2005 -...

2005 2 LettertoShareholders:TheYearinReview

4 FinancialHighlights:YearlyGrowth

5 PRO2:EverydayTriumphs

6 MarketforCONMED’sCommonStockandRelatedStockholderMatters

6 FiveYearSummaryofSelectedFinancialData

7 Management’sDiscussionandAnalysisofFinancialConditionandResultsofOperations

15 Management’sReportonInternalControlOverFinancialReporting

16 ReportofIndependentRegisteredPublicAccountingFirm

17 ConsolidatedBalanceSheets

18 ConsolidatedStatementsofIncome

19 ConsolidatedStatementsofShareholders’Equity

20 ConsolidatedStatementsofCashFlows

21 NotestoConsolidatedFinancialStatements

32 BoardofDirectorsBiographies

IBC ExecutiveandSeniorOfficers,ShareholderInformation

Contents

2

DearShareholders, March31,2006

Eugene R. Corasanti Joseph J. Corasanti

CONMED’srevenuesreachedarecord$617.0millionin2005,anincreaseof10.5%over2004.Mostofthisgrowthoccurredinthefirstsixmonthsoftheyearwithoverallsalesincreasing18.6%throughJune2005.Despitereportingtheserecordsales,ourexpectationsfortheCompanyin2005werenotachieved.Ouryear-end2005resultsfellshortofgoalsinallcategories:sales,netincomeandearningspershare.

FactorscontributingtotheCompany’spoorresultsincluded:

• SlowersalesgrowthversusexpectationsinallproductlinesexceptforEndosurgery,wherestronginternationalgrowthcompensatedforflatdomesticsales.

• Highercostofgoodssold,impactedbyhigherrawmaterialcostandhigheroverheadexpensesrelatedtoreducedvolumeandexpandedandimprovedqualityandregulatoryinitiatives.

WebelievethattheCompany’slowerthanexpectedsalesgrowthin2005resultedfromtwotemporaryproblemsandconditionsthatlargelyimpactedtheOrthopedicsideofourbusiness,whichrepresents55%oftotalsales.CONMED

experiencedseveralrecallsin2005whichwereasignificantdistractionforourOrthopedicsalesforceof210salesrepresentatives.WealsobelievethatthemarketgrowthforArthroscopyandPoweredSurgicalInstrumentsslowedin2005duetothehurricanesinthesoutheasternpartofourcountryandaslowerrateofgrowthforelectivesportsmedicinetypesofsurgicalprocedures.Wedonotexpecttheseconditionstopersistthroughout2006.Accordingly,wehaveforecastedimprovedorganicsalesgrowthfortheCompanyin2006over2005.

Compoundingoursalesweakness,weexperiencedtheeffectsofhighermanufacturingcostsinthesecondhalfof2005.Substantialcostincreasesoccurredinpurchasesofpetroleum-basedrawmaterials,suchasplasticsandresins.Approximately75%ofourproductsaresingle-usedisposables,andplasticrawmaterialsareoneofourmajorcomponents.Ourcostswerefurtherimpactedbyincreasedtransportationcostsandunfavorablemanufacturingoverheadvariancesresultingfromlowerthananticipatedsalesvolumesin2005.Further,westrategicallydecidedtoimproveandexpandourqualityandregulatorystructuretoensureour

LETTER TO ShAREhOLdERSThe Year in Review

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nextphaseofgrowth.Thisrequiredsubstantialheadcountincreasesinourmanufacturingfacilities.Duetolong-termpricingcontractswithmanyofourcustomers,wecouldnotquicklyoffsetthesecoststhroughpriceincreasesand,asaresult,ourprofitmarginsweresqueezedduring2005.

In2005,wealsoaddedanewcorporatequalityoversightfunctiontoimproveregulatorycomplianceinallofourfactories.OurexpectationisthatthiscentralizedapproachtoqualityandregulatorycompliancewillallowourCompanytogrowconsistentlyandprofitablybyimprovingcustomersatisfaction,increasingmanufacturingefficiencyandreducingscrap.

Ascommunicatedthroughouttheyear,wehavecontinuedtoexpandourexpendituresinresearchanddevelopmentandweareconfidentthatwewillseethefruitsofthisinvestmentinthefuture.

Asaresultoftheseresearchanddevelopmentactivities,welaunchedaseriesofnewproductsin2005.Intheorthopedicfield,weintroducedsevennewproductsattheAmericanAcademyofOrthopaedicSurgeonsmeeting.AmongthesewastheCrossPinSystemforACLreconstruction,whichfeaturesimprovedpull-outstrengthasaresultoftheCompany’sproprietarySelf-Reinforcedbioabsorbabletechnology.WealsointroducedtheAdvantage®TurboHandpiece,whichcombinesthebestfeaturesofourcurrentlineofshaverhandpieceswithlighterweight,higherspeedandincreasedtorque,andtheThRevo™,thefirsttriple-loadedsutureanchoronthemarket.

Inourpulseoximetryline,weintroducedthePRO2®,whichreliesonpatentedreflectancetechnologytoobtainbloodoxygenationreadings.Thisproprietarytechnologyisabletoobtainreliablemeasurementsfrompatientswhoseconditionsmakeitimpossibleforthepriortechnologytodeliverthiscriticalinformation.Forexample,burnpatientsandpatientsexperiencingtraumatypicallyareunabletogeneratereliablereadingsonstandardpulseoximetryproducts.Notsurprisingly,thisexcitingproducthascreatedverypositiveresponsesinfieldtrials.Wehaveplacedtheproductinsomehospitalsfortrialswheretheproducthasworkedsowell,thatthehospitalswerereluctanttoreturntheevaluationunitstous.WhileoursalesofthePRO2areonlynowrampingup,webelievethistechnologyhasabrightoutlook.

Welookforwardtothefuture.Ourbusinessmodelhasproventobesolid:growththroughservicingcustomerswithtop-notchproductsandmarket-leadingtechnologies.Ourmanagementteamhasneverbeenasstrongasitistoday.Wecontinueto

adheretothestrategywhichhasbroughtustowherewearetodaybyfocusingonachievingbothinternalandacquisitiongrowth.

In2006,ManagementintendstoemphasizeimprovingtheCompany’sprofitmargins.Wewillbeincreasingpricing,whereprudent,andworkingtoimprovemanufacturingandoperatingefficienciesatallfacilities.Throughtheseactionsin2006,wewillbebetterpositionedforimprovedprofitabilityin2007.

Asalways,wethankourdedicatedemployeesaroundtheworldandourshareholdersforyourcontinuedtrustandsupport.

JosephJ.CorasantiPresident,ChiefOperatingOfficer

EugeneR.CorasantiChairmanoftheBoardofDirectors,ChiefExecutiveOfficer

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Financial Highlights

5

InDecember,2005atragichousefirebadlyinjureda5yearoldMinnesotaboy.Burnedover95%ofhisbody,hewastakentotheburncenteratHennepinCountyMedicalCentertoreceivestate-of-theartburncare.

Treatingandmonitoringburnpatientscanbeespeciallychallenging,especiallywhensomuchburnedtissueisinvolved,destroyingtypicalsitesforconventionalmonitoring.

Pulseoximetryisanimportantmonitoringtechnologyusedtomeasurebloodoxygenlevelsinmanyhospitalizedpatients.Itissowidelyusedthatitisconsideredbyclinicianstobea“5thvitalsign”,alongwiththefourothervitalsigns:temperature,heartrate,bloodpressureandrespirationrate.Conventionalpulseoximetersusetwolightemittersandaseparatephotodetectorthatareplacedoneachsideofthepatient’sfinger,toeorear.Theyworkbyshiningredandinfraredlightthroughthetissueandmeasuringtheamountoflightthatisabsorbedbyoxygenatedhemoglobininarterialredbloodcells.Whilethisconventional“transmission”oximetrytechnologyworksinmostcases,itisfrequentlydifficulttogetmeasurementsfromtheseperipheralsites,particularlyincriticalpatientswhenitisneededthemost.

Inthecaseofthe5yearoldburnpatient,therewerenouninvolvedfingersortoesthatcouldbeusedtoplacetheprobes.Hisearswerealsodeeplyburnedandcouldnotbeused.

“Wevirtuallyhadnoavailablesitetomonitorthispatient,otherthanthetopofhishead.Obviously,wecouldn’tuseconventionaloximetryprobesbecausetheyarelimitedmostlytoperipheraldigits”,explainsDr.JohnA.Twomey,DirectoroftheburncenteratHennepinCountyMedicalCenterinMinneapolis.“TheCONMEDPRO2®pulseoximeteristheonlydevicethatwecoulduseforthispatient.WewereabletocontinuouslyandreliablymonitorSpO2andpulseratefromthetopoftheforeheadandscalp.”

CONMED’snewlyintroducedPRO2pulseoximeterutilizesadifferentapproachtomeasurebloodoxygen.Ratherthanshininglightthroughafinger,PRO2utilizesaflatsensoraboutthesizeofanickelthatmeasureslightreflectedfromtissue.Thisuniquelydesignedreflectancetechnologyallowsanindividualsensortobeplacedonaflatcorebodysurfacesuchastheforeheadandback.ItistheonlypulseoximeterthatisclearedbytheFDAforuseonboththeforeheadandback.

BurnpatientsarenottheonlypatientsthatcanbenefitfromCONMED’sreflectancetechnology.“ManypatientshavecompromisedperipheralcirculationthatpresentproblemswhentryingtomeasureSpO2usingtheconventionalapproach”,accordingtoDr.Twomey.“Hypotensivepatientsandthoseinshock,patientswithperipheralvasculardisease,oneswiththickdigitsorpatientssufferingfromhypothermiaaftertraumaorsurgerycanbeproblematicforconventionalfingertypeprobes.”Inaddition,measuringfromcorebodylocationscandetectcriticaloxygendesaturationeventsuptoaminuteandahalffastercomparedtosensorsplacedonthedigits.“PRO2isanimportantadditiontoourarmamentariumformonitoringcriticalpatients”explainsDr.Twomey.

Asforthe“miracle”5yearoldatHennepinCountyBurnCenter,heismakingaslowbutremarkablerecoverythanksinparttoadvancedmedicaltechnologiessuchasCONMED’sPRO2reflectancepulseoximeter.

Dr. John Twomey showing the PRO2 reflectance pulse oximeter. The unique flat sensor design allows it to be placed on core body locations such as the forehead and back.

...Everyday Triumphs.

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(Inthousands,exceptpersharedata)YearsEndedDecember31, 2001 2002 2003 2004 2005StatementsofOperationsData(1): Netsales $ 428,722 $ 453,062 $ 497,130 $ 558,388 $ 617,305 Incomefromoperations 68,958 79,349 79,955 63,161 63,748 Netincome(2) 24,406 34,151 32,082 33,465 31,994Earningspershare: Basic $ 1.02 $ 1.25 $ 1.11 $ 1.13 $ 1.09 BasicadjustedforSFAS142(2) 1.25 1.25 1.11 1.13 1.09

Diluted 1.00 1.23 1.10 1.11 1.08 DilutedadjustedforSFAS142(2) 1.23 1.23 1.10 1.11 1.08Weightedaveragenumberofcommonsharesincalculating: Basicearningspershare 24,045 27,337 28,930 29,523 29,300 Dilutedearningspershare 24,401 27,827 29,256 30,105 29,736OtherFinancialData: Depreciationandamortization $ 30,148 $ 22,370 $ 24,854 $ 26,868 $ 30,786 Capitalexpenditures 14,443 13,384 9,309 12,419 16,242

BalanceSheetData(atperiodend): Cashandcashequivalents $ 1,402 $ 5,626 $ 5,986 $ 4,189 $ 3,454 Totalassets 701,608 742,140 805,058 872,825 903,783 Long-termdebt(includingcurrentportion) 335,929 257,387 264,591 294,522 306,851 Totalshareholders’equity 283,634 386,939 433,490 447,983 453,006

(1)Resultsofoperationsofacquiredbusinesseshavebeenrecordedinthefinancialstatementssincethedateofacquisition.SeeadditionaldiscussioninNote2totheConsolidatedFinancialStatements.

(2)EffectiveJanuary1,2002,theprovisionsofStatementofFinancialAccountingStandardsNo.142,“GoodwillandOtherIntangibleAssets,”(“SFAS142”)wereadoptedrelativetothecessationofamortizationforgoodwillandcertainintangibleassets.HadweaccountedforgoodwillandcertainintangiblesinaccordancewithSFAS142forallperiodspresented,netincomewouldhavebeen$30.1millionin2001.

Ourcommonstock,parvalue$.01pershare,istradedontheNASDAqStockMarketunderthesymbol“CNMD.”AtFebruary13,2006,therewere1,138registeredholdersofourcommonstockandapproximately7,661accountsheldin“streetname.”

ThefollowingtablesetsforthquarterlyhighandlowsalespricesfortheyearsendedDecember31,2004and2005,asreportedbytheNASDAqStockMarket.

2004 2005 Period High Low High Low ________________________________________________________________________________________________________ Firstquarter $ 29.54 $ 23.72 $ 30.16 $ 26.69 Secondquarter 30.89 24.00 32.58 29.27 Thirdquarter 27.92 20.73 31.81 27.44 Fourthquarter 30.02 25.47 27.85 22.55

Wedidnotpaycashdividendsonourcommonstockduring2004or2005anddonotcurrentlyintendtopaydividendsfortheforeseeablefuture.FuturedecisionsastothepaymentofdividendswillbeatthediscretionoftheBoardofDirectors,subjecttoconditionsthenexisting,includingourfinancialrequirementsandconditionandthelimitationandpaymentofcashdividendscontainedindebtagreements.

OurBoardofDirectorshasauthorizedasharerepurchaseprogram;SeeNote8totheConsolidatedFinancialStatementsforfurtherdiscussion.

lFiveYearSummarYoFSelectedFinancialdata

lmarketForconmed’ScommonStockandrelatedStockholdermatterS

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ThefollowingdiscussionshouldbereadinconjunctionwiththeFiveYearSummaryofSelectedFinancialData,andourConsolidatedFinancialStatementsandrelatednotescontainedelsewhereinthisAnnualReport.

OverviewofCONMEDCorporationCONMEDCorporation(“CONMED,”the“Company,”“we”or“us”)isamedicaltechnologycompanywithanemphasisonsurgicaldevicesandequipmentforminimallyinvasiveproceduresandmonitoring.TheCompany’sproductsservetheclinicalareasofarthroscopy,poweredsurgicalinstruments,electrosurgery,cardiacmonitoringdisposables,endosurgeryandendoscopictechnologies.Theyareusedbysurgeonsandphysiciansinavarietyofspecialtiesincludingorthopedics,generalsurgery,gynecology,neurosurgery,andgastroenterology.Theseproductlinesandthepercentageofconsolidatedrevenuesassociatedwitheach,areasfollows: 2003 2004 2005Arthroscopy 37% 37% 34%PoweredSurgicalInstruments 25 23 22Electrosurgery 15 15 14PatientCare 14 14 12Endosurgery 9 8 8EndoscopicTechnologies — 3 10 ______ ______ ______ ConsolidatedNetSales 100% 100% 100% ______ ______ ______ ______ ______ ______

Asignificantamountofourproductsareusedinsurgicalprocedureswithapproximately75%ofourrevenuesderivedfromthesaleofdisposableproducts.Ourcapitalequipmentofferingsalsofacilitatetheongoingsaleofrelateddisposableproductsandaccessories,thusprovidinguswitharecurringrevenuestream.WemanufacturesubstantiallyallofourproductsinfacilitieslocatedintheUnitedStates,MexicoandFinland.Wemarketourproductsbothdomesticallyandinternationallydirectlytocustomersandthroughdistributors.Internationalsalesapproximated33%,35%and37%in2003,2004and2005,respectively.

BusinessEnvironmentandOpportunitiesTheagingoftheworldwidepopulationalongwithlifestylechanges,continuedcostcontainmentpressuresonhealthcaresystemsandthedesireofcliniciansandadministratorstouselessinvasive(ornon-invasive)proceduresareimportanttrendswhicharedrivingthegrowthinourindustry.Webelievethatwithourbroadproductofferingofhighqualitysurgicalandpatientcareproducts,wecancapitalizeonthisgrowthforthebenefitoftheCompanyandourshareholders.

Inordertofurtherourgrowthprospects,wehavehistoricallyusedstrategicbusinessacquisitionsandexclusivedistributionrelationships,includingthefollowing,tocontinuetodiversifyourproductofferings,increaseourmarketshareandrealizeeconomiesofscale.

• InMarch2003,wemadeimportantprogressinbroadeningourofferingofbioabsorbableimplantswithinourArthroscopyproductlinewiththeacquisitionofBionxImplants,Inc.(the“Bionxacquisition”–SeeNote2totheConsolidatedFinancialStatements).

• InJanuary2004,weexpandedourPatientCareofferingsthroughanagreementwithDolphinMedical,Inc.,asubsidiaryofOSISystems,Inc.,underwhichwebecametheexclusiveNorthAmericandistributorforafulllineofDolphin®pulseoximetryproducts.

• InSeptember2004,weaddedanentirelynewproductlinewiththeacquisitionofcertainassetsoftheEndoscopicTechnologiesDivisionofC.R.Bard,Inc.(the“BardEndoscopicTechnologiesacquisition”-SeeNote2totheConsolidatedFinancialStatements).TheEndoscopicTechnologiesproductlineconsistsofvariousdisposableproductsusedbygastroenterologiststodiagnoseandtreatdiseasesofthedigestivetract.TheseproductsalsocomplementourexistingElectrosurgeryproductofferings.

Wehaveavarietyofresearchanddevelopmentinitiativesfocusedineachofourprincipalproductlines.AmongthemostsignificantoftheseeffortsistheEndotrachealCardiacOutputMonitor(“ECOM”).OurECOMproductofferingisexpectedtoreplacecathetermonitoringofcardiacoutputwithaspeciallydesignedendotrachealtubewhichutilizesproprietarybio-impedancetechnology.Alsoofsignificanceareourresearchanddevelopmenteffortsintheareaoftissue-sealingforelectrosurgeryandhighdefinitionminimally-invasivesurgerycamerasystemsforarthroscopy.

Continuedinnovationandcommercializationofnewproprietaryproductsandprocessesareessentialelementsofourlong-termgrowthstrategy.InMarch2006,weplantounveilseveralnewproductsattheAmericanAcademyofOrthopedicSurgeonsAnnualMeetingwhichwillenhanceourarthroscopyandpoweredinstrumentproductofferings.Additionally,werecentlyintroducedourPRO2®productwhichpermitsnon-invasiveanalysisofbloodoxygenlevelsinclinicalsituationswhichpreviouslycouldnotbeaccomplishedusingtraditionalnon-invasivetechniques.

BusinessChallengesDuringthesecondhalfof2005weexperiencedlowerthanexpectedsales,asaresult,webelieve,oflowerthananticipatedsurgicalprocedures.Inaddition,weexperiencedsignificantcostincreaseswithrespecttopetroleum-basedrawmaterialssuchasplasticresinsandpolymersusedintheproductionofmanyofourproducts,particularlyourdisposableproducts,asaresultoftheincreasedcostofoilfollowingHurricaneKatrina.Wealsoexperiencedsignificantincreasesinin-boundandout-boundfreightcosts.During2006,webelievethenumberofsurgicalprocedureswillreturntomorenormallevelsresultinginincreasedsalesofourproducts.Inaddition,weplantoimplementlimitedpriceincreasestooffsetthemanufacturingcostincreasesasaresultoftheincreasesinthepriceofoil.

OurfacilitiesaresubjecttoperiodicinspectionbytheUnitedStatesFoodandDrugAdministration(“FDA”)for,amongotherthings,conformancetoqualitySystemRegulationandCurrentGoodManufacturingPractice(“CGMP”)requirements.Followinganinspection,theFDAtypicallyprovidesitsobservations,ifany,intheformofaForm483(NoticeofInspectionalObservations)withspecificobservationsconcerningpotentialviolationofregulations.InDecember2004,theFDAinitiatedaninspectionofourLargo,Floridamanufacturingfacility.Followingtheinspection,theFDAissuedtousaForm483noticewhichincludedobservationsrelatedtoourcorrectiveandpreventativeactionproceduresfornonconformingproductsandotherqualityproblems.AlthoughwerespondedtotheForm483toaddressandcorrectthedeficiencies,theFDAfurtherissuedawarningletterinJune2005relatingtotheseobservations.WesubsequentlyrespondedtotheFDAwithaplanofthecorrectiveactionsthatwehavetakenorproposedtotake.Inthatresponse,wecommittedtofurtherdevelopingandimplementing,inatimelymanner,theprinciplesandstrategiesofaCompany-widesystems-basedqualitymanagementforimprovedCGMPcompliance,operationalperformanceandefficiencies.Weconsider

lmanagement’SdiScuSSionandanalYSiSoFFinancialconditionandreSultSoFoperationS

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thereceiptofawarninglettertobeanimportantregulatoryevent.Accordingly,weareundertakingcorrectiveactionsthatwebelievewillinvolvesignificantadditionalcostsfortheCompany.However,evenwithoureffortstoimplementaCompany-widequalitysystemsinitiative,therecanbenoassurancethattheactionsundertakenbytheCompanywillensurethatwewillnotreceiveanadditionalForm483orwarningletter,orotherregulatoryactionswhichmayincludeconsentdecreesorfines.

WeremaininlitigationagainstJohnson&Johnsonandseveralofitssubsidiaries,includingEthicon,Inc.forviolationoffederalandstateantitrustlaws.ThelawsuitclaimsthatJohnson&Johnsonengagedinillegalandanticompetitiveconductwithrespecttosalesofproductusedinendoscopicsurgery,resultinginhigherpricestoconsumersandtheexclusionofcompetition.WehavesoughtreliefwhichincludesaninjunctionrestrainingJohnson&Johnsonfromcontinuingitsanticompetitivepracticeaswellasreceivingthemaximumamountofdamagesallowedbylaw.Whilewebelievethatourclaimsarewell-groundedinfactandlaw,therecanbenoassurancethatwewillbesuccessfulinourclaim.Inaddition,thecostsassociatedwithpursuingthisclaimhavebeensubstantial.SeeNote11totheConsolidatedFinancialStatements.

CriticalAccountingEstimatesPreparationofourfinancialstatementsrequiresustomakeestimatesandassumptionswhichaffectthereportedamountsofassets,liabilities,revenuesandexpenses.Note1totheConsolidatedFinancialStatementsdescribesthesignificantaccountingpoliciesusedinpreparationoftheConsolidatedFinancialStatements.ThemostsignificantareasinvolvingmanagementjudgmentsandestimatesaredescribedbelowandareconsideredbymanagementtobecriticaltounderstandingthefinancialconditionandresultsofoperationsofCONMEDCorporation.

RevenueRecognitionRevenueisrecognizedwhentitlehasbeentransferredtothecustomerwhichisatthetimeofshipment.Thefollowingpoliciesapplytoourmajorcategoriesofrevenuetransactions:

• Salestocustomersareevidencedbyfirmpurchaseorders.Titleandtherisksandrewardsofownershiparetransferredtothecustomerwhenproductisshippedunderourstatedshippingterms.Paymentbythecustomerisdueunderfixedpaymentterms.

• Weplacecertainofourcapitalequipmentwithcustomersinreturnforcommitmentstopurchasedisposableproductsovertimeperiodsgenerallyrangingfromonetothreeyears.Inthesecircumstances,norevenueisrecognizeduponcapitalequipmentshipmentandwerecognizerevenueuponthedisposableproductshipment.Thecostoftheequipmentisamortizedoverthetermofindividualcommitmentagreements.

• ProductreturnsareonlyacceptedatthediscretionoftheCompanyandinaccordancewithour“ReturnedGoodsPolicy.”Historicallythelevelofproductreturnshasnotbeensignificant.Weaccrueforsalesreturns,rebatesandallowancesbaseduponananalysisofhistoricalcustomerreturnsandcredits,rebates,discountsandcurrentmarketconditions.

• Ourtermsofsaletocustomersgenerallydonotincludeanyobligationstoperformfutureservices.Limitedwarrantiesareprovidedforcapitalequipmentsalesandprovisionsforwarrantyareprovidedatthetimeofproductsalebaseduponananalysisofhistoricaldata.

• Amountsbilledtocustomersrelatedtoshippingandhandlinghavebeenincludedinnetsales.Shippingandhandlingcostsincludedin

sellingandadministrativeexpensewere$8.3million,$9.3millionand$11.2millionfor2003,2004and2005,respectively.

• Weselltoadiversifiedbaseofcustomersaroundtheworldand,therefore,believethereisnomaterialconcentrationofcreditrisk.

• Weassesstheriskoflossonaccountsreceivableandadjusttheallowancefordoubtfulaccountsbasedonthisriskassessment.Historically,lossesonaccountsreceivablehavenotbeenmaterial.Managementbelievesthattheallowancefordoubtfulaccountsof$1.5millionatDecember31,2005isadequatetoprovideforprobablelossesresultingfromaccountsreceivable.

InventoryReservesWemaintainreservesforexcessandobsoleteinventoryresultingfromtheinabilitytosellourproductsatpricesinexcessofcurrentcarryingcosts.Themarketsinwhichweoperatearehighlycompetitive,withnewproductsandsurgicalproceduresintroducedonanon-goingbasis.Suchmarketplacechangesmayresultinourproductsbecomingobsolete.Wemakeestimatesregardingthefuturerecoverabilityofthecostsofourproductsandrecordaprovisionforexcessandobsoleteinventoriesbasedonhistoricalexperience,expirationofsterilizationdatesandexpectedfuturetrends.Ifactualproductlifecycles,productdemandoracceptanceofnewproductintroductionsarelessfavorablethanprojectedbymanagement,additionalinventorywrite-downsmayberequired.Webelievethatourcurrentinventoryreservesareadequate.

BusinessAcquisitionsWehaveahistoryofgrowththroughacquisitions.Assetsandliabilitiesofacquiredbusinessesarerecordedunderthepurchasemethodofaccountingattheirestimatedfairvaluesasofthedateofacquisition.Goodwillrepresentscostsinexcessoffairvaluesassignedtotheunderlyingnetassetsofacquiredbusinesses.Otherintangibleassetsprimarilyrepresentallocationsofpurchasepricetoidentifiableintangibleassetsofacquiredbusinesses.Wehaveaccumulatedgoodwillof$335.7millionandotherintangibleassetsof$191.4millionasofDecember31,2005.

InaccordancewithStatementofFinancialAccountingStandardsNo.142,“GoodwillandOtherIntangibleAssets,”(“SFAS142”),goodwillandintangibleassetsdeemedtohaveindefinitelivesarenotamortized,butaresubjecttoatleastannualimpairmenttesting.Theidentificationandmeasurementofgoodwillimpairmentinvolvestheestimationofthefairvalueofourbusiness.Estimatesoffairvaluearebasedonthebestinformationavailableasofthedateoftheassessment,whichprimarilyincorporatemanagementassumptionsaboutexpectedfuturecashflowsandcontemplateothervaluationtechniques.Futurecashflowsmaybeaffectedbychangesinindustryormarketconditionsortherateandextenttowhichanticipatedsynergiesorcostsavingsarerealizedwithnewlyacquiredentities.

Intangibleassetswithafinitelifeareamortizedovertheestimatedusefullifeoftheasset.Intangibleassetswhichcontinuetobesubjecttoamortizationarealsoevaluatedtodeterminewhethereventsandcircumstanceswarrantarevisiontotheremainingperiodofamortization.Anintangibleassetisdeterminedtobeimpairedwhenestimatedundiscountedfuturecashflowsindicatethatthecarryingamountoftheassetmaynotberecoverable.Animpairmentlossisrecognizedbyreducingtherecordedvaluetoitscurrentfairvalue.Althoughnogoodwillorotherintangibleassetimpairmenthasbeenrecordedtodate,therecanbenoassurancethatfutureimpairmentwillnotoccur.Itisourpolicytoperformannualimpairmenttestsinthefourthquarter.SeeNote2totheConsolidatedFinancialStatementsfordiscussiononrecentacquisitions.

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PensionPlanWesponsoradefinedbenefitpensionplancoveringsubstantiallyallouremployees.OverallbenefitlevelsprovidedundertheplanwerereducedeffectiveJanuary1,2004resultinginanimmediatereductionintheprojectedbenefitobligationofapproximately$6.4million.Majorassumptionsusedinaccountingfortheplanincludethediscountrate,expectedreturnonplanassets,rateofincreaseinemployeecompensationlevelsandexpectedmortality.AssumptionsaredeterminedbasedonCompanydataandappropriatemarketindicators,andareevaluatedannuallyasoftheplan’smeasurementdate.Achangeinanyoftheseassumptionswouldhaveaneffectonnetperiodicpensioncostsreportedintheconsolidatedfinancialstatements.

Lowermarketinterestrateshaveresultedinusloweringthediscountrateusedindeterminingpensionexpensefrom5.75%in2005to5.55%in2006.Thischangeinassumptionwillresultinhigherpensionexpenseduring2006.ThisratewasdeterminedbyusingtheCitigroupPensionLiabilityIndexratewhich,webelieve,isareasonableindicatorofourplan’sfuturepaymentstream.

Wehaveusedanexpectedrateofreturnonpensionplanassetsof8.0%forpurposesofdeterminingthenetperiodicpensionbenefitcost.Indeterminingtheexpectedreturnonpensionplanassets,weconsidertherelativeweightingofplanassets,thehistoricalperformanceoftotalplanassetsandindividualassetclassesandeconomicandotherindicatorsoffutureperformance.Inaddition,weconsultwithfinancialandinvestmentmanagementprofessionalsindevelopingappropriatetargetedratesofreturn.

Wehaveestimatedourrateofincreaseinemployeecompensationlevelsat3.0%consistentwithourinternalbudgeting.

AsofDecember31,2004,wechangedfromthe1984UnisexPensionmortalitytabletothe1994GroupAnnuityReservingmortalitytableforpurposesofdeterminingexpectedmortality.Thischangeinassumptionresultedinhigherpensionexpensein2005.

Basedontheseandotherfactors,2006pensionexpenseisestimatedatapproximately$6.9millionascomparedto$5.6millionin2005.Actualexpensemayvarysignificantlyfromthisestimate.

Wedonotexpecttheretobeanyrequiredcontributionstoourpensionplanin2006.SeeNote10totheConsolidatedFinancialStatementsforfurtherdiscussion.

IncomeTaxesTherecordedfuturetaxbenefitarisingfromnetdeductibletemporarydifferencesandtaxcarryforwardsisapproximately$21.7millionatDecember31,2005.Managementbelievesthatourearningsduringtheperiodswhenthetemporarydifferencesbecomedeductiblewillbesufficienttorealizetherelatedfutureincometaxbenefits.

WehaveestablishedavaluationallowancetoreflecttheuncertaintyofrealizingthebenefitsofcertainnetoperatinglosscarryforwardsrecognizedinconnectionwiththeBionxacquisition.Anysubsequentlyrecognizedtaxbenefitsassociatedwiththevaluationallowancewouldbeallocatedtoreducegoodwill.Inassessingtheneedforavaluationallowance,weestimatefuturetaxableincome,consideringthefeasibilityofongoingtaxplanningstrategiesandtherealizabilityoftaxlosscarryforwards.Valuationallowancesrelatedtodeferredtaxassetsmaybeimpactedbychangestotaxlaws,changestostatutorytaxratesandfuturetaxableincomelevels.SeeNote7totheConsolidatedFinancialStatementsforfurtherdiscussion.

ResultsofOperationsThefollowingtablepresents,asapercentageofnetsales,certaincategoriesincludedinourconsolidatedstatementsofincomefortheperiodsindicated:YearsEndedDecember31, 2003 2004 2005Netsales 100.0% 100.0% 100.0%Costofsales 47.8 48.6 49.3 _______ ______________ Grossmargin 52.2 51.4 50.7Sellingandadministrativeexpense 31.7 32.8 35.1Researchanddevelopmentexpense 3.4 3.6 4.1Write-offofpurchasedin-processresearchanddevelopmentassets 1.7 2.9 —Otherexpense(income),net (0.6) 0.8 1.0 _______ ______________ Incomefromoperations 16.0 11.3 10.5Lossonearlyextinguishmentofdebt 1.6 0.1 —Interestexpense 3.7 2.3 2.6 _______ ______________Incomebeforeincometaxes 10.7 8.9 7.9Provisionforincometaxes 4.2 2.9 2.7 _______ ______________ Netincome 6.5% 6.0% 5.2% _______ ______________ _______ ______________

2005Comparedto2004Salesfor2005were$617.3million,anincreaseof$58.9million(10.5%)comparedtosalesof$558.4millionin2004.TheBardEndoscopicTechnologiesacquisitionaccountedfor$43.2millionoftheincreaseandfavorableforeigncurrencyexchangeratesaccountedfor$3.6million.TheBardEndoscopicTechnologiesacquisitionisdescribedmorefullyinNote2totheConsolidatedFinancialStatements.

• Arthroscopysalesincreased$6.5million(3.2%)in2005to$211.4millionfrom$204.9millionin2004,principallyasaresultofincreasedsalesofourprocedure-specific,resectionandvideoimagingproductsforarthroscopyandgeneralsurgery,andourintegratedoperatingroomsystemsandequipment.

• Poweredsurgicalinstrumentsalesincreased$3.4million(2.6%)in2005to$132.0millionfrom$128.6millionin2004,principallyasaresultofincreasedsalesofourPowerPro®lineoflargebonepoweredinstrumentproductsandourPowerProMax®lineofsmallbonepoweredinstrumentproducts.

• Patientcaresalesremainedflatat$75.9millionin2005and2004asincreasedsalesofpulseoximetryproductsanddefibrillatorpadsoffsetdecreasedsalesofECGelectrodes.

• Electrosurgerysalesincreased$2.6million(3.0%)in2005to$88.5millionfrom$85.9millionin2004,principallyasaresultofincreasedsalesofourSystem5000™electrosurgicalgeneratorandUltraclean™activeelectrodes.

• Endosurgerysalesincreased$3.2million(6.8%)in2005to$50.6millionfrom$47.4millionin2004,asaresultofincreasedsalesofourskinstaplers,suction/irrigationproductsandvariouslaparoscopicinstrumentproductsandsystems.

• EndoscopicTechnologiessalesincreased$43.2million(275.2%)in2005to$58.9millionfrom$15.7millionin2004,asaresultoftheinclusionofafullyearofsalesin2005relatedtotheBardEndoscopicTechnologiesacquisition.

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Costofsalesincreasedto$304.3millionin2005comparedto$271.5millionin2004,primarilyasaresultofincreasedsalesvolumesineachofourprincipalproductlinesasdescribedabove.Grossprofitmarginsdecreased0.7percentagepointsfrom51.4%in2004to50.7%in2005primarilyasaresultofsignificantcostincreaseswithrespecttopetroleum-basedrawmaterialssuchasplasticresinsandpolymersusedintheproductionofmanyofourproductsandhigherspendingrelatedtoqualityassurance.Thesehighercosts(approximately1.2percentagepoints)morethanoffsettheimprovementinmarginsweexperiencedasaresultoftheadditionofthehighermarginproductsacquiredintheBardEndoscopicTechnologiesacquisition(0.5percentagepoints).

During2005and2004,respectively,weincurred$7.8millionand$4.4millionofacquisition-relatedexpenseswhichhavebeenincludedincostofsales.The$7.8millionofacquisition-relatedchargesincludedincostsofsalesin2005,consistsofthefollowing:$0.5millionofexpensewhichrepresentsaportionofthestep-uptofairvaluerecordedrelatingtothesaleofinventoryacquiredthroughtheBardEndoscopicTechnologiesacquisition;and$7.3millioninchargesrepresentingtheincrementalcostsweareincurringduringatransitionperiodinwhichwearecontinuingtopurchasetheacquiredproductsfromC.R.Bard.During2006,weexpecttocontinuetoexperiencehigherincrementalcostsuntilmanufacturingoftheacquiredproductsisfullyintegratedintoourfacilitiesandwehavesoldallofthehighercostinventorypurchasedfromC.R.Bard.

Sellingandadministrativeexpenseincreasedto$216.7millionin2005ascomparedto$183.2millionin2004.Sellingandadministrativeexpenseasapercentageofnetsalesincreasedto35.1%in2005from32.8%in2004.Thisincreaseof2.3percentagepointsisprimarilyattributabletoincreasedadministrativeexpensesassociatedwithhigherdistributioncosts(0.4percentagepoints)dueinparttohigherpetroleumprices;higherpensioncosts(0.2percentagepoints)dueprimarilyasaresultofchangesinactuarialassumptions(see“PensionPlan”sectionof“CriticalAccountingEstimates”above);increasedspendingoncorporatequalitysystemsandmanagement(0.2percentagepoints)toensurewecontinuetomaintainappropriateregulatorycompliance;increasedsellingandmarketingcostsassociatedwiththeEndoscopicTechnologiesbusiness(0.3percentagepoints);otherincreasesinsellingandadministrativecosts(1.2percentagepoints)includingtheJohnson&Johnsonlitigation(seeNote11totheConsolidatedCondensedFinancialStatements).

Researchanddevelopmentexpensewas$25.5millionin2005comparedto$20.2millionin2004.Asapercentageofnetsales,researchanddevelopmentexpenseincreasedto4.1%in2005from3.6%in2004.TheincreaseinresearchanddevelopmentexpenseasapercentageofsalesisprincipallyaresultofincreasedspendingonthedevelopmentofourPRO2®reflectancepulseoximetrysystemandECOMendotrachealcardiacoutputmonitorforourPatientCarebusinessandtheadditionoftheEndoscopicTechnologiesbusinessinSeptember2004.

AsdiscussedinNote2totheConsolidatedFinancialStatements,wewrote-off$16.4millionofpurchasedin-processresearchanddevelopmentassetsassociatedwiththeBardEndoscopicTechnologiesacquisitionin2004.Thistechnologyiscurrentlyinavarietyofphasesrangingfromtheconceptphasetobeingintroducedinthemarketplace.

AsdiscussedinNote12totheConsolidatedFinancialStatements,otherexpensein2005consistedof$1.5millionofexpensesassociatedwiththeterminationofoursurgicallightsproductoffering,$4.1millionofacquisitiontransitionandintegrationexpensesrelatedtotheBardEndoscopicTechnologiesacquisition,$0.7millionin

environmentalsettlementcostsand$0.8millionofexpenserelatedtothelossonanequityinvestment.Otherexpensein2004consistedprimarilyof$2.4millionofexpensesassociatedwiththeterminationofoursurgicallightsproductofferingand$1.5millionofexpensesrelatedtotheBardEndoscopicTechnologiesacquisition.

During2004,werecorded$0.8millioninlossesontheearlyextinguishmentofdebtrelatedtotherefinancingofaportionofthetermloansunderourseniorcreditagreementthroughtheissuanceof2.50%convertibleseniorsubordinatednotes.SeeadditionaldiscussionunderManagement’sDiscussionandAnalysisofFinancialConditionandResultsofOperations—LiquidityandCapitalResourcesandNote6totheConsolidatedFinancialStatements.

Interestexpensein2005was$15.6millioncomparedto$12.8millionin2004.Theincreaseininterestexpenseisprimarilyaresultofhigherweightedaverageborrowingsoutstandingin2005ascomparedto2004andhigherweightedaverageinterestratesonourborrowings(4.69%in2005ascomparedto4.17%in2004)inclusiveofthefinancechargeonouraccountsreceivablesalefacility.Theincreaseinweightedaverageinterestratesonourborrowingisprimarilyaresultofourincreasedborrowingsagainstourrevolvingcreditfacilitycoupledwithoverallincreasesininterestratesonourvariableratedebt.

Aprovisionforincometaxeswasrecordedataneffectiverateof33.6%in2005and32.5%in2004.Theeffectiveratefor2005washigherthan2004becausethe2004effectivetaxratereflectedanadjustmenttotheestimatedbenefittoberealizedfromtheExtraterritorialIncomeExclusiontaxrulesonforeignsales.AreconciliationoftheUnitedStatesstatutoryincometaxratetooureffectivetaxrateisincludedinNote7totheConsolidatedFinancialStatements.

2004Comparedto2003Salesfor2004were$558.4million,anincreaseof$61.3million(12.3%)comparedtosalesof$497.1millionin2003.TheBionxacquisitionandBardEndoscopicTechnologiesacquisitionaccountedfor$3.3millionand$15.7millionoftheincrease,respectively,andfavorableforeigncurrencyexchangeratesaccountedfor$9.7million.TheBionxacquisitionandBardEndoscopicTechnologiesacquisitionaredescribedmorefullyinNote2totheConsolidatedFinancialStatements.

• Arthroscopysalesincreased$22.9million(12.6%)in2004to$204.9millionfrom$182.0millionin2003,principallyasaresultoftheBionxacquisitionandincreasedsalesofourprocedure-specific,kneereconstruction,softtissuefixationandvideoimagingproductsforarthroscopyandgeneralsurgery.Thisincreasewasoffsetinpartbyreducedsalesofintegratedoperatingroomsystemsandequipment.

• Poweredsurgicalinstrumentsalesincreased$6.6million(5.4%)in2004to$128.6millionfrom$122.0millionin2003,principallyasaresultofincreasedsalesofourPowerPro®lineoflargeboneinstruments.Thisincreasewaspartiallyoffsetbydecreasedsalesofoursmallboneinstrumentsandspecialtyproductofferings.

• Patientcaresalesincreased$5.9million(8.4%)in2004to$75.9millionfrom$70.0millionin2003,principallyasaresultofincreasedsalesofourpulseoximetrymonitoringdevices,ECGelectrodes,surgicalsuctioninstrumentsandotherpatientcareproducts.

• Electrosurgerysalesincreased$8.6million(11.1%)in2004to$85.9millionfrom$77.3millionin2003,principallyasaresultofincreasedsalesofelectrosurgicaldisposablegroundpadsandpencils.

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• Endosurgerysalesincreased$1.6million(3.5%)in2004to$47.4millionfrom$45.8millionin2003,asaresultofincreasedsalesofourvariouslaparoscopicinstrumentproductsandsystems.

• EndoscopicTechnologiessalesfor2004were$15.7millionrepresentingtheinclusionofresultsofoperationsfortheformerEndoscopicTechnologiesDivisionofC.R.Bardsincethedateofacquisition.

Costofsalesincreasedto$271.5millionin2004comparedto$237.4millionin2003,primarilyasaresultofincreasedsalesvolumesineachofourprincipalproductlinesasdescribedabove.Grossprofitmarginsdecreasedfrom52.2%in2003to51.4%in2004.Weincurred$4.4millionand$1.3millionofacquisition-relatedexpensesduring2004and2003,respectively,whichhavebeenincludedincostofsales.Thedecreaseingrossmarginpercentagein2004ascomparedto2003isprincipallyduetotheincreaseinacquisition-relatedexpenses.

The$4.4millionofacquisition-relatedchargesincludedincostsofsalesin2004,consistsofthefollowing:$2.3millionofexpensewhichrepresentsaportionofthestep-uptofairvaluerecordedrelatingtothesaleofinventoryacquiredthroughtheBardEndoscopicTechnologiesacquisition;and$2.1millioninchargesrepresentingtheincrementalcostsweincurredaspartofthetransitionperiodinwhichwearecontinuingtopurchasetheacquiredproductsfromC.R.Bard.

Sellingandadministrativeexpenseincreasedto$183.2millionin2004ascomparedto$157.5millionin2003.Sellingandadministrativeexpenseasapercentageofnetsalesincreasedto32.8%in2004from31.7%in2003.Thisincreaseof1.1percentagepointsisattributabletoincreasedsellingexpensesprimarilyassociatedwiththetransitiontoalarger,independentsalesagentbasedsalesforceinourArthroscopyandPoweredSurgicalInstrumentproductlines(0.6percentagepoints)andincreasedadministrativeexpensesassociatedwithlitigationagainstJohnson&Johnson(seeNote11totheConsolidatedFinancialStatements)andourSarbanes-Oxleycomplianceprogram(0.5percentagepoints).

Researchanddevelopmentexpensewas$20.2millionin2004comparedto$17.3millionin2003.Asapercentageofnetsales,researchanddevelopmentexpenseincreasedto3.6%in2004from3.4%in2003.TheincreaseinresearchanddevelopmentexpenseasapercentageofsalesisprincipallyaresultofincreasedspendingonthedevelopmentofourPRO2®reflectancepulseoximetrysystemandendotrachealcardiacoutputmonitorforourPatientCarebusiness.TheadditionoftheEndoscopicTechnologiesbusinessinSeptember2004alsocontributedtotheincreaseinresearchanddevelopmentexpense.

AsdiscussedinNote2totheConsolidatedFinancialStatements,wewrote-off$16.4millionand$7.9millionofpurchasedin-processresearchanddevelopmentassetsassociatedwiththeBardEndoscopicTechnologiesacquisitionandBionxacquisitionin2004and2003,respectively.

AsdiscussedinNote12totheConsolidatedFinancialStatements,otherexpensein2004consistedprimarilyof$2.4millionofexpensesassociatedwiththeterminationofoursurgicallightsproductofferingand$1.5millionofexpensesrelatedtotheBardEndoscopicTechnologiesacquisition.AsdiscussedinNote12totheConsolidatedFinancialStatements,otherincomein2003consistedofa$9.0millionnetgainonthesettlementofacontractualdispute,$2.8millioninpensionsettlementcostsassociatedwiththerestructuringofourorthopedicsalesforceand$3.2millioninacquisitioncostsrelatedprimarilytotheacquisitionofCOREDynamics,Inc.(the“COREacquisition”–seeNote2totheConsolidatedFinancialStatements)andBionxacquisition.

During2004,werecorded$0.8millioninlossesontheearlyextinguishmentofdebtrelatedtotherefinancingofaportionofthetermloansunderourseniorcreditagreementthroughtheissuanceof2.50%convertibleseniorsubordinatednotes.SeeadditionaldiscussionunderManagement’sDiscussionandAnalysisofFinancialConditionandResultsofOperations—LiquidityandCapitalResourcesandNote6totheConsolidatedFinancialStatements.

Interestexpensein2004was$12.8millioncomparedto$18.9millionin2003.Thedecreaseininterestexpenseisprimarilyaresultoflowerweightedaverageborrowingsoutstandingin2004ascomparedto2003andlowerweightedaverageinterestratesonourborrowings(4.17%in2004ascomparedto5.99%in2003)inclusiveofthefinancechargeonouraccountsreceivablesalefacility.Thedecreaseinweightedaverageinterestratesonourborrowingisprimarilyaresultofourredemptionof$130.0millionin9%seniorsubordinatednotesin2003(SeeNote6totheConsolidatedFinancialStatements)infavoroflowercostbankdebt.

Aprovisionforincometaxeswasrecordedataneffectiverateof32.5%in2004and39.5%in2003.Theeffectiveratefor2004waslowerthanthatrecordedin2003andtheUnitedStatesstatutoryrateof35.0%asaresultofanincreaseintheestimatedbenefitstoberealizedfromtheExtraterritorialIncomeExclusion(“ETI”)taxrulesonforeignsales.Theeffectiveratein2003increasedfromthestatutoryrateasaresultofthenon-deductibilityforincometaxpurposesoftheBionxin-processresearchanddevelopmentchargediscussedabove.

LiquidityandCapitalResources

Ourliquidityneedsariseprimarilyfromcapitalinvestments,workingcapitalrequirementsandpaymentsonindebtednessundertheseniorcreditagreement.Wehavehistoricallymettheseliquidityrequirementswithfundsgeneratedfromoperations,includingsalesofaccountsreceivableandborrowingsunderourrevolvingcreditfacility.Inaddition,weusetermborrowings,includingborrowingsunderourseniorcreditagreementandborrowingsunderseparateloanfacilities,inthecaseofrealpropertypurchases,tofinanceouracquisitions.Wealsohavetheabilitytoraisefundsthroughthesaleofstockorwemayissuedebtthroughaprivateplacementorpublicoffering.Wegenerallyattempttominimizeourcashbalanceson-handanduseavailablecashtopaydowndebtorrepurchaseourcommonstock.

Operatingcashflows

Ournetworkingcapitalpositionwas$193.4millionatDecember31,2005.Netcashprovidedbyoperatingactivitieswas$58.4million,$74.8millionand$42.4millionfor2003,2004and2005,respectively.

Netcashprovidedbyoperatingactivitiesdeclinedin2005ascomparedto2004and2003onsimilarnetincomelevelsprimarilybecause2004and2003netincomeincludedlargenon-cashacquisition-relatedin-processresearchanddevelopmentcharges.Additionally,in2005weincreasedourinventorylevelsby$33.6million.TheincreaseininventorieswasplannedtoensurewehaveadequateinventoriesofEndoscopicTechnologiesproducton-handaswetransitionthemanufacturingtoourownfacilitiesfromC.R.Bard(seeNote2totheConsolidatedFinancialStatements).Inaddition,in2005weincreasedourinventoriesinordertoensureadequatestocksinordertoavoidbackordersandensureahighlevelofcustomerservice,particularlyintheEndosurgeryproductlines.

Investingcashflows

Capitalexpenditureswere$9.3million,$12.4millionand$16.2millionfor2003,2004and2005,respectively.Thecontinuedincreaseincapitalexpendituresin2005ascomparedto2004and

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2003isprimarilyduetotheongoingexpansionofourmanufacturinganddistributioncapacityasaresultoftheBardEndoscopicTechnologiesacquisition.Thesecapitalexpendituresrepresenttheongoingcapitalinvestmentrequirementsofourbusinessandareexpectedtocontinueatthesameapproximaterateduring2006.

Paymentsrelatedtobusinessacquisitionsin2005totaled$0.4millionandareadditionalcashconsiderationpaidforabusinessacquisitionasaresultofapurchasepriceadjustment.Investingcashflowsin2004consistedof$81.3millioninpaymentsrelatedtotheBardEndoscopicTechnologiesacquisition.

Financingcashflows

Netcashprovidedby(usedin)financingactivitiesduring2005consistedofthefollowing:$17.0millioninproceedsfromtheissuanceofcommonstockunderourstockoptionplansandemployeestockpurchaseplan(SeeNote8totheConsolidatedFinancialStatements);$29.9millioninnetrepaymentsunderthetermloanfacilityofourseniorcreditagreement;$43.0millioninborrowingsundertherevolvingcreditfacilityofourseniorcreditagreement;$0.8millioninnetrepaymentsonmortgagenotes;$6.1millionnetchangeincashoverdrafts;andtherepurchaseof1.8millionsharesofourcommonstockunderourBoardofDirector’sauthorizedstockrepurchaseprogramatanaggregatecostofapproximately$45.4million.

Ourseniorcreditagreementconsistsofa$100.0millionrevolvingcreditfacilityanda$260.0milliontermloan.AtDecember31,2005therewas$43.0millionoutstandingontherevolvingcreditfacility.Theaggregateamountoutstandingonthetermloanwas$98.1millionatDecember31,2005.TherevolvingcreditfacilityexpiresinAugust2007.Thetermloanisscheduledtoberepaidinquarterlyinstallmentsoveraremainingperiodofapproximatelyfouryears,withscheduledprincipalpaymentsof$2.6millionannuallythroughDecember2007increasingto$60.3millionin2008andtheremainingbalanceoutstandingdueinDecember2009.Wehavemadeallscheduledtermloanrepaymentsastheyhavecomedue.Wemayalsoberequired,undercertaincircumstances,tomakeadditionalprincipalpaymentsbasedonexcessannualcashflowasdefinedintheseniorcreditagreement.Nosuchpaymentswererequiredduring2005.InterestratesonthetermloanareattheLondonInterbankOfferedRate(“LIBOR”)plus2.25%(6.44%atDecember31,2005).InterestratesontherevolvingcreditfacilityareatLIBORplus2.25%oranalternativebaserate(8.50%atDecember31,2005).

Theseniorcreditagreementiscollateralizedbysubstantiallyallofourpersonalpropertyandassets,exceptforouraccountsreceivableandrelatedrightswhichhavebeensoldinconnectionwithouraccountsreceivablesalesagreement(SeeNote1totheConsolidatedFinancialStatements).Theseniorcreditagreementcontainscovenantsandrestrictionswhich,amongotherthings,requiremaintenanceofcertainworkingcapitallevelsandfinancialratios,prohibitdividendpaymentsandrestricttheincurrenceofcertainindebtednessandotheractivities,includingacquisitionsanddispositions.Theseniorcreditagreementcontainsamaterialadverseeffectclausewhichcouldlimitourabilitytoaccessadditionalfundingunderourrevolvingcreditfacilityshouldamaterialadversechangeinourbusinessoccur.Wearealsorequired,undercertaincircumstances,tomakemandatoryprepaymentsfromnetcashproceedsfromanyissueofequityandassetsales.

MortgagenotesoutstandinginconnectionwiththepropertyandfacilitiesutilizedbyourCONMEDLinvatecsubsidiaryconsistofanotebearinginterestat7.50%perannumwithsemiannualpaymentsofprincipalandinterestthroughJune2009(the“ClassA

note”);andanotebearinginterestat8.25%perannumcompoundedsemiannuallythroughJune2009,afterwhichsemiannualpaymentsofprincipalandinterestwillcommence,continuingthroughJune2019(the“ClassCnote”).TheprincipalbalancesoutstandingontheClassAnoteandClassCnoteaggregated$6.9millionand$8.8million,respectively,atDecember31,2005.ThesemortgagenotesaresecuredbytheCONMEDLinvatecpropertyandfacilities.

OnNovember112004,wecompletedanofferingof$150.0millionin2.50%convertibleseniorsubordinatednotes(the“Notes”)due2024.Thisofferinghasallowedustofixinterestrateson$150.0millionofourtotaloutstandinglong-termdebtat2.50%.TheNotesrepresentsubordinatedunsecuredobligationsandareconvertibleundercertaincircumstances,asdefinedinthebondindenture,intoacombinationofcashandCONMEDcommonstock.Uponconversion,theholderofeachNotewillreceivetheconversionvalueoftheNotepayableincashuptotheprincipalamountoftheNoteandCONMEDcommonstockfortheNote’sconversionvalueinexcessofsuchprincipalamount.Amountsinexcessoftheprincipalamountareataninitialconversionrate,subjecttoadjustment,of26.1849sharesper$1,000principalamountoftheNote(whichrepresentsaninitialconversionpriceof$38.19pershare).TheNotesmatureonNovember15,2024andarenotredeemablebyuspriortoNovember15,2011.HoldersoftheNoteswillbeabletorequirethatwerepurchasesomeoralloftheNotesonNovember15,2011,2014and2019.

TheNotescontaintwoembeddedderivatives.Theembeddedderivativesarerecordedatfairvalueinotherlong-termliabilitiesandchangesintheirvaluearerecordedthroughtheconsolidatedstatementofincome.Theembeddedderivativeshaveanominalvalue,anditisourbeliefthatanychangeintheirfairvaluewouldnothaveamaterialadverseeffectonourbusiness,financialconditionorresultsofoperations.

Proceedsfromtheofferingandcashonhandwereusedtorepay$82.2milliononthetermloanandafurther$45.0millioninborrowingsthenoutstandingontherevolvingcreditfacilityunderourseniorcreditagreement.Additionally,inconjunctionwiththeNotesoffering,werepurchased$30.0millionofourcommonstockinprivatelynegotiatedtransactions.Asaresultofthe$82.2millionprepaymentonthetermloan,werecorded$0.8millioninlossesontheearlyextinguishmentofdebtrelatedtothewrite-offofunamortizeddeferredfinancingfees.

OurBoardofDirectorshasauthorizedasharerepurchaseprogramunderwhichwemayrepurchaseupto$100.0millionofourcommonstock,althoughnomorethan$50.0millionmaybepurchasedinanycalendaryear.Therepurchaseprogramcallsforsharestobepurchasedintheopenmarketorinprivatetransactionsfromtimetotime.Wemaysuspendordiscontinuethesharerepurchaseprogramatanytime.During2005,werepurchased$45.4millionincommonstockinordertooffsetthedilutiveeffectoftheissuanceofsharesunderouremployeestockoptionandemployeestockpurchaseplans.Wehavefinancedtherepurchasesandexpecttofinanceadditionalrepurchasesthroughtheproceedsfromtheissuanceofcommonstockunderourstockoptionplans,fromoperatingcashflowandfromavailableborrowingsunderourrevolvingcreditfacility.

Managementbelievesthatcashflowfromoperations,includingaccountsreceivablesales,cashandcashequivalentsonhandandavailableborrowingcapacityunderourseniorcreditagreementwillbeadequatetomeetouranticipatedoperatingworkingcapitalrequirements,debtservice,fundingofcapitalexpendituresandcommonstockrepurchasesintheforeseeablefuture.

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Off-BalanceSheetArrangementsWehaveanaccountsreceivablesalesagreementpursuanttowhichweandcertainofoursubsidiariessellonanongoingbasiscertainaccountsreceivabletoCONMEDReceivablesCorporation(“CRC”),awholly-owned,bankruptcy-remote,special-purposesubsidiaryofCONMEDCorporation.CRCmayinturnselluptoanaggregate$50.0millionundividedpercentageownershipinterestinsuchreceivables(the“assetinterest”)toabank(the“purchaser”).Thepurchaser’sshareofcollectionsonaccountsreceivablearecalculatedasdefinedintheaccountsreceivablesalesagreement,asamended.Effectively,collectionsonthepoolofreceivablesflowfirsttothepurchaserandthentoCRC,buttotheextentthatthepurchaser’sshareofcollectionsmaybelessthantheamountofthepurchaser’sassetinterest,thereisnorecoursetoCONMEDorCRCforsuchshortfall.Forreceivableswhichhavebeensold,CONMEDCorporationanditssubsidiariesretaincollectionandadministrativeresponsibilitiesasagentforthepurchaser.AsofDecember31,2004and2005,theundividedpercentageownershipinterestinreceivablessoldbyCRCtothepurchaseraggregated$49.0millionand$40.0million,respectively,whichhasbeenaccountedforasasaleandreflectedinthebalancesheetasareductioninaccountsreceivable.Expensesassociatedwiththesaleofaccountsreceivable,includingthepurchaser’sfinancingcoststopurchasetheaccountsreceivable,were$1.0millionand$1.9million,in2004and2005,respectively,andareincludedininterestexpense.

Therearecertainstatisticalratios,primarilyrelatedtosalesdilutionandlossesonaccountsreceivable,whichmustbecalculatedandmaintainedonthepoolofreceivablesinordertocontinuesellingtothepurchaser.Thepoolofreceivablesisinfullcompliancewiththeseratios.Managementbelievesthatadditionalaccountsreceivablearisinginthenormalcourseofbusinesswillbeofsufficientqualityandquantitytomeettherequirementsforsaleundertheaccountsreceivablessalesagreement.Intheeventthatnewaccountsreceivablearisinginthenormalcourseofbusinessdonotqualifyforsale,thencollectionsonsoldreceivableswillflowtothepurchaserratherthanbeingusedtofundnewreceivablepurchases.TotheextentthatsuchcollectionswouldnotbeavailabletoCONMEDintheformofnewreceivablespurchases,wewouldneedtoaccessanalternatesourceofworkingcapital,suchasour$100.0millionrevolvingcreditfacility.Ouraccountsreceivablesalesagreement,asamended,alsorequiresustoobtainacommitment(the“purchasercommitment”),onanannualbasis,fromthepurchasertofundthepurchaseofouraccountsreceivable.ThepurchasercommitmentwasamendedeffectiveOctober21,2005wherebyitwasextendedforanadditionalyearundersubstantiallythesametermsandconditions.

ContractualObligationsThefollowingtablesummarizesourcontractualobligationsforthenextfiveyearsandthereafter(amountsinthousands).Purchaseobligationsrepresentpurchaseordersforgoodsandservicesplacedintheordinarycourseofbusiness.TherewerenocapitalleaseobligationsasofDecember31,2005. PaymentsDuebyPeriod Lessthan 1-3 3-5 Morethan Total 1Year Years Years 5YearsLong-termdebt $306,851 $ 4,208 $109,736$35,272 $157,635Purchaseobligations 62,606 62,051 465 90 —Operatingleaseobligations 14,066 3,051 5,492 3,157 2,366 _______ ____________________________Totalcontractualobligations $383,523 $69,310 $115,693 $38,519 $160,001 _______ ____________________________ _______ ____________________________

Inadditiontotheabovecontractualobligations,wearerequiredtomakeperiodicinterestpaymentsonourlong-termdebtobligations;(Seeadditionaldiscussionunder“quantitativeandqualitativeDisclosuresAboutMarketRisk—InterestRateRisk”)andNote6totheConsolidatedFinancialStatements.Wedonotexpecttheretobeanyrequiredcontributionstoourpensionplanin2006.SeeNote10totheConsolidatedFinancialStatements.

Stock-basedCompensationWehavereservedsharesofcommonstockissuancetoemployeesanddirectorsunderthreeshareholder-approvedstockoptionplans.Theexercisepriceonalloutstandingoptionsisequaltothequotedfairmarketvalueofthestockatthedateofgrant.Stockoptionsarenon-transferableotherthanondeathandgenerallybecomeexercisableoverafiveyearperiodfromdateofgrantandexpiretenyearsfromdateofgrant.SeeNote8totheConsolidatedFinancialStatements.

NewAccountingPronouncementsSeeNote14totheConsolidatedFinancialStatementsforadiscussionofnewaccountingpronouncements.

quantitativeandqualitativeDisclosuresAboutMarketRiskMarketriskisthepotentiallossarisingfromadversechangesinmarketratesandpricessuchascommodityprices,foreigncurrencyexchangeratesandinterestrates.Inthenormalcourseofbusiness,weareexposedtovariousmarketrisks,includingchangesinforeigncurrencyexchangeratesandinterestrates.Wemanageourexposuretotheseandothermarketrisksthroughregularoperatingandfinancingactivitiesandasnecessarythroughtheuseofderivativefinancialinstruments.

ForeignCurrencyRiskAsignificantportionofouroperationsconsistofsalesactivitiesinforeignjurisdictions.Asaresult,ourfinancialresultsmaybeaffectedbyfactorssuchaschangesinforeigncurrencyexchangeratesorweakeconomicconditionsinthemarketsinwhichwedistributeproducts.AsofDecember31,2004,wehavenotenteredintoanyforeignexchangeforwardoroptioncontractsdesignedtohedgetheeffectofforeigncurrencytransactions.WehavemitigatedtheeffectofforeigncurrencyexchangerateriskbytransactingasignificantportionofourforeignsalesinUnitedStatesdollars.During2005,changesincurrencyexchangeratesincreasedsalesbyapproximately$3.6millionandincomebeforeincometaxesbyapproximately$2.4million.Inthefuture,wewillcontinuetoevaluateourforeigncurrencyexposureandassesstheneedtoenterintoderivativecontractswhichhedgeforeigncurrencytransactions.

InterestRateRiskAtDecember31,2005,wehadapproximately$141.1millionofvariableratelong-termdebtunderourseniorcreditagreement;wearenotapartytoanyinterestrateswapagreementsasofDecember31,2005.Assumingnorepaymentsotherthanour2006scheduledtermloanpayments,ifmarketinterestratesforsimilarborrowingsaverage1.0%morein2006thantheydidin2005,interestexpensewouldincrease,andincomebeforeincometaxeswoulddecreaseby$1.8million.Comparatively,ifmarketinterestratesforsimilarborrowingsaverage1.0%lessin2006thantheydidin2005,ourinterestexpensewoulddecrease,andincomebeforeincometaxeswouldincreaseby$1.8million.

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Forward-LookingStatementsThisAnnualReportcontainscertainforward-lookingstatements(assuchtermisdefinedinthePrivateSecuritiesLitigationReformActof1995)andinformationrelatingtoCONMEDCorporationwhicharebasedonthebeliefsofourmanagement,aswellasassumptionsmadebyandinformationcurrentlyavailabletoourmanagement.

WhenusedinthisAnnualReport,thewords“estimate,”“project,”“believe,”“anticipate,”“intend,”“expect”andsimilarexpressionsareintendedtoidentifyforward-lookingstatements.Thesestatementsinvolveknownandunknownrisks,uncertaintiesandotherfactors,whichmaycauseouractualresults,performanceorachievements,orindustryresults,tobemateriallydifferentfromanyfutureresults,performanceorachievementsexpressedorimpliedbysuchforward-lookingstatements.Suchfactorsinclude,amongothers,thefollowing:

• generaleconomicandbusinessconditions;

• cyclicalcustomerpurchasingpatternsduetobudgetaryandotherconstraints;

• changesincustomerpreferences;

• competition;

• changesintechnology;

• theintroductionandacceptanceofnewproducts;

• theabilitytoevaluate,financeandintegrateacquiredbusinesses,productsandcompanies;

• changesinbusinessstrategy;

• theavailabilityandcostofmaterials;

• thepossibilitythatUnitedStatesorforeignregulatoryand/oradministrativeagenciesmayinitiateenforcementactionsagainstusorourdistributors;

• futurelevelsofindebtednessandcapitalspending;

• changesinforeignexchangeandinterestrates;

• qualityofourmanagementandbusinessabilitiesandthejudgmentofourpersonnel;

• theavailability,termsanddeploymentofcapital;

• theriskoflitigation,especiallypatentlitigationaswellasthecostassociatedwithpatentandotherlitigation;and

• changesinregulatoryrequirements.

Youarecautionednottoplaceunduerelianceontheseforward-lookingstatements.Wedonotundertakeanyobligationtopubliclyreleaseanyrevisionstotheseforward-lookingstatementsortoreflecttheoccurrenceofunanticipatedevents.

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ThemanagementofCONMEDCorporationisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreporting.Internalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalreportingpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Ourinternalcontroloverfinancialreportingincludespoliciesandproceduresthatpertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflecttransactionsanddispositionsofassets;providereasonableassurancesthattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica,andthatreceiptsandexpendituresarebeingmadeonlyinaccordancewithauthorizationsofmanagementandthedirectorsoftheCompany;andprovidereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,useordispositionofourassetsthatcouldhaveamaterialeffectonourfinancialstatements.Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.ManagementassessedtheeffectivenessofCONMED’sinternalcontroloverfinancialreportingasofDecember31,2005.Inmakingitsassessment,managementutilizedthecriteriasetforthbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(“COSO”)in“InternalControl-IntegratedFramework.”Managementhasconcludedthatbasedonitsassessment,CONMED’sinternalcontroloverfinancialreportingwaseffectiveasofDecember31,2005.Management’sassessmentoftheeffectivenessofCONMED’sinternalcontroloverfinancialreportingasofDecember31,2005hasbeenauditedbyPricewaterhouseCoopersLLP,anindependentregisteredpublicaccountingfirm,asstatedintheirreportwhichappearsonpage16.

EugeneR.Corasanti RobertD.Shallish,Jr.ChairmanoftheBoardand VicePresident-FinanceandChiefExecutiveOfficer ChiefFinancialOfficer

lmanagement’SreportoninternalcontroloverFinancialreporting

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TotheBoardofDirectorsandShareholdersofCONMEDCorporation:WehavecompletedintegratedauditsofCONMEDCorporation’s2005and2004consolidatedfinancialstatementsandofitsinternalcontroloverfinancialreportingasofDecember31,2005,andanauditofits2003consolidatedfinancialstatementsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Ouropinions,basedonouraudits,arepresentedbelow.

ConsolidatedfinancialstatementsandfinancialstatementscheduleInouropinion,theconsolidatedfinancialstatementslistedintheindexappearingunderItem15(a)(1)presentfairly,inallmaterialrespects,thefinancialpositionofCONMEDCorporationanditssubsidiariesatDecember31,2005and2004,andtheresultsoftheiroperationsandtheircashflowsforeachofthethreeyearsintheperiodendedDecember31,2005inconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica.Inaddition,inouropinion,thefinancialstatementschedulelistedintheindexappearingunderItem15(a)(2)presentsfairly,inallmaterialrespects,theinformationsetforththereinwhenreadinconjunctionwiththerelatedconsolidatedfinancialstatements.ThesefinancialstatementsandfinancialstatementschedulearetheresponsibilityoftheCompany’smanagement.Ourresponsibilityistoexpressanopiniononthesefinancialstatementsandfinancialstatementschedulebasedonouraudits.WeconductedourauditsofthesestatementsinaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhetherthefinancialstatementsarefreeofmaterialmisstatement.Anauditoffinancialstatementsincludesexamining,onatestbasis,evidencesupportingtheamountsanddisclosuresinthefinancialstatements,assessingtheaccountingprinciplesusedandsignificantestimatesmadebymanagement,andevaluatingtheoverallfinancialstatementpresentation.Webelievethatourauditsprovideareasonablebasisforouropinion.

InternalcontroloverfinancialreportingAlso,inouropinion,management’sassessment,includedin“Management’sReportonInternalControlOverFinancialReporting”appearingonpage15,thattheCompanymaintainedeffectiveinternalcontroloverfinancialreportingasofDecember31,2005basedoncriteriaestablishedinInternal Control - Integrated FrameworkissuedbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommission(COSO),isfairlystated,inallmaterialrespects,basedonthosecriteria.Furthermore,inouropinion,theCompanymaintained,inallmaterialrespects,effectiveinternalcontroloverfinancialreportingasofDecember31,2005basedoncriteriaestablishedinInternal Control - Integrated FrameworkissuedbytheCOSO.TheCompany’smanagementisresponsibleformaintainingeffectiveinternalcontroloverfinancialreportingandforitsassessmentoftheeffectivenessofinternalcontroloverfinancialreporting.Ourresponsibilityistoexpressopinionsonmanagement’sassessmentandontheeffectivenessoftheCompany’sinternalcontroloverfinancialreportingbasedonouraudit.WeconductedourauditofinternalcontroloverfinancialreportinginaccordancewiththestandardsofthePublicCompanyAccountingOversightBoard(UnitedStates).Thosestandardsrequirethatweplanandperformtheaudittoobtainreasonableassuranceaboutwhethereffectiveinternalcontroloverfinancialreportingwasmaintainedinallmaterialrespects.Anauditofinternalcontroloverfinancialreportingincludesobtaininganunderstandingofinternalcontroloverfinancialreporting,evaluatingmanagement’sassessment,testingandevaluatingthedesignandoperatingeffectivenessofinternalcontrol,andperformingsuchotherproceduresasweconsidernecessaryinthecircumstances.Webelievethatourauditprovidesareasonablebasisforouropinions.

Acompany’sinternalcontroloverfinancialreportingisaprocessdesignedtoprovidereasonableassuranceregardingthereliabilityoffinancialreportingandthepreparationoffinancialstatementsforexternalpurposesinaccordancewithgenerallyacceptedaccountingprinciples.Acompany’sinternalcontroloverfinancialreportingincludesthosepoliciesandproceduresthat(i)pertaintothemaintenanceofrecordsthat,inreasonabledetail,accuratelyandfairlyreflectthetransactionsanddispositionsoftheassetsofthecompany;(ii)providereasonableassurancethattransactionsarerecordedasnecessarytopermitpreparationoffinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciples,andthatreceiptsandexpendituresofthecompanyarebeingmadeonlyinaccordancewithauthorizationsofmanagementanddirectorsofthecompany;and(iii)providereasonableassuranceregardingpreventionortimelydetectionofunauthorizedacquisition,use,ordispositionofthecompany’sassetsthatcouldhaveamaterialeffectonthefinancialstatements.

Becauseofitsinherentlimitations,internalcontroloverfinancialreportingmaynotpreventordetectmisstatements.Also,projectionsofanyevaluationofeffectivenesstofutureperiodsaresubjecttotheriskthatcontrolsmaybecomeinadequatebecauseofchangesinconditions,orthatthedegreeofcompliancewiththepoliciesorproceduresmaydeteriorate.

PricewaterhouseCoopersLLPSyracuse,NewYorkMarch10,2006

lreportoFindependentregiSteredpuBlicaccountingFirm

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December31,2004and2005(Inthousandsexceptshareandpershareamounts)

2004 2005AssetsCurrentassets: Cashandcashequivalents $ 4,189 $ 3,454 Accountsreceivable,lessallowancefordoubtful accountsof$1,235in2004and$1,522in2005 74,593 83,327 Inventories 127,935 152,428 Deferredincometaxes 13,733 12,887 Prepaidexpensesandothercurrentassets 2,492 3,419 _________ _________ Totalcurrentassets 222,942 255,515 _________ _________

Property,plantandequipment,net 101,465 104,224Goodwill,net 334,483 335,651Otherintangibleassets,net 195,234 191,402Otherassets 18,701 16,991 _________ _________ Totalassets $872,825 $903,783 _________ _________ _________ _________

LiabilitiesandShareholders’Equity

Currentliabilities: Currentportionoflong-termdebt $ 4,037 $ 4,208 Accountspayable 28,913 31,084 Accruedcompensationandbenefits 12,655 12,461 Incometaxespayable 5,870 4,706 Accruedinterest 748 1,095 Othercurrentliabilities 10,838 8,578 _________ _________ Totalcurrentliabilities 63,061 62,132 _________ _________

Long-termdebt 290,485 302,643Deferredincometaxes 51,433 62,554Otherlong-termliabilities 19,863 23,448 _________ _________ Totalliabilities 424,842 450,777 _________ _________

Commitmentsandcontingencies

Shareholders’equity: Preferredstock,parvalue$.01pershare;authorized 500,000shares,noneoutstanding — — Commonstock,parvalue$.01pershare;100,000,000authorized; 30,135,835and31,137,119,issuedin2004and2005,respectively 301 311 Paid-incapital 256,551 278,281 Retainedearnings 227,938 259,932 Accumulatedothercomprehensiveincome(loss) (6,399) (9,736) Less:Treasurystock,atcost;1,156,500and2,944,905sharesin 2004and2005,respectively (30,408) (75,782) _________ _________ Totalshareholders’equity 447,983 453,006 _________ _________ Totalliabilitiesandshareholders’equity $872,825 $903,783 _________ _________ _________ _________

See notes to consolidated financial statements.

lconSolidatedBalanceSheetS

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YearsEndedDecember31,2003,2004and2005(Inthousandsexceptpershareamounts)

2003 2004 2005

Netsales $497,130 $ 558,388 $ 617,305

Costofsales 237,433 271,496 304,284 _________ _________ _________

Grossprofit 259,697 286,892 313,021 _________ _________ _________

Sellingandadministrativeexpense 157,453 183,183 216,685

Researchanddevelopmentexpense 17,306 20,205 25,469

Write-offofpurchasedin-processresearchanddevelopmentassets 7,900 16,400 —

Otherexpense(income) (2,917) 3,943 7,119 _________ _________ _________

179,742 223,731 249,273 _________ _________ _________

Incomefromoperations 79,955 63,161 63,748

Lossonearlyextinguishmentofdebt 8,078 825 —

Interestexpense 18,868 12,774 15,578 _________ _________ _________

Incomebeforeincometaxes 53,009 49,562 48,170

Provisionforincometaxes 20,927 16,097 16,176 _________ _________ _________

Netincome $ 32,082 $ 33,465 $ 31,994 _________ _________ _________ _________ _________ _________

Earningspershare Basic $ 1.11 $ 1.13 $ 1.09

Diluted 1.10 1.11 1.08

lconSolidatedStatementSoFincome

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YearsEndedDecember31,2003,2004and2005(Inthousands)

Accumulated Other CommonStock Paid-in Retained Comprehensive Treasury Shareholders’ __________________ Shares Amount Capital Earnings Income(Loss) Stock Equity

BalanceatDecember31,2002 28,808 $ 288 $231,832 $162,391 $ (7,153) $ (419) $ 386,939 ________ _______ ________ ________ ________ _________________ Commonstockissuedunderemployeeplans 248 2 3,198 3,200Taxbenefitarisingfromcommonstockissuedunderemployeeplans 390 390Commonstockissuedinconnectionwithbusinessacquisitions 85 1 1,656 1,657Comprehensiveincome: Foreigncurrencytranslationadjustments 3,082 Cashflowhedging(netofincometaxexpenseof$593) 1,054 Minimumpensionliability(netofincometaxexpense of$2,861) 5,086 Netincome 32,082Totalcomprehensiveincome 41,304 ________ _______ ________ ________ ________ _________________

BalanceatDecember31,2003 29,141 $ 291 $237,076 $194,473 $ 2,069 $ (419) $ 433,490 ________ _______ ________ ________ ________ _________________ ________ _______ ________ ________ ________ _________________ Commonstockissuedunderemployeeplans 995 10 15,578 15,588Taxbenefitarisingfromcommonstockissuedunderemployeeplans 3,897 3,897Repurchaseofcommonstock (29,989) (29,989)Comprehensiveincome: Foreigncurrencytranslationadjustments 2,133 Cashflowhedging(netofincometaxbenefitof$82) (146) Minimumpensionliability(netofincometaxbenefit of$5,630) (10,455) Netincome 33,465Totalcomprehensiveincome 24,997 ________ _______ ________ ________ ________ _________________ BalanceatDecember31,2004 30,136 $ 301 $256,551 $227,938 $ (6,399) $ (30,408) $ 447,983 ________ _______ ________ ________ ________ _________________ ________ _______ ________ ________ ________ _________________ Commonstockissuedunderemployeeplans 1,001 10 16,988 16,998Taxbenefitarisingfromcommonstockissuedunderemployeeplans 4,742 4,742Repurchaseofcommonstock (45,374) (45,374)Comprehensiveincome: Foreigncurrencytranslationadjustments (3,657) Minimumpensionliability(netofincometaxbenefit of$172) 320 Netincome 31,994Totalcomprehensiveincome 28,657 ________ _______ ________ ________ ________ _________________ BalanceatDecember31,2005 31,137 $ 311 $278,281 $259,932 $ (9,736) $ (75,782) $ 453,006 ________ _______ ________ ________ ________ _________________ ________ _______ ________ ________ ________ _________________

lconSolidatedStatementSoFShareholderS’equitY


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YearsEndedDecember31,2003,2004and2005(Inthousands)

2003 2004 2005Cashflowsfromoperatingactivities: Netincome $ 32,082 $ 33,465 $ 31,994 _________ _________ _________ Adjustmentstoreconcilenetincometonetcash providedbyoperatingactivities: Depreciation 10,539 10,962 12,466 Amortization 14,315 15,906 18,320 Deferredincometaxes 13,715 4,301 10,128 Incometaxbenefitofstockoptionexercises 390 3,897 4,742 Contributionstopensionplanslessthan(inexcessof)netpensioncost (11,082) 3,619 2,062 Write-offofpurchasedin-processresearchanddevelopmentassets 7,900 16,400 — Write-offofdeferredfinancingcosts 2,181 825 — Lossonsaleofequityinvestment — — 794 Increase(decrease)incashflowsfromchangesinassetsandliabilities, netofeffectsfromacquisitions: Saleofaccountsreceivable 7,000 5,000 (9,000) Accountsreceivable (6,405) (19,144) 266 Inventories (3,411) 1,441 (33,620) Accountspayable (4,732) 4,350 8,273 Incometaxespayable 2,188 (2,532) 675 Accruedcompensationandbenefits (338) 1,626 (194) Accruedinterest (3,515) 469 347 Otherassets (3,138) (3,884) (4,402) Otherliabilities 694 (1,861) (417) _________ _________ _________ 26,301 41,375 10,440 _________ _________ _________ Netcashprovidedbyoperatingactivities 58,383 74,840 42,434 _________ _________ _________Cashflowsfrominvestingactivities: Paymentsrelatedtobusinessacquisitions,netofcashacquired (55,079) (81,645) (372) Purchasesofproperty,plantandequipment,net (9,309) (12,419) (16,242) Otherinvestingactivities (4,085) — — _________ _________ _________

Netcashusedininvestingactivities (68,473) (94,064) (16,614) _________ _________ _________Cashflowsfromfinancingactivities: Netproceedsfromcommonstockissuedunderemployeeplans 3,200 15,200 16,998 Repurchaseofcommonstock — (29,989) (45,374) Redemptionof9.0%seniorsubordinatednotes (130,000) — — Paymentsonseniorcreditagreement (22,000) (114,937) (29,917) Proceedsofseniorcreditagreement 160,000 — 43,000 Paymentsonmortgagenotes (796) (5,132) (754) Proceedsfromissuanceof2.5%convertibleseniorsubordinatednotes — 150,000 — Paymentsrelatedtoissuanceofdebt (1,950) (5,848) (185) Netchangeincashoverdrafts (373) 6,209 (6,102) _________ _________ _________ Netcashprovidedby(usedin)financingactivities 8,081 15,503 (22,334) _________ _________ _________Effectofexchangeratechangesoncashandcashequivalents 2,369 1,924 (4,221) _________ _________ _________Netincrease(decrease)incashandcashequivalents 360 (1,797) (735)Cashandcashequivalentsatbeginningofyear 5,626 5,986 4,189 _________ _________ _________Cashandcashequivalentsatendofyear $ 5,986 $ 4,189 $ 3,454 _________ _________ _________ _________ _________ _________Supplementaldisclosuresofcashflowinformation: Cashpaidduringtheyearfor: Interest $ 21,698 $ 12,680 $ 13,794 Incometaxes 5,507 11,994 3,921Supplementaldisclosuresofnon-cashinvestingandfinancingactivities:AsmorefullydescribedinNote2,weassumed$12.1millionand$3.5millioninliabilitiesinconnectionwithbusinessacquisitionsin2003and2004,respectively.AsmorefullydescribedinNote2,during2003weissuedapproximately85,000sharesofourcommonstockvaluedatapproximately$1.7millionaspartoftheconsiderationforthepurchaseofseveralbusinessesin2002.

lconSolidatedStatementSoFcaShFlowS


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Note1—OperationsandSignificantAccountingPoliciesOrganizationandOperationsCONMEDCorporation(“CONMED,”the“Company,”“we”or“us”)isamedicaltechnologycompanywithanemphasisonsurgicaldevicesandequipmentforminimallyinvasiveproceduresandmonitoring.TheCompany’sproductsservetheclinicalareasofarthroscopy,poweredsurgicalinstruments,electrosurgery,cardiacmonitoringdisposables,endosurgeryandendoscopictechnologies.Theyareusedbysurgeonsandphysiciansinavarietyofspecialtiesincludingorthopedics,generalsurgery,gynecology,neurosurgery,andgastroenterology.

PrinciplesofconsolidationTheconsolidatedfinancialstatementsincludetheaccountsofCONMEDCorporationanditscontrolledsubsidiaries.Allsignificantintercompanyaccountsandtransactionshavebeeneliminated.

UseofestimatesThepreparationoffinancialstatementsinconformitywithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmericarequiresmanagementtomakeestimatesandjudgmentswhichaffectthereportedamountsofassets,liabilities,relateddisclosureofcontingentassetsandliabilitiesatthedateofthefinancialstatements,andthereportedamountofrevenuesandexpensesduringthereportingperiod.Estimatesareusedinaccountingfor,amongotherthings,allowancesforuncollectibleaccounts,rebatesandsalesallowances,inventoryallowances,purchasedin-processresearchanddevelopment,pensionbenefits,goodwillandintangibleassets,contingenciesandotheraccruals.Webaseourestimatesonhistoricalexperienceandonvariousotherassumptionswhicharebelievedtobereasonableunderthecircumstances.Duetotheinherentuncertaintyinvolvedinmakingestimates,actualresultsreportedinfutureperiodsmaydifferfromthoseestimates.Estimatesandassumptionsarereviewedperiodically,andtheeffectofrevisionsarereflectedintheconsolidatedfinancialstatementsintheperiodtheyaredeterminedtobenecessary.

CashandcashequivalentsWeconsiderallhighlyliquidinvestmentswithanoriginalmaturityofthreemonthsorlesstobecashequivalents.

AccountsreceivablesaleOnNovember1,2001,weenteredintoafive-yearaccountsreceivablesalesagreementpursuanttowhichweandcertainofoursubsidiariessellonanongoingbasiscertainaccountsreceivabletoCONMEDReceivablesCorporation(“CRC”),awholly-owned,bankruptcy-remote,special-purposesubsidiaryofCONMEDCorporation.CRCmayinturnselluptoanaggregate$50.0millionundividedpercentageownershipinterestinsuchreceivables(the“assetinterest”)toabank(“the“purchaser”).Thepurchaser’sshareofcollectionsonaccountsreceivablearecalculatedasdefinedintheaccountsreceivablesalesagreement,asamended.Effectively,collectionsonthepoolofreceivablesflowfirsttothepurchaserandthentoCRC,buttotheextentthatthepurchaser’sshareofcollectionsmaybelessthantheamountofthepurchaser’sassetinterest,thereisnorecoursetoCONMEDorCRCforsuchshortfall.Forreceivableswhichhavebeensold,CONMEDCorporationanditssubsidiariesretaincollectionandadministrativeresponsibilitiesasagentforthepurchaser.AsofDecember31,2004and2005,theundividedpercentageownershipinterestinreceivablessoldbyCRCtothepurchaseraggregated$49.0millionand$40.0million,respectively,whichhasbeenaccountedforasasaleandreflectedinthebalancesheetasareductioninaccountsreceivable.Expensesassociatedwiththesaleofaccountsreceivable,includingthepurchaser’sfinancingcoststopurchasetheaccountsreceivable,were$1.0millionand$1.9million,in2004and2005,respectively,andareincludedininterestexpense.

Therearecertainstatisticalratios,primarilyrelatedtosalesdilutionandlossesonaccountsreceivable,whichmustbecalculatedandmaintainedonthepoolofreceivablesinordertocontinuesellingtothepurchaser.Thepoolofreceivablesisinfullcompliancewiththeseratios.Managementbelievesthatadditionalaccountsreceivablearisinginthenormalcourseofbusinesswillbeofsufficientqualityandquantitytomeettherequirementsforsaleundertheaccountsreceivablesalesagreement.Intheeventthatnewaccountsreceivablearisinginthenormalcourseofbusinessdonotqualifyforsale,thencollectionsonsoldreceivableswillflowtothepurchaserratherthanbeingusedtofundnewreceivablepurchases.TotheextentthatsuchcollectionswouldnotbeavailabletoCONMEDintheformofnewreceivablespurchases,wewouldneedtoaccessanalternatesourceofworkingcapital,suchasour$100millionrevolvingcreditfacility.Ouraccountsreceivablesalesagreement,asamended,alsorequiresustoobtainacommitment(the“purchasercommitment”),onanannualbasis,fromthepurchasertofundthepurchaseofouraccountsreceivable.ThepurchasercommitmentwasamendedeffectiveOctober21,2005wherebyitwasextendedforanadditionalyearundersubstantiallythesametermsandconditions.

InventoriesInventoriesarevaluedatthelowerofcostormarket.CostisdeterminedontheFIFO(first-in,first-out)methodofaccounting.

Property,plantandequipmentProperty,plantandequipmentarestatedatcostanddepreciatedusingthestraight-linemethodoverthefollowingestimatedusefullives: Buildingandimprovements 40years Leaseholdimprovements Shorteroflifeofassetorlifeoflease Machineryandequipment 2to15years

GoodwillandotherintangibleassetsGoodwillrepresentstheexcessofpurchasepriceoverfairvalueofidentifiablenetassetsofacquiredbusinesses.Otherintangibleassetsprimarilyrepresentallocationsofpurchasepricetoidentifiableintangibleassetsofacquiredbusinesses.Becauseofourhistoryofgrowththroughacquisitions,goodwillandotherintangibleassetscompriseasubstantialportion(58.6%atDecember31,2005)ofourtotalassets.Goodwillandintangibleassetsdeemedtohaveindefinitelivesarenotamortized.Allotherintangibleassetsareamortizedovertheirestimatedusefullives.Weperformimpairmenttestsofgoodwillandindefinite-livedintangibleassetsandevaluatetheusefullivesofacquiredintangibleassetssubjecttoamortization.ThesetestsandevaluationsareperformedinaccordancewithStatementofFinancialAccountingStandardsNo.142“GoodwillandOtherIntangibleAssets”(“SFAS142”).Noimpairmentlossesoradjustmentstousefulliveshavebeenrecognizedasaresultofthesetests.Itisourpolicytoperformannualimpairmenttestsinthefourthquarter.

Otherlong-livedassetsWereviewassetcarryingamountsforimpairment(consistingofintangibleassetssubjecttoamortizationandproperty,plantandequipment)whenevereventsorcircumstancesindicatethatsuchcarryingamountsmaynotberecoverable.Ifthesumoftheexpectedfutureundiscountedcashflowsislessthanthecarryingamountoftheasset,animpairmentlossisrecognizedbyreducingtherecordedvaluetoitscurrentfairvalue.

EquityinvestmentsWehavetwoinvestmentsinthecommonstockofothercompaniesinourindustrywhichrepresentlessthan20%ofthevotingstockofthesecompaniesandinwhichwedonothavetheabilitytoexercisesignificantinfluence.Wehaveaccountedfortheseinvestments

lnoteStoconSolidatedFinancialStatementS

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underthecostmethod.Wereviewtheseinvestmentsforimpairmentwhenevereventsorcircumstancesindicatethatthecarryingamountsoftheseinvestmentsmaynotberecoverable.Ifthesumoftheexpectedfutureundiscountedcashflowsislessthanthecarryingamountoftheinvestment,animpairmentlossisrecognizedbyreducingtherecordedvaluetoitscurrentfairvalue.

FairvalueoffinancialinstrumentsThecarryingamountsreportedinourbalancesheetsforcashandcashequivalents,accountsreceivable,accountspayableandlong-termdebtexcludingthe2.50%convertibleseniorsubordinatednotes(the“Notes”)approximatefairvalue.ThefairvalueoftheNotesapproximated$156.0millionand$132.0millionatDecember31,2004and2005,respectively,basedontheirquotedmarketprice.

TranslationofforeigncurrencyfinancialstatementsAssetsandliabilitiesofforeignsubsidiarieshavebeentranslatedintoUnitedStatesdollarsattheapplicableratesofexchangeineffectattheendoftheperiodreported.Revenuesandexpenseshavebeentranslatedattheapplicableweightedaverageratesofexchangeineffectduringtheperiodreported.Translationadjustmentsarereflectedinaccumulatedothercomprehensiveincome(loss).Transactiongainsandlossesareincludedinnetincome.

IncometaxesWeprovideforincometaxesinaccordancewiththeprovisionsofStatementofFinancialAccountingStandardsNo.109,“AccountingforIncomeTaxes”(“SFAS109”).UndertheliabilitymethodspecifiedbySFAS109,deferredtaxassetsandliabilitiesarebasedonthedifferencebetweenthefinancialstatementandtaxbasisofassetsandliabilitiesasmeasuredbythetaxratesthatareanticipatedtobeineffectwhenthesedifferencesreverse.Thedeferredtaxprovisiongenerallyrepresentsthenetchangeintheassetsandliabilitiesfordeferredtax.Avaluationallowanceisestablishedwhenitisnecessarytoreducedeferredtaxassetstoamountsforwhichrealizationismorelikelythannot.

RevenuerecognitionRevenueisrecognizedwhentitlehasbeentransferredtothecustomerwhichisatthetimeofshipment.Thefollowingpoliciesapplytoourmajorcategoriesofrevenuetransactions:• Salestocustomersareevidencedbyfirmpurchaseorders.Title

andtherisksandrewardsofownershiparetransferredtothecustomerwhenproductisshippedunderourstatedshippingterms.Paymentbythecustomerisdueunderfixedpaymentterms.

• Weplacecertainofourcapitalequipmentwithcustomersinreturnforcommitmentstopurchasedisposableproductsovertimeperiodsgenerallyrangingfromonetothreeyears.Inthesecircumstances,norevenueisrecognizeduponcapitalequipmentshipmentandwerecognizerevenueuponthedisposableproductshipment.Thecostoftheequipmentisamortizedoverthetermofindividualcommitmentagreements.

• ProductreturnsareonlyacceptedatthediscretionoftheCompanyandinaccordancewithour“ReturnedGoodsPolicy.”Historicallythelevelofproductreturnshasnotbeensignificant.Weaccrueforsalesreturns,rebatesandallowancesbaseduponananalysisofhistoricalcustomerreturnsandcredits,rebates,discountsandcurrentmarketconditions.

• Ourtermsofsaletocustomersgenerallydonotincludeanyobligationstoperformfutureservices.Limitedwarrantiesareprovidedforcapitalequipmentsalesandprovisionsforwarrantyareprovidedatthetimeofproductsalebaseduponananalysisofhistoricaldata.

• Amountsbilledtocustomersrelatedtoshippingandhandlinghavebeenincludedinnetsales.Shippingandhandlingcostsincludedinsellingandadministrativeexpensewere$8.3million,$9.3millionand$11.2millionfor2003,2004and2005,respectively.

• Weselltoadiversifiedbaseofcustomersaroundtheworldand,therefore,believethereisnomaterialconcentrationofcreditrisk.

• Weassesstheriskoflossonaccountsreceivableandadjusttheallowancefordoubtfulaccountsbasedonthisriskassessment.Historically,lossesonaccountsreceivablehavenotbeenmaterial.Managementbelievesthattheallowancefordoubtfulaccountsof$1.5millionatDecember31,2005isadequatetoprovideforprobablelossesresultingfromaccountsreceivable.

EarningspershareWecomputebasicearningspershare(“basicEPS”)bydividingnetincomebytheweightedaveragenumberofsharesoutstandingforthereportingperiod.Dilutedearningspershare(“dilutedEPS”)giveseffecttoalldilutivepotentialsharesoutstandingresultingfromemployeestockoptionsduringtheperiod.ThefollowingtablesetsforththecalculationofbasicanddilutedearningspershareatDecember31,2003,2004and2005,respectively: 2003 2004 2005

Netincome $32,082 $33,465 $31,994 _______ _______ _______ _______ ______________Basic-weightedaveragesharesoutstanding 28,930 29,523 29,300Effectofdilutivepotentialsecurities 326 582 436 _______ ______________Diluted-weightedaveragesharesoutstanding 29,256 30,105 29,736 _______ ______________ _______ ______________BasicEPS $ 1.11 $ 1.13 $ 1.09 _______ ______________ _______ ______________DilutedEPS $ 1.10 $ 1.11 $ 1.08 _______ ______________ _______ ______________ThesharesusedinthecalculationofdilutedEPSexcludeoptionstopurchaseshareswheretheexercisepricewasgreaterthantheaveragemarketpriceofcommonsharesfortheyear.Suchsharesaggregatedapproximately1.3million,0.1millionand0.6millionatDecember31,2003,2004and2005,respectively.Uponconversionofour2.50%convertibleseniorsubordinatednotes(the“Notes”),theholderofeachNotewillreceivetheconversionvalueoftheNotepayableincashuptotheprincipalamountoftheNoteandCONMEDcommonstockfortheNote’sconversionvalueinexcessofsuchprincipalamount.AsofDecember31,2005,oursharepricehasnotexceededtheconversionpriceoftheNotes,thereforetheconversionvaluewaslessthantheprincipalamountoftheNotes.UnderthenetsharesettlementmethodandinaccordancewithEmergingIssuesTaskForce(“EITF”)Issue04-8,“TheEffectofContingentlyConvertibleDebtonDilutedEarningsperShare,”therewerenopotentialsharesissuableundertheNotestobeusedinthecalculationofdilutedEPS.ThemaximumnumberofshareswemayissuewithrespecttotheNotesis5,750,000.SeeNote6forfurtherdiscussionoftheNotes.

Stock-basedcompensationStatementofFinancialAccountingStandardsNo.123,“AccountingforStock-BasedCompensation”(“SFAS123”)definesafairvaluebasedmethodofaccountingforanemployeestockoptionwherebycompensationcostismeasuredatthegrantdatebasedonthefairvalueoftheawardandisrecognizedovertheserviceperiod.AcompanymayelecttoadoptSFAS123orelecttocontinueaccountingforitsstockoptionorsimilarequityawardsusingthemethodofaccountingprescribedbyAccountingPrinciplesBoardOpinionNo.25,“AccountingforStockIssuedtoEmployees”(“APB25”),wherecompensationcostismeasuredatthedateofgrantbasedontheexcessofthemarketvalueoftheunderlyingstockovertheexerciseprice.Wehaveelectedtocontinuetoaccountforourstock-basedcompensationplansundertheprovisionsofAPB25.Nocompensationexpensehasbeenrecognizedintheaccompanyingfinancialstatementsrelativetoourstockoptionplans.ProformainformationregardingnetincomeandearningspershareisrequiredbySFAS123andhasbeendeterminedasifwehadaccountedforouremployeestockoptionsunderthefairvaluemethodofthatstatement.Theweightedaveragefairvalueofoptions

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grantedin2003,2004and2005was$5.81,$14.59and$16.51,respectively.ThefairvalueoftheseoptionswasestimatedatthedateofgrantusingaBlack-Scholesoptionpricingmodelwiththefollowingweighted-averageassumptionsforoptionsgrantedin2003,2004and2005,respectively:Risk-freeinterestratesof3.13%,4.04%and4.16%;volatilityfactorsoftheexpectedmarketpriceoftheCompany’scommonstockof32.08%,51.20%and53.26%;aweighted-averageexpectedlifeoftheoptionof5.0yearsin2003,7.3yearsin2004and5.7yearsin2005;andthatnodividendswouldbepaidoncommonstock.Forpurposesoftheproformadisclosures,theestimatedfairvalueoftheoptionsisamortizedtoexpenseovertheoptions’vestingperiod.ThefollowingtableillustratestheeffectonnetearningsasifthefairvalueprovisionsofSFAS123hadbeenappliedtostock-basedemployeecompensation: 2003 2004 2005Netincome—asreported $32,082 $33,465 $31,994 _______ ______________Proformastock-basedemployee compensationexpense,netof relatedincometaxeffect (2,383) (4,598) (4,075) _______ ______________Netincome—proforma $29,699 $28,867 $27,919 _______ ______________ _______ ______________Earningspershare—asreported:Basic $ 1.11 $ 1.13 $ 1.09Diluted $ 1.10 $ 1.11 $ 1.08Earningspershare—proforma:Basic $ 1.03 $ 0.98 $ 0.95Diluted $ 1.02 $ 0.96 $ 0.94InDecember2004,SFAS123wasrevisedtorequirethatallshare-basedpaymentsberecognizedinthefinancialstatementsbasedontheirfairvalues.WewillberequiredtoadopttherevisedSFAS123inthefirstquarterof2006.SeeNote14foradditionaldiscussion.

Accumulatedothercomprehensiveincome(loss)Accumulatedothercomprehensiveincome(loss)consistsofthefollowing: Minimum Cumulative AccumulatedOther Pension Translation Comprehensive Liability Adjustments Income(loss)Balance,December31,2004 (10,455) $ 4,056 $ (6,399)Foreigncurrencytranslationadjustments — (3,657) (3,657)Minimumpensionliability(netofincometaxes) 320 — 320 ________ ________ _________Balance,December31,2005 (10,135) $ 399 $ (9,736) ________ ________ _________ ________ ________ _________

Note2—BusinessAcquisitionsAssetsandliabilitiesofacquiredbusinessesarerecordedunderthepurchasemethodofaccountingattheirestimatedfairvaluesasofthedateofacquisition.Goodwillrepresentscostsinexcessoffairvaluesassignedtotheunderlyingnetassetsofacquiredbusinesses.Theresultsofoperationsofacquiredbusinesseshavebeenincludedintheconsolidatedstatementsofincomesincethedateofacquisition.In2003,wecompletedseveralacquisitionsrelatingtoourPatientCareandElectrosurgeryproductlinestotaling$6.1millionincash.Wealsorecordedadditionalcontingentconsiderationrelatedto2002acquisitionsof$2.0millionandissued85,000sharesofcommonstocktotaling$1.7million.Goodwillrecordedin2003relatedtotheseacquisitionsapproximated$5.9millionandwasdeductibleforincometaxpurposes.TheseacquisitionsdidnothaveamaterialeffectonourresultsofoperationsfortheyearendedDecember31,2003.InMarch2003,wealsocompletedtheacquisitionofBionxImplants,Inc.(the“Bionxacquisition”)relatingtoourArthroscopyproductline,for$47.0millionincashplustheassumptionofapproximately$12.1millioninliabilities.TheBionxacquisitionwasfundedprimarilythroughborrowingsonourrevolvingcreditfacility(seeNote6).

Includedincostofsalesduring2003are$1.3millionofacquisition-relatedcharges,consistingprincipallyofthefollowing:$0.5millioninchargesasaresultofthestep-uptofairvaluerecordedrelatedtothesaleofinventoryacquiredasaresultoftheBionxacquisitionandtheacquisitionofCOREDynamics,Inc.in2002;$0.5millionininventorychargesasaresultofthediscontinuationofcertainofourArthroscopyproductlinesinfavorofthoseacquiredasaresultoftheBionxacquisition;and$0.3millioninothertransition-relatedcharges.Anadditional$3.2millioninacquisition-relatedcostsincurredin2003notrelatedtocostofsaleshavebeenrecordedinotherexpenseasdiscussedinNote12.Asdeterminedbymanagementwiththeassistanceofathird-partyvaluation,$7.9millionoftheBionxacquisitionpurchasepricerepresentstheestimatedfairvalueofprojectsforwhichtherelatedproducts,asoftheacquisitiondate,hadnotreachedtechnologicalfeasibilityandhadnofutureuse.Accordingly,thepurchasedin-processresearchanddevelopment(“IPRD”)assetswerewrittenoffinaccordancewithFinancialAccountingStandardsBoard(“FASB”)InterpretationNo.4,“ApplicabilityofFASBStatementNo.2toBusinessCombinationsAccountedforbythePurchaseMethod.”Nobenefitforincometaxeswasrecordedonthewrite-offofpurchasedIPRDasthesecostswerenotdeductibleforincometaxpurposes.Goodwillrecordedin2003relatedtotheBionxacquisitionapproximated$25.2millionandwasnotdeductibleforincometaxpurposes.InSeptember2004,weacquiredthebusinessoperationsoftheEndoscopicTechnologiesDivisionofC.R.Bard,Inc.(the“BardEndoscopicTechnologiesacquisition”)foraggregateconsiderationof$81.3millionincash.WefundedtheBardEndoscopicTechnologiesacquisitionthroughavailablecashonhandof$31.3millionwithanadditional$50.0milliondrawnunderourrevolvingcreditfacility(seeNote6).Includedincostofsalesduring2004and2005is$2.3millionand$0.5million,respectively,ofexpensewhichrepresentsthestep-uptofairvaluerecordedrelatingtothesaleofinventoryacquiredthroughtheBardEndoscopicTechnologiesacquisition.Theacquiredbusinessenhancedourproductofferingsbyaddingacomprehensivelineofsingle-usemedicaldevicesemployedbygastrointestinalandpulmonaryphysicianstodiagnoseandtreatdiseasesofthedigestivetractandlungsusingminimallyinvasiveendoscopictechniques.Asdeterminedbymanagementwiththeassistanceofathird-partyvaluation,$16.4millionoftheBardEndoscopicTechnologiesacquisitionpurchasepricerepresentsthefairvalueofdevelopment-stageprojectsforwhichtherelatedproducts,asoftheacquisitiondatehadnotreachedtechnologicalfeasibility,hadnotreceivedregulatoryapprovalandhadnoalternativefutureuse.Accordingly,theentireamountofin-processresearchanddevelopmentassetswerewritten-offinaccordancewithFASBInterpretationNo.4.The$16.4millionwrite-offofpurchasedin-processresearchanddevelopmentassetsisdeductibleforincometaxpurposes.UnauditedproformastatementsofincomefortheyearsendedDecember31,2003and2004,assumingtheBionxacquisitionoccurredasofJanuary1,2003andassumingtheBardEndoscopicTechnologiesacquisitionoccurredasofJanuary1,2003and2004arepresentedbelow.TheseproformastatementsofincomehavebeenpreparedforcomparativepurposesonlyanddonotpurporttobeindicativeoftheresultsofoperationswhichactuallywouldhaveresultedhadtheBionxacquisitionandBardEndoscopicTechnologiesacquisitionoccurredonthedatesindicated,orwhichmayresultinthefuture. 2003 2004Netsales $555,084 $ 604,566Netincome 28,090 33,749Netincomepershare Basic $ 0.97 $ 1.14 Diluted $ 0.96 $ 1.12

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Note3—InventoriesInventoriesconsistofthefollowingatDecember31,: 2004 2005Rawmaterials $ 40,781 $ 45,991Workinprocess 13,427 16,472Finishedgoods 73,727 89,965 ________ ________ $127,935 $152,428 ________ ________ ________ ________

Note4—Property,PlantandEquipmentProperty,plantandequipmentconsistofthefollowingatDecember31,: 2004 2005Land $ 4,200 $ 4,200Buildingandimprovements 78,637 80,713Machineryandequipment 92,789 95,300Constructioninprogress 3,675 7,086 ________ ________ 179,301 187,299 Less:Accumulateddepreciation (77,836) (83,075) ________ ________ $101,465 $104,224 ________ ________ ________ ________Weleasevariousmanufacturingfacilities,officefacilitiesandequipmentunderoperatingleases.Rentalexpenseontheseoperatingleaseswasapproximately$1,959,$2,649and$2,727fortheyearsendedDecember31,2003,2004and2005,respectively.TheaggregatefutureminimumleasecommitmentsforoperatingleasesatDecember31,2005areasfollows:

YearendingDecember31,:

2006 $3,1242007 2,8712008 2,6252009 1,7622010 1,395Thereafter 2,366

Note5—GoodwillandOtherIntangibleAssetsThechangesinthenetcarryingamountofgoodwillfortheyearendedDecember31,areasfollows:

2004 2005BalanceasofJanuary1, $290,562 $334,483Goodwillacquired 43,876 —Adjustmentstogoodwillresultingfrom businessacquisitionsfinalized 176 372Foreigncurrencytranslation (131) 796 ________ ________BalanceasofDecember31, $334,483 $335,651 ________ ________ ________ ________

GoodwillassociatedwitheachofourprincipaloperatingunitsatDecember31,isasfollows:

2004 2005CONMEDElectrosurgery $ 16,645 $ 16,645CONMEDEndoscopicTechnologies 46,592 46,649CONMEDEndosurgery 42,388 42,404CONMEDLinvatec 175,120 175,853CONMEDPatientCare 53,738 54,100 ________ ________BalanceasofDecember31, $334,483 $335,651 ________ ________ ________ ________

Otherintangibleassetsconsistofthefollowing: Dec.31,2004 Dec.31,2005 ___________________ __________________ Gross Gross Carrying Accumulated Carrying Accumulated Amount Amortization Amount AmortizationAmortizedintangibleassets:

Customer relationships $110,612 $(18,290) $110,612 $(21,317)Patentsandotherintangibleassets 35,444 (19,876) 37,344 (22,581)Unamortizedintangibleassets:

Trademarksand tradenames 87,344 — 87,344 — ________ ________ ________ ________ $233,400 $(38,166) $235,300 $(43,898) ________ ________ ________ ________ ________ ________ ________ ________Otherintangibleassetsprimarilyrepresentallocationsofpurchasepricetoidentifiableintangibleassetsofacquiredbusinesses.Theweightedaverageamortizationperiodforintangibleassetswhichareamortizedis24years.Customerrelationshipsarebeingamortizedoveraweightedaveragelifeof37years.Patentsandotherintangibleassetsarebeingamortizedoveraweightedaveragelifeof10years.Customerrelationshipassetswereacquiredinconnectionwiththe1997acquisitionofLinvatecCorporation,2003Bionxacquisitionand2004BardEndoscopicTechnologiesacquisition.Theseassetsrepresentthevalueassociatedwithbusinessexpectedtobegeneratedfromacquiredcustomersasoftheacquisitiondate.Assetvaluesweredeterminedbymeasuringthepresentvalueoftheprojectedfutureearningsattributabletotheseassets.Additionally,whiletheusefullivesoftheseassetsarenotlimitedbycontractoranyothereconomic,regulatoryorotherknownfactors,theweightedaverageusefullifeof37yearswasdeterminedasofacquisitiondatebyhistoricalcustomerattrition.InaccordancewithSFAS142andasclarifiedbyEITFIssue02-17,“RecognitionofCustomerRelationshipIntangibleAssetsAcquiredinaBusinessCombination,”customerrelationshipsevidencedbycustomerpurchaseordersarecontractualinnatureandthereforecontinuetoberecognizedseparatefromgoodwillandareamortizedovertheirweightedaverage37yearlife.Trademarksandtradenameswererecognizedinconnectionwiththe1997acquisitionofLinvatecCorporation,2003Bionxacquisitionand2004BardEndoscopicTechnologiesacquisition.Wecontinuetomarketproducts,releasenewproductandproductextensionsandmaintainandpromotethesetrademarksandtradenamesinthemarketplacethroughlegalregistrationandsuchmethodsasadvertising,medicaleducationandtradeshows.Itisourbeliefthatthesetrademarksandtradenameswillgeneratecashflowforanindefiniteperiodoftime.Therefore,inaccordancewithSFAS142,ourtrademarksandtradenamesintangibleassetsarenotamortized.AmortizationexpenserelatedtointangibleassetsfortheyearendingDecember31,2005andestimatedamortizationexpenseforeachofthefivesucceedingyearsisasfollows:

2005 $5,7322006 5,2662007 5,2522008 5,2522009 4,8592010 4,652

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Note6—Long-TermDebtLong-termdebtconsistsofthefollowingatDecember31,: 2004 2005Revolvinglineofcredit $ — $ 43,000Termloanborrowingsonseniorcreditfacility 128,063 98,1472.5%Convertibleseniorsubordinatednotes 150,000 150,000Mortgagenotes 16,459 15,704 ________ ________ Totallong-termdebt 294,522 306,851Less:Currentportion 4,037 4,208 ________ ________ $290,485 $302,643 ________ ________ ________ ________EffectiveAugust28,2002weenteredintoa$200.0millioncreditagreement(the“seniorcreditagreement”)withJPMorganChaseBankandotherfinancialinstitutionsfromtimetotimepartythereto.Theseniorcreditagreementconsistedofa$100.0millionrevolvingcreditfacilityanda$100.0milliontermloan.EffectiveJune30,2003weenteredintoanAmendedandRestatedCreditAgreement(the“amendedseniorcreditagreement”)wherebythetermloanamountwasincreasedby$160.0million.Proceedsoftheamendedseniorcreditagreementwereusedtoreduceoutstandingborrowingsontherevolvingcreditfacility,fundtheredemptionof$130.0millionin9.0%seniorsubordinatednotes,includingaccruedinterest,fundpaymentof4.5%callpremiumontheseniorsubordinatednotesandfundbankandlegalfeesassociatedwiththeamendment.During2003,werecordedalossontheearlyextinguishmentofdebtintheamountof$8.1million.Thisamountrepresented$5.9millionofthe4.5%callpremiumand$2.2millionofunamortizeddeferredfinancingcostsassociatedwiththeredemptionofthe9.0%seniorsubordinatednotes.AtDecember31,2005theamendedseniorcreditagreementconsistedofa$100.0millionrevolvingcreditfacilityanda$98.1milliontermloan.Therewere$43.0millioninborrowingsoutstandingontherevolvingcreditfacilityatDecember31,2005.TherevolvingcreditfacilityexpiresinAugust2007.Thetermloanisscheduledtoberepaidinquarterlyinstallmentsoveraremainingperiodofapproximatelyfouryears,withscheduledprincipalpaymentsof$2.6millionannuallythroughDecember2007increasingto$60.3millionin2008andtheremainingbalanceoutstandingduein2009.Wemayalsoberequired,undercertaincircumstances,tomakeadditionalprincipalpaymentsbasedonexcesscashflowasdefinedintheamendedseniorcreditagreement.Nosuchpaymentswererequiredduring2004and2005.InterestratesonthetermloanareattheLondonInterbankOfferedRate(“LIBOR”)plus2.25%(6.44%atDecember31,2005).InterestratesontherevolvingcreditfacilityareatLIBORplus2.25%oranalternativebaserate(8.50%atDecember31,2005).Theamendedseniorcreditagreementiscollateralizedbysubstantiallyallofourpersonalpropertyandassets,exceptforouraccountsreceivableandrelatedrightswhichhavebeensoldinconnectionwithouraccountsreceivablesalesagreement(seeNote1).Theseniorcreditagreementcontainscovenantsandrestrictionswhich,amongotherthings,requiremaintenanceofcertainworkingcapitallevelsandfinancialratios,prohibitdividendpaymentsandrestricttheincurrenceofcertainindebtednessandotheractivities,includingacquisitionsanddispositions.Theseniorcreditagreementcontainsamaterialadverseeffectclausewhichcouldlimitourabilitytoaccessadditionalfundingunderourrevolvingcreditfacilityshouldamaterialadversechangeinourbusinessoccur.Wearealsorequired,undercertaincircumstances,tomakemandatoryprepaymentsfromnetcashproceedsfromanyissueofequityandassetsales.MortgagenotesoutstandinginconnectionwiththepropertyandfacilitiesutilizedbyourCONMEDLinvatecsubsidiaryconsistofanotebearinginterestat7.50%perannumwithsemiannualpaymentsofprincipalandinterestthroughJune2009(the“ClassAnote”);andanotebearinginterestat8.25%perannumcompounded

semiannuallythroughJune2009,afterwhichsemiannualpaymentsofprincipalandinterestwillcommence,continuingthroughJune2019(the“ClassCnote”).TheprincipalbalancesoutstandingontheClassAnoteandClassCnoteaggregated$6.9millionand$8.8million,respectively,atDecember31,2005.ThesemortgagenotesaresecuredbytheCONMEDLinvatecpropertyandfacilities.OnNovember112004,wecompletedanofferingof$150.0millionin2.50%convertibleseniorsubordinatednotes(the“Notes”)due2024.Thisofferinghasallowedustofixinterestrateson$150.0millionofourtotaloutstandinglong-termdebtat2.50%.TheNotesrepresentsubordinatedunsecuredobligationsandareconvertibleundercertaincircumstances,asdefinedinthebondindenture,intoacombinationofcashandCONMEDcommonstock.Uponconversion,theholderofeachNotewillreceivetheconversionvalueoftheNotepayableincashuptotheprincipalamountoftheNoteandCONMEDcommonstockfortheNote’sconversionvalueinexcessofsuchprincipalamount.Amountsinexcessoftheprincipalamountareataninitialconversionrate,subjecttoadjustment,of26.1849sharesper$1,000principalamountoftheNote(whichrepresentsaninitialconversionpriceof$38.19pershare).TheNotesmatureonNovember15,2024andarenotredeemablebyuspriortoNovember15,2011.HoldersoftheNoteswillbeabletorequirethatwerepurchasesomeoralloftheNotesonNovember15,2011,2014and2019.TheNotescontaintwoembeddedderivatives.Theembeddedderivativesarerecordedatfairvalueinotherlong-termliabilitiesandchangesintheirvaluearerecordedthroughtheconsolidatedstatementofincome.Theembeddedderivativeshaveanominalvalue,anditisourbeliefthatanychangeintheirfairvaluewouldnothaveamaterialadverseeffectonourbusiness,financialconditionorresultsofoperations.Proceedsfromtheofferingandcashonhandwereusedtorepay$82.2milliononthetermloanandafurther$45.0millioninborrowingsthenoutstandingontherevolvingcreditfacilityunderourseniorcreditagreement.Additionally,inconjunctionwiththeNotesoffering,werepurchased$30.0millionofourcommonstockinprivatelynegotiatedtransactions.Asaresultofthe$82.2millionprepaymentonthetermloan,werecorded$0.8millioninlossesontheearlyextinguishmentofdebtrelatedtothewrite-offofunamortizeddeferredfinancingfees.Thescheduledmaturitiesoflong-termdebtoutstandingatDecember31,2005areasfollows:

2006 $ 4,2082007 47,3932008 62,3432009 34,4482010 824Thereafter 157,635

Note7—IncomeTaxesTheprovisionforincometaxesfortheyearsendedDecember31,2003,2004and2005consistsofthefollowing: 2003 2004 2005Currenttaxexpense:Federal $ 5,486 $ 9,138 $ 3,083State 665 975 795Foreign 1,061 1,683 2,170 _______ _______ _______ 7,212 11,796 6,048Deferredincometaxexpense 13,715 4,301 10,128 _______ _______ _______Provisionforincometaxes $20,927 $16,097 $16,176 _______ _______ _______ _______ _______ _______

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AreconciliationbetweenincometaxescomputedatthestatutoryfederalrateandtheprovisionforincometaxesfortheyearsendedDecember31,2003,2004and2005follows: 2003 2004 2005Taxprovisionatstatutoryratebasedonincomebeforeincometaxes 35.00% 35.00% 35.00%

Extraterritorialincomeexclusion (2.36) (5.30) (2.78)Stateincometaxes .90 2.75 .66Nondeductibleintangibleamortization .17 .18 .05Nondeductiblewrite-offofpurchasedin-processresearchanddevelopmentassets 5.22 — —

Othernondeductiblepermanentdifferences .51 .36 .85

Other,net .04 (.51) (.20) ________ _______________ 39.48% 32.48% 33.58% ________ _______________ ________ _______________

ThetaxeffectsofthesignificanttemporarydifferenceswhichcomprisethedeferredtaxassetsandliabilitiesatDecember31,2004and2005areasfollows: 2004 2005Assets: Inventory $ 10,791 $ 10,913 Netoperatinglossesofacquiredsubsidiaries 8,025 8,663 Deferredcompensation 1,602 1,931 Accountsreceivable 509 865 Additionalminimumpensionliability 5,630 5,457 Other 2,024 — Valuationallowance (5,887) (6,160) ________ ________ 22,694 21,669 ________ ________Liabilities: Goodwillandintangibleassets 51,707 63,601 Depreciation 6,412 5,568 Employeebenefits 1,530 722 Statetaxes 745 1,116 Other — 329 ________ ________ 60,394 71,336 ________ ________Netliability $ (37,700) $(49,667) ________ ________ ________ ________EarningsbeforeincometaxesconsistsofthefollowingU.S.andforeignincome: 2003 2004 2005U.S.income $49,275 $45,876 $42,653Foreignincome 3,734 3,686 5,517 _______ _______ _______Totalincome $53,009 $49,562 $48,170 _______ _______ _______ _______ _______ _______

Thenetoperatinglosscarryforwardsofacquiredsubsidiariesbegintoexpirein2008.WehaveestablishedavaluationallowancetoreflecttheuncertaintyofrealizingthebenefitsofcertainnetoperatinglosscarryforwardsrecognizedinconnectionwiththeBionxacquisition.Anysubsequentlyrecognizedtaxbenefitsassociatedwiththevaluationallowancewouldbeallocatedtoreducegoodwill.TheAmericanJobsCreationAct,signedintolawinOctober2004,providedanopportunityin2005torepatriateaccumulatedincomeearnedabroadbyprovidingan85percentdividendsreceiveddeductionforcertaindividendsfromcontrolledforeigncorporations.Weevaluatedthepotentialeffectsoftherepatriationprovisionanddeterminednottorepatriateearningsunderthisprovision.Wehavenotprovidedforfederalincometaxesontheundistributedearningsofourforeignsubsidiariesasitremainsourintentiontopermanentlyreinvestsuchearnings(approximately$23.2millionasofDecember31,2005).Weoperateinmultipletaxingjurisdictions,bothwithinandoutsidetheUnitedStates.Wefaceauditsfromthesevarioustaxauthoritiesregardingtheamountoftaxesdue.Suchauditscaninvolvecomplex

issuesandmayrequireanextendedperiodoftimetoresolve.OurUnitedStatesfederalincometaxreturnshavebeenexaminedbytheInternalRevenueService(“IRS”)forcalendaryearsendingthrough2000.Webelievealltaxdifferencesarisingfromthoseauditshavebeenresolvedandsettled.TheIRSiscurrentlyexaminingourfederalincometaxreturnsforcalendaryears2001through2003.Wedonotcurrentlyanticipateanymaterialadjustmentstoincometaxexpenseasaresultoftheseexaminations.

Note8—Shareholders’EquityTheshareholdershaveauthorized500,000sharesofpreferredstock,parvalue$.01pershare,whichmaybeissuedinoneormoreseriesbytheBoardofDirectorswithoutfurtheractionbytheshareholders.AsofDecember31,2004and2005,nopreferredstockhadbeenissued.InNovember2004,werepurchased1.1millionsharesofourcommonstockinprivatelynegotiatedtransactionsatanaggregatecostof$30million.Thisrepurchasecoincidedwithour2.50%convertibleseniorsubordinatednotestransaction(seeNote6).OnFebruary15,2005,ourBoardofDirectorsauthorizedasharerepurchaseprogramunderwhichwemayrepurchaseupto$50.0millionofourcommonstock,althoughnomorethan$25.0millioncouldbepurchasedinanycalendaryear.TheBoardsubsequentlyamendedthisprogramonDecember2,2005toauthorizerepurchasesupto$100.0millionofourcommonstock,althoughnomorethan$50.0millionmaybepurchasedinanycalendaryear.Therepurchaseprogramcallsforsharestobepurchasedintheopenmarketorinprivatetransactionsfromtimetotime.Wemaysuspendordiscontinuethesharerepurchaseprogramatanytime.Wehaverepurchased1.8millionsharesofcommonstockasofDecember31,2005underthisauthorization.Wehavereserved6.7millionsharesofcommonstockforissuancetoemployeesanddirectorsunderthreestockoptionplans(the“Plans”)ofwhichapproximately144,000sharesremainavailableforgrantatDecember31,2005.InMay2004,thetotalnumberofsharesavailableforissuancetoemployeesanddirectorsunderthePlanswasincreasedby1.0millionshares.Theexercisepriceonalloutstandingoptionsisequaltothequotedfairmarketvalueofthestockatthedateofgrant.Stockoptionsarenon-transferableotherthanondeathandgenerallybecomeexercisableoverafiveyearperiodfromdateofgrantandexpiretenyearsfromdateofgrant.ThefollowingisasummaryofincentivestockoptionactivityunderthePlans: Number Weighted-Average ofOptions ExercisePriceOutstandingatDecember31,2002 3,590 $ 17.27 Granted 669 17.44 Forfeited (84) 19.49 Exercised (181) 11.84 ________ _______OutstandingatDecember31,2003 3,994 $ 17.55 Granted 659 25.03 Forfeited (152) 19.16 Exercised (940) 15.28 ________ _______OutstandingatDecember31,2004 3,561 $ 19.45 Granted 504 30.75 Forfeited (26) 24.33 Exercised (954) 16.67 ________ _______OutstandingatDecember31,2005 3,085 $ 22.12 ________ _______ ________ _______ Exercisable: December31,2003 2,590 17.19 December31,2004 2,435 18.90 December31,2005 2,023 20.98

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Stock Stock Options Weighted Weighted Options Weighted Rangeof Outstanding Average Average Exercisable Average Exercise atDec.31, Remaining Exercise atDec.31, Exercise Prices 2005 Life(Years) Price 2005 Price$ 6.52to$16.29 468 4.9 $14.16 363 $13.96$16.29to$19.55 627 5.1 17.55 469 17.44$19.55to$22.81 647 5.9 20.92 432 20.70$22.81to$29.32 869 7.8 25.81 599 25.47$29.32to$32.58 474 9.2 30.92 160 31.22 _____ _____ Total 3,085 2,023 _____ _____ _____ _____During2002weadoptedashareholder-approvedEmployeeStockPurchasePlan(the“EmployeePlan”),underwhichwehavereserved1.0millionsharesofcommonstockforissuancetoouremployees.TheEmployeePlanprovidesemployeeswiththeopportunitytoinvestfrom1%to10%oftheirannualsalarytopurchasesharesofCONMEDcommonstockthroughtheexerciseofstockoptionsgrantedbytheCompanyatapurchasepriceequaltothelesserof(1)85%ofthefairmarketvalueofthecommonstockatthebeginningofasemi-annualperiodor(2)85%ofthefairmarketvalueofthecommonstockattheendofsuchsemi-annualperiod.During2005,weissuedapproximately47,000sharesofcommonstockundertheEmployeePlan.Nostock-basedcompensationexpensehasbeenrecognizedintheaccompanyingconsolidatedfinancialstatementsasaresultofcommonstockissuancesundertheEmployeePlan.EffectiveJanuary1,2006,thePlanwasamendedtoeliminatethelookbackfeaturewherebythepurchasepriceisequalto95%ofthefairmarketvalueofthecommonstockontheexercisedate.

Note9—BusinessSegmentsandGeographicAreasCONMEDconductsitsbusinessthroughfiveprincipaloperatingunits,CONMEDEndoscopicTechnologies,CONMEDEndosurgery,CONMEDElectrosurgery,CONMEDLinvatecandCONMEDPatientCare.InaccordancewithStatementofFinancialAccountingStandardsNo.131“DisclosuresAboutSegmentsofanEnterpriseandRelatedInformation”(“SFAS131”),ourchiefoperatingdecision-makerhasbeenidentifiedasthePresidentandChiefOperatingOfficer,whoreviewsoperatingresultsandmakesresourceallocationdecisionsfortheentirecompany.Webelieveeachofoursegmentsaresimilarinthenatureofproducts,productionprocesses,customerbase,distributionmethodsandregulatoryenvironment.AllofouroperatingunitsqualifyforaggregationunderSFAS131exceptCONMEDPatientCare.TheeconomiccharacteristicsofCONMEDPatientCaredonotmeetthecriteriain2005foraggregationduetotheloweroveralloperatingincomeinthissegment.Accordingly,wehaveprovidedcomparableinformationforthepriortwoyears.Basedupontheaggregationcriteriaforsegmentreporting,wehavegroupedallofouroperatingunitsexceptCONMEDPatientCareintoasinglesegmentcomprisedofmedicalinstrumentsandsystemsusedinsurgicalandothermedicalprocedures.CONMEDPatientCareiscomprisedofcardiacandothervitalsigndevicesaswellasavarietyofothermedicalproducts.Thefollowingisnetsalesinformationbyproductlineandreportablesegment: 2003 2004 2005Arthroscopy $182,061 $204,887$211,397PoweredSurgicalInstruments 122,031 128,572 132,045Electrosurgery 77,337 85,912 88,455Endosurgery 45,764 47,400 50,694EndoscopicTechnologies — 15,738 58,835 ________ ________ ________ MedicalInstrumentsandSystems 427,193 482,509 541,426PatientCare 69,937 75,879 75,879 ________ ________ ________ Total $497,130 $558,388$617,305 ________ ________ ________ ________ ________ ________

Totalassets,capitalexpenditures,depreciationandamortizationinformationarenotavailablebysegment.

Thefollowingisareconciliationbetweensegmentoperatingincomeandincomebeforeincometaxes: 2003 2004 2005MedicalInstrumentsandSystems $69,717 $53,431 $59,391PatientCare 10,238 9,730 4,357 _______ _______ _______ Totaloperatingincome 79,955 63,161 63,748Lossonearlyextinguishmentofdebt 8,078 825 —Interestexpense 18,868 12,774 15,578 _______ _______ _______ Totalincomebeforeincometaxes $53,009 $49,562 $48,170 _______ _______ _______ _______ _______ _______

Thefollowingisnetsalesinformationforgeographicareas: 2003 2004 2005UnitedStates $333,473 $364,819$390,050Canada 24,620 27,384 36,111UnitedKingdom 19,883 27,120 30,117Japan 18,265 19,793 22,073Australia 12,604 17,536 23,237Allothercountries 88,285 101,736115,717 ________ ________ ________ Total $497,130 $558,388$617,305 ________ ________ ________ ________ ________ ________

Salesareattributedtocountriesbasedonthelocationofthecustomer.Therewerenosignificantinvestmentsinlong-livedassetslocatedoutsidetheUnitedStatesatDecember31,2004and2005.Nosinglecustomerrepresentedover10%ofourconsolidatednetsalesfortheyearsendedDecember31,2003,2004and2005.

Note10—EmployeeBenefitPlansWesponsoranemployeesavingsplan(“401(k)plan”)andadefinedbenefitpensionplan(the“pensionplan”)coveringsubstantiallyallouremployees.OverallbenefitlevelsprovidedunderthepensionplanwerereducedeffectiveJanuary1,2004resultinginareductionintheprojectedbenefitobligationofapproximately$6.4million.Totalemployercontributionstothe401(k)planwere$2.2million,$1.8millionand$2.2millionduringtheyearsendedDecember31,2003,2004and2005,respectively.WeuseaDecember31,measurementdateforourpensionplan.Unrecognizedgainsandlossesareamortizedonastraight-linebasisovertheaverageremainingserviceperiodofactiveparticipants.Thefollowingtableprovidesareconciliationoftheprojectedbenefitobligation,planassetsandfundedstatusofthepensionplanatDecember31,: 2004 2005AccumulatedBenefitObligation $ 43,337 $ 44,971 ________ ________ ________ ________ ChangeinbenefitobligationProjectedbenefitobligationat beginningofyear $ 38,878 $ 48,872Adjustmentforplanamendment (6,352) —Servicecost 3,144 4,503Interestcost 2,377 2,575Actuarialloss 13,759 517Benefitspaid (2,934) (5,047) ________ ________ Projectedbenefitobligationatendofyear $ 48,872 $ 51,420 ________ ________ ChangeinplanassetsFairvalueofplanassetsatbeginningofyear $ 33,632 $ 33,188Actualgainonplanassets 2,490 1,611Employercontribution — 3,500Benefitspaid (2,934) (5,047) ________ ________ Fairvalueofplanassetsatendofyear $ 33,188 $ 33,252 ________ ________ ChangeinfundedstatusFundedstatus $ 15,684 $ 18,168Unrecognizednetactuarialloss (27,461) (27,536)Unrecognizedtransitionliability (44) (40)Unrecognizedpriorservicecost 5,886 5,535Additionalminimumpensionliability 16,084 15,592 ________ ________ Accrued(prepaid)pensioncost $ 10,149 $ 11,719 ________ ________ ________ ________

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AmountsrecognizedintheconsolidatedbalancesheetsconsistofthefollowingatDecember31,: 2004 2005Accruedpensionliability $ 10,149 $ 11,719Accumulatedothercomprehensiveincome(loss) (16,084) (15,592) ________ ________ Netamountrecognized $ (5,935) $ (3,873) ________ ________ ________ ________

ThefollowingactuarialassumptionswereusedtodetermineouraccumulatedandprojectedbenefitobligationsasofDecember31,: 2004 2005Discountrate 5.75% 5.55%Expectedreturnonplanassets 8.00% 8.00%Rateofcompensationincrease 3.00% 3.00%Additionally,asofDecember31,2004,theCompanychangedfromthe1984UnisexPensionmortalitytabletothe1994GroupAnnuityReservingmortalitytableforpurposesofdeterminingexpectedmortality.NetperiodicpensioncostfortheyearsendedDecember31,consistofthefollowing: 2003 2004 2005Servicecost—benefitsearnedduringtheperiod $ 4,167 $ 3,144 $ 4,503

Interestcostonprojectedbenefitobligation 2,419 2,377 2,651

Expectedreturnonplanassets (1,728) (2,562) (2,047)Netamortizationanddeferral 750 660 455Settlementloss 2,839 — — _______ _______ _______Netperiodicpensioncost $ 8,447 $ 3,619 $ 5,562 _______ _______ _______ _______ _______ _______Duringtheyear-endedDecember31,2003,werecognizedsettlementlossesof$2.8million.SeeNote12forfurtherdiscussion.DuringtheyearendedDecember31,2003,2004and2005,respectively,werecognizedcomprehensiveincomeof$5.1million,netofincometaxes,acomprehensivelossof$10.5million,netofincometaxes,andcomprehensiveincomeof$0.3million,netofincometaxes,asaresultofchangesintheadditionalminimumpensionliabilityrequiredtoberecognized.ThefollowingactuarialassumptionswereusedtodetermineournetperiodicpensionbenefitcostfortheyearsendedDecember31,: 2003 2004 2005Discountrate 6.75% 6.25% 5.75%Expectedreturnonplanassets 8.00% 8.00% 8.00%Rateofcompensationincrease 3.00% 3.00% 3.00%Indeterminingtheexpectedreturnonpensionplanassets,weconsidertherelativeweightingofplanassets,thehistoricalperformanceoftotalplanassetsandindividualassetclassesandeconomicandotherindicatorsoffutureperformance.Inaddition,weconsultwithfinancialandinvestmentmanagementprofessionalsindevelopingappropriatetargetedratesofreturn.Assetmanagementobjectivesincludemaintaininganadequatelevelofdiversificationtoreduceinterestrateandmarketriskandprovidingadequateliquiditytomeetimmediateandfuturebenefitpaymentrequirements.TheallocationofpensionplanassetsbycategoryisasfollowsatDecember31,: PercentageofPension Target PlanAssets Allocation 2004 2005 2006Equitysecurities 48% 64% 70%Debtsecurities 52 36 30 _____ ______ _____ Total 100% 100% 100% _____ ______ _____ _____ ______ _____ AsofDecember31,2005,thePlanheld27,562sharesofourcommonstock,whichhadafairvalueof$0.7million.Webelievethatour

long-termassetallocationonaveragewillapproximatethetargetedallocation.Weregularlyreviewouractualassetallocationandperiodicallyrebalancethepensionplan’sinvestmentstoourtargetedallocationwhendeemedappropriate.Wedonotexpecttheretobeanyrequiredcontributionstoourpensionplanin2006.Thefollowingtablesummarizesthebenefitsexpectedtobepaidbyourpensionplanineachofthenextfiveyearsandinaggregateforthefollowingfiveyears.TheexpectedbenefitpaymentsareestimatedbasedonthesameassumptionsusedtomeasuretheCompany’sprojectedbenefitobligationatDecember31,2005andreflecttheimpactofexpectedfutureemployeeservice.

2006 $3,4792007 1,8282008 1,8972009 1,9152010 2,1202011-2015 12,129

Note11—LegalMattersFromtimetotime,weareadefendantincertainlawsuitsallegingproductliability,patentinfringement,orotherclaimsincurredintheordinarycourseofbusiness.Likewise,fromtimetotime,theCompanymayreceiveasubpoenafromagovernmentagencysuchastheEqualEmploymentOpportunityCommission,OccupationalSafetyandHealthAdministration,theDepartmentofLabor,theTreasuryDepartment,andotherfederalandstateagencies.Thesesubpoenasmayormaynotberoutineinquiries.Theseclaimsaregenerallycoveredbyvariousinsurancepolicies,subjecttocertaindeductibleamountsandmaximumpolicylimits.Whenthereisnoinsurancecoverage,aswouldtypicallybethecaseprimarilyinlawsuitsallegingpatentinfringementorinconnectionwithcertaingovernmentinvestigations,weestablishsufficientreservestocoverprobablelossesassociatedwithsuchclaims.Wedonotexpectthattheresolutionofanypendingclaimsorinvestigationswillhaveamaterialadverseeffectonourfinancialconditionorresultsofoperations.Therecanbenoassurance,however,thatfutureclaimsorinvestigations,thecostsassociatedwithclaimsorinvestigations,especiallyclaimsandinvestigationsnotcoveredbyinsurance,willnothaveamaterialadverseeffectonourfutureperformance.Manufacturersofmedicalproductsmayfaceexposuretosignificantproductliabilityclaims.Todate,wehavenotexperiencedanymaterialproductliabilityclaims,butanysuchclaimsarisinginthefuturecouldhaveamaterialadverseeffectonourbusinessorresultsofoperations.Wecurrentlymaintaincommercialproductliabilityinsuranceof$25millionperincidentand$25millionintheaggregateannually,whichwebelieveisadequate.Thiscoverageisonaclaims-madebasis.Therecanbenoassurancethatclaimswillnotexceedinsurancecoverageorthatsuchinsurancewillbeavailableinthefutureatareasonablecosttous.Ouroperationsaresubject,andinthepasthavebeensubject,toanumberofenvironmentallawsandregulationsgoverning,amongotherthings,airemissions,wastewaterdischarges,theuse,handlinganddisposalofhazardoussubstancesandwastes,soilandgroundwaterremediationandemployeehealthandsafety.Insomejurisdictionsenvironmentalrequirementsmaybeexpectedtobecomemorestringentinthefuture.IntheUnitedStatescertainenvironmentallawscanimposeliabilityfortheentirecostofsiterestorationuponeachofthepartiesthatmayhavecontributedtoconditionsatthesiteregardlessoffaultorthelawfulnessoftheparty’sactivities.Whilewedonotbelievethatthepresentcostsofenvironmentalcomplianceandremediationarematerial,therecanbenoassurancethatfuturecomplianceorremedialobligationscouldnothaveamaterialadverseeffectonourfinancialconditionorresultsofoperations.AsdiscussedinNote12,weenteredintoasettlementofcertainenvironmentalclaimsduringthesecondquarterof2005relatedtotheoperationsofoneofoursubsidiaries

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duringthe1980s,beforeitwasacquiredbyCONMED,atasiteotherthantheoneitcurrentlyoccupies.InNovember2003,wecommencedlitigationagainstJohnson&Johnsonandseveralofitssubsidiaries,includingEthicon,Inc.forviolationoffederalandstateantitrustlaws.ThelawsuitclaimsthatJohnson&Johnsonengagedinillegalandanticompetitiveconductwithrespecttosalesofproductusedinendoscopicsurgery,resultinginhigherpricestoconsumersandtheexclusionofcompetition.WehavesoughtreliefwhichincludesaninjunctionrestrainingJohnson&Johnsonfromcontinuingitsanticompetitivepracticeaswellasreceivingthemaximumamountofdamagesallowedbylaw.Thediscoveryphaseisnowessentiallycompleted.Johnson&JohnsonfiledamotionforsummaryjudgmentonOctober21,2005.Ifgranted,themotionwouldendthecase,subjecttoanappealthatwewouldbeentitledtotake.OurresponsetothemotionwassubmittedinNovember2005,andthehearingonthemotionwasheldonDecember16,2005.ThereisnofixedtimeframewithinwhichtheCourtmustdecidethemotion.Whilewebelievethatourclaimsarewell-groundedinfactandlaw,therecanbenoassurancethatwewillbesuccessfulinourclaim.Inaddition,thecostsassociatedwithpursuingthisclaimmaybematerial.

Note12—OtherExpense(Income)Otherexpense(income)fortheyearendedDecember31,consistsofthefollowing: 2003 2004 2005Gainonsettlementofacontractual dispute,netoflegalcosts $ (9,000) $ — $ —Pensionsettlementcosts 2,839 — —Acquisition-relatedcosts 3,244 1,547 4,108Terminationofproductoffering — 2,396 1,519Environmentalsettlementcosts — — 698Lossonequityinvestment — — 794 _______ _______ _______ Otherexpense(income) $ (2,917) $ 3,943 $ 7,119 _______ _______ _______ _______ _______ _______During2003,weenteredintoanagreementwithBristol-MyersSquibbCompany(“BMS”)andZimmer,Inc.,(“Zimmer”)tosettleacontractualdisputerelatedtothe1997salebyBMSanditsthensubsidiary,Zimmer,ofLinvatecCorporationtoCONMEDCorporation.Asaresultoftheagreement,BMSpaidus$9.5millionincash,whichwasrecordedasagainonsettlementofacontractualdispute,netof$0.5millioninlegalcosts.During2003,weannouncedaplantorestructureourArthroscopyandPoweredSurgicalInstrumentsalesforcebyincreasingourdomesticsalesforcefrom180to230salesrepresentatives.TheincreasewasinconjunctionwithourintegrationplanfortheBionxacquisitiondiscussedinNote2.Aspartofthesalesforcerestructuring,weconverted90directemployeesalesrepresentativesintonineindependentsalesagentgroups.Asaresultoftheterminationofthe90directemployeesalesrepresentatives,werecordedachargetootherexpenseof$2.8millionrelatedtosettlementlossesofpensionobligations,pursuanttoStatementofFinancialAccountingStandardsNo.88,“Employers’AccountingforSettlementsandCurtailmentsofDefinedBenefitPensionPlansandforTerminationBenefits.”During2003,weincurredacquisition-relatedchargesofapproximately$4.5million,ofwhich$1.3millionhasbeenrecordedincostofsalesasdiscussedinNote2.Anadditional$3.2millionofacquisitionandtransition-relatedcostshavebeenrecordedinotherexpense.The$3.2millionofcostsrecordedinotherexpenseconsistof$1.3millioninretentionbonuses,travel,severanceandothercostsrelatedtoacquisitionscompletedinthefourthquarterof2002,and$1.9millionofsimilarcostsrelatedtotheBionxacquisitioncompletedinthefirstquarterof2003.During2004,weelectedtoterminateoursurgicallightsproductline.WeinstitutedacustomerreplacementprogramwherebyallcurrentlyinstalledsurgicallightshavebeenorwillbereplacedbyCONMED.

Theentirecostofthereplacementprogram,includingthewrite-offoftheremainingsurgicallightsinventory,purchaseofnewsurgicallightsfromanalternativesupplierandinstallationcostsareexpectedtoapproximate$5.8million.During2004,werecordedachargeof$2.4millionforthewrite-offofsurgicallightsinventoryandthecostofsurgicallightreplacementsperformedthroughDecember31,2004.During2005,werecordedanadditional$1.5million.Itisanticipatedthattheremaining$1.9millionincostswillbeincurredinthefirsthalfof2006asthereplacementprogramiscompleted.During2004,weincurred$1.5millionofacquisition-relatedchargesassociatedwiththeBardEndoscopicTechnologiesacquisitionwhichhavebeenrecordedinotherexpense.Theseexpensesprincipallyconsistofseveranceandothertransitionrelatedcharges.During2005,weincurredanadditional$4.1millionofexpenserelatedtoacquisitiontransitionandintegrationrelatedcharges.During2005,weenteredintoasettlementofcertainenvironmentalclaimsrelatedtotheoperationsofoneofoursubsidiariesduringthe1980s,beforeitwasacquiredbyCONMED,atasiteotherthantheoneitcurrentlyoccupies.Thecurrentownerallegedthattheacquiredsubsidiarycausedenvironmentalcontaminationoftheproperty.Inordertoavoidlitigation,theCompanyagreedtoreimbursetheownerforacertainpercentageofpastremediationcosts,andtoparticipateinthefundingoftheremediationactivities.Thetotalsumofpastcosts,includingattorney’sfees,togetherwiththecurrentestimateoffuturecosts,amountstoapproximately$0.7millionandhasbeenrecordedinotherexpense.Weincurreda$0.8millionlossonthesaleofanequityinvestment.Thisinvestmenthadacarryingvalueof$2.0millionandwassoldinJanuary2006for$1.2millionresultinginthe$0.8millionloss.

Note13—GuaranteesWeprovidewarrantiesoncertainofourproductsatthetimeofsale.Thestandardwarrantyperiodforourcapitalandreusableequipmentisgenerallyoneyear.Liabilityunderserviceandwarrantypoliciesisbaseduponareviewofhistoricalwarrantyandserviceclaimexperience.Adjustmentsaremadetoaccrualsasclaimdataandhistoricalexperiencewarrant.ChangesinthecarryingamountofserviceandproductwarrantiesfortheyearendedDecember31,areasfollows: 2003 2004 2005BalanceasofJanuary1, $ 3,213 $ 3,588 $ 3,524 _______ _______ _______Provisionforwarranties 4,209 3,961 4,035Claimsmade (3,934) (4,025) (4,143)Warrantiesacquired 100 — — _______ _______ _______BalanceasofDecember31, $ 3,588 $ 3,524 $ 3,416 _______ _______ _______ _______ _______ _______

Note14—NewAccountingPronouncementsInDecember2004,StatementofFinancialAccountingStandardsNo.123(revised2004),“Share-BasedPayment”(“SFAS123R”),wasissuedwhichreplacesSFAS123andsupersedesAPB25.WeadoptedSFAS123ReffectiveJanuary1,2006.SFAS123Rrequiresthatallshare-basedpaymentstoemployees,includinggrantsofemployeestockoptions,berecognizedinthefinancialstatementsbasedontheirfairvalues.TheproformadisclosurespreviouslypermittedunderSFAS123,nolongerwillbeanalternativetofinancialstatementrecognition.SFAS123Rprovidesfortwoalternativemethodsofadoption,themodifiedprospectiveapplicationandthemodifiedretrospectiveapplication.Themodifiedprospectiveapplicationappliestonewawardsandtoawardsmodified,repurchased,orcancelledaftertheeffectivedate.Additionally,compensationcostfortheportionofawardsforwhichtherequisiteservicehasnotbeenrenderedthatareoutstandingaftertheeffectivedatewillberecognizedastheserviceisrenderedonoraftertheeffectivedate.WehaveelectedthemodifiedprospectiveapplicationmethodforadoptingSFAS123R.Thefairvalueofemployeestock

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optionswillbedeterminedonthegrantdateusingaBlack-Scholesvaluationmodel.Thefairvalueofallstockoptionsissuedwillbebaseduponthefairvaluecalculatedasofthegrantdate.SincewecurrentlyaccountforemployeestockoptionsunderAPB25,theadoptionofSFAS123Risexpectedtoimpactourresultsofoperationsby$0.10to$0.15perdilutedearningspershare.FinancialAccountingStandardsBoardInterpretationNo.47,“AccountingforConditionalAssetRetirementObligations(aninterpretationofFASBStatementNo.143)”(“FIN47”)wasissuedinMarch2005.ThisInterpretationprovidesclarificationwithrespecttothetimingofliabilityrecognitionforlegalobligationsassociatedwiththeretirementoftangiblelong-livedassetswhenthetimingand/ormethodofsettlementoftheobligationareconditionalonafutureevent.WehaveadoptedFIN47andhavedeterminedwe

havelegalobligations,howeverthisliabilityisnotmaterialtothefinancialstatements.InMay2005,theFASBissuedStatementofFinancialAccountingStandardsNo.154,“AccountingChangesandErrorCorrections-AReplacementofAPBOpinionNo.20andFASBStatementNo.3.,”(“SFAS154”).SFAS154requiresretrospectiveapplicationtopriorperiods’financialstatementsforthedirecteffectsofchangesinaccountingprinciple,unlessitisimpracticabletodetermineeithertheperiod-specificeffectsorthecumulativeeffectofthechange.SFAS154iseffectiveforaccountingchangesandcorrectionsoferrorsmadeinfiscalyearsbeginningafterDecember15,2005,andearlyadoptionispermitted.WehaveconsideredSFAS154andhavedeterminedthispronouncementwillnotmateriallyimpactourconsolidatedresultsofoperations.

Note15—SelectedquarterlyFinancialData(Unaudited)Selectedquarterlyfinancialdatafor2004and2005areasfollows: ThreeMonthsEnded March June September December2004Netsales $ 133,964 $ 130,912 $ 132,289 $ 161,223Grossprofit 70,359 68,714 67,487 80,332Netincome 12,039 12,292 1,699 7,435EPS: Basic $ .41 $ .41 $ .06 $ .25 Diluted .40 .41 .06 .25

March June September December2005Netsales $ 155,859 $ 158,276 $ 149,970 $ 153,200Grossprofit 80,475 82,124 75,954 74,468Netincome 10,765 10,508 7,914 2,807EPS: Basic $ .37 $ .36 $ .27 $ .10 Diluted .36 .35 .26 .10

UnusualItemsIncludedInSelectedQuarterlyFinancialData:

2004

ThirdquarterDuringthethirdquarterof2004,werecordedachargeintheamountof$13.7millionrelatedtothewrite-offoftheestimatedpurchasein-processresearchanddevelopmentassociatedwiththeBardEndoscopicTechnologiesacquisition—seeNote2.

Duringthethirdquarterof2004,werecordedachargeintheamountof$0.9millioninotherexpenseforcostsrelatedtotheBardEndoscopicTechnologiesacquisition—seeNote12.

FourthquarterDuringthefourthquarterof2004,werecordedachargeintheamountof$2.7millionrelatedtothewrite-offofthefinalizedpurchasedin-processresearchanddevelopmentassociatedwiththeBardEndoscopicTechnologiesacquisition—seeNote2.

Duringthefourthquarterof2004,werecorded$2.3millionofBardEndoscopicTechnologiesacquisition-relatedchargesincostofsales—seeNote2.

Duringthefourthquarterof2004,werecordedachargeof$2.4millionrelatedtoourterminationofoursurgicallightsproductlineand$0.7millionofacquisition-relatedcostsassociatedwiththeBardEndoscopicTechnologiesacquisitiontootherexpense—seeNote12.

Duringthefourthquarterof2004,werecordedlossesontheearlyextinguishmentofdebtof$0.8million—seeNote6.

2005FirstquarterDuringthefirstquarterof2005,werecorded$0.5millionofBardEndoscopicTechnologiesacquisition-relatedchargesincostofsales—seeNote2.

Duringthefirstquarterof2005,werecordedachargeof$0.5millionrelatedtoourterminationofoursurgicallightsproductlineand$1.4millionofacquisition-relatedcostsassociatedwiththeBardEndoscopicTechnologiesacquisitiontootherexpense—seeNote12.

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SecondquarterDuringthesecondquarterof2005,werecordedachargeof$0.4millionrelatedtoourterminationofoursurgicallightsproductline;$1.4millionofacquisition-relatedcostsassociatedwiththeBardEndoscopicTechnologiesacquisition;and$0.7millionrelatedtoasettlementofcertainenvironmentalclaimsrelatedtotheoperationsofoneofoursubsidiariesduringthe1980s,beforeitwasacquiredbyCONMED,atasiteotherthantheoneitcurrentlyoccupiestootherexpense—seeNote12.

ThirdquarterDuringthethirdquarterof2005,werecordedachargeof$0.1millionrelatedtoourterminationofoursurgicallightsproductlineand$0.7millionofacquisition-relatedcostsassociatedwiththeBardEndoscopicTechnologiesacquisitiontootherexpense—seeNote12.

FourthquarterDuringthefourthquarterof2005,werecordedachargeof$0.5millionrelatedtoourterminationofoursurgicallightsproductline;$0.6millionofacquisition-relatedcostsassociatedwiththeBardEndoscopicTechnologiesacquisitionanda$0.8millionchargerelatedtothelossonthesaleofanequityinvestmenttootherexpense—seeNote12.

Thedeclineinnetincomeinthefourthquarterisaresultofadecreaseingrossprofitmarginasaresultofincreasedcostsassociatedwithhigherrawmaterialcostsandincreasedspendingrelatedtoqualityassurance.WealsoincurredsignificantlyhighersellingandadministrativecostsassociatedwithhigherdistributioncostsaswellasincreasedspendingoncorporatequalitysystemsandmanagementandtheJohnsonandJohnsonlitigation—seeNote11.

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BOARd OF diRECTORS Biographies

WILLIAMD.MATTHEWShasservedasaDirectoroftheCompanysinceAugust1997.From1986untilretiringfromthe positions in 1999, Mr. Matthews was the Chairman of the Board and the Chief Executive Officer of Oneida Ltd. Mr.MatthewsistheChairmanoftheBoardofDirectorsandamemberoftheauditcommitteeofOneidaFinancialCorporationandaformerdirectorofCoyneTextileServices.Mr.MatthewsholdsaB.A.degreefromUnionCollegeandanL.L.B.degreefromCornellUniversitySchoolofLaw.

STUARTJ.SCHWARTZhasservedasaDirectoroftheCompanysinceMay1998.Dr.Schwartzisaretiredphysician.From1969toDecember1997hewasengagedinprivatepracticeasaurologist.Dr.SchwartzholdsaB.A.degreefromCornellUniversityandanM.D.degreefromSUNYUpstateMedicalCollege,Syracuse.

STEPHENM.MANDIAhasservedasaDirectoroftheCompanysinceJuly2002.Mr.MandiahasbeenthePresidentand Chief Executive Officer of East Coast Olive Oil Corp. since 1991. Mr. Mandia also possesses financial ownership and sitsontheBoardofGemPackingCorp.,UticaPlastics,LLC,ECOORealtyCorp.,OliveTransportCorp.andNorthsideGourmetCorp.Mr.MandiaholdsaB.S.degreefromBentleyCollege,havingalsoundertakenundergraduatestudiesatRichmondCollegeinLondon.

JOANNGOLDEN joined the Board of Directors in 2003. Ms. Golden is a certified public accountant and managing partner of the New Hartford, NY office of Dermody Burke and Brown, CPAs, LLC. Ms. Golden is past President of the New York StateSocietyofCPAsandtheNewYorkStateSociety’sFoundationforAccountingEducation.ShealsoservedasSecretaryand Vice President of the State Society and was a member of the governing Council of the American Institute of Certified PublicAccountants,wheresheservedontheGlobalCredentialSurveyTaskForcein2001.Ms.GoldenholdsaB.A.degreefromtheStateUniversityCollegeatNewPaltz,andaB.S.degreeinAccountingfromUticaCollegeofSyracuseUniversity.

JOSEPHJ.CORASANTI has served as President and Chief Operating Officer of the Company since August 1999 andasaDirectoroftheCompanysinceMay1994.Mr.CorasantiisalsoontheBoardofDirectorsofII-VI,Inc.HepreviouslyservedasGeneralCounselandVicePresident-LegalAffairs,andExecutiveVice-President/GeneralManagerof the Company. Prior to that time he was an Associate Attorney with the law firm of Morgan, Wenzel & McNicholas. Mr.CorasantiholdsaB.A.degreeinPoliticalSciencefromHobartCollegeandaJ.D.degreefromWhittierCollegeSchoolof Law. Joseph J. Corasanti is the son of Eugene R. Corasanti, Chairman and Chief Executive Officer of the Company.

BRUCEF.DANIELShasservedasaDirectoroftheCompanysinceAugust1992.Mr.Danielsisaretiredexecutive.FromAugust1974toJune1997,Mr.Danielsheldvariousexecutivepositions,includingapositionasControllerwithChicagoPneumaticToolCompany.Mr.DanielsholdsaB.S.degreeinBusinessfromUticaCollegeofSyracuseUniversity.

EUGENER.CORASANTIhasservedasChairmanoftheBoardoftheCompanysinceitsincorporationin1970.Mr. Corasanti has also served as the Company’s Chief Executive Officer since its founding, having served as President and Chief Operating Officer from its founding until August 1999. Prior to the founding of the Company, Mr. Corasanti wasanindependentpublicaccountant.Mr.CorasantiholdsaB.B.A.degreeinAccountingfromNiagaraUniversity.Eugene R. Corasanti's son, Joseph J. Corasanti, is President and Chief Operating Officer and a Director of the Company.

lexecutiveandSenioroFFicerSEugeneR.CorasantiChairmanoftheBoardandCEOJosephJ.Corasanti,Esq.PresidentandCOOWilliamW.AbrahamSeniorVicePresidentThomasM.AceyTreasurerandSecretaryDanielS.Jonas,Esq.GeneralCounselandVicePresident–LegalAffairsAlexanderR.JonesVicePresident–CorporateSalesJaneE.MetcalfVicePresident–CorporateRegulatoryAffairsDavidR.MurrayPresident–CONMEDElectrosurgeryLukeA.PomilioVicePresident–CorporateControllerRobertD.Shallish,Jr.VicePresident–FinanceandChiefFinancialOfficerJohnJ.StottsVicePresident–CONMEDPatientCareDennisM.WergerVicePresident,GeneralManager–CONMEDEndoscopicTechnologiesFrankR.WilliamsVicePresident–CONMEDEndosurgeryGeraldG.WoodardPresident–CONMEDLinvatec

OperatingSubsidiariesCONMEDElectrosurgeryCONMEDEndoscopicTechnologiesCONMEDIntegratedSystemsCONMEDIntegratedSystemsCanadaCONMEDLinvatecCONMEDLinvatecAustraliaCONMEDLinvatecAustriaCONMEDLinvatecBelgiumCONMEDLinvatecBiomaterialsCONMEDLinvatecCanadaCONMEDLinvatecDeutschlandCONMEDLinvatecEndoscopyCONMEDLinvatecEuropeCONMEDLinvatecFranceCONMEDLinvatecKoreaCONMEDLinvatecNederlandCONMEDLinvatecPolandCONMEDLinvatecSpainCONMEDLinvatecU.K.CONMEDReceivablesCorporation

lShareholderinFormationInterestedshareholdersmayobtainacopyoftheCompany’sForm10-Kwithoutchargeuponwrittenrequestto:InvestorRelationsDepartmentCONMEDCorporation525FrenchRoadUtica,NY13502

TransferAgent/RegistrarRegistrarandTransferCompany10CommerceDriveCranford,NJ07016

StockTheNASDAqStockMarket®StockSymbol:CNMD

IndependentRegisteredPublicAccountingFirmPricewaterhouseCoopersLLPOneLincolnCenterSyracuse,NY13202

GeneralCounselDanielS.Jonas,Esq.525FrenchRoadUtica,NY13502

SpecialCounselSullivan&Cromwell125BroadStreetNewYork,NY10004

CorporateOfficesCONMEDCorporation525FrenchRoadUtica,NY13502(315)797-8375FaxNo.(315)797-0321CustomerService1-800-448-6506email:[email protected]:www.conmed.com

EthicsPolicyAvailableatwww.conmed.com

DesignedbyRomanelliCommunications

525 French road, Utica, nY 13502 USa©conMed corPoration 3/06, 13M, Printed in the U.S.a.

c o r P o r a t i o non edc M ®

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