To Our Stockholders:


United States Surgical Corporation's management had three primary objectives during 1995: to significantly improve the company's financial condition, to improve sales and regain market share and to accelerate new product development and acquisitions. These objectives were achieved.

By any measure, USSC's financial condition improved significantly.
The health care industry is in its third year of major change. Although President Clinton's formula for centralized control of medicine was soundly rejected, hospitals and payers, recognizing the need to rein in rapidly escalating costs, embarked on their own market-driven cost containment initiative. The result has been a totally new approach by hospitals to purchasing and financial management.

USSC has made significant changes in its strategies and marketing programs to fill the needs of its customers in this new environment. During prior years, responding to the surgeon's needs and enhancing clinical efficacy were the company's principal objectives. These are still primary goals, but the company has expanded its efforts to include a close working relationship with the hospital's materials and financial management.

The objective is to save our customers money in managing their operating rooms and purchasing surgical products. USSC is ideally positioned to do so. All three of the company's major product lines facilitate better patient care and provide a cost effective means of performing surgery. Today, the company's sales organization works hand- in-hand, not only with the surgery and nursing departments, but also with materials management and financial administration. The results have been measurable and satisfying.

During 1995, USSC's sales increased, market share increased and the company was particularly successful in expanding its business with some of the largest hospital organizations in the world.

Effective January 1, 1995, we were awarded a primary source agreement to supply both stapling and laparoscopic instruments to all of Kaiser Permanente's 66 hospitals and surgicenters. In May, we received a sole source suture agreement for Kaiser's entire Northern California region.

In addition, USSC increased its business with Columbia/HCA Health Care Corporation, the nation's largest hospital system. Columbia owns and operates more than 450 hospitals and surgicenters.

During the fourth quarter, the Tenet Hospital Group, the second largest hospital chain in the United States, signed a sole source contract with USSC for all of their hospitals' stapling and laparoscopic products.

The company is currently discussing its new marketing programs and the benefits they can provide with other integrated health networks and hospital purchasing organizations.

Suture sales continue to grow dramatically, enjoying an increase of approximately 50% during 1995 over the prior year. One of the year's bright lights was the launching of the company's newest suture product, BIOSYN, in October.

The BIOSYN suture is the world's first synthetic monofilament suture that embodies most of the characteristics of a braided suture. Surgeons prefer braided sutures because they are more supple, handle better, provide better knot security and have higher tensile strength during the critical postoperative healing period. However, braided sutures, because of their braided structure, can provide a pathway for bacteria to migrate. Surgeons, therefore, would very much like to have a monofilament suture with the characteristics of a braid.

BIOSYN is the only monofilament suture available today that answers this need. It is very close to a braided suture in tensile strength, knot security and suppleness. Although BIOSYN has been on the market for only a few months, it has already won many converts.

USSC was built on innovation and today, more than ever, we are committed to innovation both in existing businesses and in areas of new opportunity. In 1996 our R&D budget will be increased by almost 20%.

At the American College of Surgeons Meeting in October, the company showed
some of the innovative products planned for introduction in 1996 and 1997. One of these products, the ABBI system, introduced during the first quarter of 1996, is an exciting new minimally invasive system for breast surgery, and represents an entirely new market for USSC. ABBI's groundbreaking technology can significantly improve women's health care while reducing costs. There are nearly one million women in the United States who require breast biopsies each year.

Currently the standard approach for diagnosis of breast lesions requires a radiologist to place a wire marker into the breast to identify the position of the lesion. The patient is then transferred to the operating room where the surgeon removes a tissue specimen while the patient is under general anesthesia.

The ABBI system reduces the procedure to one step, with the patient under local anesthesia. It utilizes stereotactic x-ray, a three-dimensional locating process accurate to within one millimeter. The placement of the wire marker and removal of the tissue sample are performed using a minimally invasive technique. The entire specimen is removed through an incision that can be less than one inch in diameter. If the specimen proves to be cancerous, but pathology reports the entire tissue margin is free of cancer cells, it is up to the clinical judgment of the surgeon as to whether additional tissue must be removed or the surgical procedure can be considered complete.

ABBI's minimally invasive technique can minimize scarring and disfigurement and facilitate postoperative healing. Most patients are back to normal function in just a few hours. The ABBI system provides an optimal fit with managed care by reducing the cost of breast surgery.

Cardiovascular and peripheral vascular surgery are rapidly expanding surgical specialties where innovative technology is contributing significantly to patient care and reduced cost.

USSC pioneered the use of mechanical clip appliers for vascular closure and has recently introduced a series of state-of-the-art vascular sutures. With these products as a beginning, the company plans to become a major player in this important surgical arena.

There are approximately 400,000 coronary bypass operations performed annually in the United States alone. These procedures require opening the chest, placing the patient on a heart lung bypass machine and stopping the heart. It is a highly invasive procedure requiring a lengthy postoperative hospital stay and an extended recuperative period.

USSC, in collaboration with a multinational group of leaders in cardiovascular surgery, is developing a minimally invasive approach to coronary bypass surgery, and a system that can eliminate expensive heart lung bypass equipment in both open and minimally invasive procedures. Heart lung perfusion is one of the principal causes of complications associated with coronary bypass surgery.

Coronary bypass surgery also involves removing the saphenous vein in the leg to graft to the coronary artery. This vein stripping procedure requires a lengthy leg incision, often from the ankle to the groin, and in many patients creates even greater discomfort than the heart operation itself. The long incision is slow to heal and can result in unsightly scarring.

The company has developed a new minimally invasive technique to remove the saphenous vein that requires only four to five small incisions. The result is much less tissue trauma, less postoperative pain and significantly improved cosmetic results.

Another important technological breakthrough in vascular surgery is the company's new VCS clip applier. This unique device enables surgeons to reconnect arteries or veins without penetrating the inside of the vessel. Suturing, the standard procedure today, requires a needle and thread to pass through the inside of the vessel, resulting in a portion of the suture remaining within the vessel. This foreign body can cause turbulence and blood clotting.

The VCS clip application is rapid and precise and can reduce operative time by up to 30%. Use of the VCS clip has the potential to provide patient benefits and reduced costs in more than one million procedures, including many non-vascular applications.

Back pain has brought misery to millions of people for years and years. Current approaches provide only marginal relief. Late in 1995, the company acquired Surgical Dynamics, Inc. (SDI), a manufacturer of spinal cages. The spinal cage is a device used to facilitate fusion of injured or deteriorating vertebrae.

Spinal cages are implants that hold the discs in correct approximation while new bone grows into position, creating a permanent fusion. Four years of clinical experience with SDI's spinal cages have resulted in a success rate of more than 95%, a truly impressive record. Experts in orthopedics believe spinal cages have the potential to revolutionize back surgery and provide long-term relief to millions of patients who now suffer disorders of the spine.

There are no spinal cages approved for use in the United States at the present time; however, the FDA has informed the company that its Pre-market Approval application will receive expedited review.

Modern medicine and surgery have reduced the pain and suffering of millions and expanded our life expectancy considerably. Nevertheless, some organ diseases reach a level where they no longer can be treated successfully. The only hope for these patients is an organ transplant. Unfortunately, the number of available donor organs falls far short of the need. There are approximately 100,000 people in the United States alone waiting to receive donor organs. For the majority, their only hope is new technology that can provide a readily available source of organs. Today, this technology is being transformed from a dream to potential reality.

Last August, USSC entered into an agreement with Alexion Pharmaceuticals, a biopharmaceutical company that is developing genetically altered pig organs for use in human transplant surgery. USSC purchased 9.5% of Alexion and has the worldwide rights to manufacture, market, sell and distribute any products that result from this research.

In the human-to-human transplant, the white blood cells of the host patient recognize the transplanted organ as a foreign body and then attack and destroy it. Human-to-human transplants have been successful because immunosuppressant medicines such as cyclosporin are able to neutralize the effect of the white blood cells on the transplanted organ.

When an animal organ is transplanted into a human body, the organ is rejected through a different mechanism. The rejection begins as antibodies in the human's system attach themselves to sugar molecules in the tissue of the transplanted animal organ. Once attached, the antibodies attract and activate human inflammatory proteins which quickly attack and destroy the transplanted organ.

Pigs have been identified as the ideal animal for transgenic implants because their anatomy is similar to humans; and pigs, unlike primates, are unlikely to transmit viruses to humans.

We believe that a successful transgenic organ program requires animals that are genetically altered to both eliminate the sugar molecules that attract the human antibodies, in addition to providing a coating of human protein on the animal's tissue to act as a defense mechanism against the human inflammatory proteins.

Alexion is developing transgenic pigs whose genes will be genetically engineered to (1) remove the foreign sugar molecules, and (2) provide a coating of human proteins that will defend the tissues against human inflammatory proteins. The engineered transgenic pig, therefore, will have organs that when implanted into a human will be treated by the body similarly to a human organ.

Alexion has successfully engineered a colony of mice that reproduce with organs that do not have foreign sugar molecules and whose cells have inflammatory protein inhibitors. They are currently developing pigs with these same gene alterations, and hope to be implanting transgenic pig organs into primates within 18 to 24 months.

New products and new surgical techniques require highly specialized training. USSC has always been an innovative leader in surgical training. Today, the company is partnering with leading academic and medical centers throughout the world to provide research and training programs for minimally invasive surgery and other advanced techniques. These "centers of excellence" have been created to train physicians and residents, investigate new applications and new surgical techniques and to conduct preclinical trials.

As the world becomes closer knit through improved communication and transportation, surgical techniques and surgical instrumentation become multinational. Recognizing the globalization of surgery, USSC has been increasing the resources it commits to the international market. During 1995, the company acquired its Japanese distributor's wound closure business, providing a major base of operations in the Far East to complement its significant European presence. USSC's international business has reached approximate parity with domestic sales.

The company's objective for 1996 is to improve upon the success achieved in 1995.

Sincerely,



Leon C. Hirsch, Chairman
March 15, 1996

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