provisions are calculated on a separate
company basis.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1994, Target had working capital of approximately $43.1
million and its principal sources of liquidity consisted of approximately $36.4
million in cash, cash equivalents and

35
36

short-term investments, cash provided by operating activities and $3.0 million
available under a line of credit which expires in July 1996. At December 31,
1994, no amounts were outstanding under this line of credit. Net cash provided
by operating activities for the nine months ended December 31, 1994 was $4.3
million.

Inventories increased to $5.0 million at December 31, 1994 (including
inventories held at the German subsidiary location) compared to $3.0 million at
March 31, 1994. The increase is primarily attributable to the products
introduced during the last year resulting in a broader product range for which
inventories are maintained to meet customer demand and increased revenue levels.
Accounts receivable increased to $8.9 million at December 31, 1994 compared to
$6.4 million at March 31, 1994 due primarily to the increased sales volume in
the third quarter of fiscal 1995 and to the consolidation of accounts receivable
of the new German subsidiary described above. Other assets increased to $6.2
million at December 31, 1994 from $3.0 million at March 31, 1994 primarily due
to the net effect of equity accounting for Target's joint venture and
unconsolidated subsidiaries, increased investments in unconsolidated
subsidiaries and increased long-term receivables from less than 50% owned
subsidiaries pursuant to lease-line agreements with Target as lessor. Target
anticipates making additional investments in its less than 50% owned
subsidiaries during the final quarter of fiscal 1995 of up to an aggregate of
approximately $750,000 and approximately $200,000 of additional lease-line
drawdowns. Target currently expects to purchase approximately $3.5 million of
capital equipment in fiscal 1995 of which purchases and commitments totaling
approximately $2.9 million had been made at December 31, 1994.

Target expects to invest $1.7 million in fiscal 1996 to substantially
upgrade its information systems infrastructure. This upgrade is expected to
improve customer service turnaround times and better materials planning. There
can be no assurance that this project will be completed successfully or in a
timely manner, or that the project will not result in disruptions in Target's
operations and it is unlikely that these improvements will result in increased
revenues or profits in the near term if at all.

Target believes that available cash, cash equivalents and short-term
investments, as well as funds expected to be generated from operations, will be
sufficient to meet Target's operating expenses and cash requirements for the
foreseeable future.

36
37

BUSINESS OF COLLAGEN

GENERAL

Collagen develops, manufactures and markets on a worldwide basis high
quality biocompatible products for the treatment of defective, diseased,
traumatized or aging human tissues. Collagen 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. Collagen's core products are principally used
in cosmetic and reconstructive applications for the face, the treatment of
stress urinary incontinence, and bone repair. Collagen focuses on development of
new products based upon biomaterials, especially collagen, for sale in human
healthcare markets worldwide.

CORE TECHNOLOGY

The foundation of Collagen's current business is the collagen protein
family, around which Collagen has developed proprietary technology and patented
materials, processes and uses. Collagen is a family of naturally occurring
proteins that serve as the basic structural building blocks of the tissues found
in skin, cartilage, bone, tendons, ligaments, arterial walls, nerve sheaths and
other organs and tissues of the body. Collagen is present in all mammals in
higher concentration than any other protein and is quite similar among species.
There are at least fifteen types of collagen, the most common of which is the
type primarily used in Collagen's commercial products and products under
development.

Collagen has developed proprietary processes to purify its bovine-source
collagen on a commercial scale and to manufacture "tissue-like" implants from
the resulting materials. These proprietary processes alter the immunological
profile of the bovine-source collagen, thus minimizing the potential for causing
an allergic reaction. The result is a purified and sterilized fibrous collagen
material that can be easily injected or implanted into the human body.

The potential for causing an allergic reaction arising from the injection
of bovine-source collagen is relatively low. Based on Collagen's statistics,
approximately 97% of men and women tested show no allergic reaction to a skin
test and can be treated with the bovine-source collagen injection. The 3% that
show an allergic reaction to the skin test display typical symptoms of
hypersensitivity, which include redness, itchiness and swelling. An additional
1-2% of the people treated develop an allergic reaction after one or more
injections.

STRATEGY

Collagen's strategy consists of the following principal elements:

- Expand Existing Medical Franchise. Collagen has a 14-year involvement
with the cosmetic procedure-oriented segments of the plastic surgery and
dermatology markets. Medical procedures for cosmetic indications in those
markets are generally paid for by the patient and therefore are not
commonly subject to reimbursement constraints imposed by third party
payors. Collagen's objectives include developing, in-licensing, and
acquiring products related to this market. Collagen holds marketing
rights in the United States, United Kingdom, Italy, France and Germany
for the TRILUCENT Breast Implant, which is a vegetable-oil based product
currently under development by LipoMatrix, Incorporated ("LipoMatrix"), a
company affiliated with Collagen.

- Broaden Therapeutic Applications. Collagen has developed innovative
medical products that take advantage of the physical and biological
properties of collagen, and has developed proprietary collagen technology
platforms that could lead to new applications for product development. In
addition, Collagen has implemented an "affiliate" program to expand its
new product development activities outside of the areas of its core
competence, such as interventional cardiology, ophthalmology, and otology
(treatment of ear disorders).

37
38

- Enhance Biomaterials Technology. Collagen has substantial research,
pre-clinical, clinical and regulatory expertise in the development of
collagen-based medical devices. Collagen's current objectives include
improving the clinical persistence of current collagen materials and
reducing or eliminating allergic reactions arising from the bovine source
of current collagen products.

PRODUCTS, MARKETS AND METHODS OF DISTRIBUTION

Cosmetic and Reconstructive Surgery. Collagen has three principal products
for the treatment of skin contour defects: Zyderm I Implant, Zyderm II Implant,
a more concentrated form of injectable collagen, and Zyplast Implant, a
cross-linked collagen product. These products are sterile devices, composed of
highly purified bovine dermal collagen, dispersed in a saline solution
containing a small amount of lidocaine and packaged in a sterile syringe. They
are injected with a fine gauge needle into depressed layers of skin to elevate
the area to surface contour.

Depending on the indication and the product (or product combination) used,
most patients can achieve considerable correction in one to four treatment
sessions, utilizing an average of 1.5 - 2.0 cc of collagen product. The implants
take on the texture and appearance of normal host tissue and are subject to
similar stresses and aging processes. Consequently, supplemental treatments are
often necessary after initial treatment, depending on the location and original
cause of the skin deformity.

Collagen believes that opportunities exist in the market for injectable
collagen implants based on potential new products and product applications,
potential increases in patient awareness of the procedure and product price,
demand among younger people for cosmetic procedures and increased physician
interest in cosmetic procedures not reimbursed by third party payors. Factors
such as negative publicity, adverse rulings by regulatory authorities or in
connection with product liability lawsuits, introduction of competitive products
by third parties or other loss of market acceptance for Collagen's principal
products may significantly and adversely affect Collagen's business, financial
condition and results of operations.

Collagen markets Zyderm and Zyplast Implants primarily to the approximately
11,000 dermatologists and plastic surgeons in the United States through a direct
sales force. Approximately 4,000 of these medical professionals have purchased
Zyderm and Zyplast Implants from Collagen in the past two years. United States
sales of Zyderm and Zyplast Implants, which represented slightly more than 50%
of worldwide sales of Zyderm and Zyplast Implants, remained relatively flat from
year to year.

Collagen utilizes a variety of methods to market its dermatological
products. Collagen sponsors a "Partners in Growth" program for plastic surgeons
and dermatologists. This program is designed to identify and support a committed
group of physicians who endorse the appropriate use of injectable collagen and
are skilled in its proper use. Collagen conducts other physician marketing
activities such as direct mail campaigns, physician education, in-office
merchandising and patient seminars. Collagen has emphasized physician education
to ensure proper training in the use of its products and timely communication of
clinical and product use information. To stimulate demand at the patient level,
Collagen also conducts consumer marketing awareness programs such as public
relations events, health and beauty magazine advertising and direct mailing
campaigns.

Collagen markets its Zyderm and Zyplast Implants directly to physicians in
10 European countries, Canada, Australia and New Zealand. Collagen markets its
products through distributors in all other international markets. Collagen has
granted exclusive distribution rights for Zyderm and Zyplast Implants in Japan.
Over the past two years, Collagen has appointed a number of new foreign
distributors for its injectable collagen products.

A large portion of Collagen's revenues in recent years has come from its
international operations. Consolidated export sales of Zyderm and Zyplast
Implants totaled $20.8 million in fiscal 1994. Export sales for Zyderm and
Zyplast Implants represented 32% of Collagen's revenues in fiscal

38
39

1994 and 33% for the six months ended December 31, 1994. Collagen has expanded
and intends to further expand its direct selling efforts in certain
international markets. There can be no assurance that difficulties associated
with a transition to direct marketing efforts would not have an adverse effect
on Collagen's results of operations.

Incontinence. According to the National Institutes of Health, more than
ten million Americans suffer from urinary incontinence, or the involuntary loss
of urine. While comprehensive data are not available as to the incidence of a
form of stress urinary incontinence called intrinsic sphincter deficiency
("ISD"). Collagen has estimated, based upon physician survey information, that
as many as one million of these persons suffer from ISD, a poor or
nonfunctioning bladder outlet mechanism that may be helped by a locally injected
bulking agent. Collagen and its marketing and distribution partner, Bard,
received approval from the FDA to produce and market Contigen Implant in
September, 1993 for the treatment of ISD. ISD occurs among all demographic
groups, but its incidence increases with age and is twice as high in women as
men. Management and treatment alternatives have historically included absorbent
products, behavior modification, medication and surgery. Contigen Implant
injections may improve stress incontinence caused by stretched pelvic muscles
from childbirth, decreased tone in the pelvic muscles supporting the bladder
(often associated with menopause and aging) and prostate surgery.

Contigen Implant is a sterile, highly purified bovine dermal collagen that
is lightly 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 coaptation (joining) of the
urethral lumen. After injection, the suspended collagen forms a soft cohesive
network of fibers. Over time, the implant takes on the appearance of normal host
tissue.

Pursuant to the terms of an agreement between Collagen and Bard, Bard
purchases commercial products, including Contigen Implant, developed under this
agreement. In addition, Collagen receives a percentage of Bard's direct sales to
physician customers. Bard holds exclusive worldwide marketing and distribution
rights to Contigen Implant.

Collagen recorded approximately $16.7 million of revenue from sales of
Contigen Implant in fiscal 1994. Of such revenue, $15.9 million was derived from
sales of Contigen Implant to Bard and $789,000 from Bard's direct sales to
physicians, compared to $4.4 million of sales of Contigen Implant to Bard
recorded in fiscal 1993. For the six months ended December 31, 1994, product
sales of Contigen Implant to Bard were $8.1 million, which consisted of
shipments of Contigen Implant of $6.6 million and income from Bard's direct
sales of Contigen Implant to physician customers of approximately $1.5 million.
There were no sales of Contigen Implant in fiscal 1992.

Orthopaedics. Collagen and its orthopaedic marketing partner, Zimmer, a
wholly-owned subsidiary of Bristol-Myers Squibb, received approval from the FDA
in May 1993 to produce and market Collagraft Implant. Collagraft Strip, a
"premixed" formulation which is the early "ready-to-mix" Collagraft Implant
formulation, was subsequently approved in January 1994. Collagraft Implant and
Collagraft Strip, when used with autogenous bone marrow, is indicated for use in
acute long bone fractures and traumatic osseous defects to provide a matrix for
the repair process of bone. Bone graft substitute eliminates the need for
patients to undergo a painful autograft bone grafting procedure, which involves
harvesting patients' own bone from another site, and it prevents the
transmission of human infectious agents and inconsistent results from allograft
procedures (bone graft supplied through a bone bank). During surgery Collagraft
Strip or Collagraft Implant is mixed with the patient's own bone marrow and is
placed into the fracture site providing a scaffolding around which new bone will
grow. Medical conditions which may require bone grafting include acute long bone
fractures and certain tumors and cysts.

Collagraft Implant and Collagraft Strip are a mixture of purified fibrillar
collagen and hydroxyapatite/tricalcium phosphate ceramic ("HA/TCP"), and is
supplied sterile in both a strip form (premixed) and a ready-to-mix form.
Hydroxyapatite is a substance which is biocompatible and is

39
40

minimally resorbed. Tricalcium phosphate is radiopaque, biocompatible and
biodegradable. Its degradation products can be reconstituted by the body to form
new bone mineral allowing for bone deposition.

An agreement between Collagen and Zimmer provides for the development and
distribution of collagen and other biologically-based products for orthopaedic
applications. Collagen will manufacture approved products and sell them to
Zimmer, which has exclusive marketing rights for Collagraft Implant and
Collagraft Strip in the United States and Asia. Collagen holds marketing rights
for Collagraft Implant and Collagraft Strip in Europe, Canada, Africa and the
Middle East. Collagraft Implant and Collagraft Strip are currently sold only in
the United States, and Collagen does not anticipate substantial sales outside
the United States for the foreseeable future.

Fiscal 1994 represented the first full year of Collagraft Implant and
Collagraft Strip sales, which totaled $2.7 million. Collagraft Implant and Strip
sales to Zimmer totalled $1.6 million in the six months ended December 31, 1994,
compared to sales of approximately $700,000 of Collagraft Implant in the same
period of the prior year. Collagen had approximately $150,000 of Collagraft
Implant and Collagraft Strip sales in fiscal 1993. There were no sales of
Collagraft Implant or Collagraft Strip in fiscal 1992.

A number of uncertainties exist surrounding the marketing and distribution
of Collagen's new products, Contigen Implant, Collagraft Implant and Collagraft
Strip. Collagen's business and financial results could be adversely affected in
the event that either or both of Bard and Zimmer, or Collagen, are unable to
effectively market the product, accurately anticipate customer demand, or
effectively manage industry-wide pricing and cost containment pressures in
health care.

Other Medical Products. In June 1979, Collagen introduced Vitrogen 100
Purified Collagen for Tissue Culture ("Vitrogen 100 Collagen"), which is
primarily for non-diagnostic laboratory use in cell and tissue culture systems
for biomedical research. This sterile solution of collagen provides an
environment which facilitates cell growth, maturation and differentiation.

COMPETITION

The medical device industry is characterized by rapidly evolving technology
and increasing competition under the recent changes in the health care
environment. Collagen faces competition in each of its target product markets.

Zyderm and Zyplast Implants. Collagen is aware of one commercial product
in the United States that is directly competitive with Zyderm and Zyplast
Implants. This product is a gelatin-based (denatured collagen) product for soft
tissue augmentation presently being marketed in the U.S. and Canada. Collagen is
also aware of one foreign company which is marketing a collagen-based material
for soft tissue augmentation internationally. Indirect competitors to Zyderm and
Zyplast Implants include, among others, chemical peels, fat injections,
dermabrasion, laser treatment 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. There can be no
assurance that Collagen will not face increased direct and indirect competition
in the soft-tissue augmentation market.

Contigen. At the present time, autologous fat, silicon micro-implants and
polytetrafluorethane (Teflon paste, or PTFE) are directly competing with
Contigen Implant for the treatment of stress incontinence due to ISD. Neither
silicon micro-implants nor PTFE have been approved by the FDA for use in the
United States. Other methods of treatment or amelioration of ISD may be
considered competitive with Contigen Implant. These include surgery, medication,
absorbent products and behavior modification.

Collagraft. Bone graft substitutes currently are used in a small fraction
of bone grafting procedures. The vast majority of bone grafting procedures
currently use autograft (autologous bone) taken from the patient's own body and
allograft (bone bank bone taken from deceased donors). Collagraft Implant and
Collagraft Strip belong to a new family of products called bone graft
substitutes. The most direct competitor to Collagraft Implant and Collagraft
Strip is Pro-Osteon, a

40
41

synthetic bone graft substitute made of a coral-like mineral. A less direct
competitor to Collagraft Implant and Collagraft Strip is an allograft bone
product called Grafton, which is packaged in a syringe and marketed and priced
like a bone graft substitute.

In addition, several companies and institutions are engaged in the
development of collagen-based and other materials, techniques, procedures and
products for use in medical applications anticipated to be addressed by
Collagen's products, including Contigen Implant and Collagraft Implant products.
Some of these companies and institutions may have substantially greater capital
resources; research and development staffs and facilities; and experience in
conducting clinical trials, obtaining regulatory approvals, and manufacturing
and marketing products similar to those of Collagen. There can be no assurance
that Collagen's competitors will not succeed in developing technologies and
products that are more effective than any which have been or may be developed by
Collagen or that would render Collagen's technology and products obsolete or
non-competitive. There can be no assurance that such potential competition will
not have an adverse effect on the future business or financial condition of
Collagen. Certain of Collagen's collagen-based products, including the Zyderm
implants, were manufactured and sold pursuant to an exclusive license from
Stanford University under a U.S. patent, which expired in April 1993, covering
the use of native, solubilized collagen for soft-tissue augmentation. The
expiration of this patent may result in increased competition in the market for
injectable collagen implants if and as other companies enter that market.

MANUFACTURING

Collagen manufactures its collagen-based products utilizing readily
available chemicals and enzymes. The source of its collagen is bovine (cow)
dermis. In an attempt to ensure that the hides are free from any
herd-threatening disease such as BSE, the hides are sourced from a closed herd,
which 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 veterinarian program. Collagen 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 are available from
other sources. Collagen obtains HA/TCP solely from Zimmer for the manufacture of
Collagraft Implant. See "-- Competition" and "Risk Factors -- Risk Factors
Relating to Collagen -- Governmental Regulation and Adverse Publicity."

Collagen's principal products have various refrigerated shelf lives of 30
to 36 months. Collagen typically ships products to physicians as orders are
received on an express delivery basis, and has no material backlog. It is
Collagen's policy to maintain levels of finished goods inventory adequate to
allow for the expeditious handling of orders received. Collagen believes its
physician customers typically purchase products on an as-needed basis, while
distributor customers purchase products based on inventory stocking levels.

In November 1990, Collagen commenced manufacture of its collagen-based
products in its facility located in Fremont, California, significantly
increasing its capacity. Collagen has experienced and may continue to experience
disruptions in its manufacturing schedule as it continues to manufacture
products in increasingly larger quantities and with new process improvements.
Collagen's manufacturing facilities are subject to regulatory requirements and
periodic inspection by regulatory authorities both in the United States,
including the FDA, and outside the United States, in countries such as the
United Kingdom. See "Risk Factors -- Risk Factors Relating to Collagen -- Single
Manufacturing Facility."

PRODUCT RESEARCH AND DEVELOPMENT

Collagen maintains an active program of technology and new product
development. Collagen intends to continue to devote a significant portion of
revenues to research and product development activities throughout its product
lines to generate significant returns to stockholders. Research and Development
("R & D") expenses for Collagen totaled $5.0 million for the six months ended

41
42

December 31, 1994, $9.4 million in fiscal 1994, $8.8 million in fiscal 1993, and
$6.9 million in fiscal 1992. R & D expenses represented 14%, 14%, 18%, and 15%
of total revenues for the six months ended December 31, 1994, in fiscal years
1994, 1993 and 1992, respectively. Fiscal 1992 results in the foregoing
comparison exclude results of Target, a consolidated subsidiary of Collagen in
fiscal 1992.

Collagen is pursuing a soft tissue augmentation product development program
with the objective of developing new injectable products and enhancements to
existing products for the treatment of skin contour defects. The types of
improvements being focused on relate to one of two performance criteria:
duration of treatment benefit and/or the elimination of local inflammatory
reactions. Collagen is exploring human collagen, which may prove to be the
alternative for the potential collagen patients who are allergic to bovine-based
products as well as first choice for patients who elect to minimize this
possibility; in addition, human collagen could become the basis for numerous
future products that currently rely on a bovine collagen foundation. There are
two potential sources for human collagen: placental-sourced human collagen and
recombinant human collagen through transgenic animals. Collagen has an ongoing
collaboration with IMEDEX, a subsidiary of Rhone-Poulenc S.A., to develop new
products based on the use of human placental-collagen. In addition, Collagen has
made an equity investment in and is actively collaborating with GenPharm
International, Inc. for the purpose of developing recombinant human collagen.

The Amended and Restated Development and Distribution Agreement between
Collagen and Bard provides for funding of expenditures by Bard related to
certain R&D projects agreed upon by both companies. The funding, which will be
equal to a percentage of net sales of Contigen Implants, is not expected to have
a significant impact on fiscal 1995 results.

An additional element of Collagen's product development strategy is the
support of research at leading institutions in areas that may broaden Collagen's
basic technology or suggest new clinical applications for Collagen's products.
Collagen enters into contractual research agreements with various institutions
throughout the United States and Europe in the normal course of business. These
agreements typically provide for various levels of funding over time periods not
exceeding two years. These agreements typically give Collagen rights of first
refusal to develop and market any commercial products which may result from
research performed and impose, in some cases, royalty and payment obligations
and marketing restrictions.

In addition to joint development arrangements, Collagen has an active
program for developing new products through affiliated companies in which
Collagen makes equity and debt investments. Collagen believes the formation of
new companies allows each to focus its technology on select market segments, to
bring products efficiently to market and to advance proprietary know-how at a
rapid rate. However, there can be no assurance that these investments will
result in positive returns nor can there be any assurance on the timing of any
return on such investments. Collagen's product development and research strategy
consists of the following principal elements:

- New Products in New Market Segments. In fiscal 1994, Collagen, together
with Target, and Celtrix Pharmaceuticals, Inc., formed Prograft Medical
Inc. ("Prograft"). Prograft focuses on the development of proprietary
vascular grafts, vascular stents and vascular stent-graft combinations,
which may use certain of Collagen's biomaterials, for use in the repair
and replacement of diseased and damaged blood vessels. As of December 31,
1994, Collagen held approximately 32% of the equity of, and has also
entered into license and supply agreements with, Prograft. Also in fiscal
1994, Collagen and its founder, Dr. Rodney Perkins, formed Otogen
Corporation, a start-up company which is seeking to develop PEG-collagen
based tympanostomy tubes and tympanic membrane prostheses for use in the
ear by otolaryngologists. In fiscal 1993, Collagen participated in the
formation of CollOptics, Inc. to develop collagen-based lenticules, which
are custom-made contact lenses for refractive errors.

- New Products in Existing Plastic Surgery/Dermatology Market. In 1992,
Collagen participated in the formation of LipoMatrix, a start-up company
which intends to research, develop,

42
43

manufacture, and market medical devices designed to replace, restore, or
augment body structures that consist largely of adipose (fat) tissues,
including the human breast. During fiscal 1994, Collagen made an
additional equity investment of $1.75 million in LipoMatrix, which
recently received clearance from the FDA to commence clinical studies in
the U.S., and already has gathered clinical data on its breast implants
from more than 100 patients treated in Europe.

- Access to New Technology. In addition, Collagen has made an equity
investment in and is actively collaborating with GenPharm International,
Inc. for the purpose of developing recombinant human collagen. This
technology could provide Collagen with a source of recombinant human
collagen that is chemically identical to native human collagen.

LITIGATION

Collagen is involved in various legal actions arising in the ordinary
course of business, the majority of which involve product liability claims.
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 Collagen's future consolidated financial position or results of operations.

Collagen faces an inherent business risk of exposure to product liability
claims alleging that the use of Collagen's technology or products has resulted
in adverse effects. Such risks will exist even with respect to those products
that have received or in the future may receive regulatory approval for
commercial sale. There can be no assurance that Collagen will avoid significant
product liability claims and attendant negative publicity. Furthermore, there
can be no assurance that present insurance coverage will be adequate or that
adequate insurance coverage will remain available at acceptable costs, if at
all, or that a product liability claim or recall would not adversely affect the
future business or financial condition of Collagen. It is possible that adverse
product liability actions could negatively affect Collagen's ability to obtain
and maintain regulatory approval for its products.

In light of regulatory investigations surrounding product safety, Collagen
announced in September 1991 that it will indemnify physicians against damages
and legal fees arising from lawsuits brought to a jury trial alleging a link
between collagen injections and Polymyositis and Dermatomyositis. To date, the
impact of this indemnification on Collagen's results of operations has not been
significant. There can be no assurance, however, that any future such claims
would not have a material adverse effect on Collagen's operating results.

On December 21, 1994, Collagen filed suit against Matrix Pharmaceutical,
Inc., ("Matrix") alleging fraud, misappropriation of trade secrets, unfair
competition, breach of fiduciary duty, inducing breach of contract, breach of
duty of loyalty and tortious interference. Collagen alleges that Matrix, which
uses collagen for certain drug delivery applications, unlawfully obtained
Collagen's confidential and proprietary information relating to Collagen's
products and operations by hiring ten former employees that Collagen alleges had
access to or were knowledgeable about Collagen's proprietary information. On
February 12, 1995, Matrix denied Collagen's allegations and filed a
cross-complaint charging Collagen with, among other things, unfair competition,
defamation and restraint of trade. Matrix also has requested certain declaratory
relief. Howard Palefsky, Chairman of the Board and Chief Executive Officer of
Collagen, was personally named as an additional defendant to the Matrix
defamation charge. Collagen intends to vigorously contest Matrix's charges.

EMPLOYEES

As of December 31, 1994, Collagen employed 320 full-time employees, of
which 69 were engaged in research and development, 105 were engaged in sales and
marketing, 95 were involved in production and quality control, and 51 were
engaged in finance and administration. None of Collagen's employees is covered
by a collective bargaining agreement. Collagen also has a Board of Scientific
Advisors which currently consists of five scientists, each of whom is prominent
in his field

43
44

and serves as a professor at a major academic institution. Collagen has a
consulting agreement with each advisor which ranges from two to three years.

PROPERTIES

Collagen's principal executive, marketing, and research activities are
presently located in three buildings in Palo Alto, California which occupy a
total of approximately 77,000 square feet. Collagen has leased these buildings
under various leases that expire between June 1999 and November 2004 and contain
renewal options. Collagen's international facilities are also leased under
various leases and amount to approximately 10,000 square feet in total.

In 1989, Collagen completed a sale-leaseback transaction relating to its
manufacturing facility in Fremont, California. The facility lease term extends
for fifteen years with four five-year renewal options. Collagen commenced
commercial manufacturing in this facility in November 1990. In addition,
Collagen leases approximately 11,000 square feet of warehouse space in Fremont,
California.

Collagen considers that its facilities are adequate to meet its
requirements for at least the next twelve months.

44
45

BUSINESS OF TARGET

GENERAL

TARGET STRATEGY

Target's strategy consists of the following principal elements:

- Focus Primarily on Neurovascular Disorders. Target focuses its resources
primarily on developing products for the minimally invasive treatment of
neurovascular disorders associated with stroke. Acute stroke is the third
leading cause of death in the United States and a major cause of
long-term disability. Target's micro-catheters and guidewires are
specially designed to access the tortuous vascular system of the brain
for delivery of therapeutic agents and devices, such as its micro-coils,
and chemotherapeutic drugs. Target believes that its GDC system, which is
currently in clinical trials, can provide minimally invasive treatment
for cerebral aneurysms.

- Apply Proprietary Technology in Specialized Applications. In addition to
treatment of neurovascular disorders, Target also seeks to apply its
technology in other areas, including access to small peripheral vessels,
reproductive physiology, vascular stent-graft products and
electrophysiology. Target pursues these opportunities directly and, in
areas outside Target's core business focus, through affiliated companies.
Target expects that in the future it may also pursue such opportunities
through strategic alliances with other companies.

- Emphasize Technology, Innovation and Leadership. Target has substantial
design, manufacturing and applications engineering expertise in the
development of small vessel access and delivery systems. Target has
developed proprietary techniques and customized equipment to extrude and
process its micro-catheters, as well as proprietary processes to grind
its guidewires to precise specifications. Target has obtained a number of
patents on its products, including its variable stiffness micro-catheter
shaft design, and has other patent applications pending.

- Maintain Close Relationships with Leading Practitioners
Worldwide. Target maintains close relationships with leading
interventional neuroradiologists and neurosurgeons worldwide who are
dedicated to expanding the use of interventional neurovascular
techniques. Target works closely with interventional physicians to
identify potential new applications for product development. Target's
objectives include increasing the number of interventional practitioners
and promoting new ideas for the intravascular treatment of disease.
Target actively supports fellowship programs in the United States that
provide training in interventional techniques.

45
46

PRODUCTS

Target's products include micro-catheters and guidewires, micro-coils and
vascular angioplasty products. All of Target's products are intended for single
use and are either disposed of or, in the case of micro-coils, remain in the
patient after the procedure.

MICRO-CATHETERS AND GUIDEWIRES

Target's micro-catheters and guidewires are used to access small vessels in
the circulatory system. A catheterization procedure typically involves the
insertion of a guidewire through a needle puncture into the easily accessible
femoral artery of the upper leg. A large diameter guidewire is pushed through
the vasculature of the circulatory system and a large guiding catheter is then
advanced over the guidewire so that the tip of the guiding catheter reaches the
appropriate large artery. The guidewire is then removed. To access the
vasculature of the brain, Target's guidewires and micro-catheters are advanced
through the large guiding catheter to a blood vessel in the neck and then pushed
through the guiding catheter tip. Using x-ray imaging to monitor positioning,
the interventional physician alternately advances the guidewire and
micro-catheter through blood vessels in the brain to the diseased site. These
blood vessels are smaller than those in the neck and are typically characterized
by numerous acute curves. After the micro-catheter is positioned, the guidewire
is removed to allow the infusion of diagnostic, embolic or other therapeutic
agents through the micro-catheter directly to the diseased site.

Several design characteristics enable Target's guidewires to be manipulated
and maneuvered through small tortuous blood vessels to allow its micro-catheters
to access the diseased site. These include (i) gradual transitioning of
guidewire stiffness to provide a flexible, atraumatic tip and a more rigid
handle for manipulation and advancement, (ii) torqueability to permit steering
of the guidewire by the interventional physician (through manipulation of the
angled tip of the guidewire) into side-branch vessels, (iii) lubricious
guidewire surface coating to reduce friction as the catheter is advanced over
the guidewire, and (iv) tip radiopacity to enable the physician to view the
device under x-ray imaging. Target's Taper, Seeker and Dasher guidewires allow
the interventional physician to use a guidewire specifically designed and
engineered to match the challenges of the vasculature being catheterized.
Target's Taper guidewire is made of a precision ground, tapered stainless steel
core with a wrapped platinum coil tip. The Taper is Target's most steerable
guidewire and is typically used to provide initial access to the tortuous
vascular anatomy. The Seeker and Dasher guidewires are more flexible than the
Taper, incorporating coatings that enhance smooth tracking of Target's
micro-catheters over the guidewire. Target's guidewires range in size from 0.010
inches to 0.022 inches in diameter and are often used sequentially in a
procedure. For example, to access remote sites, an interventional physician
could first use a Taper, followed by a Seeker or Dasher.

To navigate the complex vascular anatomy of the brain and other regions
remote from large arteries, Target's micro-catheters must be rigid enough to be
pushed as much as five feet through the circulatory system, yet flexible enough
to track over a guidewire without injuring the blood vessel. All of Target's
micro-catheters utilize Target's variable shaft stiffness design, which is a
patented design feature of Target's Tracker catheters. Target's micro-catheters
are highly flexible at the leading (distal) end, have a slightly stiffer middle
section and are stiffer still at the trailing (proximal) end. Target believes
that this design enables the interventional physician to navigate tortuous
vessels that cannot practically be navigated by a catheter not incorporating
variable stiffness. Target's largest selling micro-catheter, the Tracker, is
manufactured in diameters ranging from 0.026 to 0.062 inches and in a variety of
lengths. After accessing a diseased site, Target's micro-catheters may be used
by the practitioner to treat the disease by delivering various diagnostic or
therapeutic agents or embolic devices such as Target's micro-coils.

The newest addition to Target's family of Tracker catheters is the
FasTRACKER, which incorporates a proprietary chemically bonded hydrophilic
polymer that allows the micro-catheter to

46
47

glide more easily through the circulatory system, possibly resulting in
shortened procedure times. Market clearance for the FasTRACKER has been obtained
in the United States and Japan.

The Soft Stream micro-catheter incorporates perforations on the sides of
the distal end for more effective infusion of diagnostic and therapeutic agents.
Guidewire tracking of the Soft Stream micro-catheter into small tortuous blood
vessels is enhanced by the varied stiffness of the catheter shaft. The flexible
distal end of the Soft Stream micro-catheter is intended to minimize trauma to
occluded vessels, such as saphenous (coronary bypass) vein grafts. The catheter
may remain in the vessel for several hours to permit continuous infusion of
clot-dissolving (thrombolytic) drugs.

Target also markets a number of flow-assisted micro-catheters that
incorporate a highly flexible shaft material and are designed to access diseased
sites characterized by rapid blood flow. Using the "flow-assisted" technique,
the interventional physician advances the micro-catheter without a guidewire and
allows the blood flow to assist in positioning the catheter. In certain cases,
this technique enables interventional physicians to maneuver more quickly
through rapid flow vessels than would be possible using micro-catheters that
track over guidewires. In June 1993, Target introduced a redesigned Zephyr
flow-assisted micro-catheter. In August 1992, Target entered into an agreement
with Balt Extrusion of Paris, France ("Balt") pursuant to which Target agreed to
obtain the necessary regulatory clearance for Balt's neurological products and
to promote and distribute such products on an exclusive basis in the United
States and Canada. The products distributed by Target include Balt's Magic line
of flow-assisted catheters, guiding catheters and catheter valve introducers.

Target's Retriever endovascular snare is designed to retrieve objects in
the cerebral, peripheral and coronary vasculature. The Retriever combines a
guidewire and variable stiffness catheter to allow access to remote, tortuous
vasculature. The distal end of the guidewire is radiopaque and is attached to
the distal end of the catheter, forming a loop. By extending or retracting the
guidewire through the catheter, the interventional physician can adjust the size
of the loop to encircle and grasp the desired object. Target introduced the
Retriever endovascular snare in June 1992.

Target's micro-catheters range in domestic list price from $140 to $340,
and its guidewires range in domestic list price from $120 to $180. In a typical
procedure involving difficult-to-access vessels, multiple Target micro-catheters
and guidewires may be used.

For the nine months ended December 31, 1994 and the fiscal years ended
March 31, 1994, 1993 and 1992, sales of Target's micro-catheters accounted for
approximately 50%, 52%, 49% and 49%, respectively, and sales of Target's
guidewires accounted for approximately 20%, 22%, 24% and 30%, respectively, of
Target's product sales during such periods.

47
48

The following table shows Target's principal micro-catheter and guidewire
products and indicates significant applications for which such products are
used.

CURRENT DATE FIRST
NUMBER MODEL
OF INTRODUCED FDA CLEARED REPRESENTATIVE
PRODUCT LINE MODELS IN U.S. INDICATIONS(1) CLINICAL APPLICATIONS
------------------------------------ ------- ---------- ------------------------------- ------------------------

MICRO-CATHETERS
Tracker Infusion Catheter 8 Oct. 1986 Neurovascular, general vascular Delivery of diagnostic
and cardiovascular infusion and therapeutic agents
Tracker Soft Stream Infusion 2 Dec. 1991 General vascular and cardiovas- Delivery of diagnostic
Catheter and Micro Soft Stream cular infusion and therapeutic agents
with Hydrolene
Retriever Endovascular Snare 2 June 1992 General vascular use Retrieval of foreign ob-
jects in small vessels
Zephyr Flow-Assisted Catheter 1 June 1993 Neurovascular and general vas- Delivery of therapeutic
cular infusion agents
FasTRACKER Infusion Catheter 4 Aug. 1993 Neurovascular, general vascular Delivery of diagnostic
and cardiovascular infusion and therapeutic agents
Balt Magic Flow-Assisted Catheter 4 Sept. Neurovascular infusion Infusion of contrast
1993 materials
FasGUIDE Guiding Catheter 2 Nov. 1994 General vascular use Conduit for other medi-
cal devices and infusion
of diagnostic agents
GUIDEWIRES
Taper Steerable Guidewire 5 July 1987 Neurovascular, general vascular Assist in placement of
and cardiovascular use therapeutic and diagnos-
tic catheters(2)
Seeker Steerable Guidewire 3 Dec. 1988 Neurovascular, general vascular Assist in placement of
and cardiovascular use therapeutic and diagnos-
tic catheters
Dasher Steerable Guidewire 2 June 1992 Neurovascular, general vascular Assist in placement of
and cardiovascular use therapeutic and diagnos-
tic catheters

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

(1) Not all models are cleared for all stated indications.

(2) Pursuant to an agreement with Eli Lilly and Company, Target cannot market
this product for use in coronary angioplasty applications. See "-- Patents,
Trade Secrets and Licenses."

MICRO-COILS

Target's family of micro-coil products includes micro-coils that are pushed
through a catheter for delivery to a diseased site, and micro-coils that are
mechanically detached or released in applications and procedures where highly
precise coil placement is necessary.

Target's pushable coils include complex helical and straight platinum
coils, and Braided Occlusion Devices. Target's complex helical and straight
platinum micro-coils are designed to be inserted through a Tracker
micro-catheter to occlude the diseased area of a blood vessel. These micro-coils
are placed by positioning the distal tip of a Tracker micro-catheter at the
desired delivery site and pushing the micro-coil through the catheter and out
the tip with a coil pusher. Target's complex helical coils, when released, twist
and take on a complex shape to fill and block the diseased vessel. Target's
micro-coils are used to treat arteriovenous malformations ("AVM"s), which are
aberrant interconnections of arteries and veins. In these cases, Target's
micro-coils are delivered to the diseased region to block blood vessels and
restrict blood flow. This allows for surgical removal of the AVM with
significantly reduced blood loss. Many models of Target's micro-coils
incorporate polyester fibers to enhance space filling and promote occlusion.
Target's micro-coils vary in length and shape, and range in domestic list price
from $160 to $370 for a box of five. Target has also developed its Braided
Occlusion Devices, all of which are densely covered with polyester fibers and
are manufactured in relatively simple shapes. The greatly increased density of
polyester fibers, relative to Target's other micro-coil products, promotes
occlusion.

48
49

Target's mechanically detachable coils include its GDC system, which
provides detachment through electrolysis, and its Interlocking Detachable Coil
("IDC") system, which provides detachment through release of an interlocking
mechanical coupling.

Target is clinically testing its GDC system for the treatment of
neurovascular aneurysms, which are balloon-like enlargements stemming from
weakened vessel walls. The GDC system is currently being sold, in accordance
with cost-recovery provisions of applicable regulations, to a limited number of
clinical investigators pursuant to an Investigational Device Exemption ("IDE")
for treatment of patients suffering from high-risk or inoperable cerebral
aneurysms. The GDC system incorporates a micro-coil which is attached to a
delivery wire. This allows a micro-coil to be retracted into the catheter and
then reinserted if initial micro-coil placement is suboptimal. In addition,
movement of the micro-coil is eliminated until detachment, which reduces the
risk that the micro-coil will be dislodged. Precise coil placement is essential
for effective treatment but is difficult to achieve and may require a number of
attempts. If placed improperly in an aneurysm, the micro-coil may become
dislodged or released into the bloodstream. Application of a slight electric
current to the wire produces controlled, electrolytic detachment of a complete
coil system after the micro-coil has been placed precisely in the aneurysm. Once
in place, the GDC system is intended to disrupt blood supply to the aneurysm,
occluding and sealing off the aneurysm from the blood vessel. One patent has
been issued and two additional patents have been applied for with respect to the
GDC system.

In October 1993, Target announced that it was pursuing certain changes to
the GDC system as a result of magnetic resonance imaging ("MRI") tests which
indicated a potential for the creation of small metallic particles during the
electrolytic detachment of the coil. Upon completion of certain laboratory tests
of these changes a supplement to the existing IDE was filed with the FDA in
January 1994 and approved in March 1994. The revised IDE protocol submitted to
the FDA by Target required commencement of limited clinical trials for the
modified GDC system. Target has exchanged modified product for any original
product that customers still had in their inventory as treatment sites were
converted to the modified product. The limited clinical trials in the United
States were commenced in April 1994. The clinical trials with the modified GDC
system have shown an apparent reduction in both the frequency of the occurrence
and the size of these microscopic particles. The results of these clinical
trials were then included in a new application for 510(k) clearance for the
modified GDC system, which Target submitted in March 1995. Results of the
clinical investigations of both the original GDC system, for which the 510(k)
application was withdrawn, and the modified GDC system were included as
supporting data in its March 1995 510(k) application. Target anticipates that
this application, which includes clinical data on approximately 800 patients,
will be reviewed by advisory consultants, some of whom may also be members of
other FDA panels. This review may increase the overall length of the regulatory
review period. Regulatory clearance to market the modified product in France was
obtained during the quarter ended December 31, 1994, and Target is currently
pursuing regulatory clearance in Japan for such product.

Unlike the GDC, the IDC is not released by an electrical charge but through
mechanical means. Currently, the IDC system is principally marketed in Japan.
Target is currently seeking regulatory clearance to use the IDC in United States
clinical trials for the treatment of fistulae and AVMs.

For the nine months ended December 31, 1994 and the fiscal years ended
March 31, 1994, 1993 and 1992, Target's micro-coil products, including the GDC
system, accounted for 28%, 24%, 26% and 19%, respectively, of Target's product
sales.

49
50

The following table shows Target's principal micro-coil products and
indicates significant applications for which such products are used.

DATE FIRST
CURRENT MODEL
NUMBER OF INTRODUCED FDA CLEARED REPRESENTATIVE
PRODUCT LINE MODELS IN U.S. INDICATIONS CLINICAL APPLICATIONS
-------------------------------- --------- ---------- ------------------------------- -------------------------

MICRO-COILS
Complex Helical and Straight 20 Sept. 1989 Neurovascular and peripheral Embolization of AVMs and
Platinum Coils vascular occlusion trauma-induced vessel
rupture
Guglielmi Detachable Coil System 28 (1) Investigational Device Aneurysm embolization
Exemption permitting limited
regulated clinical trials for
neurovascular aneurysm
occlusion
Interlocking Detachable Coil 14 (2) None currently Embolization of AVMs and
System fistulae
Braided Occlusion Device 7 Dec. 1992 Neurovascular and peripheral Embolizations of AVMs and
vascular occlusion trauma-induced vessel
rupture

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

(1) This product is currently in U.S. clinical trials. See "-- Government
Regulation and Product Testing" for additional information.

(2) Target is currently planning clinical trials for this product, for which an
application for an IDE has been submitted. The initial applications are
expected to include embolization of AVMs and fistulae. Target expects to
include data from the planned clinical trials in a submission to the FDA
seeking future market clearance.

VASCULAR ANGIOPLASTY

Target has developed its Stealth balloon angioplasty micro-catheters,
including the Fas-
STEALTH (which incorporates a hydrophilic polymer), for use in dilation of
certain arteries of the peripheral vasculature that have become narrowed due to
atherosclerotic disease. These balloon-tipped micro-catheters are inserted into
the vessel system and guided through the arteries over a guidewire to the site
of a blockage, using a technique similar to that used to maneuver Target's other
micro-catheters. The deflated balloon is positioned across the occluded area and
inflated and deflated once or several times, resulting in expansion of the
arterial narrowing to improve blood flow. Target's Stealth balloon angioplasty
micro-catheter utilizes a proprietary single lumen (or channel) design and
incorporates variable shaft stiffness to impart guidewire tracking
characteristics similar to those of the Tracker micro-catheter. Target believes
that other balloon angioplasty catheters are less maneuverable because they
either use a single lumen with a fixed wire or two lumens -- one to track over
the guidewire and a second to allow infusion of liquids to inflate the balloon
located at the tip of the catheter. Target's trackable, single lumen design and
variable shaft stiffness allow the Stealth to track through tortuous vascular
paths. The Stealth is used to dilate arteries in the brain diseased by
atherosclerotic plaque that are not accessible by conventional angioplasty
catheters. The Stealth and FasSTEALTH micro-catheters are each available in five
balloon diameters and have a domestic list price of $650 and $695, respectively.

MARKETS

Interventional Neurology. Acute stroke is the third leading cause of death
in the United States and a major cause of adult long-term disability. Stroke is
the disruption of blood supply to critical areas of the brain. The reduced blood
flow results in a lack of oxygen to the brain, known as ischemia, and often
causes the loss of normal brain functions. Patients who survive a stroke may
experience partial paralysis or may lose the ability to speak or comprehend
language. Strokes are

50
51

typically caused either by ruptures (hemorrhagic stroke) or blockages
(vaso-occlusive stroke) of arteries within or leading to the brain.

Hemorrhagic strokes are generally caused by the rupture of arteries
resulting from vascular defects such as cerebral aneurysms or AVMs. Cerebral
aneurysms and AVMs are estimated to occur in one-half of one percent to five
percent of the general population in the United States. Without treatment, these
vascular defects typically grow with time and may cause a variety of symptoms or
may remain asymptomatic until they rupture. In some people, these defects never
become symptomatic or rupture. The treatment of hemorrhagic stroke typically
requires highly invasive neurosurgery, which involves the opening of a portion
of the skull, manipulation of the brain, extensive blood loss, prolonged
hospitalization and a long recovery period.

In the case of aneurysms, neurosurgery is generally performed either before
or after an aneurysm ruptures, although many patients who survive a ruptured
aneurysm are not treated surgically due to the high risk of such surgery.
Approximately 18,000 aneurysm surgeries were performed in the United States in
1989. Target's GDC system, used with a Tracker micro-catheter, is a specialized
micro-coil designed for use in aneurysms and is being investigated in clinical
trials. Target believes the GDC system may in certain cases be an effective,
minimally invasive treatment to lessen blood loss or reduce the risk of a
re-rupture for patients suffering from hemorrhagic stroke due to ruptured
aneurysms, or as prophylactic treatment for nonsurgical patients by embolizing
aneurysms prior to rupture.

Approximately 4,000 AVMs were surgically removed in the United States in
1989. Target's micro-coils enable interventional physicians to occlude AVMs
prior to surgery. After occluding the vessels of or leading to an AVM, the
neurosurgeon may perform surgery to remove the abnormal vasculature more rapidly
and with significantly less blood loss than if the surgery was performed without
first using the micro-coil, greatly reducing the attendant surgical risks. In
some cases, the micro-coils may occlude the AVM completely and highly-invasive
surgery can be avoided.

Vaso-occlusive stroke is typically caused by the existence of a blood clot
within an artery causing a complete blockage of blood flow or by the narrowing
of blood vessels due to the formation of atherosclerotic plaque on the inside of
vessel walls, causing a reduction in the flow of blood and increasing the risk
that a blood clot will cause a complete blockage.

There are a number of conventional treatments for cerebral atherosclerotic
disease. Pharmacologic treatment using drugs to dilate narrowed vessels often
has limited effectiveness, especially in highly diseased blood vessels. Vascular
surgery to remove the atherosclerotic tissue within a diseased artery has proven
to be somewhat more effective but currently is limited to blood vessels within
the neck. Arteries within the brain are generally too small and difficult to
reach for this procedure and have typically been treated by highly invasive
bypass grafting techniques. Balloon angioplasty, which is considered to be less
invasive and more cost-effective as a means of treating coronary
atherosclerosis, has not been used extensively to treat cerebral atherosclerosis
primarily due to the limitations of standard catheter systems. The Company is
not aware of any balloon catheter currently on the market indicated for cerebral
angioplasty. Target's Stealth micro-catheter has been cleared by the FDA for
performing minimally invasive balloon angioplasty procedures to access and
dilate small vessels of the peripheral vascular system to permit the restoration
of normal blood flow.

The conventional treatment for a cerebral blood clot involves the use of
thrombolytic drugs. However, such drugs appear to be relatively ineffective when
delivered intravenously and may cause significant bleeding in other parts of the
body as a side effect. Certain of Target's catheter products are cleared for
delivery of therapeutic agents, but additional clearances must be obtained with
respect to the use of a particular drug to treat a specific indication.
Similarly, Target believes that its Soft Stream micro-catheter may be used to
deliver certain therapeutic agents through perforations in its side holes
directly to a disease site. By delivering such agents through the side-hole zone
of the micro-catheter, the entire length of the diseased area can be treated at
once, potentially accelerating

51
52

treatment. Regulatory clearance of Target's catheter products for site-specific
drug delivery will depend in part on clinical proof of efficacy and safety, and
there can be no assurance that such clinical proof will be obtained. While
Target is aware that others are conducting or planning to conduct such studies,
Target does not currently intend to initiate independent studies in this area.

Peripheral Vascular Intervention. Target's products are used to treat many
site-specific disorders affecting the peripheral vascular system. These
disorders, which include gastro-intestinal bleeding, peripheral vascular blood
clots, internal bleeding from trauma, and peripheral AVMs and other
malformations, are not easily accessible by conventional catheters and therefore
have traditionally been treated by highly invasive surgery. Tracker
micro-catheters can be used to deliver embolizing agents or devices to address
certain cases of gastro-intestinal bleeding, trauma-induced bleeding or AVMs and
other malformations. Occluded peripheral vessels can be treated by dilation
using a Stealth balloon angioplasty micro-catheter in the case of
atherosclerosis.

Target's infusion micro-catheters are also being used to treat liver
cancer, primarily in Japan where the incidence of that disease is relatively
high. The micro-catheters are used to deliver embolizing agents to the blood
vessels that iced the tumor to reduce or eliminate its blood supply. Although
not curative, such treatment may contribute to an improved quality of life for
such patients.

MARKETING AND SALES

Target's marketing strategy is designed to promote awareness of the
clinical efficacy and cost-effectiveness of the minimally invasive
interventional procedures in which Target's products are employed. Target
implements this strategy by providing clinical and technical information to its
sales force and worldwide distributors that encourages the interventionalist to
perform procedures utilizing Target's products. Target places particular
marketing emphasis on physician assistance and support for physician training.

In North America, the typical user of Target's products is the
interventional neuroradiologist. Target believes that the number of
interventional neuroradiologists and neurosurgeons trained to use its vascular
access and delivery products to treat neurovascular disorders is relatively
small and the growth in the number of neuro-interventional physicians is
constrained by the lengthy training programs required to educate these
physicians in the United States. Target supports these programs through
consultation with these practitioners. The expansion of these training programs,
and increased usage of Target's products by these practitioners, are important
factors in the growth of Target's domestic market for treating neurovascular
disorders with its products. In addition, an important source of product
promotion comes from referrals within the medical community. As of December 31,
1994, there were ongoing programs training approximately 30 fellows at 15
teaching hospitals in North America. Target believes that future growth in the
United States market also depends significantly on the unpredictable, costly and
time-consuming process of obtaining regulatory clearance to market its products,
such as the GDC system, which is awaiting regulatory clearance. See
"-- Government Regulation and Product Testing."

Internationally, Target's products are typically used by interventional
neuroradiologists, neurosurgeons, cardiologists and peripheral vascular
radiologists. These practitioners provide peer training, expanding the use of
Target's products. To date, Target is not aware of any formal fellowship
programs outside of the United States. However, there are several interventional
centers where physicians are trained in the field of interventional
neuroradiology.

Future growth of the market for Target's neurovascular micro-catheters,
guidewires and micro-coils will depend upon success in obtaining necessary
regulatory clearances and expansion of the number of trained interventional
practitioners. To the extent that physicians do not adopt these products for use
in treating neurovascular disorders or sufficient physicians are not trained in
the use of Target's products, both in the United States and abroad, the market
for Target's products will remain limited.

52
53

Of the 1,500 hospitals in the United States providing interventional
radiology services, approximately 450 provide some treatment for neurovascular
disease. Approximately 100 hospitals in the United States accounted for a
substantial portion of Target's domestic revenues in the fiscal year ended March
31, 1994. Internationally, approximately 225 centers provide neurointerventional
therapy. In Japan, the majority of cases are performed by neurosurgeons trained
in these techniques.

Sales to customers outside North America are made through a network of 30
international specialty distributors, Target's new German subsidiary and the
Japanese joint venture with CMI, both of which are described below. Target
promotes its products through trade shows, seminars, publications and direct
mailings to interventional practitioners. Export product sales accounted for
69%, 60%, 61% and 56% of total product sales for the nine months ended December
31, 1994 and the fiscal years ended March 31, 1994, 1993 and 1992, respectively.
Target anticipates that product sales to customers in Europe and Japan will
generate a large portion of total product sales through at least fiscal 1996.
Target's international operations are subject to certain risks common to foreign
operations in general, including governmental regulations, reimbursement
practices, and import and export restrictions. Changes in such governmental
regulations or import and export restrictions could adversely affect sales of
Target's products and Target's results of operations. See "Risk Factors Relating
to Target -- Importance of Foreign Sales."

In addition to selling its own products, Target has exclusive rights in the
United States and Canada to distribute Balt's Magic line of flow-assisted
catheters, guiding-catheters and catheter valve introducers. The agreement
between Target and Balt, effective in June 1992, has an initial term of three
years and is renewable at the option of Target for an additional three-year term
if certain sales and regulatory milestones are achieved.

In 1991, Target formed a distribution joint venture with CMI in order to
provide Target a direct presence in Japan. CMI initially contributed
approximately $200,000 for a 100% ownership in the joint venture, and in
November 1992, CMI sold a 50% ownership in the joint venture to Target for
approximately $120,000. The joint venture, Target-CMI, Inc., commenced selling
in Japan certain of Target's products for coronary applications in December 1991
and Target's products for neurology and peripheral vascular intervention in
April 1992. Sales to CMI accounted for approximately 29% and 27% of Target's
product sales for the years ended March 31, 1994 and 1993, respectively.

MANUFACTURING

Target's manufacturing organization fabricates certain proprietary
components of Target's products and assembles, inspects, tests and packages all
components into finished products. By designing and manufacturing all of its
products from raw materials, Target believes it maintains greater control of
quality and manufacturing process changes and is better able to limit outside
access to its proprietary technology.

Target believes that its custom-designed, proprietary process equipment is
an important component of its manufacturing strategy. In some cases, Target has
added proprietary software to standard equipment and, in others, has developed
proprietary enhancements for existing production machinery to facilitate the
manufacture of its products to exacting standards. Target has also developed
core manufacturing technologies and processes, including (i) proprietary
extrusion techniques and equipment and polymer processing capabilities,
including composite lamination, welding of dissimilar materials,
balloon-forming, tubing expansion and silicone-coating, and (ii) proprietary
precision guidewire grinding techniques enabling fabrication of a large variety
of guidewire core profiles using many core alloys, thermal treating, variable
pitch spring winding and soldering. Other areas of Target's technological
expertise include braiding, teflon-spray coating, hydrophilic coatings,
electroplating and material cleaning and surface preparation.

53
54

Most of Target's subassemblies and products are assembled and tested in a
controlled clean-room environment by trained production personnel. At various
assembly stages each lot of product undergoes thorough testing to ensure
compliance with applicable regulations. Target's quality assurance group
independently verifies that product fabrication and inspection process steps
meet Target's specifications and applicable regulatory requirements. Upon
successful completion of these tests, the products are sterilized, packaged and
prepared for shipment.

Raw materials utilized in Target's products are purchased from outside
vendors. Target's manufacturing group procures, tests and inspects all raw
materials used in Target's products. Target relies on single sources for certain
of its key components. Target believes, however, that alternative sources for
these components are available and generally maintains adequate raw material
inventory supply to avoid product flow interruptions. Nevertheless, any
unanticipated interruption in the supply of these components could have a
material adverse effect on Target.

PRODUCT DEVELOPMENT

Target's product development strategy is to improve its current products
and to develop new products to meet the needs of physicians performing small
vessel interventional procedures. Target is developing new products and enhanced
versions of its existing products to perform an expanded range of diagnostic and
therapeutic procedures within Target's core interventional neurovascular and
peripheral vascular markets. Target's future success will depend upon, among
other factors, its ability to develop or acquire from third parties, introduce
and manufacture new products or enhanced versions of, or new uses for, existing
products, and to obtain regulatory clearance on a timely basis for such
products.

For the embolization of peripheral aneurysms and AVMs, Target has developed
its IDC coils that are detached by mechanical, rather than electrolytic, means
as described above. The initial intended use of the IDC system is the treatment
of AVMs or fistulae. Target is currently planning clinical trials, the results
of which will be used as support for a future filing with the FDA in order to
obtain market clearance in the United States. The IDC system may have
applications where speed of detachment is important or where a high degree of
accuracy of placement is not as critical. Target has three patents relating to
the IDC system and has acquired rights from a third party with respect to an
IDC. The IDC system is currently being marketed commercially in Japan as the
Mechanical Detachable Coil.

Target believes its technology may be used for applications other than
those currently marketed or currently in Target's product pipeline. For example,
in December 1992, Target formed a partially owned subsidiary, Conceptus, Inc.,
to focus on the diagnosis and treatment of female and male reproductive
disorders such as infertility and impotence. As of December 31, 1994, Target
held an approximate 20% equity position in Conceptus with an option to increase
this ownership position in the future by exercising a warrant for Conceptus
common stock. The warrant is exercisable at any time on or before December 1996
subject to acceleration upon the occurrence of certain events. In return, Target
has granted to Conceptus certain rights to its current and future proprietary
technologies for exclusive use in developing and commercializing products for
application in the field of reproductive physiology. In March 1994, Conceptus
completed a second round of financing.

In May 1993, Target formed another partially owned subsidiary, Cardima,
Inc. ("Cardima"), which is engaged in the development of products for diagnosis
and treatment of cardiac rhythm disorder. As of December 31, 1994, Target held
an equity interest in Cardima of approximately 30%. Target has granted Cardima
certain rights to its current and future proprietary technologies for exclusive
use in developing and commercializing products primarily for electrophysiology
applications.

In June 1993, Target, along with Collagen and Celtrix, formed another
partially owned subsidiary, Prograft Medical, Inc. ("Prograft"), by contributing
cash and granting certain rights to its current and future proprietary
technologies for exclusive use in developing and commercializing products for
applications in the field of vascular prostheses. Prograft is focusing its
development

54
55

efforts on vascular stents (devices that hold arteries open from within), grafts
(that allow for the repair of narrowed, blocked or weakened arteries and veins)
and stent-grafts. As of December 31, 1994, Target held approximately 32% of the
equity in Prograft. In July and August of 1994, Prograft partially completed a
second round of financing.

Target's expenditures for research and development totaled approximately
$7.6 million, $6.5 million and $4.3 million in the years ended March 31, 1994,
1993 and 1992, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Target."

COMPETITION

The medical device industry is characterized by rapidly evolving technology
and competition. Target currently experiences competition in the interventional
neuroradiology market and expects such competition to increase substantially.
Target believes that procedures using its interventional products, including the
recovery period, are substantially less costly than highly invasive, traditional
surgical procedures and may ultimately replace these procedures in some
applications. In many other applications, Target's products can be used prior to
surgery to enable the physician to perform procedures less invasively, with
greater efficiency and reduced patient trauma in a shorter period of time.
Several companies in the United States, including large companies with resources
significantly greater than those of Target, have introduced products that are
being used in the interventional neuroradiology market. Target is also aware of
other companies that may pursue commercialization of products which may compete
with Target's products and may result in future pricing and margin pressures
within this market. There can be no assurance that these companies will not
succeed in developing technologies and products that are more effective than any
which have been or are being developed by Target or that would render Target's
technologies or products obsolete or not competitive.

The cardiovascular and peripheral vascular interventional markets are
substantially more developed than the neuroradiology market and are subject to
intense competition. There are many large companies with significantly greater
financial, manufacturing, marketing, distribution and technical resources, and
experience than Target focusing principally on cardiovascular and peripheral
applications for their catheter technologies. As a result, Target focuses its
product development and marketing strategies on market segments where Target's
small vessel access and delivery systems can be used in applications not
presently addressed by conventional catheter and other interventional products.
There can be no assurance, however, that competitors will not successfully enter
these markets with superior products. In addition, Target is aware of several
other companies that have introduced guidewires to the marketplace and
attributes the slower growth rate of its guidewire product line to increased
competitive pressures. Such competition could have a material adverse effect on
Target's business, financial condition and results of operations.

Target believes that the primary competitive factors in the market for
interventional small vessel access and delivery products are safety, efficacy,
ease of use, reliability, innovation and price. In addition, Target believes
that customer service and physician relationships, as well as the time in which
companies can develop products, complete the clinical testing and regulatory
clearance process, and supply commercial quantities of the products to the
market are important competitive factors.

PATENTS, TRADE SECRETS AND LICENSES

Target's policy is to protect its proprietary position by, among other
methods, filing United States and foreign patent applications to protect
technology, inventions and improvements that are important to the development of
its business. As of March 15, 1995, Target held or was the exclusive licensee of
35 issued United States patents and had 33 United States and numerous foreign
patents issued and applications pending covering various aspects of its products
and core technology. The

55
56

issued patents relate to the variable stiffness design of Target's Tracker
micro-catheters, the patent for which expires in April 2005, and other important
aspects of Target's technologies. No assurance can be given that pending patent
applications will be approved or that any patents will provide competitive
advantages for Target's products or will not be challenged or circumvented by
competitors. In order to preserve its competitive position, it is Target's
intent to actively pursue any patent infringement issues of which it becomes
aware.

Target also relies upon trade secrets and technical know-how and continuing
technological innovation to develop and maintain its competitive position.
Target typically requires its employees, consultants and advisors to execute
appropriate confidentiality and assignment of inventions agreements in
connection with their employment, consulting or advisory relationship with
Target. There can be no assurance, however, that these agreements will not be
breached or that Target will have adequate remedies for any breach. Furthermore,
no assurance can be given that competitors will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to Target's proprietary technology, or that Target can meaningfully
protect its rights in unpatented proprietary technology.

Target was founded in June 1985 as a corporate joint venture between
Collagen and Eli Lilly and Company ("Lilly"). In January 1988, Lilly sold its
interest in Target to Collagen. In connection with the transfer of ownership,
Lilly and its wholly owned subsidiary, Advanced Cardiovascular Systems, Inc.
("ACS"), transferred to Target all rights to certain patents and confidential
information developed through the transfer date by the joint venture.
Additionally, Target granted to Lilly and ACS a royalty-free worldwide license
to make, use and sell products, other than in the field of therapeutic
embolization, under certain patents and know-how relating to the Taper
guidewire. Such license is exclusive, except that Target retained a
non-exclusive, royalty-free worldwide right under such patent rights and
know-how to make, have made, use and sell products, other than in the field of
diagnosis and treatment of coronary angioplasty. Lilly and ACS further agreed
not to assert against Target any intellectual property right relating to
Target's Tracker micro-catheter and Taper guidewire, or any products
substantially similar to such products and for the applications for which such
products were then being used.

In June 1990, Target obtained an exclusive, worldwide, royalty-bearing
license from The Regents of the University of California to certain pending
patent applications relating to the construction and method of use of the GDC
system. The license requires Target to make certain minimum payments and to pay
a royalty based on net sales of products utilizing the licensed technology. This
license extends for the life of the patents unless terminated earlier in the
event of Target's breach of certain covenants or agreements, including failure
to obtain regulatory clearance or market the GDC system within specified
periods. Under the license, the licensor retained the rights to use the
invention and associated technology for educational and research purposes.

In March 1992, Target obtained an exclusive, worldwide, royalty-bearing
license to certain inventions, technical information, know-how and patents which
may issue with respect to an endovascular retrieval device. Target commenced
marketing a product using this technology, the Retriever endovascular snare, in
June 1992. The license requires Target to pay a royalty based on net sales of
products utilizing the licensed technology. The license extends for the life of
the patents, after which Target shall have a royalty-free, paid-up license.

In October 1992, September 1993 and March 1994, Target obtained certain
royalty-bearing licenses to certain inventions, technical information, know-how
and patents with respect to the surface treatment of guidewires, temporary-use
infusion catheters, devices used to introduce other neurovascular catheters or
embolics and for a balloon dilatation catheter. Such licenses are non-exclusive
except for infusion catheters sold exclusively for neurovascular infusion usage.
Target commenced marketing an infusion catheter product line using this
technology, the FasTRACKER product family, during fiscal 1994 and in the third
quarter of fiscal 1995 introduced a line of guide catheters used to introduce
other neurovascular catheters, the FasGUIDE product family, using this
technology. These licenses require Target to make certain minimum payments and
to pay royalties

56
57

based on net sales of products utilizing the licensed technology. The licenses
extend for the life of the patents but may be terminated at Target's discretion
with no future right to the technology. Target has not yet commenced sales of
guidewires or balloon dilatation products which use this technology.

In addition to the licenses described above, Target may, in the future,
license from third parties rights to certain products and processes related to
Target's business.

The patent which relates to the variable stiffness design of Target's
Tracker micro-catheters (the "Tracker patent") has been the subject of
reexamination proceedings in the United States Patent and Trademark Office
("PTO"). The first such proceeding was concluded on November 15, 1994, when the
PTO issued a reexamination certificate and confirmed the patentability of the
patent claims set forth in the certificate. The second reexamination of the
patent was initiated by a subsidiary of Boston Scientific Corporation and one of
Target's competitors, SciMed Life Systems, Inc. ("SciMed"), raising new issues
of patentability. A petition for a third reexamination was filed recently by the
same competitor alleging another issue of patentability and requiring the merger
with the second reexamination. Both proceedings are currently pending in the
PTO. No assurance can be given that the PTO will issue a reexamination
certificate confirming the patentability of the patent claims, or that the
patent claims will not be amended in ways that will reduce any competitive
advantages the Tracker patent has provided for Target's products.

GOVERNMENT REGULATION AND PRODUCT TESTING

Target's research and development activities are subject to regulation by
numerous governmental authorities in the United States and other countries, and
the production and marketing of any products developed by Target are also
significantly regulated, particularly as to safety and efficacy. In the United
States, medical device products are subject to rigorous FDA review. The Federal
Food, Drug, and Cosmetic Act (the "FDC Act"), the Public Health Service Act and
other federal statutes and regulations govern or influence the testing,
manufacture, safety, labeling, storage, record keeping, market clearance,
advertising and promotion of such products. Non-compliance with applicable
requirements can result in fines, civil penalties, injunctions, suspensions or
losses of regulatory clearance, recall or seizure of products, operating
restrictions, refusal of the government to approve product license applications
or allow Target to enter into supply contracts, and criminal prosecution.

Certain of Target's products are sold pursuant to IDEs obtained from the
FDA. According to IDE regulations, sale of the applicable device for clinical
use may not constitute commercialization. As a result, Target sells products
subject to an IDE at prices which allow only for the recovery of research and
development, manufacturing and handling costs. In addition, products sold under
an IDE are limited by the FDA as to the number of investigation sites and the
number of patients treatable in clinical trials.

57
58

In the United States, Target currently sells the GDC system pursuant to an
IDE. Target submitted a 510(k) application in March 1995 regarding the GDC
system that includes clinical data on approximately 800 patients. See
"-- Products -- Micro-Coils."

In order to obtain FDA clearance of a new medical device, Target must
submit proof of safety and efficacy. In most cases, such proof entails extensive
pre-clinical, clinical and laboratory tests. The testing, preparation of
necessary applications and processing of those applications by the FDA is
expensive and time consuming and may take several years to complete. There is no
assurance that the FDA will act favorably or quickly in making such reviews, and
significant difficulties or costs may be encountered by Target in its efforts to
obtain FDA clearance that could delay or preclude Target from marketing any
product it may develop. The FDA may also require post-marketing testing and
surveillance to monitor the effects of proposed products or place conditions on
any clearance that could restrict commercial applications of such products.
Product clearances may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur following initial marketing. In addition,
delays imposed by the governmental review process may materially reduce the
period during which Target may have the exclusive right to commercialize
patented products or technologies.

The two principal methods by which medical devices may be submitted to the
FDA for clearance to market include a premarket notification filing under
Section 510(k) and a PMA application. To obtain a PMA, the applicant is required
to submit clinical data to the FDA, and the FDA may also request that a 510(k)
include clinical data. Before beginning a clinical study, the applicant must
submit an IDE application to the FDA for approval. The IDE application requires
that in vitro and in vivo animal tests be completed in order to demonstrate
sufficient safety of the product. Clinical studies must be done under a clinical
protocol with assurance of adherence to the protocol, informed consent from
clinical subjects, approval of an Institutional Review Board, maintenance of
required documentation, proper monitoring and appropriate statistical
evaluations.

Applications under the 510(k) procedure must demonstrate substantial
equivalence to a device that was on the market prior to the Medical Device
Amendments of 1976 or to devices marketed thereafter under the 510(k) procedure.
Applicants must defer marketing until a favorable response to the 510(k) is
received from the FDA. While reviewing the 510(k), the FDA may require
additional data, which can have the effect of materially extending the time
required to commence marketing. Each 510(k) for a separate application may
require the submission of clinical data concerning human patients relating to
the safety and the effectiveness for each specific proposed medical use. The FDA
may also refer the device to an advisory panel of experts for consideration and
recommendation, which may delay the 510(k) clearance process.

The preparation and processing of a PMA application is significantly more
complex and time consuming than a 510(k). Once the clinical investigation is
completed, Target must assemble and submit to the FDA a significant quantity of
clinical, animal testing, manufacturing, and other data. The PMA clearance
process may take several years or longer and no assurance can be given
concerning the ultimate outcome of PMAs submitted by an applicant. In addition,
there can be no assurance that required clearance from the FDA for any proposed
potential medical use will be granted, or that the FDA process will not be
unduly expensive or lengthy.

To date, all of Target's FDA marketing clearances for commercially
available products have been obtained through the 510(k) process. It is possible
that future potential applications of existing products or that future products
may require PMA clearance, with corresponding increases in the costs and tune
required to obtain governmental clearance.

Target is also required to register as a medical device manufacturer with
the FDA and state agencies. Target is subject to inspection on a routine basis
by both the FDA and the State of California for compliance with the FDA's
current Good Manufacturing Practice ("GMP") regulations. Under GMP regulations,
Target is subject to certain procedural and documentation requirements with
respect to manufacturing and control activities, and Target's manufacturing
facilities are

58
59

subject to periodic inspections by the FDA, as well as by state and foreign
regulatory authorities. Target's existing facilities have been inspected by the
FDA in the past. Target believes its manufacturing facilities are in compliance
in all material respects with all applicable local, state and federal
regulations.

Target must also comply with various FDA requirements for design, safety,
advertising, labeling, record keeping and reporting of adverse experiences with
the use of its products. The FDA actively enforces regulations prohibiting
marketing of products for unapproved uses. Failure to comply with applicable
regulatory requirements can result in, among other things, fines, civil
penalties, injunctions, suspensions or loss of clearances, seizures or recalls
of products, operating restrictions, refusal of the government to approve
product license applications or allow Target to enter into supply contracts,
injunctions and criminal prosecutions. Changes in existing requirements or
adoption of new requirements could adversely affect the ability of Target to
comply with regulatory requirements. Failure to comply with regulatory
requirements could have a material adverse affect on Target's business,
financial condition and results of operations.

In addition to regulations enforced by the FDA, Target is also subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act and other present and potential future federal, state or local
regulations. To date, compliance with these regulations has not had any material
effect on its financial results, capital requirements or competitive position.

Export sales of investigational devices or devices not cleared for
commercial distribution in the United States are subject to FDA export permit
requirements. In order to obtain such a permit, Target must provide the FDA with
documentation from the medical device regulatory authority of the country in
which the purchaser is located, stating that the sale of the device is not a
violation of that country's medical device laws.

PRODUCT LIABILITY LITIGATION AND INSURANCE

Medical device companies are subject to an inherent risk of product
liability and other liability claims in the event that the use of their products
results in personal injury claims. Target's products are often used in the
brain, where there is a high risk of serious injury or death, and in other life-
threatening situations. Such risks will exist even with respect to those
products that have received, or in the future may receive, regulatory clearance
for commercial sale. Target is currently a party to several legal actions
involving product liability claims. While the outcome of these actions is
presently not determinable, it is management's opinion that these matters will
not, either individually or in the aggregate, have a material adverse effect on
Target's business financial condition or results of operations. While Target
seeks to maintain product liability insurance with coverage that Target believes
is comparable to that maintained by companies similar in size and serving
similar markets, there can be no assurance that Target's product liability
insurance will be adequate or that such insurance will remain available at
acceptable costs, or at all. A successful claim brought against Target for which
insurance coverage is denied or in excess of its insurance coverage could have a
material

59
60

adverse effect on Target's business, financial condition and results of
operations. Additionally, it is possible that adverse product liability actions
could negatively affect Target's ability to obtain and maintain regulatory
clearance for its products.

THIRD-PARTY REIMBURSEMENT

Target's products are purchased by hospitals, which, in the United States,
then bill various third-party payers, including Medicare, Medicaid and private
insurers, for the healthcare services provided to patients. Government agencies
reimburse hospitals for medical procedures at a fixed rate according to
diagnosis-related groups. Federal and state laws and regulations govern
reimbursement by such government agencies. Such laws and regulations also
influence reimbursement by private insurance companies of medical fees. Changes
in current policies could reduce or eliminate such reimbursements and thereby
adversely affect future sales of Target's products. Third-party payers may deny
reimbursement if they determine that the device used in the procedure is
unnecessary, inappropriate, not cost-effective, experimental or for a
non-approved indication. Third-party payers may deny reimbursement for
treatments using Target's products, regardless of the FDA clearance status of
such products. Third-party payers are increasingly challenging the prices
charged for medical products and services. There can be no assurance that
reimbursement from third-party payers will be available, or if available, that
reimbursement will not be limited, thereby adversely affecting Target's ability
to sell its products profitably. Although Target has not experienced any
problems to date, significant uncertainty exists as to the reimbursement status
of newly approved health care products and the current political issues being
addressed by the Clinton Administration, and there can be no assurance that
adequate third-party coverage will be available to patients. Similar
circumstances exist in many international markets and are subject to various
foreign health care policies. In such circumstances, sales of Target's products
could be adversely affected.

EMPLOYEES

As of December 31, 1994, Target had 317 full-time and part-time employees,
including 49 in research and development, 19 in regulatory, clinical and quality
assurance, 181 in manufacturing and quality assurance, 41 in sales, marketing
and customer service and 27 in finance and administration. Target is dependent
upon a limited number of key management and technical personnel. Target's future
success will depend in part upon its ability to attract and retain highly
qualified personnel. Target competes for such personnel with other companies,
academic institutions, government entities and other organizations. Target
attempts to maintain competitive compensation, benefits, equity participation
and work environment policies to assist in attracting and retaining qualified
personnel as Target believes that the success of its business will depend, in
part, on its ability to attract and retain such employees. None of Target's
employees is covered by a collective bargaining agreement. Target believes its
relationship with its employees is good.

PROPERTIES

In October 1991, Target signed a ten-year lease for a 76,000 square foot
building in Fremont, California and in early fiscal 1993, consolidated its
operations in this facility. In October 1994, Target subleased from Cardima, for
a period of two years with the option to extend, certain space in Cardima's
Fremont location primarily to be utilized for Target's finished goods storage
and shipping needs. Target believes that these facilities will be adequate to
meet its requirements through at least calendar 1995. Target currently
anticipates that it will require additional office space in calendar 1996 and is
currently reviewing alternatives to handle its anticipated future space
requirements.

60
61

MANAGEMENT OF COLLAGEN

The directors and executive officers of Collagen and their ages as of March
15, 1995 are as follows:

NAME AGE POSITION
------------------------------------- --- ---------------------------------------------

Howard D. Palefsky................... 47 Chairman of the Board and Chief Executive
Officer
Gary S. Petersmeyer.................. 47 President, Chief Operating Officer and
Director
Frank A. DeLustro, Ph.D.............. 46 Senior Vice President, Scientific Affairs
Ross R. Erickson..................... 49 Vice President, Regulatory Affairs and
Quality Assurance
Deborah W. Berard.................... 35 Vice President, Human Resources and
Administrative Services
David Foster......................... 37 Vice President, Finance & MIS, and Chief
Financial Officer
A. Neville H. Pelletier.............. 53 Vice President and Managing Director, Europe
William C. Miller.................... 57 Vice President and General Counsel
Michael Levitt....................... 44 Vice President, Operations
Reid W. Dennis(1).................... 68 Chairman Emeritus of the Board
Anne L. Bakar(1)..................... 37 Director
John R. Daniels, M.D................. 56 Director
William G. Davis(1).................. 62 Director
Craig W. Johnson(2).................. 48 Director
Terry R. Knapp, M.D.................. 51 Director
Michael F. Mee(2).................... 52 Director
Rodney Perkins, M.D.................. 58 Director
Cornelius W. Pettinga, Ph.D.(1)...... 72 Director
Roger H. Salquist(2)................. 52 Director

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

(1) Member of the Human Resources Committee of the Board of Directors.

(2) Member of the Audit Committee of the Board of Directors.

Mr. Palefsky joined Collagen as President, Chief Executive Officer and
Director in March 1978 and served in such capacities until February 1995, when
he became the Chairman of the Board and Chief Executive Officer. From 1973 to
March 1978, Mr. Palefsky was employed by Alza Corporation where his last
position was Vice President, Marketing. Prior to 1973, Mr. Palefsky was employed
by Whitehall Laboratories as Assistant to the President. Both Alza Corporation
and Whitehall Laboratories are manufacturers of pharmaceutical products. Mr.
Palefsky is also a director of Calgene, Inc. and Target. Calgene, Inc. is an
agribusiness biotechnology company.

Mr. Petersmeyer joined Collagen as President, Chief Operating Officer and
Director in February 1995. Prior to joining Collagen, 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.

Dr. DeLustro joined Collagen as Manager of Immunology in June 1983 and has
served in various positions in Collagen. In 1991, Dr. DeLustro was promoted to
Senior Vice President, Scientific

61
62

Affairs. Prior to 1983, he was Assistant Professor of Medicine at the Medical
University of South Carolina.

Mr. Erickson joined Collagen as Program Director in January 1987 and served
in various senior regulatory positions. In 1990, Mr. Erickson was promoted to
Vice President, Regulatory Affairs and Quality Assurance. From 1983 to 1986, Mr.
Erickson was employed by Laserscope as Director of Biomedical Affairs. From 1977
to 1983, he was employed by Cobe Laboratories as Manager of Clinical
Evaluations. Both Laserscope and Cobe Laboratories are medical device
manufacturers. From 1970 to 1977, Mr. Erickson was employed by Alza Corporation.

Ms. Berard joined Collagen as a member of the finance staff in February
1982 and served in various human resource positions. In 1991, Ms. Berard was
promoted to Vice President, Human Resources and Administrative Services. Prior
to 1982, Ms. Berard held a position in Medical Development in the Stanford
Medical School.

Mr. Foster joined Collagen as Financial Analyst in November 1984 and served
in various positions in Collagen. In 1992, Mr. Foster was appointed Vice
President of Finance and Chief Financial Officer. From 1979 to 1984, Mr. Foster
was employed by Brown, Vence and Associates, an energy and environmental
consulting firm, as Engineering Project Manager.

Mr. Pelletier joined Collagen in May of 1991 as Vice President of Collagen
International, Inc. In 1992, he was appointed Vice President and Managing
Director, Europe. From 1979 to 1991, Mr. Pelletier was employed by Sandoz AG, a
manufacturer of food products, where his most recent position was Senior Vice
President, Sandoz Nutrition, Inc. During his time at Sandoz, Mr. Pelletier was
based in Minnesota, U.S., Australia and Switzerland. Prior to 1979, Mr.
Pelletier held a variety of marketing positions with Pepsico, Inc., a
manufacturer of beverages; Miles Laboratories, Inc., a manufacturer of
over-the-counter toiletries and micro-nutrients; and Proctor and Gamble, a
manufacturer of consumer products. In addition to Australia and Switzerland, Mr.
Pelletier has spent his international career in Canada, the Philippines,
Venezuela and Spain.

Mr. Miller joined Collagen in October of 1992 as Vice President and General
Counsel. From 1985 to 1992, Mr. Miller was employed by Boehringer Mannheim
United States Holding, Inc., a manufacturer of medical products, as Vice
President, General Counsel and Secretary. From 1981 to 1985, Mr. Miller was
employed by Max Factor & Company, a manufacturer of cosmetics and fragrances, as
Vice President, General Counsel and Secretary. From 1969 to 1980, Mr. Miller was
employed by Xerox Corporation, a manufacturer of photocopying devices, as
Associate General Counsel.

Mr. Levitt joined Collagen in July 1994 as Vice President, Operations.
Prior to joining Collagen, Mr. Levitt was employed by Eli Lilly and Company, a
manufacturer of pharmaceutical products. During his 18 years with Eli Lilly and
Company, Mr. Levitt held positions in sales, research, human resources and
operations. Mr. Levitt's last position with Eli Lilly and Company was Director
of Pharmaceutical Operations.

Mr. Dennis has served as a director of Collagen since 1975. Mr. Dennis
served as President of Collagen from February 1976 to March 1978, as Chairman of
the Board from March 1978 to February 1995, and has served as Chairman Emeritus
of the Board since February 1995. Mr. Dennis is also a director of MiniStor
Peripherals International, Limited.

Ms. Bakar has served as a director of Collagen since 1993. Ms. Bakar has
been President and Chief Executive Officer of Telecare Corporation, the largest
dedicated provider of in-patient psychiatric services in the state of
California, since 1987. Previously, Ms. Bakar spent seven years in the
investment banking industry.

Dr. Daniels has served as a director of Collagen since 1977. Dr. Daniels, a
founder of Collagen, was a Vice President of Collagen from September 1975 to
September 1979. He served as President of Target from June 1985 to April 1989,
and as a director from June 1985 to May 1990. Dr. Daniels is

62
63

also the President, Chief Executive Officer and a director of Regional
Therapeutics, Inc. and the Chairman of Balance Pharmaceuticals, Inc.

Mr. Davis has served as a director of Collagen 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 Abiomed, Inc., Alza Corp., Endosonics,
Inc. and Target.

Mr. Johnson has served as a director of Collagen since 1991. Mr. Johnson
has been a Director in Venture Law Group, A Professional Corporation, principal
outside counsel to Collagen, 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 Collagen during such
period. He was appointed Secretary of Collagen in August 1986. Mr. Johnson
served as Assistant Secretary of Collagen for ten years prior to his appointment
as Secretary. Mr. Johnson is also a director of Retix.

Dr. Knapp has served as a director of Collagen since 1990. Dr. Knapp, a
founder of Collagen, has served as Chairman of the Board of Directors, President
and Chief Executive Officer of LipoMatrix, Incorporated, a developer of
alternative breast implants, since February 1992. He was a director and
President of Centers for Human Appearance, Inc., a developer of medical device
products, from February 1989 to November 1993. Dr. Knapp was also President of,
and a surgeon with, Northern California Plastic Surgery Medical Group, Inc. from
1977 until 1993.

Mr. Mee has served as a director of Collagen since 1986. Mr. Mee served as
a director of Collagen from August 1981 to January 1985 and was re-elected to
the Board in June 1986. He joined the Norton Company, a multinational
manufacturer, in January 1985 as Vice President, Finance and served as a
director, Vice President, Finance and Chief Financial Officer of that company
through January 1990. In February 1990, Mr. Mee joined Wang Laboratories, Inc.,
a computer manufacturer, as the Executive Vice President, Finance, Chief
Financial Officer and a director and subsequently served as Chairman of the
Board of Directors and Chief Financial Officer of that company. He joined
Bristol-Myers Squibb Company, a diversified producer and distributor of
pharmaceutical products, medical devices, non-prescription health products,
toiletries and beauty aids, as Senior Vice President and Chief Financial Officer
in March 1994.

Dr. Perkins has served as a director of Collagen since 1975. Dr. Perkins, a
founder of Collagen, served as President of Collagen from September 1975 to
November 1975. He is a Clinical Associate Professor of Surgery at the Stanford
University Medical Center and President of the California Ear Institute.

Dr. Pettinga has served as a director of Collagen since 1987. Dr. Pettinga
served with Eli Lilly and Company from 1949 to 1986, most recently as a director
and as Executive Vice President. Since 1987 he has served as a consultant to
Great Lakes Chemical Corporation, a world-wide chemical manufacturer. He is also
a director of Atrix Laboratories, Wyckoff Chemical Company and Celtrix
Pharmaceuticals, Inc.

Mr. Salquist has served as a director of Collagen since 1988. Mr. Salquist
has served as Chief Executive Officer and a director of Calgene, Inc., an
agribusiness biotechnology company, since November 1985, and is currently
Chairman of the Board of Directors of that company. He is also Chairman of the
Board of Directors of Celtrix, and a trustee of the Fidelity Investments
Charitable Gift Trust.

63
64

MANAGEMENT OF TARGET

The directors and executive officers of Target and their ages as of March
15, 1995 are as follows:

NAME AGE POSITION
------------------------------------- --- ---------------------------------------------

Gary R. Bang......................... 48 President, Chief Executive Officer and
Director
Erik T. Engelson..................... 35 Senior Vice President, Operations and
Research and Development
Abhi Acharya, Ph.D................... 53 Vice President, Regulatory, Quality and
Clinical Affairs
U. Hiram Chee........................ 35 Vice President, New Product Development
Robert Hellewell..................... 53 Vice President, Operations
Edward R. LeMoure.................... 40 Vice President, International Sales
Timothy C. Mills, Ph.D............... 38 Vice President, New Business Development
Kevin P. Riley....................... 34 Vice President, Worldwide Marketing
A. Larry Tannenbaum.................. 43 Vice President, Finance and Administration,
Chief Financial Officer and Assistant
Secretary
Charles M. Strother, M.D............. 54 Chairman of the Board
William G. Davis(1).................. 62 Director
Kathleen Murray, M.S.N............... 46 Director
Howard D. Palefsky(2)................ 47 Director
Richard D. Randall(1)................ 43 Director
John C. Villforth(1)(2).............. 63 Director

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

(1) Member of the Compensation Committee of the Board of Directors.

(2) Member of the Audit Committee of the Board of Directors.

Mr. Bang joined Target in May 1993 as President and Chief Executive Officer
and a director. Prior to joining Target, Mr. Bang worked for Baxter
International, a diversified multinational manufacturer of health care products
("Baxter"), for 19 years. In his most recent position with Baxter, Mr. Bang
served from April 1990 to April 1993 as President of the Pharmaseal Surgical
Division, a world leader in disposable products sold to hospital operating
rooms. Mr. Bang served as President of the Gloves Strategic Business Unit from
November 1989 to April 1990. From October 1986 to November 1989, Mr. Bang served
as Vice President, Sales and Marketing of Baxter U.K. in England. Prior to 1986,
he served in various capacities including President, Vice President, Division
Controller of divisions of Baxter, whose products included solutions, dialysis
products and disposable hospital products.

Mr. Engelson joined Target in 1985 as Project Manager. He became Manager of
Research and Development in January 1987 and served in that position until March
1988 when he became Director of Research and Development. He was appointed Vice
President, Research and Development in October 1988 and Senior Vice President,
Operations and Research and Development in September 1992. Prior to joining
Target, Mr. Engelson served as a research and development engineer at ACS, an
intravascular catheter company, from November 1984 to October 1985.

Dr. Acharya joined Target in July 1994 as Vice President, Regulatory,
Quality and Clinical Affairs. Prior to joining Target, he served as Senior
Technical Consultant at Biometrix Research Institute, Inc., a healthcare
consulting firm, from July 1993 until June 1994. Dr. Acharya served as Director
of the Division of Cardiovascular, Respiratory and Neurological Devices at the
FDA from September 1985 until July 1993 and as Senior Reviewer in the FDA's
Office of Device Evaluation from 1977 until September 1985.

Mr. Chee joined Target in September 1987 as Senior Research and Development
Engineer. He became Project Manager in September 1988 and served in that
position until December 1990 when he became Project Director, Research and
Development. He was appointed Vice President, New

64
65

Product Development in October 1992. Before joining Target, Mr. Chee held
various engineering positions from June 1983 to September 1987 with the Edwards
Critical Care Division of Baxter.

Mr. Hellewell joined Target in April 1991 as Director of Manufacturing
Engineering and was appointed Vice President, Operations in February, 1993.
Prior to joining Target, he held various professional and management positions
with McGaw Laboratories, a manufacturer of intravenous solutions and related
medical devices, from 1972 until 1991 including Director, Engineering from June
1988 to March 1991. Mr. Hellewell also worked with Proctor and Gamble, a
multinational manufacturer of food products, cleansers and other similar
products, from 1968 to 1972.

Mr. LeMoure joined Target in April 1990 as Vice President, International
Sales. He has been a director of Target-CMI, Inc. since April 1, 1992. From
March 1986 to April 1990, he held various sales and marketing positions with the
Bard Japan Division ("Bard Japan") of Bard, including Senior Product Manager,
Cardiovascular Products from March 1986 to December 1988 and Manager of Sales
and Marketing, Cardiovascular Products from December 1988 to April 1990. Mr.
LeMoure served on the Bard Japan Management Board from 1987 to 1990. Before
joining Bard Japan, Mr. LeMoure was employed with the U.S.C.I. Division of Bard
from 1979 to 1986.

Dr. Mills joined Target in April 1994 as Vice President, New Business
Development. Prior to joining Target, he served as Director of Business
Development of the Interventional Cardiology Division of Baxter from September
1991 to April 1994. Dr. Mills served as Director of the Artificial Heart Program
at the University of California, Irvine Medial Center from September 1988 to
September 1991. From June 1984 to June 1987, he was a research faculty member in
the Department of Radiology at the University of California, San Francisco.

Mr. Riley joined Target in September 1987 as a sales manager. In September
1989, he took on the role of Marketing Manager until October 1992 when he was
promoted to Director of Marketing. In April 1994, Mr. Riley was appointed Vice
President, Worldwide Marketing. Prior to joining Target, Mr. Riley held various
sales positions with Elecath, a manufacturer of invasive electrophysiology
devices, with Davis and Geck Surgical, a manufacturer of surgical products, and
with Baxter.

Mr. Tannenbaum joined Target in May 1992 and was appointed Vice President,
Finance and Administration and Chief Financial Officer June 1, 1992. Mr.
Tannenbaum was appointed Assistant Secretary in October 1992. Prior to joining
Target, Mr. Tannenbaum held various positions with Tandem Computers
Incorporated, a multinational manufacturer of mainframe computers, including
Western Region Business Manager from October 1988 to May 1992 and Manager of
Corporate Finance from May 1987 to October 1988. Mr. Tannenbaum will be stepping
down as Target's Vice President, Finance and Administration and Chief Financial
Officer on or before May 31, 1995.

Dr. Strother joined Target as a member of the Scientific Advisory Board in
October 1989 and was elected a director of Target in May 1990 and Chairman of
the Board of Directors in May 1994. Since July 1976, Dr. Strother has been a
Professor of Radiology, Neurology and Neurosurgery at the University of
Wisconsin.

Mr. Davis, an independent business consultant, has served as a director of
Target since August 1988 and served as Chairman of the Board of Directors from
June 1989 to July 1991. From 1957 to 1984, Mr. Davis was associated with Eli
Lilly & Company, 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 Abiomed, Inc., Alza Corporation, Endosonics Corporation and
Collagen.

Ms. Murray was elected to Target's Board of Directors in February 1995. She
has been employed by Northwestern Memorial Hospital since 1986 and currently
serves as its Executive Vice President and Chief Operating Officer. Prior to
1986, Ms. Murray was Senior Vice President at St. Joseph Hospital.

Mr. Palefsky has served as a director of Target since 1985. He has been
Chief Executive Officer and a director of Collagen since 1978. He is also a
director of Calgene, Inc.

65
66

Mr. Randall joined Target in June 1989 as President and Chief Executive
Officer and a director, and served as Chief Financial Officer of Target from
July 1991 to June 1992. Mr. Randall served as President and Chief Executive
Officer of Target until May 1993 and as Chairman of the Board of Directors of
Target from April 1993 to May 1994. Mr. Randall has served as President and
Chief Executive Officer of Innovasive Devices, Inc., a medical device
manufacturer, since January 1994. Prior to joining Target, he served as Vice
President, Sales and Marketing of Trimedyne, Inc., a cardiovascular laser
company ("Trimedyne"), from March 1987 to March 1989 and as Director of
Marketing from March 1986 to March 1987. Mr. Randall also served as a director
of Trimedyne from February 1988 to June 1989. Before joining Trimedyne, Mr.
Randall served as Senior Product Manager of the Edwards Division of Baxter, from
November 1984 to March 1986. From January 1981 to November 1984, Mr. Randall
held several sales positions with the U.S.C.I. Division of C.R. Bard, Inc., a
medical products company.

Mr. Villforth has served as a director of Target since September 1992. He
has been President of The Food and Drug Law Institute in Washington, D.C., a
non-profit association providing education with regard to FDA regulations, since
January 1991. Prior to that time, Mr. Villforth served as Executive Director of
The Food and Drug Law Institute from September 1990 to January 1991. From July
1982 to September 1990, Mr. Villforth served as Director of the Center for
Devices and Radiological Health at the FDA.

66
67

DESCRIPTION OF THE NOTES

The Notes will be issued under an Indenture (the "Indenture") dated as of
April , 1995 between Collagen and The First National Bank of Boston, as
trustee (the "Trustee"). The following description of the terms of the Notes
does not purport to be complete and is subject and qualified in its entirety by
reference to the detailed provisions of the Indenture, a copy of which has been
filed as an exhibit to the Registration Statement. Capitalized terms not defined
herein have the meanings assigned thereto in the Indenture.

GENERAL

The Notes will be subordinated unsecured obligations of Collagen limited to
an aggregate principal amount of $45,000,000 (assuming the exercise in full of
the Underwriters' over-allotment option) and will mature on May 1, 2002, unless
earlier redeemed or exchanged. The Notes are exchangeable at any time after 60
days following initial issuance at the option of the holder for shares of Target
Common Stock and/or certain other property attributable to such shares as set
forth below (collectively, the "Exchange Property"). The Notes are not
redeemable prior to May 10, 1998. Thereafter, the Notes are redeemable at the
option of Collagen at the redemption prices set forth herein, plus accrued
interest.

The Notes will bear interest from the date of issuance at the rate per
annum shown on the cover page of this Prospectus, payable semiannually on
November 1 and May 1 of each year, commencing November 1, 1995, to Noteholders
of record at the close of business on the 15th day of October or April preceding
each such interest payment date. Principal of, and premium, if any, and interest
on the Notes will be payable and the Notes may be presented for exchange at the
office of the Exchange Agent, which initially will be the Trustee. The Notes
will be issued only in registered form, without coupons, in denominations of
$1,000 and integral multiples thereof.

The Indenture provides that Collagen will deliver to the Exchange Agent all
of the shares of Target Common Stock currently owned by Collagen initially
required to satisfy the obligations of Collagen upon exchange of the Notes. The
Indenture prohibits Collagen from selling, pledging or distributing the Target
Common Stock and other Exchange Property, except as provided below. However,
Target Common Stock and other Exchange Property deposited with the Exchange
Agent, subject to the contractual rights of the Noteholders set forth therein,
will remain the property of Collagen. Accordingly, the right of a Noteholder to
exchange Notes for Target Common Stock or other Exchange Property may be
adversely affected in the event of a bankruptcy, insolvency or liquidation of
Collagen. In such event the Target Common Stock and other Exchange Property may
be subject to the claims of Collagen's creditors. The Indenture does not contain
any financial covenants or dividend restrictions on Collagen.

Each Note is being offered with original issue discount ("OID") for United
States federal income tax purposes equal to the excess of the principal amount
at maturity of the Note over the amount of the issue price of the Note. For this
purpose, a Note's issue price does not include the portion of the purchase price
of the Note attributable to the right to exchange the Note for Target Common
Stock. Accrued OID will be includible, periodically, in a holder's gross income
for United States federal income tax purposes (in addition to the stated
interest) prior to exchange, redemption, other disposition or maturity of such
holder's Note, whether or not such Notes are ultimately exchanged, redeemed,
sold or paid at maturity. In addition, the exchange of a Note for Target Common
Stock or other Exchange Property will be treated as a taxable disposition of the
Note. See "Certain United States Federal Income Tax Considerations."

67
68

be able to effect transactions that could result in a change in the composition
of the Exchange Property.

The Underwriting agreement provides that Target will use its best efforts
to keep a registration statement covering the Target Common Stock for delivery
upon exercise of the exchange rights continuously effective at all times while
any of the Notes remain outstanding; provided, that Target may upon notice to
the Exchange Agent decline to supplement or amend the registration statement
covering the exchange of Notes for Target Common Stock in certain instances for
not more than 90 days in any 365 day period and other than during the pendency
of any notice of redemption of Notes or after April 25, 2002. No exchange of
Notes for Target Common Stock may be made while such an election by Target is in
effect, and at any time when a Noteholder seeks to exchange Notes for Target
Common Stock, Collagen will be required to pay cash equal to the Market Price
(as hereinafter defined) of the Target Common Stock. Payment of cash and, in
certain instances, Target Common Stock and other Exchange Property receivable
upon exchange by a Noteholder of its Notes will be subject to the subordination
provisions set forth herein and, accordingly, may be delayed or prohibited.
Exchange Property may include securities other than Target Common Stock, and
neither Target nor Collagen will have any obligation to effect any registration
covering the sale of such other securities upon exchange of Notes.

EXCHANGE RIGHTS

The Notes are exchangeable at the option of the holder for Target Common
Stock or other Exchange Property at any time after 60 days following issuance
and prior to maturity, conversion or redemption at a price (the "Exchange
Price") initially equal to $ per share of Target Common Stock
equivalent to an exchange rate of shares of Target Common Stock per
$1,000 principal amount of Notes. The Exchange Price will be proportionately
adjusted upon (a) the payment in shares of Target Common Stock of a dividend or
distribution on Target Common Stock; (b) the combination of outstanding shares
of Target Common Stock into a smaller number of shares of Target Common Stock;
(c) the subdivision of outstanding shares of Target Common Stock into a greater
number of shares of Target Common Stock; or (d) the reclassification of Target
Common Stock resulting in the issuance of any shares of capital stock of Target.

In order to exercise exchange rights, a Noteholder must properly complete
the Exchange Notice provided on the Note and surrender the Note to the Exchange
Agent at the office of the Exchange Agent maintained for such purpose in New
York, New York. The right to exchange Notes will terminate on the fifth day
preceding the redemption date and will be lost if not exercised prior to that
time. No fractional shares or interests in Target Common Stock or other Exchange
Property will be delivered on any exchange of Notes, but in lieu thereof, a cash
adjustment will be paid based on the Market Price (as defined below) of the
Target Common Stock or other Exchange Property.

No payment or adjustment will be made for accrued interest on an exchanged
Note. If any Noteholder surrenders a Note for exchange between the record date
for the payment of an installation of interest and the next interest payment
date, then, notwithstanding such exchange, the interest payable on such interest
payment date will be paid to the holder on such record date. However, in such
event, such Note, when surrendered for exchange, must be accompanied by delivery
by the exchanging Noteholder of a check or draft payable in an amount equal to
the interest payable on such interest payment date on the portion so exchanged.

Deposit of Exchange Property. Collagen will deliver to the Exchange Agent
all of the shares of Target Common Stock initially required to satisfy the
obligations of Collagen upon exchange of the Notes. The Exchange Property may,
as a result of transactions involving Target Common Stock, subsequently include
cash or property other than or in addition to Target Common Stock. In any such
case, Collagen will deposit with the Exchange Agent from time to time any cash
or other property that may become deliverable as Exchange Property in exchange
for the Notes. Collagen will not be permitted to pledge, mortgage, hypothecate
or grant a security interest in, or permit any

68
69

mortgage, pledge, security interest or other lien upon, the Target Common Stock
or other Exchange Property so deposited. However, Collagen will be entitled to
vote the shares of Target Common Stock and any other voting securities which may
constitute Exchange Property so deposited prior to exercise of the exchange
rights relating to such securities.

To the extent the Notes are redeemed prior to exchange or cash is paid in
lieu of delivering shares upon notice of exchange, Collagen will be entitled to
receive from the Exchange Agent any number of shares of Target Common Stock and
other Exchange Property, if any, held by the Exchange Agent for exchange as
exceeds the number of shares of Target Common Stock or other Exchange Property
then required to be held by the Exchange Agent for the exchange of all remaining
Notes then outstanding. The deposit arrangements with the Exchange Agent will
terminate at such time as the right to exchange Notes shall have expired
pursuant to the Indenture.

Collagen's Cash Option on Exchange. In lieu of delivering Exchange
Property in exchange for any Note, Collagen may pay to the holder surrendering
such Notes, within five business days of receipt by the Exchange Agent of a
Noteholder's notice of exchange, an amount in cash equal to the market price of
the Exchange Property for which such Notes are exchangeable (the "Market
Price"), based on (a) in the case of Target Common Stock or other Exchange
Property which consists of publicly traded securities, the average closing
market price (or average bid and asked prices, if closing prices are not
available) for the five consecutive trading days immediately preceding the date
of receipt by the Exchange Agent of the notice of exchange relating to such
Notes (or, if such date is not a business day, on the business day next
preceding such date), and (b) in the case of Exchange Property which does not
consist of publicly traded securities, the market value of such property on the
date of receipt by the Exchange Agent of the notice of exchange relating to such
Notes, as determined by an investment banking firm selected by the Exchange
Agent. The Indenture provides that Collagen is required to deliver cash equal to
the Market Price for Notes exchanged in the event that a registration statement
covering the Target Common Stock deliverable upon exchange is not then effective
under the Securities Act or Target has elected to suspend exchange of Notes for
Target Common Stock.

Additions to and Withdrawals from the Exchange Property. Collagen will be
entitled to receive and retain all ordinary cash dividends paid out of retained
earnings on the shares of Target Common Stock deposited with the Exchange Agent.
All other distributions, if any, on Target Common Stock or other Exchange
Property deposited with the Exchange Agent shall become additional Exchange
Property. The additional Exchange Property will be apportioned pro rata among
the deposited shares of Target Common Stock, or, if there are no such shares,
among such other Exchange Property as shall have replaced such shares.

If there is a taxable distribution on Exchange Property of any securities,
options, warrants or similar rights or other noncash items of property, Collagen
will instruct the Exchange Agent to sell all such distributed property for cash,
and the cash proceeds of such property after payment of taxes thereon, including
income taxes of Collagen, will be Exchange Property. If extraordinary cash
dividends are paid on securities constituting Exchange Property pursuant to a
plan of liquidation, partial liquidation, recapitalization or restructuring, or
if securities constituting Exchange Property are converted into cash pursuant to
a merger or tender offer, then such cash after payment of any taxes thereon,
including income taxes of Collagen, will be Exchange Property.

If there is a nontaxable distribution on Exchange Property of any
securities or other noncash items of property (other than options, warrants or
similar rights as described in the following paragraph), Collagen in good faith
may, at its option, cause the sale of some or all of such property, and the cash
proceeds and/or the remainder of such property after payment of any taxes
thereon, including income taxes of Collagen, will be Exchange Property;
provided, that if Collagen has received a similar nontaxable distribution on
similar securities owned by Collagen not comprising Exchange Property, including
Target Common Stock, Collagen may not sell the distribution property

69
70

or the Exchange Property unless Collagen also sells the distribution property on
the similar securities owned by Collagen.

If there is a nontaxable distribution on Exchange Property of any options,
warrants or similar rights, Collagen in good faith may, at its option, (a) cause
the sale of such options, warrants or similar rights and the cash proceeds after
payment of any taxes thereon, including income taxes of Collagen, will be
Exchange Property; (b) to the extent there is sufficient cash among the Exchange
Property or to the extent Collagen may cause the sale of Target Common Stock or
other Exchange Property to provide sufficient cash, after payment of taxes
thereon, among the Exchange Property, cause the exercise of such options,
warrants or similar rights and thereafter, either (i) retain the securities
received upon such exercise as Exchange Property, (ii) cause some or all of such
securities to be sold, in which case the cash proceeds and the remainder of such
property, if any, after payment of any taxes thereon, including income taxes of
Collagen, will be Exchange Property, or (iii) cause the pro rata distribution of
such securities to Noteholders; (c) retain such options, warrants or similar
rights as Exchange Property, provided that such options, warrants or similar
rights shall not be allowed to expire unexercised so long as they are in the
money and if otherwise feasible; or (d) cause the pro rata distribution of such
options, warrants or similar rights to Noteholders; provided, that if Collagen
has received a similar nontaxable distribution on similar securities owned by
Collagen not comprising Exchange Property, including Target Common Stock,
Collagen may not sell the distribution property or the Exchange Property unless
Collagen also sells the distribution property on the similar securities owned by
Collagen. Because any subsequent distribution to Noteholders of securities,
options, warrants or similar rights or other noncash items of property received
with respect to Exchange Property may give rise to tax liability for Collagen,
Collagen may be more likely to elect to cause the sale of such items (or, in the
case of options, warrants or similar rights, to cause the sale of the securities
received upon the exercise of such items) and to cause the cash proceeds (after
provision for taxes) to be treated as Exchange Property, in lieu of causing the
pro rata distribution of such items to the Noteholders.

Upon the happening of any of the foregoing events with respect to the
Target Common Stock or other Exchange Property that is taxable or treated as
being taxable to Collagen or the Exchange Agent, the Exchange Agent will deliver
cash which it holds for exchange (including cash received as a result of such
event) to Collagen or to itself for payment of the taxes arising from such
transaction. If the cash held for exchange is insufficient to pay such taxes,
the Exchange Agent will sell such of the shares of Target Common Stock or other
Exchange Property as may be necessary to pay the amount of the insufficiency and
any taxes payable by Collagen or the Exchange Agent arising from such sale. Any
proceeds from such sale which remain after the above tax payments are made will
be Exchange Property. As a result of the payment of such taxes from the Exchange
Property, the net amount of Exchange Property received by a holder upon
exchanging Notes for such Exchange Property may be significantly less than the
amount of Exchange Property that would have been received by such holder (after
taking into account taxes imposed on the holder with respect to such exchange,
as described in "Certain United States Federal Income Tax
Consequences -- Exchange of Notes for Target Common Stock") had the holder
exercised the exchange right immediately prior to any such event.

In the event of a proposed merger, consolidation or reorganization of
Target, the sale of all or substantially all of Target's assets, or certain
tender or exchange offers for Target Common Stock (a "Reorganization"), the
Noteholders shall have the option to conditionally exercise their right to
exchange all or any portion of their Notes for Exchange Property in advance of
the Reorganization subject to its completion and to withdraw such exchange and
retain their Notes within certain time periods set forth in the Exchange
Agreement in the event that such Reorganization is not effected.

Merger or Consolidation of Target. In the case of any merger or
consolidation of Target with or into any other entity which results in shares of
Target Common Stock being converted into other securities and/or property,
including cash, or any sale or transfer of all or substantially all the assets
of Target in which holders of Target Common Stock receive other securities
and/or property,

70
71

including cash, in exchange for their shares of Target Common Stock, Collagen
will execute and deliver to the Trustee a supplemental indenture, and to the
Exchange Agent a supplement to the Exchange Agreement, each providing that the
holder of any Note surrendered for exchange thereafter will, subject to
provision for taxes, be entitled to receive, in addition to other Exchange
Property, if any, the kind and amount of securities and/or property receivable
in connection with such transaction by a holder of the number of shares of
Target Common Stock for which such Note might have been exchanged immediately
prior to such transaction, plus accrued interest thereon, if any, to the date of
exchange.

Tender or Exchange Offer. In the event of a tender offer or exchange offer
for any class of securities included within the Exchange Property (a) if
Collagen owns other securities of such class which are not Exchange Property,
Collagen will cause the Exchange Agent to tender such securities of such class
in the same proportion that Collagen tenders its securities in such class which
are not Exchange Property, and (b) if the only securities of such class owned by
Collagen are Exchange Property, Collagen may, at its option and in its sole
discretion, elect to cause the Exchange Agent to tender all or any portion or
none of such class of security included within the Exchange Property. If,
however, the tender or exchange offer for securities included within the
Exchange Property is made by Collagen or any affiliate of Collagen, Collagen
will not cause the Exchange Agent to tender any such securities unless a
majority of such class of securities that are held by persons other than
Collagen or any affiliate of Collagen have been tendered and not withdrawn
pursuant to such tender or exchange offer as of immediately prior to the
expiration of such offer. The proceeds, after provision for taxes, of the sale
of any such Exchange Property pursuant to any such tender or exchange offer,
plus accrued interest thereon, if any, to the date of exchange, will be held by
the Exchange Agent for the benefit of Noteholders as provided in the Indenture.
A tender or exchange offer, whether made by Collagen, any affiliate of Collagen
or a third party, may result in shares of Target Common Stock or other Exchange
Property being replaced by cash or other property (which may or may not be
publicly traded equity securities).

If any tender offer or exchange offer results in there being no shares of
Target Common Stock among the Exchange Property, Collagen will execute and
deliver to the Trustee a supplemental indenture, and to the Exchange Agent a
supplement to the Exchange Agreement, each providing that any Note surrendered
for exchange thereafter will, subject to provision for taxes, be entitled to
receive, in addition to other Exchange Property, if any, the kind and amount of
securities and/or property receivable upon or in connection with such tender or
exchange offer by a holder of the number of shares of Target Common Stock for
which such Note might have been exchanged immediately prior to such transaction.

Certain Tax Withholding; Notices; and Investment of Exchange
Property. From time to time, Collagen may require the Exchange Agent to
segregate such Exchange Property as Collagen determines may be necessary for
Collagen or the Exchange Agent to pay taxes with respect to the transactions or
events described above. The remaining Exchange Property will be deliverable to
holders of Notes only after determination that withholding is not necessary for
the payment of such taxes and after deducting the reasonable expenses incurred
in connection with such determination.

Collagen is required to notify Noteholders of certain dividends or other
distributions on the Target Common Stock or other Exchange Property deliverable
upon exchange of Notes, the granting of subscription rights, options, warrants
or other similar rights to holders of Target Common Stock, any reclassification
of Target Common Stock, certain mergers involving Target, the sale of all or
substantially all of the assets of Target, any tender or exchange offer for the
Target Common Stock and the dissolution, liquidation or winding up of Target.

Any cash held by the Exchange Agent that is deliverable as Exchange
Property upon exchange of Notes will be invested by the Exchange Agent at the
direction of Collagen in U.S. Government Obligations with maturity dates of
twelve months or less. Accrued interest, if any, on such investments shall
become the property of Collagen except for interest accruing on Exchange

71
72

Property received upon conversion or sale of Target Common Stock in connection
with a merger, consolidation, or reorganization of Target or a tender or
exchange offer for Target Common Stock.

OPTIONAL REDEMPTION BY COLLAGEN

The Notes will not be redeemable at the option of Collagen prior to May 10,
1998. At any time on or after that date, the Notes may be redeemed at the option
of Collagen, in whole or from time to time in part, on not less than 30 nor more
than 60 days' notice by mail. The redemption prices (expressed as percentages of
the principal amount) (the "Redemption Price") are as follows for the 12-month
period beginning May 10 of the following years:

REDEMPTION
YEAR PRICE
------------------------------------------------------- ----------

1998................................................... %
1999................................................... %
2000................................................... %
2001................................................... %

and 100% at May 10, 2002, in each case together with accrued interest to the
redemption date. If fewer than all of the Notes are to be redeemed, the Trustee
will select the Notes to be redeemed by lot or, in its discretion, on a pro rata
basis. If any Note is to be redeemed in part only, a new Note or Notes in
principal amount equal to the unredeemed principal portion thereof will be
issued. There is no sinking fund applicable to the Notes.

REDEMPTION OF NOTES AT THE OPTION OF NOTEHOLDERS UPON A CHANGE IN CONTROL

In the event of a Change in Control (as defined below), each Noteholder
will have the right, subject to the terms and conditions of the Indenture, to
require Collagen to purchase all or any part of the Notes held by such
Noteholder on the date that is 40 business days after the occurrence of such
Change in Control (the "Change in Control Purchase Date") for a purchase price
equal to 100% of the principal amount thereof, plus accrued interest to the
Change in Control Purchase Date (the "Change in Control Price").

Within ten business days after the occurrence of the Change in Control,
Collagen will mail a written notice of the Change in Control to the Trustee and
to each Noteholder, setting forth, among other things, the terms, conditions,
and procedures required for exercise of the Noteholder's right to require the
purchase of the Notes held by such Noteholder.

To exercise the purchase right, a Noteholder must deliver written notice of
exercise to the Exchange Agent at any time prior to the close of business on the
Change in Control Purchase Date, specifying the Notes with respect to which the
right of purchase is being exercised. Such notice of exercise may be withdrawn
by the Noteholder by a written notice of withdrawal delivered to the Exchange
Agent at any time prior to the close of business on the Change in Control
Purchase Date.

A Change in Control shall be deemed to have occurred at such time after the
original issuance of the Notes as there shall occur:

(i) the acquisition by any person (including any syndicate or group
deemed to be a "person" under Section 13(d)(3) or 14(d)(2) of the Exchange
Act, or any successor provision to either of the foregoing), of beneficial
ownership, directly or indirectly, through a purchase, merger or other
acquisition transaction or series of transactions, through proxies or
otherwise, of shares of capital stock of Collagen entitling such person to
exercise more than 50% of the total voting power of all shares of capital
stock of Collagen entitled to vote generally in elections of directors; or

(ii) any consolidation of Collagen with, or merger of Collagen into,
any other person, any merger of another person into Collagen, or any sale
or transfer of all or substantially all of the

72
73

assets of Collagen to another person (other than a merger (x) which does
not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of capital stock, or (y) which is effected solely to
change the jurisdiction of incorporation of Collagen and results in a
reclassification, conversion or exchange of outstanding shares of Collagen
common stock into solely shares of common stock); or

(iii) a change in the composition of the Board of Directors of
Collagen such that a majority of such Board are not Continuing Directors
(as hereinafter defined)

provided, however, that a Change in Control shall not be deemed to have occurred
if the average closing price of the Notes for each of any five trading days
within the period of ten consecutive trading days ending immediately after the
later of the Change in Control or the public announcement of the Change in
Control (in the case of a Change in Control under clauses (i) and (iii) above)
or ending immediately after the Change in Control (in the case of a Change in
Control under clause (ii) above) shall equal or exceed 105% of the principal
amount of the Notes, or (b) the rating assigned to the Notes by a nationally
recognized rating agency immediately after the public announcement of the Change
in Control remains equal to or better than the rating of the Notes assigned by
such agency immediately prior to the public announcement of the Change in
Control. A "beneficial owner" shall be determined in accordance with Rule 13d-3
promulgated by the Commission under the Exchange Act or any successor rule or
regulation. For purposes of the foregoing, a Change in Control shall not be
deemed to have occurred solely because any person receives revocable proxies
entitling such person to (i) exercise 50% or more of the total voting power of
all shares of capital stock of Collagen in an annual or special meeting of
stockholders or (ii) elect a majority of the members of Board of Directors of
Collagen.

The Change in Control purchase right may in certain circumstances make more
difficult or discourage a takeover of Collagen and the removal of incumbent
management. Management of Collagen presently are unaware of any specific effort
to accumulate shares of capital stock or to obtain control of Collagen by means
of a merger, tender offer, proxy solicitation or otherwise. The Change in
Control purchase feature is customary in similar debt offerings and is the
result of negotiations between Collagen, Target and the Underwriter. The Change
in Control feature is not part of a plan by Collagen management to adopt a
series of anti-takeover provisions.

In the event a Change in Control occurs and the Noteholders exercise their
rights to require Collagen to repurchase the Notes, Collagen intends to comply
with applicable tender offer rules under the Exchange Act, including Rules 13e-4
and 14e-1, as then in effect, with respect to any such repurchase.

If a Change in Control were to occur, there can be no assurance that
Collagen then would have sufficient funds to pay the Change in Control Price for
all of the Notes tendered by holders thereof. Payment of the Change in Control
Price is subject to the subordination provisions set forth below, and,
accordingly, any repurchase of the Notes upon a Change in Control may be
blocked, deferred or limited by the holders of Senior Indebtedness.

"Continuing Director" is defined in the Indenture as, of any date, a member
of the Board of Directors of Collagen who (a) was a member of the Board of
Directors of Collagen at the time of the initial issuance of the Notes, or (b)
was nominated or appointed to the Board of Directors of Collagen with the
affirmative vote of at least a majority of the directors who were Continuing
Directors at the time of such nomination or appointment.

SUBORDINATION OF NOTES

Indebtedness evidenced by the Notes will be subordinated in right of
payment, as set forth in the Indenture, to the prior payment in full of all
existing and future Senior Indebtedness of Collagen. By reason of such
subordination, in the event of dissolution, insolvency, bankruptcy or other
similar proceedings, upon any distribution of assets, (a) the holders of Notes
will be required

73
74

to return their share of such distribution in respect of the Notes to the
holders of Senior Indebtedness until such Senior Indebtedness is paid in full
and (b) creditors of Collagen who are not holders of Notes may recover more,
ratably, than the holders of Notes.

No payment of principal, premium, if any, or interest, including the
Redemption Price or the Change in Control Price, on the Notes may be made if any
default with respect to any Designated Senior Indebtedness occurs and is
continuing that permits the acceleration of the maturity thereof and, in the
case of a default other than a default in the payment of principal, premium, if
any, or interest on any Designated Senior Indebtedness, Collagen receives
written notice of such default. Notwithstanding the foregoing, Collagen is
required to (a) honor a Noteholder's right to exchange the Note for Target
Common Stock or other Exchange Property at any time without regard to any such
default, and (b) resume payments of principal, premium, if any, and interest on
the Notes, including the Redemption Price and the Change of Control Price, if
(i) (x) 179 days (the "Blockage Period") pass after notice of the default is
given, (y) and such default is not then the subject of judicial proceedings or
such Designated Senior Indebtedness has not been accelerated in accordance with
its terms, and (z) such default is not a default in the payment of principal,
premium, if any, or interest on any Designated Senior Indebtedness, or (ii) the
default with respect to the Designated Senior Indebtedness is cured or waived,
and, in the case of (a) and (b) above, the terms of the Indenture otherwise
permit the payment, conversion or redemption of the Notes at that time.
Successive Blockage Periods based on successive defaults, other than payment
defaults, may be commenced, provided, that no default, other than a payment
default, which existed or was continuing on the date of the commencement of any
Blockage Period may be the basis for the commencement of any other Blockage
Period with respect to such Designated Senior Indebtedness unless such event of
default has been cured or waived for a period of not less than 90 consecutive
days.

The delivery of Target Common Stock and other Exchange Property upon
exchange of a note will constitute payment on a Note and therefore will be
subject to the subordination provisions in the Indenture, as described above.
The subordination provisions will not prevent the occurrence of an Event of
Default under the Indenture or impair, as between Collagen, the Noteholders, and
the holders of other indebtedness, other than Senior Indebtedness, the
obligations of Collagen to make payments on the Notes when due.

The Notes will be obligations exclusively of Collagen and not of Target. In
addition, the Notes will be effectively subordinated to all liabilities,
including trade payables, of Collagen's subsidiaries. Any right of Collagen to
receive assets of any of its subsidiaries upon their liquidation or
reorganization (and the consequent right of the holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that subsidiary's creditors, including trade creditors, except to the extent
that Collagen is itself recognized as a creditor of such subsidiary, in which
case the claims of Collagen would still be subordinate to any security interest
in the assets of such subsidiary and any indebtedness of such subsidiary senior
to that held by Collagen.

As of February 28, 1995, there was no outstanding Senior Indebtedness of
Collagen and $2.5 million of outstanding indebtedness of Collagen's
subsidiaries. There is no restriction in the Indenture on the creation of
additional indebtedness by Collagen or its subsidiaries, including Senior
Indebtedness.

"Designated Senior Indebtedness" is defined in the Indenture as any Senior
Indebtedness with an aggregate principal amount in excess of $3 million and
which is designated in its governing instrument as Designated Senior
Indebtedness.

"Indebtedness" means with respect to any person at any date, without
duplication, (a) all obligations of such person for borrowed money (including,
without limitation, indebtedness secured by a mortgage or other lien which is
(i) given to secure all or part of the purchase price of property subject
thereto, whether given to the vendor of such property or to another, or (ii)
existing on property at the time of acquisition thereof), (b) all obligations of
such person evidenced by

74
75

bonds, debentures, notes or other similar instruments and all indebtedness
consisting of reimbursement obligations due and owing with respect to letters of
credit, (c) all Indebtedness of others secured by a lien on any asset of such
person, whether or not such Indebtedness is assumed by such person, (d) all
obligations of such person pursuant to capitalized leases, (e) all Indebtedness
of others for the payment of which such person is responsible or liable as
obligor or guarantor, (f) commitment or standby fees due and payable to lending
institutions with respect to available credit facilities; and (g) all
obligations of such person for interest rate and currency swaps, floors,
collars, caps and similar arrangements.

"Senior Indebtedness" is defined in the Indenture as the principal,
premium, if any, and interest on (including interest accruing after the filing
of any petition initiating any proceeding pursuant to any bankruptcy) and other
amounts due (including, without limitation, fees, costs, enforcement expenses,
collateral protection expenses and other reimbursement or indemnity obligations
in respect of Senior Indebtedness) on or in connection with any Indebtedness
incurred, assumed or guaranteed by Collagen, whether outstanding on the date of
the Indenture or thereafter incurred, assumed or guaranteed, and all renewals,
extensions, restructurings, amendments, modifications and refundings of any such
Indebtedness. Excluded from the definition of Senior Indebtedness are the
following: (a) any Indebtedness which expressly provides (i) that such
Indebtedness shall not be senior in right of payment to the Notes, or (ii) that
such Indebtedness shall be subordinated to any other Indebtedness of Collagen,
unless such Indebtedness expressly provides that such Indebtedness also shall be
senior in right of payment of the Notes, and (b) any Indebtedness of Collagen to
any affiliate or subsidiary of Collagen.

EVENTS OF DEFAULT AND REMEDIES

If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency or reorganization) occurs and is continuing, the Trustee
may, by notice to Collagen, or the Noteholders of at least 25% in aggregate
principal amount of the Notes then outstanding may, by notice to Collagen and
the Trustee, declare all unpaid principal of and accrued interest to the date of
acceleration on the Notes then outstanding to be immediately due and payable. If
an Event of Default resulting from certain events of bankruptcy, insolvency or
reorganization shall occur, all unpaid principal of and accrued interest on the
Notes then outstanding shall immediately be due and payable without any
declaration or other act on the part of the Trustee or any Noteholders. Such
acceleration and its consequences may be rescinded or waived by the Noteholders
of a majority in aggregate principal amount of the Notes then outstanding,
subject to the conditions provided in the Indenture.

The term "Event of Default" when used in the Indenture means any of the
following: (a) a default in payment of the principal or premium, if any, on the
Notes when due, including the Redemption Price or the Change in Control Price;
(b) a default for 30 days in payment of any installment of interest on the
Notes; (c) failure by Collagen to deliver Target Common Stock or other Exchange
Property upon exchange of the Notes (an "Exchange Default"); (d) default by
Collagen or any of its subsidiaries with respect to an obligation to pay
principal or interest on any other Indebtedness which results in acceleration of
Indebtedness representing in the aggregate more than $5 million; (e) default by
Collagen for 30 days after notice in the performance of any other covenants
contained in the Indenture; and (f) certain events involving bankruptcy,
insolvency or reorganization of Collagen.

The Indenture will provide that the Trustee will give notice of any default
to the Noteholders within sixty days of notice of its occurrence; provided that,
except for a default in the payment of principal, premium, if any, or interest
on any of the Notes, including the Redemption Price, the Change in Control Price
or upon an Exchange Default, the Trustee shall be protected in withholding of
such notice if it in good faith determines that the withholding of such notice
is in the best interest of the Noteholders.

75
76

The Indenture will provide that no Noteholder may pursue any remedy,
including without limitation, failure to pay the Change in Control Price when
due, under the Indenture against Collagen, except for a default in the payment
of principal, premium, if any, or interest on any of the Notes, including the
Redemption Price, or upon an Exchange Default, unless the Noteholder gives to
the Trustee written notice of a continuing Event of Default, the Noteholders of
at least 25% in principal amount of the outstanding Notes make a written request
to the Trustee to pursue the remedy, such Noteholders offer to the Trustee
indemnity satisfactory to the Trustee against any loss, liability or expense,
the Trustee does not comply with the request within 60 days after receipt of the
request and the offer of indemnity, and the Trustee shall not have received a
contrary direction from the Noteholders of a majority in principal amount of the
outstanding Notes.

AMENDMENT AND WAIVER

Amendment or supplement of the Indenture or the Notes may be made by
Collagen and the Trustee without notice to any Noteholder but with the consent
of the Noteholders of a majority in aggregate principal amount of the then
outstanding Notes.

The Noteholders of a majority in principal amount of the Notes then
outstanding may waive compliance in a particular instance by Collagen with any
provision of the Indenture or the Notes without notice to any Noteholder.
Without the consent of each Noteholder affected thereby, no amendment,
supplement or waiver may (a) reduce the amount of Notes held by Noteholders who
must consent to an amendment, supplement or waiver; (b) reduce the rate of or
change the time for payment of interest on any Note; (c) reduce the principal of
or premium on or change the fixed maturity of any Note or alter the redemption
provisions with respect thereto (other than the purchase of the Notes upon a
Change of Control); (d) alter the exchange provisions or the Exchange Property
with respect to any Note in a manner adverse to the Noteholder thereof; (e)
waive a default in the payment of the principal of or premium or interest on any
Note; (f) make any changes which could alter the rights of Noteholders of Notes
to waive defaults, to waive events of default, or to receive payment of the
Notes; (g) modify the subordination provisions of the Indenture in a manner
adverse to the Noteholders; or (h) make any Note payable in money other than
that stated in the Note. Noteholders of not less than a majority in aggregate
principal amount of then outstanding Notes may waive certain past defaults.

Collagen and the Trustee may amend or supplement the Indenture or the Notes
without notice to or consent of any Noteholder of the outstanding Notes in
certain events, such as to comply with the liquidation and merger provisions
described in the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes, to cure any ambiguity, defect or
inconsistency or to make any other change that does not adversely affect the
rights of the Noteholders, or to comply with the provisions of the Trust
Indenture Act of 1939, as amended.

SATISFACTION AND DISCHARGE

The Indenture will be discharged and canceled upon payment of all of the
Notes upon maturity, conversion or redemption. Collagen may terminate all of its
obligations under the Indenture, other than its obligation to pay the principal
of and interest on the Notes and certain other obligations (including its
obligation to deliver shares of Target Common Stock or Exchange Property upon
conversion of the Notes), at any time, by depositing with the Trustee or a
paying agent other than Collagen or Target, money or non-callable U.S.
Government Obligations sufficient to pay all remaining indebtedness on the
Notes.

TRUSTEE AND EXCHANGE AGENT

The First National Bank of Boston will be the Trustee under the Indenture
and the Exchange Agent under the Exchange Agreement.

GOVERNING LAW

The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York, without giving effect to such State's
conflict of laws principles.

76
77

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following summary is a general discussion of certain United States
federal income tax consequences of acquiring, holding and disposing of the
Notes, including the exchange of the Notes for Target Common Stock, and of
acquiring, holding and disposing of Target Common Stock received in such
exchange. The summary is based upon laws, regulations, rulings and decisions now
in effect, all of which are subject to change. This summary does not discuss all
aspects of federal income taxation that may be relevant to a particular investor
in light of the investor's personal investment circumstances and does not
discuss any aspects of state, local, foreign or federal estate and gift tax laws
that may be applicable to the Notes, to Target Common Stock or to the holders
thereof. The summary also does not discuss federal income tax consequences for
subsequent purchasers of Notes. This discussion is limited to persons who hold
Notes and Target Common Stock as "capital assets" (generally, property held for
investment) within the meaning of section 1221 of the Internal Revenue Code of
1986, as amended (the "Code"), and does not cover special rules applicable to
taxpayers who may fall into special classes, such as financial institutions,
insurance companies, mutual funds, dealers in securities, persons holding the
Notes as a position in a straddle or other integrated investment, S
corporations, trusts, individual retirement accounts and tax-exempt
organizations. This discussion also does not deal with circumstances where all
or a portion of the Exchange Property is other than Target Common Stock.
Accordingly, prospective investors should consult their own tax advisors with
respect to the application of federal, state, local and foreign tax laws to them
in light of their particular circumstances concerning the matters discussed
below.

Investors should particularly note that the federal income tax treatment of
exchangeable debt instruments like the Notes is uncertain in a number of
significant respects. In addition, the treatment of such instruments under the
Code and proposed and final Treasury Regulations has been the subject of
frequent changes in the past and could be subject to further changes in the
future. Therefore, prospective investors are also urged to consult their tax
advisors with respect to possible future clarifications and changes in the
applicable rules governing such instruments.

INTEREST AND ORIGINAL ISSUE DISCOUNT

Stated Interest. Stated interest on the Notes will generally be includable
in and taxable as ordinary income in accordance with the holder's method of
accounting.

Original Issue Discount. Under final Treasury Regulations relating to
original issue discount (the "OID Regulations") and the terms of the Indenture,
each Note will generally be treated for federal income tax purposes as an
investment unit consisting of two distinct assets: (i) a debt instrument (the
"Debt Component") with a fixed principal amount payable at maturity of the Note
and bearing interest at the stated interest rate, and (ii) an option component
(the "Option Component") entitling the holder to exchange the Note for the
Exchange Property on the terms described herein. The OID Regulations generally
require that each holder allocate the purchase price of the Note between the
Debt Component and the Option Component based on their relative fair market
values. Collagen has determined that $ of each $1,000 face amount of
Notes will be allocated to the Option Component and the remainder to the Debt
Component. For federal income tax purposes, the difference between the portion
of the purchase price allocated to the Debt Component and the principal amount
of the Note payable at maturity constitutes OID, which holders will be required
to include as ordinary income as it accrues over the term of the Note, in
accordance with a constant yield to maturity method (in addition to the stated
interest on the Note), prior to receipt of payments attributable to such income
through exchange, redemption, other disposition or maturity of the Note.
Collagen's allocation of the purchase price between the Debt Component and
Option Component is based on its determination of the relative fair market
values of those two components. However, there can be no assurance that the
Internal Revenue Service ("IRS") will not challenge that allocation, in which
case Noteholders could recognize more or less OID than determined by Collagen.

77
78

Tax Basis of Notes. A holder's federal income tax basis with respect to
the Debt Component and the Option Component of a Note will initially equal the
portion of the purchase price of the Note allocated to each such component as
described in the preceding section. The holder's tax basis with respect to the
Debt Component will thereafter increase by the amount of OID required to be
included in the holder's income.

DISPOSITION OF NOTES

The redemption by Collagen of a Note (including the exercise of its option
to pay cash in lieu of Target Common Stock or other Exchange Property to an
exchanging Noteholder) or the sale or exchange by a holder of a Note to a party
other than Collagen, will generally result in taxable gain or loss to a holder
equal to the difference between the amount of cash and fair market value of
other property received and the holder's tax basis. It appears a holder will be
required to calculate such gain or loss separately for the Debt Component and
the Option Component of the Note. In making such calculation, the cash and fair
market value of other property received should be allocated between the Debt
Component and the Option Component in accordance with their relative fair market
values on the date of such disposition. Such gain or loss will generally be
capital gain or loss (other than to the extent the amount realized is
attributable to accrued interest) and will be long-term capital gain or loss if
the holding period exceeds one year.

EXCHANGE OF NOTES FOR TARGET COMMON STOCK

If a holder exercises the right to exchange a Note for Target Common Stock,
such exchange will be treated as a taxable disposition in which the holder will
be required to recognize taxable gain (or loss). In determining the amount of
such gain or loss, it is likely (based on the bifurcation approach under the OID
Regulations) that a holder will be treated as disposing of the Debt Component of
the Note in a taxable transaction for an amount equal to its then fair market
value and as exercising the Option Component of the Note in a non-taxable
transaction for an exercise price equal to the Debt Component's then fair market
value. In such event, a holder would recognize gain (or loss) on the disposition
of the Debt Component equal to the amount by which the fair market value of such
Debt Component exceeded (or was less than) the tax basis of the Debt Component
determined as described above. The receipt of Target Common Stock upon exercise
of the Option Component would, in such event, be non-taxable to the extent
Target Common Stock was received but would result in recognition of gain with
respect to the Option Component to the extent the holder received cash rather
than Target Common Stock. However, it is possible that a holder could instead
recognize gain (or loss) on the exercise of the exchange right equal to the
difference between the fair market value of the Target Common Stock and the
holder's overall tax basis in the Note. Any gain or loss on the exchange
generally will be long-term capital gain or loss if the Note has been held for
more than one year.

If the first of the two characterizations set forth in the preceding
paragraph applies, then the holder's tax basis for the Target Common Stock
received in the exchange would equal the sum of the tax basis of the Option
Component and the fair market value of the Debt Component surrendered in the
exchange. If instead the second characterization applies, then the tax basis of
the Target Common Stock would equal its fair market value at the time of the
exchange. The holder's holding period for the Target Common Stock would not
include any portion of the holding period for the Note.

ADJUSTMENT OF EXCHANGE RATE AND MODIFICATION OF EXCHANGE PROPERTY

Holders of Notes may be deemed to have received constructive distributions
where the exchange rate is adjusted to reflect property distributions with
respect to Target Common Stock into which such Notes are exchangeable.
Adjustments to the exchange rate made pursuant to a bona fide reasonable
adjustment formula which has the effect of preventing the dilution of the
interest of the holders of the Notes, however, will generally not be considered
to result in a constructive

78
79

distribution of Target Common Stock. Certain adjustments provided in the Notes
may not qualify as being pursuant to a bona fide reasonable adjustment formula.
If such adjustments were made, the holders of Notes could be deemed to have
received constructive distributions taxable as dividends to the extent of Target
earnings and profits. See "-- Distributions on Target Common Stock." In
addition, distributions with respect to Exchange Property of any securities,
options, warrants, similar rights or other noncash items of property could be
viewed as equivalent to exchange rate adjustments giving rise to constructive
distributions to holders of Notes.

Further, under proposed Treasury Department Regulations, some of the
possible changes in the Exchange Property could be treated as causing a
"significant modification" of the Notes. Any such modification could be treated
as a taxable exchange of the Option Component for the modified Option Component,
giving rise to gain or loss for a holder equal to the difference between the
fair market value of the modified Option Component and the holder's adjusted
basis in the original Option Component. Alternatively, if the bifurcation
treatment under the OID Regulations does not apply in this context, a holder
would recognize gain or loss equal to the difference between the fair market
value of the modified Note and the holder's adjusted basis in the original Note.

DISTRIBUTIONS ON TARGET COMMON STOCK

Distributions with respect to shares of Target Common Stock that are
received in exchange for Notes will be treated as dividends for federal income
tax purposes and will be taxed as ordinary income to the extent of Target's
earnings and profits for such purposes. Certain corporations may qualify for a
70% dividends received deduction (80% for certain corporate stockholders owning
at least 20%, by vote and value, of Target's stock) if various conditions are
met.

Distributions will constitute dividends taxable as ordinary income to the
extent Target has either (a) current earnings and profits determined at the end
of the taxable year in which the distribution is made or (b) accumulated
earnings or profits determined at the time the distribution is made. To the
extent that the entire distribution is greater than the amount of earnings and
profits determined above, the excess will be treated as a nontaxable return of
capital which will reduce the recipient's basis for the Target Common Stock. To
the extent that a recipient receives aggregate distributions that are not out of
current or accumulated earnings and profits and such distributions exceed the
tax basis of the Target Common Stock, the excess will be taxed as a gain from
the sale or exchange of the Target Common Stock. See "-- Dispositions of Target
Common Stock."

DISPOSITIONS OF TARGET COMMON STOCK

Generally, any sale or other disposition of Target Common Stock will be a
taxable event and will result in capital gain or loss if the Target Common Stock
is held as a capital asset. The amount of such gain or loss will generally be
the difference between the federal income tax basis of the Target Common Stock
on the date of the sale or other disposition and the cash and fair market value
of property received. Such gain or loss will be long-term capital gain or loss
if the Target Common Stock is held for more than one year.

BACKUP WITHHOLDING

Under the backup withholding provisions of the Code and applicable Treasury
Department regulations, a holder of Notes or Target Common Stock may be subject
to backup withholding at the rate of 31% with respect to interest on and OID
with respect to Notes, dividends on Target Common Stock and the gross proceeds
of a sale, exchange, retirement or redemption of Notes or Target Common Stock.
However, backup withholding generally will not be required if such holder (a) is
a corporation or comes within certain other exempt categories and when required
demonstrates this fact or (b) provides a taxpayer identification number,
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. The
amount of any backup withholding from a payment to a holder will be allowed as a

79
80

credit against the holder's federal income tax liability and may entitle such
holder to a refund, provided that the required information is furnished to the
IRS.

Collagen or Target will cause to be reported to the holders of Notes or
Target Common Stock and the IRS for each calendar year the amount of interest or
dividends paid and OID accrued during such year, and the amount of tax withheld,
if any, with respect to the same.

FOREIGN HOLDERS

Interest and OID on Notes held by persons who are Non-United States Holders
will generally be exempt from United States federal income tax and/or
withholding tax, provided that the Non-United States Holder does not actually or
constructively own 10% or more of the total combined voting power of all classes
of Collagen capital stock entitled to vote or certain other exceptions to
exemption from such tax apply. A Non-United States Holder is a holder who is
not, for United States federal income tax purposes, (i) a citizen or resident of
the United States, (ii) a corporation, partnership or other entity created or
organized in or under the laws of the United States or any political subdivision
thereof, or (iii) an estate or trust the income of which is subject to United
States federal income taxation regardless of source.

For a Non-United States Holder to obtain such exemption, the Code requires
the beneficial owner to submit a statement that such owner is not a United
States person, which statement must be filed with the person who would otherwise
be responsible for withholding such tax. Temporary Treasury Department
Regulations require that statement to be signed by the beneficial owner under
penalties of perjury and to provide such owner's address. Interest and OID on
the Notes may be subject to United States federal income tax (and branch profits
tax for foreign corporate holders) if they are effectively connected with the
conduct of a trade or business within the United States. There are also special
rules for controlled foreign corporations, certain other types of foreign
stockholders and foreign partnerships, estates and trusts.

In general, dividends paid on shares of Target Common Stock held by a
Non-United States Holder will be subject to withholding tax at a rate of 30% but
will not be subject to backup withholding. The withholding rate may be lower
under an applicable tax treaty. A Non-United States Holder generally will not be
subject to United States federal income tax on any gain realized in connection
with a disposition or retirement of Notes (including the exchange of a Note for
Target Common Stock) or Target Common Stock unless (i) the gain is effectively
connected with a trade or business carried on by the Non-United States Holder
within the United States, or, if a treaty applies, generally attributable to a
United States permanent establishment maintained by the Non-United States
Holder, or (ii) the Non-United States Holder is an individual who is present in
the United States for 183 days or more in the taxable year of disposition and
has a tax home or an office or other fixed place of business to which the gain
is attributable in the United States.

Prospective Non-United States Holders should consult their tax advisors as
to the scope of and procedural requirements under any treaties and with regard
to the exemption from United States federal income tax for interest and OID on
the Notes and the special backup withholding rules and provisions regarding gain
from the sale, exchange, redemption or other disposition of Notes or Target
Common Stock applicable to such purchasers.

80
81

DESCRIPTION OF TARGET CAPITAL STOCK

The authorized capital stock of Target consists of 25,000,000 shares of
Common Stock, $0.0025 par value per share, and 2,000,000 shares of Preferred
Stock, $0.001 par value per share.

COMMON STOCK

The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders, except that, upon giving the
legally required notice, stockholders may cumulate their votes in the election
of directors. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Target Common Stock are entitled to receive
ratably such dividends, if any, as may be declared from time to time by the
Board of Directors out of funds legally available therefor. See "Price Range of
Target Common Stock and Dividend Policy." In the event of a liquidation,
dissolution or winding up of Target, the holders of Target Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior rights of Preferred Stock, if any, then outstanding. The Target
Common Stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions available to the
Target Common Stock. All outstanding shares of Target Common Stock are fully
paid and non-assessable.

At December 31, 1994, 7,067,562 shares of Target Common Stock were
outstanding and held by approximately 150 holders of record, and stock options
for an aggregate of 628,629 shares of Target Common Stock were also outstanding.

PREFERRED STOCK

Target is authorized to issue 2,000,000 shares of Preferred Stock, of which
50,000 shares have been designated as Series A Participating Preferred Stock
(see "-- Preferred Share Purchase Rights"), and none of which is issued and
outstanding. The Board of Directors has the authority to issue the undesignated
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued
shares of undesignated Preferred Stock and to fix the number of shares
constituting any series and the designation of such series, without any further
vote or action by the stockholders. The issuance of Preferred Stock may have the
effect of delaying, deferring or preventing a change in control of Target
without further action by the stockholders and may adversely affect the voting
and other rights of the holders of Target Common Stock. At present, Target has
no plans to issue any shares of Preferred Stock.

PREFERRED SHARE PURCHASE RIGHTS

Each share of Target Common Stock has associated with it one Preferred
Share Purchase Right (a "Right"). The Rights trade automatically with shares of
Target Common Stock and may not be exercised or traded separately until certain
events occur, including if a person or group acquires beneficial ownership of
15% or more of Target's Common Stock (or, in the case of Collagen, acquires
shares of Target Common Stock that would increase its holdings above their
September 21, 1994 level, unless approved by Target's Board of Directors or a
committee thereof); or announces a tender or exchange offer, the consummation of
which would result in ownership by a person or group of 15% or more of Target's
Common Stock. After becoming exercisable, each Right will entitle the holder to
purchase, for $135.00, a fraction of a share of Target's Series A Participating
Preferred Stock with economic terms similar to that of one share of Target's
Common Stock. In addition, after any person (an "Acquiring Person") acquires 15%
or more of Target's Common Stock (other than pursuant to a tender offer deemed
fair by the Board of Directors (a "Permitted Offer")) (or, in the case of
Collagen, acquires shares of Target Common Stock that would increase its
holdings above their September 21, 1994 level, unless approved by Target's Board
of Directors or a committee thereof), then each Right (other than Rights owned
by an Acquiring Person or its affiliates) will entitle the holder thereof to
purchase, for the exercise price, a number of shares of Target's Common Stock
having a then current market value of twice the exercise price. If, after such
date,

81
82

Target merges into another entity, an acquiring entity merges into Target, or
(c) Target sells more than 50% of its assets or earning power, then each Right
(other than Rights owned by an Acquiring Person or its affiliates) will entitle
the holder thereof to purchase, for the exercise price, a number of shares of
Target Common Stock of the person engaging in the transaction having a then
current market value of twice the exercise price (unless the transaction
satisfies certain conditions and is consummated with a person who acquired
shares pursuant to a Permitted Offer, in which case the Rights will expire).

The Rights are redeemable at Target's option for $0.01 per Right at any
time on or prior to the tenth day (or such later date as may be determined by a
majority of Target's directors who are not affiliated with an Acquiring Person)
after any person becomes an Acquiring Person. At any time after a person becomes
an Acquiring Person and prior to the acquisition by the Acquiring Person of 50%
or more of the outstanding Target Common Stock, Target's Board of Directors may
exchange the Rights (other than Rights owned by the Acquiring Person or its
affiliates), in whole or in part, at an exchange ratio of one share of Target
Common Stock per Right (subject to adjustment). The Rights will expire, if not
earlier exchanged or redeemed, on September 21, 2004.

DELAWARE LAW

Target is subject to the provisions of Section 203 of the Delaware General
Corporation Law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date that the person became
an interested stockholder unless (with certain exceptions) the business
combination or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the 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 outstanding
voting stock. This provision may have the effect of delaying, deferring or
preventing a change in control of Target without further action by the
stockholders. However, this provision will not restrict transactions between
Target and Collagen, which became an interested stockholder more than three
years ago. See "Beneficial Ownership of Target Common Stock By Collagen and
Certain Other Relationships."

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar for Target's Common Stock is The First
National Bank of Boston, Boston, Massachusetts.

82
83

BENEFICIAL OWNERSHIP OF TARGET COMMON STOCK
BY COLLAGEN AND CERTAIN OTHER RELATIONSHIPS

As of March 15, 1995, Collagen owned 2,124,194 shares of Target Common
Stock, representing approximately 30% of the outstanding shares of Target Common
Stock. Prior to any exchange of Notes for Target Common Stock, Collagen will
continue to own the shares of Common Stock issuable upon exchange of the Notes,
and will continue to exercise all rights, including voting rights, incident to
such ownership. Accordingly, Collagen may have sufficient voting power to
significantly influence the outcome of matters submitted to Target's
stockholders for approval. As a result, Collagen may have the power to influence
any potential proxy contest, merger, tender offer, open-market repurchase
program or other purchases of Target Common Stock that could result in a change
of the composition of the Exchange Property or give the holders of Target Common
Stock the opportunity to realize a premium over the then prevailing market price
for shares of Target Common Stock. In addition, two members of Target's Board of
Directors, Howard D. Palefsky and William G. Davis, are also directors of
Collagen, and Mr. Palefsky also is an officer of Collagen, and Collagen thereby
may be able to exercise additional control over Target's affairs. Collagen has
in the past sold and expects to continue to sell shares of Target Common Stock
in the open market or otherwise, subject to the limitations of Rule 144 and
Collagen's agreement with the Underwriter to refrain from sales of Target Common
Stock for a period of 90 days after the date of this Prospectus. See
"Underwriting." Such sales may have the effect of depressing the trading price
of Target's Common Stock.

Collagen and Target have also entered into a Stockholder Agreement (the
"Stockholder Agreement") providing that all transactions between Target and
Collagen or any affiliate of Collagen must be approved by a special committee of
Target's Board of Directors comprised of three directors who are not officers,
directors, employees or affiliates of Collagen. The members of this committee
currently are Richard D. Randall and Charles M. Strother, M.D., with one
vacancy. During the effective term of the Stockholder Agreement, Collagen may
not vote to eliminate from the Company's Certificate of Incorporation provisions
requiring cumulative voting for the election of directors. In addition, the
Stockholder Agreement provides that Collagen will not sell any of its Target
Common Stock at a premium over the average market price over the three day
period preceding such sale, except for premiums which may be simultaneously
received by all of Target's stockholders in the event of a tender offer, merger
or reorganization. With respect to the offering made hereby, Target and Collagen
have agreed that the shares offered by Collagen upon exchange of Notes may be
sold on the terms and conditions described in this Prospectus. The Stockholder
Agreement requires that affiliates of Collagen purchasing Target Common Stock
from Collagen agree to the foregoing restrictions. The provisions of the
Stockholders Agreement became effective upon the consummation of the Company's
initial public offering in January 1992 and terminate on the earlier of seven
years from the date of the Stockholder Agreement or on the date Collagen
beneficially owns less than 5% of Target's Common Stock.

Collagen and Target have entered into an agreement which provides that
Collagen will pay all fees and expenses directly related to the offering
contemplated hereby, including those of Target. Collagen and Target also have
agreed that they will indemnify each other for any losses suffered by the other
as a result of any material misstatements or omissions by the indemnifying party
in this Prospectus or the Registration Statement of which this Prospectus is a
part.

83
84

UNDERWRITING

Subject to the terms and the conditions of the Underwriting Agreement,
Alex. Brown & Sons Incorporated (the "Underwriter") has agreed to purchase from
Collagen $40,000,000 in principal amount of Notes at the public offering price
less the underwriting discounts and commissions set forth on the cover page of
this Prospectus.

The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions precedent and that the Underwriter will
purchase all of the Notes offered hereby if any such Notes are purchased.

Collagen has been advised by the Underwriter that the Underwriter proposes
to offer the Notes to the public at the offering price to the public set forth
on the cover page of this Prospectus and to certain dealers at such price less a
concession not in excess of $ per Note. The Underwriter may allow, and
such dealers may reallow, a concession not in excess of $ per Note to
certain other dealers. After the offering contemplated hereby, the offering
price and other selling terms may be changed by the Underwriter.

Collagen has granted to the Underwriter an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to an additional
$5,000,000 principal amount of Notes at the offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus. The
Underwriter may exercise such option only to cover over-allotments made in
connection with the sale of the Notes offered hereby. If purchased, the
Underwriter will offer such additional Notes on the same terms as those on which
the $40,000,000 in principal amount of Notes are being offered.

Collagen and Target have agreed to indemnify the Underwriter against
certain liabilities, including liabilities under the Securities Act.

Collagen, Target and executive officers and directors of Collagen and
Target have agreed subject to certain limited exceptions not to offer to sell,
contract to sell, or otherwise sell or dispose of any shares of Target Common
Stock, any options or warrants to purchase any shares of Target Common Stock, or
any securities convertible into or exchangeable for shares of Target Common
Stock for a period of 90 days after the date of this Prospectus without the
prior written consent of the Underwriter.

In connection with this offering, the Underwriter and selling group members
(if any) who are qualifying registered market makers on the Nasdaq Stock Market
may engage in passive market making transactions in the Target Common Stock on
the Nasdaq National Market in accordance with Rule 10b-6A under the Exchange Act
during the two business day period before commencement of sales in this
offering. The passive market making transactions must comply with applicable
price and volume limits and be identified as such. In general, a passive market
maker may display its bid at a price not in excess of the highest independent
bid for the security, if all independent bids are lowered below the passive
market maker's bid, however, such bid must then be lowered when certain purchase
limits are exceeded. Net purchases by a passive market maker on each day are
generally limited to a specified percentage of the passive market maker's
average daily trading volume in the Target Common Stock during a prior period
and must be discontinued when such limit is reached. Passive market making may
stabilize the market price of the Target Common Stock at a level above that
which might otherwise prevail, and, if commenced, may be discontinued at any
time.

84
85

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon by
Venture Law Group, A Professional Corporation, Menlo Park, California, counsel
for Collagen and Target. Venture Law Group will rely as to certain matters of
New York law on the opinion of Morrison & Foerster, New York, New York. Cooley
Godward Castro Huddleson & Tatum, Palo Alto, California, are acting as counsel
for the Underwriter in connection with certain legal matters relating to the
securities offered hereby. As of the date of this Prospectus, certain attorneys
of Venture Law Group beneficially owned approximately 1,231 shares of Target
Common Stock and approximately 26,795 shares of Collagen Common Stock (including
currently exercisable options to purchase 24,000 shares of Common Stock).
Michael W. Hall, a director of Venture Law Group, is the Secretary of Target.
Craig W. Johnson, also a director of Venture Law Group, is a director and the
Secretary of Collagen.

EXPERTS

The consolidated financial statements of Collagen Corporation at June 30,
1994 and 1993, and for each of the three years in the period ended June 30,
1994, and the consolidated financial statements of Target Therapeutics, Inc. at
March 31, 1994 and 1993, and for each of the three years in the period ended
March 31, 1994, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere herein and in the Registration Statement,
and are included in reliance upon such reports given upon the authority of such
firm as experts in accounting and auditing.

85
86

INDEX TO FINANCIAL STATEMENTS

PAGE
----

COLLAGEN
Report of Ernst & Young LLP, Independent Auditors.................................... F-2
Consolidated Balance Sheets -- June 30, 1994 and 1993................................ F-3
Consolidated Statements of Operations -- Years ended June 30, 1994, 1993 and 1992.... F-4
Consolidated Statement of Stockholders' Equity -- Years ended June 30, 1994, 1993 and
1992............................................................................... F-5
Consolidated Statements of Cash Flows -- Years ended June 30, 1994, 1993 and 1992.... F-6
Notes to Consolidated Financial Statements........................................... F-7
Condensed Consolidated Balance Sheets -- December 31, 1994 and June 30, 1994
(unaudited)........................................................................ F-17
Condensed Consolidated Statements of Income -- Six months ended December 31, 1994 and
1993 (unaudited)................................................................... F-18
Condensed Consolidated Statements of Cash Flows -- Six months ended December 31, 1994
and 1993 (unaudited)............................................................... F-19
Notes to Condensed Consolidated Financial Statements (unaudited)..................... F-20
TARGET
Report of Ernst & Young LLP, Independent Auditors.................................... F-22
Consolidated Balance Sheets -- March 31, 1994 and 1993............................... F-23
Consolidated Statements of Income -- Years ended March 31, 1994, 1993 and 1992....... F-24
Consolidated Statement of Stockholders' Equity -- Years ended March 31, 1994, 1993
and 1992........................................................................... F-25
Consolidated Statements of Cash Flows -- Years ended March 31, 1994, 1993 and 1992... F-26
Notes to Consolidated Financial Statements........................................... F-27
Condensed Consolidated Balance Sheets -- December 31, 1994 and March 31, 1994
(unaudited)........................................................................ F-36
Condensed Consolidated Statements of Income -- Nine months ended
December 31, 1994 and 1993 (unaudited)............................................. F-37
Condensed Consolidated Statements of Cash Flows -- Nine months ended
December 31, 1994 and 1993 (unaudited)............................................. F-38
Notes to Condensed Consolidated Financial Statements (unaudited)..................... F-39

F-1
87

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Collagen Corporation

We have audited the accompanying consolidated balance sheets of Collagen
Corporation as of June 30, 1994 and 1993, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Collagen Corporation at June 30, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended June 30, 1994, in conformity with generally accepted accounting
principles.

As discussed in Notes 1 and 9 to the consolidated financial statements, in 1993
the Company changed its method of accounting for income taxes.

ERNST & YOUNG LLP

Palo Alto, California
August 3, 1994

F-2
88

COLLAGEN CORPORATION

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

JUNE 30,
------------------
1994 1993
-------- -------

ASSETS
Current assets:
Cash, cash equivalents and short-term investments..................... $ 12,736 $19,630
Accounts receivable, less allowance for doubtful accounts
($353 in 1994 and $416 in 1993).................................... 12,241 9,273
Inventories........................................................... 3,861 4,167
Other current assets.................................................. 3,305 3,973
-------- -------
Total current assets.......................................... 32,143 37,043
Property and equipment, net............................................. 17,108 16,464
Intangible assets....................................................... 2,243 2,491
Investment in Target Therapeutics, Inc.................................. 17,499 15,823
Other investments and assets............................................ 5,512 4,385
-------- -------
$ 74,505 $76,206
========= ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................... $ 1,420 $ 1,365
Accrued compensation.................................................. 2,169 2,575
Accrued liabilities................................................... 8,076 6,015
Income taxes payable.................................................. 4,251 2,531
-------- -------
Total current liabilities..................................... 15,916 12,486
Deferred income taxes................................................... 8,240 7,846
Other long-term liabilities............................................. 1,267 938
Commitments and contingencies...........................................
Stockholders' equity:
Preferred stock, $.01 par value, authorized 5,000,000 shares; none
issued and outstanding............................................. -- --
Common shares, $.01 par value, authorized 28,950,000 shares; issued
10,354,633 shares in 1994 (10,111,970 shares in 1993).............. 104 101
Additional paid-in capital............................................ 61,172 56,925
Retained earnings..................................................... 9,882 5,905
Cumulative translation adjustment..................................... (648) (414)
Treasury stock, 937,500 shares in 1994 (370,000 shares in 1993)....... (21,428) (7,581)
-------- -------
Total stockholders' equity.................................... 49,082 54,936
-------- -------
$ 74,505 $76,206
========= ========

The accompanying notes are an integral part of these statements.

F-3
89

COLLAGEN CORPORATION

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

YEARS ENDED JUNE 30,
-------------------------------
1994 1993 1992(1)
------- ------- -------

Revenues:
Product sales............................................. $64,552 $49,743 $65,782
Other..................................................... 1,000 -- 1,400
------- ------- -------
65,552 49,743 67,182
Cost and expenses:
Cost of sales............................................. 18,940 15,659 22,759
Research and development.................................. 9,366 8,767 12,023
Selling, general and administrative....................... 28,639 29,176 38,694
------- ------- -------
56,945 53,602 73,476
------- ------- -------
Income (loss) from operations............................... 8,607 (3,859) (6,294)
Other income (expense):
Net gain from investments, principally Target
Therapeutics, Inc. .................................... -- 20,323 9,439
Equity in earnings (losses) of affiliates................. (269) 968 (32)
Interest income........................................... 510 880 1,586
Interest expense.......................................... -- -- (796)
------- ------- -------
Income before income taxes, minority interest and
discontinued operations................................... 8,848 18,312 3,903
Provision for income taxes.................................. 3,928 8,580 1,262
Minority interest in earnings of Target Therapeutics,
Inc. ..................................................... -- -- 1,233
------- ------- -------
Income from continuing operations........................... 4,920 9,732 1,408
Loss from discontinued operations, net of tax............... -- -- (261)
------- ------- -------
Income before cumulative effect of accounting change........ 4,920 9,732 1,147
Cumulative effect of change in accounting for income
taxes..................................................... -- (989) --
------- ------- -------
Net income.................................................. $ 4,920 $ 8,743 $ 1,147
======== ======== ========
Income (loss) per share:
Continuing operations..................................... $ .50 $ .95 $ .14
Discontinued operations................................... -- -- (.03)
Cumulative effect of accounting change.................... -- (.10) --
------- ------- -------
Net income per share.............................. $ .50 $ .85 $ .11
======== ======== ========
Shares used in calculating per share information............ 9,896 10,267 10,232
======== ======== ========

---------------
(1) Includes consolidated results of Target Therapeutics, Inc. See Note 3 to the
Consolidated Financial Statements.

The accompanying notes are an integral part of these statements.

F-4
90

COLLAGEN CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEARS ENDED JUNE 30, 1994, 1993 AND 1992
-----------------------------------------------------------------------
RETAINED
ADDITIONAL EARNINGS CUMULATIVE TOTAL
COMMON PAID-IN (ACCUMULATED TRANSLATION TREASURY STOCKHOLDERS'
STOCK CAPITAL DEFICIT) ADJUSTMENT STOCK EQUITY
------ ---------- ------------ ---------- -------- -------------

Balances at June 30, 1991... $ 97 $ 41,756 $ (3,985) $ (70) $ -- $ 37,798

Sales of common stock under
options and employee stock
purchase plan............. 3 2,469 -- -- -- 2,472
Tax benefit relating to
stock options............. -- 775 -- -- -- 775
Residual equity in Target
Therapeutics, Inc. stock
proceeds.................. -- 14,901 -- -- -- 14,901
Foreign currency translation
adjustment................ -- -- -- 81 -- 81
Net income.................. -- -- 1,147 -- -- 1,147
------ ---------- ------------ ---------- -------- -------------
Balances at June 30, 1992... 100 59,901 (2,838) 11 -- 57,174

Change in method of
accounting for income
taxes..................... -- (4,346) -- -- -- (4,346)
Sale of common stock under
options and employee stock
purchase plan............. 1 1,009 -- -- -- 1,010
Tax benefit relating to
stock options............. -- 298 -- -- -- 298
Foreign currency translation
adjustment and other...... -- 63 -- (425) -- (362)
Treasury stock purchased.... -- -- -- -- (7,581) (7,581)
Net income.................. -- -- 8,743 -- -- 8,743
------ ---------- ------------ ---------- -------- -------------
Balances at June 30, 1993... 101 56,925 5,905 (414) (7,581) 54,936

Sale of common stock under
options and employee stock
purchase plan............. 3 2,909 -- -- -- 2,912
Tax benefit relating to
stock options............. -- 1,338 -- -- -- 1,338
Foreign currency translation
adjustment................ -- -- -- (234) -- (234)
Dividends declared ($.10 per
share).................... -- -- (943) -- -- (943)
Treasury stock purchased.... -- -- -- -- (13,847) (13,847)
Net income.................. -- -- 4,920 -- -- 4,920
------ ---------- ------------ ---------- -------- -------------
Balances at June 30, 1994... $104 $ 61,172 $ 9,882 $ (648) $(21,428) $ 49,082
======== ========= =========== ========= ========= ===========

The accompanying notes are an integral part of these statements.

F-5
91

COLLAGEN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)

YEARS ENDED JUNE 30,
----------------------------------
1994 1993 1992(1)
-------- -------- --------

Cash flows from operating activities:
Net income................................................................... $ 4,920 $ 8,743 $ 1,147
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization............................................ 3,909 3,808 4,656
Deferred income taxes.................................................... 553 (4,711) 812
Tax benefit relating to stock options.................................... 1,338 298 775
Gain on investment in Target Therapeutics, Inc. ......................... -- (20,323) (10,239)
Loss on investment and asset disposals................................... -- -- 1,426
Minority interest in Target Therapeutics, Inc. .......................... -- -- 1,233
Discontinued operations, including provision for loss on disposal........ -- -- 507
Cumulative effect of accounting change................................... -- 989 --
Decrease (increase) in assets:
Accounts receivable.................................................... (2,968) (1,588) 1,524
Inventories............................................................ 306 2,068 (1,542)
Other.................................................................. 285 3,475 (2,753)
Increase (decrease) in liabilities:
Accounts payable and accrued liabilities............................... 764 (3,650) 1,840
Income taxes payable................................................... 1,720 1,854 614
Other long-term liabilities............................................ (126) (21) 377
-------- -------- --------
Total adjustments.................................................... 5,781 (17,801) (770)
-------- -------- --------
Net cash provided by (used in) operating activities.......................... 10,701 (9,058) 377
-------- -------- --------
Cash flows from investing activities:
Dividends received and net proceeds from sale of Target Therapeutics, Inc.
stock...................................................................... -- 28,456 10,701
Reduction in cash from deconsolidation of Target Therapeutics, Inc. ......... -- (5,974) --
Target Therapeutics, Inc. dividend paid...................................... -- -- (314)
Proceeds from sale of short-term investments................................. 15,331 27,561 31,104
Purchase of short-term investments........................................... (12,362) (34,935) (54,067)
Expenditures for investments in affiliates................................... (2,378) (3,025) (552)
Expenditures for property and equipment...................................... (4,011) (2,510) (4,479)
Decrease (increase) in intangible and other assets........................... (269) (663) 598
-------- -------- --------
Net cash provided by (used in) investing activities........................ (3,689) 8,910 (17,009)
-------- -------- --------
Cash flows from financing activities:
Repurchase of common stock................................................... (13,847) (7,581) --
Net proceeds from issuance of common stock................................... 2,910 1,009 3,266
Issuance of stock by Target Therapeutics, Inc. .............................. -- -- 31,002
Repayment of long-term note and other obligations............................ -- -- (12,806)
-------- -------- --------
Net cash provided by (used in) financing activities........................ (10,937) (6,572) 21,462
-------- -------- --------
Net increase (decrease) in cash and cash equivalents........................... (3,925) (6,720) 4,830
Cash and cash equivalents at beginning of period............................... 9,294 16,014 11,184
-------- -------- --------
Cash and cash equivalents at the end of period................................. $ 5,369 $ 9,294 $ 16,014
========= ========= =========

---------------
(1) Includes consolidated results of Target Therapeutics, Inc. See Note 3 to the
Consolidated Financial Statements.

The accompanying notes are an integral part of these statements.

F-6
92

COLLAGEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation. The consolidated financial statements include
the accounts of Collagen Corporation (the "Company"), a Delaware corporation,
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The financial
statements for fiscal 1992 only reflect the consolidation of Target
Therapeutics, Inc. ("Target"). Investments in unconsolidated subsidiaries, and
other investments in which the Company has a 20% to 50% interest, or otherwise
exercises significant influence, are accounted for under the equity method. (See
Note 3).

Investments in companies in which the Company has less than a 20% interest
are carried at cost or estimated realizable value, if less. In fiscal 1992, an
investment was written down by $800,000 to its estimated realizable value.

Increases in the Company's carrying value arising from issuances of
Target's stock in 1992 were reflected in income to the extent such increases
were represented by the receipt of cash by the Company.

Cash equivalents and short-term investments. The Company considers all
highly liquid investments with a 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 are stated at cost,
which approximates market.

In May 1993, the Financial Accounting Standards Board issued SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The Company
adopted SFAS No. 115 effective July 1, 1994. Had the Standard been adopted as of
June 30, 1994, there would not have been a material impact on the Company's
financial position.

Inventories. Inventories 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 are provided on the straight-line method over estimated useful lives
as follows:

Machinery and equipment.............................. 5-10 years
Leasehold improvements............................... Term of lease

Intangible assets. Intangible assets are amortized using the straight-line
method. Patents are amortized over a seventeen-year period beginning with the
effective date or over the remainder of such period from the date acquired.
Trademarks are amortized over a twenty-year period beginning with their filing
dates. Organization costs are amortized over a five-year period.

Other assets. Other assets include loans to employees and directors
totaling $285,000 and $472,000, at June 30, 1994 and 1993, respectively.

Revenue recognition. Revenue from product sales is recognized at time of
shipment. Income from direct sales by C.R. Bard, Inc. ("Bard") to physicians is
earned by the Company when the physicians are invoiced.

Concentration of credit risk. The Company sells its plastic surgery and
dermatological products primarily to physicians and pharmacies in North America,
Europe and the Pacific Rim. The Company sells Contigen Bard Collagen Implant
("Contigen Implant") to Bard, its marketing partner for Contigen Implant, and
Collagraft Bone Graft Matrix and Collagraft Bone Graft Matrix Strip to Zimmer,
Inc., the Company's marketing partner for Collagraft products. The Company

F-7
93

COLLAGEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses
and such losses have been within managements's expectations.

The Company 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 the Company 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 the Company's
working capital practices.

The Company 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. The Company has not experienced any losses on its
money market investments.

Income taxes. Effective July 1, 1992, the Company prospectively adopted
the liability method of accounting for income taxes as required by SFAS No. 109,
"Accounting for Income Taxes." Prior to the adoption of SFAS No. 109, the
Company accounted for income taxes under the deferred method of APB No. 11. (See
Note 9.)

Earnings per share. Earnings per share have been computed based upon the
weighted average number of common and dilutive common equivalent shares
outstanding. Common equivalent shares result from stock options.

Foreign currency translation. The functional currency for each foreign
subsidiary is its respective foreign currency. Accordingly, all assets and
liabilities related to these operations are translated at the current exchange
rates at the end of each period. The resulting cumulative translation
adjustments are recorded directly to the accumulated foreign currency
translation adjustment account included in stockholders' equity. Revenues and
expenses are translated at average exchange rates in effect during the period.
Foreign currency transaction gains and losses are included in results of
operations.

It is the Company's policy to hedge material foreign currency transaction
exposures. There are no significant unhedged monetary assets, liabilities or
commitments in aggregate.

Forward exchange contracts. The Company enters into foreign currency
forward exchange contracts with various issuers to hedge against the effects of
fluctuating currency rates on its net foreign currency position denominated in
currencies other than the United States dollar. The Company's net foreign
currency position is approximately equal to its foreign subsidiary assets minus
liabilities resulting from transaction related exposures. The forward exchange
contracts are readily tradable major European currencies and the unhedged
exposure on the balance sheet is immaterial. The risk of loss should an issuer
not perform is the same as if the net foreign currency position was unhedged and
therefore limited to the impact of foreign currency exchange rate fluctuations.
Gains and losses on forward exchange contracts, based on the difference between
the forward exchange rate and the actual spot rate at the time of valuation, are
generally deferred and accumulated in a separate component of stockholders'
equity to the extent such contracts are designated as hedges of a net investment
in a foreign entity. There were no deferred gains or losses on forward contracts
at June 30, 1994 and 1993.

Reclassification. Certain prior year amounts in the consolidated financial
statements have been reclassified to conform with the current year presentation.

F-8
94

COLLAGEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. BALANCE SHEET INFORMATION

JUNE 30,
---------------------
1994 1993
-------- --------
(IN THOUSANDS)

Cash, cash equivalents and short-term investments:
Cash and cash equivalents.................................. $ 5,369 $ 9,294
Short-term investments..................................... 7,367 10,336
-------- --------
$ 12,736 $ 19,630
========= =========
Other current assets:
Deferred taxes............................................. $ 2,501 $ 3,414
Other...................................................... 804 559
-------- --------
$ 3,305 $ 3,973
========= =========
Inventories:
Raw materials.............................................. $ 625 $ 372
Work-in process............................................ 1,763 1,830
Finished goods............................................. 1,473 1,965
-------- --------
$ 3,861 $ 4,167
========= =========
Property and equipment, net:
Machinery and equipment, at cost........................... $ 21,544 $ 18,103
Leasehold improvements, at cost............................ 11,835 11,443
-------- --------
33,379 29,546
Less accumulated depreciation and amortization............. (16,271) (13,082)
-------- --------
$ 17,108 $ 16,464
========= =========
Intangible assets:
Patents, trademarks, and other............................. $ 2,910 $ 2,606
Organization costs*........................................ 1,451 1,435
-------- --------
4,361 4,041
Less amortization.......................................... (2,118) (1,550)
-------- --------
$ 2,243 $ 2,491
========= =========
Accrued liabilities:
Dividends payable.......................................... $ 943 $ --
Other accrued liabilities.................................. 7,133 6,015
-------- --------
$ 8,076 $ 6,015
========= =========

---------------
* In March 1991, the Company formed Collagen International, Inc., a completely
new and wholly-owned subsidiary of the Company, to assume responsibility for
the direct sales and marketing of its products used in reconstructive and
cosmetic applications for the face in nine European countries, Australia and
New Zealand from Essex Chernie, A.G., a subsidiary of Schering-Plough
Corporation. Organization costs are related to the formation of Collagen
International, Inc.

F-9
95

COLLAGEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. INVESTMENT IN TARGET THERAPEUTICS, INC.

The Company recorded a $10.2 million gain from its investment in Target, in
fiscal 1992. The gain consisted of cash received by the Company from a dividend
paid by Target and sale of Target common stock held by the Company in connection
with Target's initial public offering of approximately 2.6 million shares of its
common stock at $18 per share. Prior to Target's initial public offering,
Collagen's ownership position in Target was approximately 87%. After the
offering and sale, Collagen's ownership position was reduced to approximately
52%.

In December 1992, the Company sold 1,129,700 shares of common stock of
Target, for approximately $28.5 million, decreasing its ownership position from
52% to approximately 34%. The gain before taxes from the sale of the stock was
$20.3 million. The accounts and operating results of Target were consolidated
with the Company until the end of fiscal 1992. After fiscal 1992 the Company's
investment in Target is being accounted for under the equity method. The
Company's ownership position in Target as of June 30, 1994 was approximately
33%.

Condensed financial information for Target is shown below:

BALANCE SHEET INFORMATION

AS OF JUNE 30,
-------------------
1994 1993
------- -------
(IN THOUSANDS)

Current assets................................................. $52,152 $43,196
Property and equipment......................................... 4,856 4,450
Other.......................................................... 3,296 1,092
------- -------
Total assets......................................... $60,304 $48,738
======== ========

Current liabilities............................................ $ 9,260 $ 4,379
Long-term liabilities.......................................... 113 144
Stockholders' equity........................................... 50,931 44,215
------- -------
Total liabilities and stockholders' equity........... $60,304 $48,738
======== ========
Collagen's share of net assets................................. $17,499 $15,823
======== ========

STATEMENT OF INCOME INFORMATION

TWELVE MONTHS ENDED
JUNE 30,
---------------------
1994 1993
-------- --------
(IN THOUSANDS)

Net sales.................................................... $ 38,275 $ 29,585
Costs and expenses........................................... (32,260) (24,666)
Interest and other income.................................... 1,894 755
-------- --------
Income before income taxes and cumulative effect of
accounting change.......................................... 7,909 5,674
Provision for income taxes................................... (2,780) (1,867)
Cumulative effect of accounting change....................... -- 631
-------- --------
Net income......................................... $ 5,129 $ 4,438
========= =========
Collagen's share (included in equity in
earnings of affiliates).................................... $ 1,676 $ 1,455
========= =========

F-10
96

COLLAGEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Target's product sales for the twelve months ended June 30, 1992 included
in the Company's consolidated results for that year were $21.1 million. The
contribution of Target's operating results to the Company's consolidated net
income for the twelve months ended June 30, 1992 was $3.2 million. Other
revenues of $1.4 million recorded in fiscal 1992 by Target represented payments
received under the terms of a research and development arrangement between
Target and its joint venture partner in Japan, Century Medical, Inc.

Target's common stock is quoted on the Nasdaq National Market. The closing
price of Target's stock at June 30, 1994 was $23.25 per share. The Company held
2,294,194 shares of Target's common stock at June 30, 1994.

4. COMMITMENTS

Future minimum lease payments under noncancelable operating leases at June
30, 1994 are as follows:

(IN
THOUSANDS)

1995................................................ $ 4,677
1996................................................ 4,431
1997................................................ 4,367
1998................................................ 4,028
1999................................................ 3,744
Thereafter.......................................... 15,949
-------------
Total minimum lease payments.............. $37,196
==============

Rental expense for fiscal 1994 was approximately $4,643,000 ($4,672,000 in
1993 and $4,872,000 in 1992). The fiscal 1992 expense is net of $500,000 of
sublease rental income.

At June 30, 1994 and 1993, the Company had outstanding forward exchange
contracts maturing in July, 1994 and 1993 of approximately $5,416,000 and
$7,657,000, respectively, to buy foreign currency of seven countries in which it
operates. At June 30, 1994 and 1993, the fair market values of the Company's
foreign currency exchange forward contracts approximated cost. The Company is
required to maintain a cash equivalent balance of $2 million as collateral for
the forward exchange contracts.

5. LEGAL MATTERS

The Company is involved in legal actions, including product liability
claims, 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 the Company's consolidated
financial position or results of its operations.

6. STOCKHOLDERS' EQUITY

Stock Options. The Company has various stock option plans under which
incentive stock options or non-statutory stock options may be granted to
officers, directors, key employees and consultants to purchase the Company's
common stock. The options are granted at no less than the fair market value at
the dates of grant. Incentive stock options become exercisable at the rate of
two percent each month beginning the first full month after the date of grant
unless accelerated by the Board of Directors. Non-statutory stock options become
exercisable on a monthly or yearly basis as determined by the Board of Directors
at the date of grant.

At June 30, 1994, the total number of shares of common stock issued or
reserved for issuance under the Company's current stock option plans was
3,200,000.

F-11
97

COLLAGEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Stock option activities under the stock option plans were as follows:

OPTION NUMBER
NUMBER PRICE RANGE OF SHARES
OF SHARES PER SHARE EXERCISABLE
--------- ------------- -----------

OUTSTANDING AT JUNE 30, 1992............. 1,081,269 $ 4.69-$28.25 761,142
Granted.................................. 334,244 18.00- 25.50
Exercised................................ (77,831) 5.50- 20.00
Canceled or expired...................... (52,510) 7.25- 28.25
---------
OUTSTANDING AT JUNE 30, 1993............. 1,285,172 4.69- 28.25 832,120
Granted.................................. 229,760 22.13- 26.00
Exercised................................ (209,922) 5.13- 26.50
Canceled or expired...................... (54,030) 7.25- 28.25
---------
OUTSTANDING AT JUNE 30, 1994............. 1,250,980 $ 4.69-$28.25 780,412
=========
AVAILABLE FOR GRANT AT
JUNE 30, 1994.......................... 848,771
=========

Stock Purchase Plan. In 1985, the Company established an employee stock
purchase plan under which 450,000 shares of the Company's common stock were
reserved for issuance to employees. Subsequently, the Company increased the
authorization to 600,000 shares. Under the plan, the Company's employees,
subject to certain restrictions, may purchase shares at a price per share that
is the lesser of 85 percent of the fair market value as of the beginning or
close of the yearly offering period.

For fiscal 1994, 1993 and 1992, shares issued under the plan were 32,741,
23,103 and 24,417, respectively. The average issuance price per share was
$19.00, $18.27 and $18.61 for fiscal 1994, 1993 and 1992, respectively. At June
30, 1994, 138,093 shares remained available for future sales under this plan.

Stock Repurchase Program. In February 1993, the Company's Board of
Directors authorized a stock repurchase program. In fiscal 1993, the Company
repurchased 370,000 shares at an average acquisition price of approximately $21
per share. In fiscal 1994, the Company repurchased 567,500 shares at an average
acquisition price of approximately $24 per share. As of June 30, 1994, the
Company is authorized to repurchase an additional 262,500 shares under the
program. The Company plans to retain repurchased shares as treasury stock but
may use a portion of the stock in various company stock benefit plans.

7. INTERNATIONAL SALES AND DISTRIBUTION RIGHTS

Consolidated export sales were $20.8 million in fiscal 1994, $21.4 million
in fiscal 1993 and $35.1 million in fiscal 1992. These export sales are
primarily in Europe, Canada and the Pacific Rim.

The Company markets its products internationally directly in Canada, ten
European countries, Australia and New Zealand and via distributors in other
countries. The Company pays commissions to its former European distributor based
upon a percentage of net sales.

8. MAJOR CUSTOMER

During fiscal 1994, the Company had $16.7 million of revenue from its
marketing partner, Bard, which has exclusive worldwide marketing and
distribution rights for Contigen Implant, a product introduced in fiscal 1994.
The $16.7 million, representing approximately 26% of the Company's total

F-12
98

COLLAGEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

product sales in fiscal 1994, was comprised of sales of $15.9 million of
Contigen Implant and $789,000 of income from Bard's direct sales of Contigen
Implant to physicians. The Company also recorded other revenue in fiscal 1994
which consisted of $1.0 million in the form of a milestone payment from Bard
earned upon the Company's receipt of clearance from the U.S. Food and Drug
Administration. No single customer accounted for more than 10% of total revenue
in prior years.

9. INCOME TAXES

The Company prospectively adopted the liability method of accounting for
income taxes required by SFAS No. 109 effective July 1, 1992. The cumulative
effect of adopting SFAS No. 109 in fiscal 1993 was to decrease net income by
$989,000. Previously, income taxes were accounted for under the deferred method
under APB No. 11.

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
the Company's deferred tax assets and liabilities under SFAS No. 109 as of June
30, 1994 and June 30, 1993 are presented as follows:

JUNE 30,
------------------
1994 1993
------- ------
(IN THOUSANDS)

Deferred tax liabilities:
Property and equipment........................................ $ 619 $1,144
Intangible assets............................................. 587 372
Investments................................................... 7,034 6,330
------- ------
Total deferred tax liabilities........................ 8,240 7,846
------- ------

Deferred tax assets:
Accounts receivable........................................... 672 355
Inventories................................................... 495 896
State income taxes............................................ 311 480
Net operating loss carry forwards............................. 181 347
Equity in losses of affiliates................................ 1,416 631
Non-deductible accruals....................................... 1,588 1,444
Accrued compensation.......................................... 407 359
Valuation allowance........................................... (1,597) (880)
------- ------
Total deferred tax assets............................. 3,473 3,632
------- ------
Net deferred tax liabilities.......................... $ 4,767 $4,214
======== ======

The valuation allowance increased by $717,000 in fiscal 1994 and decreased
by $190,000 in fiscal 1993.

F-13
99

COLLAGEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Significant components of the provision for income taxes are as follows:

YEARS ENDED JUNE 30,
--------------------------------
1994 1993 1992
------- ------- --------
LIABILITY LIABILITY DEFERRED
METHOD METHOD METHOD
------- ------- --------
(IN THOUSANDS)

Current:
Federal............................................ $2,732 $ 8,907 $ 310
Foreign............................................ 187 250 (21)
State.............................................. 456 2,089 20
------- ------- --------
Total current.............................. 3,375 11,246 309
------- ------- --------

Deferred:
Federal............................................ 352 (2,111) 700
State.............................................. 201 (555) 112
------- ------- --------
Total deferred............................. 553 (2,666) 812
------- ------- --------
$3,928 $ 8,580 $1,121
======= ======== =======

For financial reporting purposes, the provision for income taxes includes
the following components:

YEARS ENDED JUNE 30,
------------------------------
1994 1993 1992
LIABILITY LIABILITY DEFERRED
METHOD METHOD METHOD
------ ------ --------
(IN THOUSANDS)

Continuing operations................................. $3,928 $8,580 $1,262
Discontinued operations............................... -- -- (141)
------ ------ --------
$3,928 $8,580 $1,121
====== ====== =======

For financial reporting purposes, income before income taxes and minority
interest includes the following components:

YEARS ENDED JUNE 30,
------------------------------
1994 1993 1992
------ ------- -------
(IN THOUSANDS)

Continuing operations................................ $8,848 $18,312 $ 3,903
Discontinued operations.............................. -- -- (402)
------ ------- -------
$8,848 $18,312 $ 3,501
====== ======== ========
Domestic operations.................................. $8,636 $16,508 $ 5,137
Foreign operations................................... 212 1,804 (1,636)
------ ------- -------
$8,848 $18,312 $ 3,501
====== ======== ========

F-14
100

COLLAGEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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:

YEARS ENDED JUNE 30,
-------------------------------
1994 1993 1992
LIABILITY LIABILITY DEFERRED
METHOD METHOD METHOD
------ ------- --------
(IN THOUSANDS)

Income before income taxes, minority interest
and discontinued operations........................ $8,848 $18,312 $3,501
====== ======== =======
Expected tax at 34%.................................. $3,008 $ 6,226 $1,190
State income tax, net of federal benefit............. 434 1,012 87
Net operating losses of subsidiaries for which no
current benefit is realizable...................... (45) 612 652
Equity in losses of affiliates....................... 660 165 --
Tax credits recognized............................... (315) -- (179)
Foreign Sales Corporation benefit.................... (150) -- (238)
Investment gains and losses.......................... -- -- (365)
Other................................................ 336 565 (26)
------ ------- --------
$3,928 $ 8,580 $1,121
====== ======== =======

The components of the provision for deferred income taxes for fiscal 1992
under the deferred method are as follows:

YEAR ENDED JUNE 30,
-------------------
1992
-------------------
(IN THOUSANDS)

Non-deductible accruals.......................................... $ 161
Accrued compensation............................................. (94)
Inventory reserves............................................... (485)
Depreciation..................................................... (150)
Investments valued at market..................................... 1,405
Other............................................................ (25)
--------
Provision for deferred income taxes............................ $ 812
=================

10. DISCONTINUED OPERATIONS

In fiscal 1992, the Company sold the assets of its dental implant operation
(primarily inventories and fixed assets) for $1.0 million in the form of cash
and a secured note. The Company also discontinued its pharmaceutical
distribution business, SummaCare, Inc. ("Summa") in fiscal 1992. The Company
sold the Summa business (primarily inventory and fixed assets) in June 1992 for
$41,000 in cash. The results of operations for the dental implant business and
the third quarter fiscal 1992 results for Summa are presented separately as
discontinued operations. Revenues were $277,000 for the dental implant business
for fiscal 1992.

F-15
101

COLLAGEN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. STATEMENT OF CASH FLOWS

Supplemental disclosures of cash flow information:

YEARS ENDED JUNE 30,
------------------------
1994 1993 1992
---- ------ ----
(IN THOUSANDS)

Cash paid during the year for:
Interest (net of capitalized interest)................... $ -- $ -- $928
Income taxes (net of refunds)............................ (54) 6,934 847
Non-cash financing activity:
Dividends declared....................................... $943 $ -- $ --

F-16
102

COLLAGEN CORPORATION

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

DECEMBER 31, JUNE 30,
1994 1994
------------ --------
(UNAUDITED) (NOTE 1)

ASSETS
Current assets:
Cash, cash equivalents and short-term investments............ $ 9,597 $ 12,736
Accounts receivable, net..................................... 11,963 12,241
Inventories.................................................. 3,892 3,861
Other current assets......................................... 4,309 3,305
------------ --------
Total current assets.................................... 29,761 32,143

Property and equipment, net..................................... 16,709 17,108
Intangible assets............................................... 2,257 2,243
Investment in Target Therapeutics, Inc. ........................ 18,240 17,499
Other investments and assets.................................... 6,759 5,512
------------ --------
$ 73,726 $ 74,505
=========== =========

LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable............................................. $ 1,487 $ 1,420
Accrued liabilities.......................................... 9,415 10,245
Income taxes payable......................................... 5,279 4,251
------------ --------
Total current liabilities............................... 16,181 15,916
Long-term liabilities:
Deferred income taxes........................................ 8,240 8,240
Other long-term liabilities.................................. 1,433 1,267
Stockholders' equity:
Preferred stock, $.01 par value, authorized 5,000,000 shares;
none issued and outstanding................................ -- --
Common stock, $.01 par value, authorized 28,950,000 shares;
issued 10,466,346 shares at December 31, 1994 (10,354,633
shares at June 30, 1994).................................... 105 104
Additional paid-in capital................................... 62,837 61,172
Retained earnings............................................ 12,740 9,882
Cumulative translation adjustment............................ (839) (648)
Treasury stock, at cost, 1,200,000 shares at December 31,
1994 (937,500 shares at June 30, 1994)...................... (26,971) (21,428)
------------ --------
Total stockholders' equity.............................. 47,872 49,082
------------ --------
$ 73,726 $ 74,505
=========== =========

See accompanying notes.

F-17
103

COLLAGEN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

SIX MONTHS ENDED
DECEMBER 31,
-------------------
1994 1993
------- -------

Revenues:
Product sales........................................................ $34,302 $30,238
Other................................................................ 1,000 1,000
------- -------
35,302 31,238
------- -------
Costs and expenses:
Cost of sales........................................................ 9,216 8,590
Research & development............................................... 5,038 4,565
Selling, general & administrative.................................... 15,331 14,292
------- -------
29,585 27,447
------- -------
Income from operations................................................. 5,717 3,791
Other income (expense):
Gain on sale of stock of Target Therapeutics, Inc.................... 775 --
Equity in earnings (losses) of affiliates, net....................... (369) (37)
Interest income...................................................... 215 283
Interest expense..................................................... (55) --
------- -------
Income before income taxes............................................. 6,283 4,037
Provision for income taxes............................................. 2,731 2,000
------- -------
Net income............................................................. $ 3,552 $ 2,037
======== ========
Net income per share................................................... $ .37 $ .20
======== ========
Shares used in calculating per share information....................... 9,517 10,031
======== ========

See accompanying notes

F-18
104

COLLAGEN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(IN THOUSANDS)

SIX MONTHS ENDED
DECEMBER 31,
-------------------
1994 1993
------- -------

Cash flows from operating activities:
Net income........................................................... $ 3,552 $ 2,037
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization..................................... 1,954 1,838
Gain on sale of stock of Target Therapeutics, Inc................. (775) --
Other adjustments related to changes in assets and liabilities.... (842) 1,091
------- -------
Net cash provided by operating activities.................... 3,889 4,966
------- -------

Cash flows from investing activities:
Proceeds from sales and maturities of short-term investments......... 4,903 11,275
Purchases of short-term investments.................................. -- (7,413)
Net proceeds from sale of stock of Target Therapeutics, Inc.......... 1,102 --
Increase in long-term investments, intangible and other assets....... (2,870) (505)
Expenditures for property and equipment.............................. (1,383) (2,086)
------- -------
Net cash provided by investing activities.................... 1,752 1,271
------- -------

Cash flows from financing activities:
Repurchase of common stock........................................... (5,543) (9,986)
Net proceeds from issuance of common stock........................... 1,666 1,837
------- -------
Net cash used in financing activities........................ (3,877) (8,149)
------- -------

Net increase (decrease) in cash and cash equivalents................... 1,764 (1,912)
Cash and cash equivalents at beginning of period....................... 5,369 9,294
------- -------
Cash and cash equivalents at end of period............................. $ 7,133 $ 7,382
======== ========

See accompanying notes.

F-19
105

COLLAGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements include the accounts of
Collagen Corporation ("the Company"), a Delaware corporation, and its
wholly-owned and majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.

The condensed consolidated balance sheet as of December 31, 1994, and the
condensed consolidated statements of income and cash flows for the six months
ended December 31, 1994 and 1993, have been prepared by the Company, without
audit. In the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at December 31, 1994 and for all periods
presented have been made. Interim results are not necessarily indicative of
results for a full fiscal year. The condensed consolidated balance sheet as of
June 30, 1994 has been derived from the audited consolidated financial
statements at that date.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended June 30, 1994 included elsewhere
herein.

Cash, Cash Equivalents and Short-term Investments

Effective July 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("FAS 115"), "Accounting for Certain Investments in
Debt and Equity Securities." In accordance with FAS 115, prior period financial
statements have not been restated to reflect the change in accounting principle.
The impact of adoption at July 1, 1994 was immaterial. The Company's debt
securities are classified as available-for-sale and are carried at fair value in
cash equivalents and short-term investments. Unrealized gains and losses, net of
tax, are included in stockholders' equity and were immaterial for the six months
ended December 31, 1994.

2. INVENTORIES

Inventories consist of the following (in thousands):

DECEMBER 31, 1994 JUNE 30, 1994
----------------- -------------

Raw materials....................................... $ 502 $ 625
Work-in-process..................................... 1,554 1,763
Finished goods...................................... 1,836 1,473
-------- -------------
$ 3,892 $ 3,861
================ ===========

F-20
106

COLLAGEN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(UNAUDITED)

3. PER SHARE INFORMATION

Earnings per share for the six months ended December 31, 1994 and 1993 have
been computed based upon the weighted average number of common and common
equivalent shares outstanding. Shares used in the per share computations are as
follows (in thousands):

SIX MONTHS ENDED
DECEMBER 31,
---------------------
1994 1993
-------- --------

Primary
Common stock................................................... 9,336 9,669
Stock options.................................................. 181 362
-------- --------
Weighted average number of common and common equivalent shares
outstanding.................................................... 9,517 10,031
========== ==========

4. INCOME TAXES

The provision for income taxes for the six months ended December 31, 1994
and 1993 was computed by applying the estimated annual income tax rates of
approximately 43% and approximately 49%, respectively, to income before income
taxes. The lower effective tax rate in the current fiscal year is primarily due
to increased equity in losses of affiliates which is partially offset by a
change in the mix of anticipated foreign and domestic earnings and a lower
effective state income tax rate.

5. STOCK REPURCHASE PROGRAM

In February 1993, the Company's Board of Directors authorized a stock
repurchase program. During the three months ended December 31, 1994, the Company
repurchased 172,000 shares of its common stock at an average acquisition price
of approximately $22 per share. Since the inception of the stock repurchase
program in February 1993, the Company has repurchased 1,200,000 shares of its
common stock at an average acquisition price of approximately $22 per share. As
of January 25, 1995, the Company is authorized to repurchase an additional
300,000 shares in the open market under the program. The Company currently plans
to keep the repurchased shares as treasury stock and may use this stock in
various company stock benefit plans.

6. SALE OF TARGET COMMON STOCK

In November 1994, the Company sold 35,000 shares of the common stock of
Target Therapeutics, Inc. ("Target") for a pre-tax gain of approximately
$775,000. After the sale, the Company's ownership position in Target was reduced
from approximately 33% to approximately 32%.

Target's common stock is quoted on the Nasdaq National Market. The closing
price of Target's stock at December 30, 1994 was $28.25 per share. The Company
held 2,259,194 shares of Target's common stock at December 30, 1994.

F-21
107

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Target Therapeutics, Inc.

We have audited the accompanying consolidated balance sheets of Target
Therapeutics, Inc. as of March 31, 1994 and 1993, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended March 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Target
Therapeutics, Inc. at March 31, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1994, in conformity with generally accepted accounting
principles.

As discussed in Notes 1 and 6 to the consolidated financial statements, in 1994
the Company changed its method of accounting for income taxes.

ERNST & YOUNG LLP
Palo Alto, California
April 27, 1994

F-22
108

TARGET THERAPEUTICS, INC.

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

MARCH 31,
-------------------
1994 1993
------- -------

ASSETS
Current assets:
Cash, cash equivalents and short-term investments.................... $37,673 $31,487
Accounts receivable.................................................. 6,426 5,925
Inventories.......................................................... 2,987 3,593
Deferred tax assets.................................................. 2,094 --
Other current assets................................................. 289 578
------- -------
Total current assets......................................... 49,469 41,583
Property and equipment, net............................................ 4,688 4,114
Other assets........................................................... 2,973 1,130
------- -------
$57,130 $46,827
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 1,454 $ 870
Accrued compensation................................................. 2,152 1,771
Taxes payable........................................................ 672 11
Accrued product replacement costs.................................... 1,141 --
Other accrued liabilities............................................ 1,925 1,561
Deferred tax liabilities............................................. 598 --
------- -------
Total current liabilities.................................... 7,942 4,213
Long-term obligations.................................................. 124 152
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value (shares authorized: 2,000,000;
issued and outstanding: none)..................................... -- --
Common stock, $.0025 par value (shares authorized: 25,000,000;
issued and outstanding: 7,024,619 and 6,756,355 at March 31,
1994 and 1993, respectively)...................................... 18 17
Additional paid-in capital........................................... 40,593 39,020
Deferred compensation................................................ (124) (232)
Retained earnings.................................................... 8,608 3,657
Notes receivable from stockholders................................... (31) --
------- -------
Total stockholders' equity................................... 49,064 42,462
------- -------
$57,130 $46,827
======== ========

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

F-23
109

TARGET THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

YEARS ENDED MARCH 31,
-------------------------------
1994 1993 1992
------- ------- -------

Revenues:
Product sales............................................. $35,353 $28,117 $19,049
Revenues from research partner............................ -- -- 1,400
------- ------- -------
Total revenues.................................... 35,353 28,117 20,449
Costs and expenses:
Cost of sales............................................. 13,368 9,657 6,920
Research and development.................................. 7,624 6,496 4,347
Selling, general and administrative....................... 9,245 7,543 5,447
------- ------- -------
Total costs and expenses.......................... 30,237 23,696 16,714
------- ------- -------
Income from operations...................................... 5,116 4,421 3,735
Interest income, net........................................ 954 890 297
Other income................................................ 515 16 --
------- ------- -------
Income before income taxes and cumulative effect of
change in method of accounting for income taxes........... 6,585 5,327 4,032
Provision for income taxes.................................. 2,265 1,747 1,532
------- ------- -------
Income before cumulative effect of accounting change........ 4,320 3,580 2,500
Cumulative effect of change in method of accounting for
income taxes.............................................. 631 -- --
------- ------- -------
Net income.................................................. $ 4,951 $ 3,580 $ 2,500
======== ======== ========
Income per share:
Income before cumulative effect of accounting change...... $ .61 $ .51
Cumulative effect of change in method of accounting for
income taxes........................................... .09 --
------- -------
Net income per share...................................... $ .70 $ .51
======== ========
Pro forma information (unaudited):
Historical income before income taxes..................... $ 4,032
Pro forma provision for income taxes...................... 1,433
-------
Pro forma net income...................................... $ 2,599
========
Pro forma net income per share............................ $ .51
========
Shares used in computing income per share and pro forma net
income per share data..................................... 7,103 7,075 5,093
======== ======== ========

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

F-24
110

TARGET THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

RETAINED NOTES
ADDITIONAL EARNINGS RECEIVABLE TOTAL
PREFERRED COMMON PAID-IN DEFERRED (ACCUMULATED FROM STOCKHOLDERS'
STOCK STOCK CAPITAL COMPENSATION DEFICIT) STOCKHOLDERS EQUITY
--------- ------ ---------- ------------ ------------ ----------- ------------

Balances at March 31, 1991..... $ 6,977 $ 66 $ -- $ -- $ (2,423) $ (42) $ 4,578
Recapitalization of common
stock pursuant to
reincorporation in the State
of Delaware.................. (6,967) (65) 7,032 -- -- -- --
Dividend paid to preferred
stockholders................. -- -- (7,005) -- -- -- (7,005)
Conversion of 9,596,010 shares
of preferred stock to
3,838,404 shares of common
stock........................ (10) 10 -- -- -- -- --
Issuance of 2,308,500 shares of
common stock in connection
with initial public offering,
net of issuance costs of
$3,651....................... -- 6 37,790 -- -- -- 37,796
Exercise of common stock
options (45,676 shares), net
of notes receivable.......... -- -- 17 -- -- 18 35
Deferred compensation related
to the grant of certain stock
options...................... -- -- 419 (419) -- -- --
Amortization of deferred
compensation................. -- -- -- 79 -- -- 79
Net income..................... -- -- -- -- 2,500 -- 2,500
--------- ------ ---------- ------ ------------ ----- ------------
Balances at March 31, 1992..... -- 17 38,253 (340) 77 (24) 37,983
Exercise of common stock
options (190,195 shares), net
of notes receivable.......... -- -- 101 -- -- 24 125
Amortization of deferred
compensation................. -- -- -- 108 -- -- 108
Income tax benefit of
disqualifying dispositions... -- -- 666 -- -- -- 666
Net income..................... -- -- -- -- 3,580 -- 3,580
--------- ------ ---------- ------ ------------ ----- ------------
Balances at March 31, 1993..... -- 17 39,020 (232) 3,657 -- 42,462
Exercise of common stock
options and issuance under
stock purchase plan (268,264
shares), net of notes
receivable................... -- 1 687 -- -- (31) 657
Amortization of deferred
compensation................. -- -- -- 108 -- -- 108
Income tax benefit of
disqualifying dispositions... -- -- 886 -- -- -- 886
Net income..................... -- -- -- -- 4,951 -- 4,951
--------- ------ ---------- ------ ------------ ----- ------------
Balances at March 31, 1994..... $ -- $ 18 $ 40,593 $ (124) $ 8,608 $ (31) $ 49,064
========== ========= =========== ============== ============== ============ =============

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

F-25
111

TARGET THERAPEUTICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)

YEARS ENDED MARCH 31,
----------------------------------
1994 1993 1992
-------- -------- --------

Cash flows from operating activities:
Net income............................................ $ 4,951 $ 3,580 $ 2,500
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization.................... 1,524 1,135 887
Changes in assets and liabilities:
Accounts receivable........................... (501) (1,826) (1,615)
Inventories................................... 606 (1,247) (669)
Deferred tax assets........................... (2,094) -- --
Other current assets.......................... 289 117 (583)
Accounts payable.............................. 584 (188) 472
Accrued compensation.......................... 381 567 686
Taxes payable................................. 661 544 124
Accrued product replacement costs............. 1,141 -- --
Other accrued liabilities..................... 384 (158) 453
Deferred tax liabilities...................... 598 -- --
Payable to Collagen Corporation............... -- (180) (600)
Accrued facility lease costs.................. -- (330) 330
Income tax benefit of disqualifying
dispositions................................ 886 666 --
-------- -------- --------
Total adjustments........................... 4,459 (900) (515)
-------- -------- --------
Net cash provided by operating activities............. 9,410 2,680 1,985
-------- -------- --------
Cash flows used in investing activities:
Capital expenditures, net.......................... (1,938) (2,205) (1,700)
Purchase of short-term investments................. (65,266) (95,371) (12,970)
Sale of short-term investments..................... 62,782 81,831 --
Increase in other assets........................... (1,895) (515) (388)
-------- -------- --------
Net cash used in investing activities................. (6,317) (16,260) (15,058)
-------- -------- --------
Cash flows from financing activities:
Increase in note payable to bank................... -- -- 500
Payments of note payable to bank................... -- -- (500)
Issuance of common stock for cash.................. 657 101 37,813
Principal payments under capital leases............ (48) (42) (26)
Decrease in notes receivable from stockholders..... -- 24 18
Dividends paid to preferred stockholders........... -- -- (7,005)
-------- -------- --------
Net cash provided by financing activities............. 609 83 30,800
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 3,702 (13,497) 17,727
Cash and cash equivalents, beginning of year............ 4,977 18,474 747
-------- -------- --------
Cash and cash equivalents, end of year.................. $ 8,679 $ 4,977 $ 18,474
========= ========= =========

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

F-26
112

TARGET THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business Target Therapeutics, Inc. (the "Company" or
"Target") was incorporated in California in June 1985 and reincorporated in the
State of Delaware in January 1992. The Company is in the business of developing,
manufacturing and marketing disposable medical devices used in minimally
invasive procedures to treat vascular diseases of the brain associated with
stroke and other diseases accessible through small vessels of the circulatory
system.

Principles of consolidation The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. Investments in
unconsolidated subsidiaries, jointly owned companies and other investments in
which the Company has a 20 to 50 percent interest are accounted for on the
equity method.

Cash equivalents and short-term investments Cash equivalents consist of
highly liquid investments, primarily money market accounts, with maturities at
the date of purchase of 90 days or less. Short-term investments consist
primarily of money auction preferred stock and government securities which are
stated at cost which approximates market.

In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement 115, "Accounting for Certain Investments in Debt and Equity
Securities." Under the rules of Statement 115, debt and equity investments must
be classified as either held-to-maturity, available-for-sale or trading.
Unrealized gains and losses for available-for-sale and trading securities are
reported in retained earnings or current period earnings, respectively. The
Company will adopt Statement 115 in the first quarter of its fiscal year ending
March 31, 1995 and does not expect a material adverse effect on its financial
statements.

Concentration of credit risk The Company sells its products primarily to
physicians and hospitals in North America, Europe and Asia. The Company performs
ongoing credit evaluations of its customers and generally does not require
collateral. The Company maintains reserves for potential credit losses. See Note
7 for discussion of export sales and major customers.

The Company invests its excess cash in deposits and foreign and corporate
debt securities. These securities typically mature within 360 days and,
therefore, bear minimal risk. The Company has not experienced any material
losses on its investments.

Income taxes In February 1992, the FASB issued Statement 109, "Accounting
for Income Taxes." Effective April 1, 1993, the Company adopted Statement 109
under which the liability method is used in accounting for income taxes. As
permitted by Statement 109, the Company has elected to report the cumulative
effect of the change in the current period rather than restate the financial
statements of prior years. The cumulative positive effect of the change in
method of accounting for income taxes increased net income by $631,000, or $.09
per share, for the year ended March 31, 1994.

Net income per share Except as noted below, historical net income per
share is computed using the weighted average number of common and dilutive
common equivalent shares outstanding. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins, common and common equivalent shares
issued at prices below the public offering price during the 12-month period
prior to the Company's initial public offering in January 1992 have been
included in the calculation as if they were outstanding for all periods prior to
the offering (using the treasury stock method and the initial public offering
price per share). Furthermore, pursuant to Staff policy, common equivalent
shares from convertible preferred stock that automatically converted upon the

F-27
113

TARGET THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
completion of the Company's initial public offering are included in the
calculation using the as-if converted method from the original date of issuance.
Historical net income per share was $.49 (based on 5,093,000 shares) for the
year ended March 31, 1992.

In accordance with Staff Accounting Bulletin No. 55, the Company has
presented unaudited pro forma net income per share information for the year
ended March 31, 1992 in the accompanying Consolidated Statements of Income,
assuming the Company did not have a tax allocation agreement with Collagen
Corporation ("Collagen") and filed its tax returns on a separate company basis.
See Note 6 for further discussion.

Inventories Inventories are stated at the lower of cost or market. Cost is
determined using standard costs, which approximate actual costs, under the
first-in, first-out method.

Property and equipment Property and equipment are stated at cost, net of
accumulated depreciation and amortization. Depreciation and amortization are
provided using the straight-line method over the estimated useful lives of the
respective assets, ranging from three to five years. Leasehold improvements are
amortized on a straight-line basis over five years or the remaining lease term,
whichever is shorter.

Patents and trademarks Patents and trademarks are stated at cost, net of
accumulated amortization. Amortization is provided using the straight-line
method over a seven-year life beginning with the effective dates or over the
remainder of such periods from the dates acquired.

Revenue recognition Product sales are recognized upon shipment. Revenues
earned under research and development agreements are recorded when earned as
defined in the specific agreements.

Reclassification Certain amounts in the prior year financial statements
have been reclassified to conform to the current year presentation.

2. BALANCE SHEET INFORMATION

MARCH 31,
-------------------
1994 1994
------- -------
(IN THOUSANDS)

Cash, cash equivalents and short-term investments:
Cash and cash equivalents.................................... $ 8,679 $ 4,977
Short-term investments....................................... 28,994 26,510
------- -------
$37,673 $31,487
======== ========
Accounts receivable:
Trade receivables............................................ $ 6,840 $ 6,322
Less allowance for doubtful accounts......................... (414) (397)
------- -------
$ 6,426 $ 5,925
======== ========
Inventories:
Raw materials................................................ $ 531 $ 646
Work-in-process.............................................. 1,152 810
Finished goods............................................... 1,304 2,137
------- -------
$ 2,987 $ 3,593
======== ========
Property and equipment:
Machinery and equipment...................................... $ 5,275 $ 4,115
Office equipment............................................. 2,495 2,078
Leasehold improvements....................................... 495 437
------- -------
8,265 6,630
Less accumulated depreciation and amortization............... (3,577) (2,516)
------- -------
$ 4,688 $ 4,114
======== ========

F-28
114

TARGET THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. EXPECTED COSTS OF PRODUCT REPLACEMENT

In October 1993, the Company announced that it is pursuing certain changes
to a product currently sold under an investigational device exemption ("IDE") by
the U.S. Food and Drug Administration ("FDA"). Pursuant to a supplement to the
IDE which was approved by the FDA in March 1994, limited FDA clinical trials of
the modified product were commenced in April 1994. As treatment sites are
converted to the modified product, the Company expects to exchange such modified
product for any original product that customers still have in their inventory.
The Company has provided $1.5 million, which was included in cost of sales in
fiscal 1994, for the estimated costs of such exchange including the disposition
of the Company's inventory of such product.

4. COMMITMENTS

Line of credit arrangement

The Company maintains a $2.0 million revolving line of credit with a bank
which expires in July 1994. Borrowings under the line of credit bear interest at
the bank's prime rate (6.25 percent at March 31, 1994), are unsecured and are
subject to certain covenants related to financial ratios and profits. There were
no amounts outstanding under this line at March 31, 1994.

Lease obligations

The Company leases its facilities and certain equipment under operating
leases. The Company recognizes rent expense on a straight-line basis over the
lease term. The future minimum lease commitments by fiscal year as of March 31,
1994 are as follows (in thousands):

1995........................................................ $ 831
1996........................................................ 821
1997........................................................ 823
1998........................................................ 877
1999........................................................ 872
Thereafter.................................................. 1,665
-------
$ 5,889
======

The following schedule shows the composition of net rental expense for all
operating leases (in thousands):

YEARS ENDED MARCH 31,
------------------------
1994 1993 1992
---- ------ ----

Rent expense............................................... $914 $1,146 $901
Less sublease rental income................................ (77) (88) --
---- ------ ----
$837 $1,058 $901
===== ====== =====

5. STOCKHOLDERS' EQUITY

Stock option and purchase plans

The 1988 Stock Option Plan (the "Plan") is an incentive and nonstatutory
option plan providing for the issuance of common stock to employees, officers,
directors and consultants of the Company. At March 31, 1994 the Company had
reserved 1,700,000 shares of common stock for issuance under the Plan. Options
granted generally become exercisable over a 48-month period. Under the Plan, the
exercise price of incentive options may not be less than 100 percent of the fair

F-29
115

TARGET THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. STOCKHOLDERS' EQUITY -- (CONTINUED)
market value at the date of grant, and the exercise price of nonstatutory
options must be at least 85 percent of the fair market value at the date of
grant. In the case of an option holder who owns more than ten percent of the
voting power of all outstanding stock, the incentive option exercise price must
be at least 110 percent of fair market value and the option must be exercised
within five years of the grant date.

The Company has recorded $419,000 in deferred compensation expense for the
difference between the grant price and the deemed fair value for financial
statement presentation purposes of the Company's common stock for certain
options granted in fiscal 1992. Amortization of deferred compensation was
$108,000 in each of the years ended March 31, 1994 and 1993 and $79,000 in the
year ended March 31, 1992. The deferred compensation amount is being amortized
over a four-year period.

Information with respect to the 1988 Stock Option Plan is summarized as
follows:

OPTIONS OUTSTANDING
SHARES ----------------------------------------
AVAILABLE NUMBER
FOR OF AGGREGATE PRICE
GRANT SHARES PRICE PER SHARE
-------- -------- ---------- ------------

Balances at March 31, 1991............. 189,740 469,440 $ 142,771 $ .13-1.25
Additional shares reserved............. 200,000 -- -- --
Options granted........................ (142,506) 142,506 828,490 2.50-11.50
Options exercised...................... -- (45,676) (16,968) .13-8.75
Options canceled....................... 14,451 (14,451) (8,801) .13-8.75
-------- -------- ---------- ------------
Balances at March 31, 1992............. 261,685 551,819 945,492 .13-11.50
Additional shares reserved............. 500,000 -- -- --
Options granted........................ (111,160) 111,160 2,227,063 17.75-26.75
Options exercised...................... -- (190,195) (100,566) .13-17.75
Options canceled....................... 14,673 (14,673) (134,309) .13-26.00
-------- -------- ---------- ------------
Balances at March 31, 1993............. 665,198 458,111 2,937,680 .13-26.75
Options granted........................ (302,875) 302,875 6,035,300 17.25-24.25
Options exercised...................... -- (252,113) (416,980) .13-25.63
Options canceled....................... 28,514 (28,514) (425,976) .33-26.00
-------- -------- ---------- ------------
Balances at March 31, 1994............. 390,837 480,359 $8,130,024 $ .13-26.75
========= ========= ========== ============

As of March 31, 1994, options for 134,361 shares were exercisable.

In December 1991, the Company's Board of Directors (the "Board") adopted
the 1991 Director Option Plan ("Director Option Plan"). A total of 100,000
shares of common stock have been reserved for issuance under the Director Option
Plan which provides for the grant of nonstatutory options to non employee
directors of the Company. As of March 31, 1994, options to purchase 22,000
shares under this plan were outstanding and become exercisable over a three year
period from the grant date. As of March 31, 1994, options for 3,334 shares were
exercisable. No options under the Director Option Plan have been exercised.

The Board also adopted the 1991 Employee Stock Purchase Plan (the "Purchase
Plan") in December 1991. The Purchase Plan allows for the issuance of up to
100,000 shares of common stock to employees of the Company. During the year
ended March 31, 1994, 16,151 shares were issued at prices ranging from $15.09 to
$18.70 per share under the Purchase Plan.

F-30
116

TARGET THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES

The Company's provision for income taxes for the years ended March 31,
1994, 1993 and 1992 consists of the following (in thousands):

YEARS ENDED MARCH 31,
----------------------------
1994 1993 1992
------ ------ ------

Current:
Federal.............................................. $2,353 $1,374 $1,398
State................................................ 674 466 422
------ ------ ------
Total current................................ 3,027 1,840 1,820
Deferred:
Federal.............................................. (614) (101) (238)
State................................................ (148) 8 (50)
------ ------ ------
Total deferred............................... (762) (93) (288)
------ ------ ------
Total provision........................................ $2,265 $1,747 $1,532
====== ====== ======

For the period from February 1, 1992 through March 31, 1992, and for the
years ended March 31, 1994 and 1993, the Company calculates its federal, foreign
sales corporation and California state tax provisions on a separate company
basis and files federal income tax returns on a separate company basis. Collagen
was the majority stockholder of the Company until November 1992 when it sold
shares that resulted in a decrease in its percentage ownership to approximately
34 percent. For the period April 1, 1991 through January 31, 1992, prior to
Target's initial public offering, Target's taxable income was included in
Collagen's consolidated federal income tax returns. For the period April 1, 1991
through June 30, 1992, Target was included in Collagen's combined California tax
returns. For periods prior to February 1, 1992, the Company's tax provisions and
tax liabilities were calculated in accordance with the Tax Allocation Agreements
that existed between Collagen and Target. Such provision may not reflect the
Company's actual tax rate had it not been consolidated with Collagen for tax
purposes.

At March 31, 1994, the Company had available net operating loss
carryforwards for tax purposes of approximately $1.1 million which expire in the
year 2001. Because of the "change in ownership" provisions of the Tax Reform Act
of 1986, the loss carryforwards will be subject to an annual limitation
regarding their utilization against future taxable income.

The Company realizes tax benefits as a result of the exercise and
subsequent sale of certain employee stock options (disqualifying dispositions).
For financial reporting purposes, any reduction in income tax obligations as a
result of these tax benefits, $886,000 and $666,000 in fiscal 1994 and 1993,
respectively, is credited to additional paid-in capital.

F-31
117

TARGET THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES -- (CONTINUED)
The provision for income taxes for the years ended March 31, 1994 and 1993
and the unaudited pro forma provision for income taxes for the year ended March
31, 1992 differ from the amount computed by applying the statutory federal
income tax rate to income before taxes. The reconciliation between the federal
statutory rate and the effective tax rate is as follows:

YEARS ENDED MARCH 31,
----------------------
1994 1993 1992
---- ---- ----

Statutory federal income tax rate............................. 34.0% 34.0% 34.0%
Foreign sales corporation tax benefit......................... (3.7) (3.3) (3.2)
State income taxes............................................ 5.3 5.9 5.8
Tax exempt interest........................................... (2.6) (2.9) --
Other......................................................... 1.4 (0.9) (1.1)
---- ---- ----
Provision for income taxes.................................. 34.4% 32.8%
==== ====
Unaudited pro forma provision for income taxes.............. 35.5%
====

Deferred taxes for the year ended March 31, 1994 reflect the net tax
effects of loss carryforwards and temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant amounts of the Company's
deferred tax assets and liabilities as of March 31, 1994 are as follows (in
thousands):

YEAR ENDED
MARCH 31,
1994
-------------

Deferred tax assets:
Inventory valuation accounts........................................
$ 382
Reserves and accruals not currently tax deductible..................
1,439
Benefit of net operating loss carryforwards.........................
546
State income tax....................................................
159
Other...............................................................
58
-------------
2,584
Valuation allowance.................................................
(490)
-------------
$ 2,094
============
Deferred tax liabilities:
Patent costs........................................................
$ 328
Depreciation........................................................
128
Accrued cost of exchanging GDC inventory............................
142
-------------
$ 598
============

F-32
118

TARGET THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. INCOME TAXES -- (CONTINUED)
The components of the credit for deferred income taxes for the years ended
March 31, 1993 and 1992 under the deferred method are as follows (in thousands):

YEARS ENDED MARCH
31,
-------------------
1993 1992
----- -----

Depreciation.................................................. $ 98 $ (26)
Accounts receivable and sales return reserves................. (51) (52)
Patent expenses............................................... 132 64
Accrued vacation and commissions.............................. (44) (35)
State taxes................................................... (129) (56)
Inventory valuation........................................... (80) (20)
Accrued expenses.............................................. (49) (163)
Other......................................................... 30 --
----- -----
Total deferred provision............................ $ (93) $(288)
====== ======

For the ten-month period ended January 31, 1992 there were no deferred or
prepaid taxes due to the Tax Allocation Agreements in effect between the Company
and Collagen.

7. EXPORT SALES AND MAJOR CUSTOMERS

The Company markets its products both domestically and internationally.
Export product sales are as follows (in thousands):

YEARS ENDED MARCH 31,
-------------------------------
1994 1993 1992
------- ------- -------

Europe.............................................. $ 8,651 $ 7,883 $ 4,591
Asia................................................ 11,019 8,275 5,269
Other............................................... 1,469 1,086 759
------- ------- -------
$21,139 $17,244 $10,619
======== ======== ========

One customer accounted for approximately 29 percent and 27 percent of the
Company's product sales for the years ended March 31, 1994 and 1993,
respectively. Another customer accounted for approximately 21 percent of the
Company's product sales for the year ended March 31, 1992.

8. SUPPLEMENTAL CASH FLOW INFORMATION

YEARS ENDED MARCH 31,
----------------------------
1994 1993 1992
------ ------ ------
(IN THOUSANDS)

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes......... $1,573 $1,195 $2,254
Cash paid during the period for interest............. 40 19 13
Supplemental schedule of noncash investing and
financing
activities:
Deferred compensation related to issuance of stock
options........................................... $ -- $ -- $ 419
Acquisition of assets under capital lease............ -- 32 93
Issuance of common stock options in exchange for a
note receivable................................... 31 -- --

F-33
119

TARGET THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. JOINT VENTURE AND RELATED AGREEMENTS

In September 1991, the Company entered into a joint venture agreement with
Century Medical Inc. ("CMI"), a Japanese corporation, to distribute the
Company's products in Japan. CMI initially contributed approximately $200,000
for a 100 percent ownership in the joint venture. CMI sold to the Company, in
November 1992, a 50 percent ownership in the joint venture for approximately
$120,000. The Company accounts for this investment on the equity method and
includes its share of joint venture net income in "Other income" on the
Consolidated Statements of Income.

In conjunction with establishing the joint venture, the Company also
entered into a distribution agreement with CMI, CMI entered into a
subdistribution agreement with the joint venture and the Company entered into a
research and development agreement with CMI. In the year ended March 31, 1992
the Company received $1.4 million pursuant to the research and development
agreement.

The Company entered into an agreement with the joint venture, effective in
January 1994, in which the Company is obligated to provide certain management
services, assist in marketing, development and planning activities and provide
certain literature to the joint venture during calendar 1994. In consideration
for the Company providing such services, the joint venture has agreed to pay
$700,000 to the Company as reimbursement of costs incurred by the Company,
$445,000 of which has been included in "Other income" for the year ended March
31, 1994.

Summarized information for the joint venture at March 31, 1994 and for the
year then ended is as follows (in thousands):

Current assets............................................................ $ 8,932
Current liabilities....................................................... 7,528
Net sales................................................................. 22,894
Gross profit.............................................................. 8,896
Income from operations.................................................... 2,876
Net income................................................................ 1,038

The Company's other investments accounted for on the equity method,
comprised of cash investments in and the granting of technology licenses to
certain of the Company's less than 50 percent-owned subsidiaries, are not
significant.

10. RELATED PARTY TRANSACTIONS

In April 1991, the Company loaned $150,000 to an executive officer of the
Company pursuant to a promissory note bearing interest at the lower of 10
percent or the prime rate in effect at the end of each calendar quarter. These
notes have all been repaid as of March 31, 1993.

In December 1993, the Company entered into a lease line agreement as lessor
with a less than 50 percent owned subsidiary. The maximum available lease line
of $1.0 million expires March 31, 1995 and requires monthly payments to be made
on the outstanding balance over 36 or 48 months with interest at approximately
8.5 percent per year. As of March 31, 1994 there was $143,000 outstanding under
this agreement.

In March 1994, the Company loaned approximately $200,000 to a less than 50
percent owned subsidiary in exchange for promissory notes bearing interest at
8.5 percent per year. Monthly payments are required over 36 and 48 months. The
Company also entered into a lease line agreement as lessor with this subsidiary
in March 1994. The maximum available lease line of $300,000 expires March 1,
1995 and requires monthly payments to be made on the outstanding balance over 36
or 48 months with interest at approximately 8.5 percent per year. There were no
amounts outstanding under this agreement at March 31, 1994.

F-34
120

TARGET THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. LEGAL MATTERS

The Company is involved in legal actions, including product liability
claims, 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, both individually or in the aggregate, will not have a material adverse
effect on the Company's consolidated financial position or results of its
operations.

F-35
121

TARGET THERAPEUTICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31, MARCH 31,
1994 1994
------------ ---------
(UNAUDITED) (NOTE 1)

ASSETS
Current assets:
Cash, cash equivalents and short-term investments................ $ 36,442 $ 37,673
Accounts receivable.............................................. 8,891 6,426
Inventories...................................................... 4,999 2,987
Deferred tax assets.............................................. 2,094 2,094
Other current assets............................................. 348 289
------------ ---------
Total current assets..................................... 52,774 49,469
Property and equipment, net........................................ 5,878 4,688
Other assets....................................................... 6,232 2,973
------------ ---------
$ 64,884 $ 57,130
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 1,351 $ 1,454
Accrued compensation............................................. 2,387 2,152
Taxes payable.................................................... 1,110 672
Accrued product replacement costs................................ 978 1,141
Other accrued liabilities........................................ 3,296 1,925
Deferred tax liabilities......................................... 598 598
------------ ---------
Total current liabilities..................................... 9,720 7,942
Long-term obligations.............................................. 104 124
Stockholders' equity:
Common stock..................................................... 18 18
Additional paid-in capital....................................... 41,195 40,593
Deferred compensation............................................ (43) (124)
Retained earnings................................................ 13,865 8,608
Cumulative translation adjustments............................... 57 --
Notes receivable from stockholders............................... (32) (31)
------------ ---------
Total stockholders' equity.................................... 55,060 49,064
------------ ---------
$ 64,884 $ 57,130
=========== ========

See accompanying notes.

F-36
122

TARGET THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

NINE MONTHS
ENDED
DECEMBER 31,
-------------------
1994 1993
------- -------

Revenues............................................................... $34,497 $25,453
Costs and expenses:
Cost of sales........................................................ 11,060 10,103
Research and development............................................. 7,472 5,468
Selling, general and administrative.................................. 9,645 6,886
------- -------
Total costs and expenses.......................................... 28,177 22,457
------- -------
Income from operations................................................. 6,320 2,996
Interest income, net................................................... 921 682
Other income........................................................... 973 276
------- -------
Income before income taxes and cumulative effect of change in method of
accounting for income taxes.......................................... 8,214 3,954
Provision for income taxes............................................. 2,957 1,344
------- -------
Income before cumulative effect of accounting change................... 5,257 2,610
Cumulative effect of change in method of accounting for income taxes... -- 631
------- -------
Net income............................................................. $ 5,257 $ 3,241
======== ========
Income per share:
Income before cumulative effect of accounting change................. $ .73 $ .37
Cumulative effect of change in method of accounting for income
taxes............................................................. -- .09
------- -------
Net income........................................................... $ .73 $ .46
======== ========
Shares used in calculation of income per share data.................... 7,190 7,087
======== ========

See accompanying notes.

F-37
123

TARGET THERAPEUTICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
(IN THOUSANDS)

NINE MONTHS ENDED
DECEMBER 31,
---------------------
1994 1993
-------- --------

Cash flows from operating activities:
Net income......................................................... $ 5,257 $ 3,241
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation and amortization................................... 1,749 1,098
Changes in assets and liabilities:
Accounts receivable........................................... (2,413) (474)
Inventories................................................... (2,009) 534
Deferred tax assets........................................... -- (1,163)
Other current assets.......................................... (59) 211
Accounts payable.............................................. (103) 202
Accrued compensation.......................................... 235 85
Taxes payable................................................. 438 (2)
Accrued product replacement costs............................. (163) 1,500
Other accrued liabilities..................................... 1,392 460
Deferred tax liabilities...................................... -- 429
-------- --------
Total adjustments............................................... (933) 2,880
-------- --------
Net cash provided by operating activities.......................... 4,324 6,121
-------- --------
Cash flows used in investing activities:
Capital expenditures, net....................................... (2,548) (1,423)
Purchases of short-term investments............................. (46,567) (47,023)
Sales and maturities of short-term investments.................. 49,598 45,526
Increase in other assets........................................ (3,567) (1,025)
-------- --------
Net cash used in investing activities.............................. (3,084) (3,945)
-------- --------
Cash flows from financing activities:
Issuance of common stock for cash............................... 602 478
Principal payments under capital leases......................... (42) (21)
-------- --------
Net cash provided by financing activities.......................... 560 457
-------- --------
Net increase in cash and cash equivalents............................ 1,800 2,633
Cash and cash equivalents, beginning of period....................... 8,679 4,977
-------- --------
Cash and cash equivalents, end of period............................. $ 10,479 $ 7,610
========= =========

See accompanying notes.

F-38
124

TARGET THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed
consolidated balance sheet, and the condensed consolidated statements of income
and cash flows reflect all adjustments which are of a normal recurring nature
considered necessary to present a fair statement of the consolidated financial
position at December 31, 1994 and the consolidated statements of income and cash
flows for the nine-month periods ended December 31, 1994 and 1993.

Certain information and footnote disclosures required by generally accepted
accounting principles for complete financial statements have been omitted
pursuant to the rules and regulations of the Securities and Exchange Commission
("SEC"). These financial statements should be read in conjunction with the
audited financial statements and notes included elsewhere herein. The condensed
consolidated balance sheet as of March 31, 1994 was derived from these audited
financial statements.

Results for the interim period ended December 31, 1994, are not necessarily
indicative of the results expected for future interim periods or for the full
year.

2. BALANCE SHEET INFORMATION

DECEMBER 31, MARCH 31,
1994 1994
------------ ---------
(IN THOUSANDS)

Cash, cash equivalents and short-term investments:
Cash and cash equivalents................................ $ 10,479 $ 8,679
Short-term investments................................... 25,963 28,994
------------ ---------
$ 36,442 $37,673
=========== ========
Accounts receivable:
Trade receivables........................................ $ 9,329 $ 6,840
Less allowance for doubtful accounts..................... (438) (414)
------------ ---------
$ 8,891 $ 6,426
=========== ========
Inventories:
Raw materials............................................ $ 1,031 $ 531
Work-in-process.......................................... 767 1,152
Finished goods........................................... 3,201 1,304
------------ ---------
$ 4,999 $ 2,987
=========== ========
Property and equipment:
Machinery and equipment.................................. $ 6,956 $ 5,275
Office equipment......................................... 3,240 2,495
Leasehold improvements................................... 587 495
------------ ---------
10,783 8,265
Less accumulated depreciation and amortization........... (4,905) (3,577)
------------ ---------
$ 5,878 $ 4,688
=========== ========

F-39
125

TARGET THERAPEUTICS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(UNAUDITED)

3. SUPPLEMENTAL CASH FLOW INFORMATION

NINE MONTHS ENDED
DECEMBER 31,
-------------------
1994 1993
------ ------
(IN THOUSANDS)

Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes................. $1,045 $1,313
Cash paid during the period for interest..................... 48 30

4. INCOME TAXES

For the nine months ended December 31, 1994 and 1993 the provision for
income taxes has been calculated by applying the estimated annual effective tax
rate to income before income taxes.

Effective April 1, 1993 the Company adopted Financial Accounting Standards
Board Statement 109, "Accounting for Income Taxes". As permitted by Statement
109, the Company elected to report the cumulative effect of the change currently
rather than restate the financial statements of prior years. The positive
cumulative effect of the change in method of accounting for income taxes of
$631,000 was recorded in the three-month period ended June 30, 1993.

F-40
126

NO PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH THE OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION NOT CONTAINED
IN THIS

$40,000,000
PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY COLLAGEN, TARGET OR THE
UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY TO
ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL
TO MAKE
[COLLAGEN LOGO]
SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY
DATE SUBSEQUENT TO THE DATE HEREOF.

------------------------------------------------------------
% EXCHANGEABLE
SUBORDINATED NOTES DUE 2002
TABLE OF CONTENTS

PAGE
------

Available Information.................... 2

EXCHANGEABLE FOR

Incorporation of Certain Documents of
Collagen by

SHARES OF COMMON STOCK OF

Reference.............................. 3
Incorporation of Certain Documents of
Target by Reference.................... 3
Prospectus Summary....................... 4
Risk Factors............................. 8

[TARGET LOGO]

Use of Proceeds.......................... 19
Capitalization of Collagen............... 19
Price Range of Target Common Stock
and Dividend Policy.................... 20
Selected Consolidated Financial Data
of Collagen............................ 21
Management's Discussion and Analysis of
Financial

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

Condition and Results of Operations of
Collagen............................... 22
Selected Consolidated Financial Data

PROSPECTUS

of Target.............................. 29
Management's Discussion and Analysis of
Financial

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

Condition and Results of Operations of
Target................................. 30
Business of Collagen..................... 37
Business of Target....................... 45
Management of Collagen................... 61
Management of Target..................... 64
Description of the Notes................. 67
Certain United States Federal Income
Tax Consequences....................... 77

ALEX. BROWN & SONS

Description of Target Capital Stock...... 81

INCORPORATED

Beneficial Ownership of Target Common
Stock by Collagen and Certain
Other Relationships.................... 83
Underwriting............................. 84
Legal Matters............................ 85
Experts.................................. 85
Index to Financial Statements............ F-1

April , 1995