BIOMET INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________.

Commission file No. 0-12515.

[BIOMET INC. LOGO]
(Exact name of registrant as specified in its charter)

INDIANA 35-1418342
(State of incorporation) (IRS Employer Identification No.)

AIRPORT INDUSTRIAL PARK, 56 EAST BELL DRIVE, WARSAW, INDIANA 46582
(Address of principal executive offices) (Zip Code)

(219) 267-6639
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

COMMON SHARES RIGHTS TO PURCHASE COMMON SHARES
(Title of class) (Title of class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the Common Shares held by non-affiliates of the
registrant, based on the closing price of the Common Shares on July 20, 2001, as
reported by the Nasdaq Stock Market, was approximately $7,838,935,024. As of
July 20, 2001, there were 269,518,156 Common Shares outstanding. These amounts
have been adjusted to reflect the 3-for-2 split of the Company's Common Shares
declared on July 9, 2001.

DOCUMENTS INCORPORATED BY REFERENCE

PARTS OF FORM 10-K
INTO WHICH DOCUMENT
IDENTITY OF DOCUMENT IS INCORPORATED
Proxy Statement with respect to the 2001
Annual Meeting of Shareholders of the Registrant Part III

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This report contains certain statements that are "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, as amended. Those statements include,
but are not limited to, statements related to the timing and number of planned
new product introductions; the effect of anticipated changes in the size, health
and activities of population on demand for the Company's products; the Company's
intent and ability to expand its operations; assumptions and estimates regarding
the size and growth of certain market segments; the Company's ability and intent
to expand in key international markets; the anticipated outcome of clinical
studies; assumptions concerning anticipated product developments and emerging
technologies; the future availability of raw materials; the anticipated adequacy
of the Company's capital resources to meet the needs of its business; the
Company's continued investment in new products and technologies; the ultimate
marketability of products currently being developed; future declarations of cash
dividends and stock splits; the Company's intent and ability to efficiently
expand its salesforces; the Company's ability to sustain sales and earnings
growth; the Company's goals for sales and earnings growth; the Company's success
in achieving timely approval of its products with domestic and foreign
regulatory entities; and the Company's ability to take advantage of
technological advancements. Readers of this report are cautioned that reliance
on any forward-looking statement involves risks and uncertainties. Although the
Company believes that the assumptions on which the forward-looking statements
contained herein are based are reasonable, any of those assumptions could prove
to be inaccurate given the inherent uncertainties as to the occurrence or
nonoccurrence of future events. There can be no assurance that the
forward-looking statements contained in this report will prove to be accurate.
The inclusion of a forward-looking statement herein should not be regarded as a
representation by the Company that the Company's objectives will be achieved.

PART I
ITEM 1. BUSINESS.

GENERAL

Biomet, Inc., an Indiana corporation incorporated in 1977 ("Biomet"), and its
subsidiaries design, manufacture and market products used primarily by
musculoskeletal medical specialists in both surgical and non-surgical therapy,
including reconstructive and fixation devices, electrical bone growth
stimulators, orthopedic support devices, operating room supplies, general
surgical instruments, arthroscopy products, spinal products, bone cements and
accessories, bone substitute materials, craniomaxillofacial implants and
instruments and dental reconstructive implants and associated instrumentation.
Biomet has corporate headquarters in Warsaw, Indiana, and manufacturing and/or
office facilities in more than 50 locations worldwide.

On September 25, 2000, the Company, through its subsidiary, EBI, L.P. ("EBI"),
acquired Biolectron, Inc. ("Biolectron") for $90 million in cash. The Company
has accounted for this acquisition as a purchase and the operating results have
been consolidated from the date of acquisition.

The Company's principal subsidiaries include Biomet Orthopedics, Inc.; Biomet
Manufacturing Corp.; EBI, L.P.; the Biomet Merck joint venture; Implant
Innovations, Inc. ("3i"); Walter Lorenz Surgical, Inc. and Arthrotek, Inc.
Unless the context requires otherwise, the term "Company" as used herein refers
to Biomet and all of its subsidiaries.

PRODUCTS

The Company operates in one business segment, musculoskeletal products, which
includes the design, manufacture and marketing of four major product groups:
reconstructive devices, fixation products, spinal products and other products.
The Company manages its business segment primarily on a geographic basis and has
three reportable geographic segments: United States, Europe and Other.
Reconstructive devices include knee, hip and shoulder systems, as well as dental
reconstructive implants, bone cements and accessories and the procedure-specific
instrumentation required to implant the Company's reconstructive systems.
Fixation products include internal and external fixation devices,
craniomaxillofacial fixation systems and EBI's electrical stimulation devices
that do not address the spine. Spinal products include electrical stimulation
devices addressing the spine and spinal fixation systems. The other product
sales category includes softgoods and bracing products, arthroscopy products,
casting materials, general surgical instruments, operating room supplies, wound
care products and other surgical products.

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The following table shows the net sales and percentages of net sales contributed
by each of the Company's product groups for each of the three most recent fiscal
years ended May 31, 2001.

YEARS ENDED MAY 31,
(DOLLAR AMOUNTS IN THOUSANDS)

2001 2000 1999
PERCENT PERCENT PERCENT
NET OF NET NET OF NET NET OF NET
SALES SALES SALES SALES SALES SALES
---------- ------- ---------- ------- ---------- -------

Reconstructive Devices $ 614,308 59% $ 580,239 63% $ 521,365 63%

Fixation Products 202,152 20% 180,336 19% 162,825 20%

Spinal Products 91,103 9% 54,119 6% 45,125 5%

Other Products 123,100 12% 108,857 12% 101,520 12%
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Total $1,030,663 100% $ 923,551 100% $ 830,835 100%
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RECONSTRUCTIVE DEVICES

Reconstructive devices are used to replace joints that have deteriorated as a
result of disease (principally arthritis and osteoporosis) or injury.
Reconstructive joint surgery involves the modification of the area surrounding
the affected joint and the implantation of one or more manufactured components,
and may involve the use of bone cement. The Company's primary reconstructive
joints are hips, knees and shoulders, but it produces other joints as well. The
Company also produces the associated instruments required by orthopedic surgeons
to implant the Company's reconstructive devices. Additionally, dental
reconstructive devices and associated instrumentation are used for oral
rehabilitation through the replacement of teeth and hard and soft tissues.

In July 1993, the Company received 510(k) clearance from the United States Food
and Drug Administration ("FDA") (see "Government Regulation" section for a
general discussion of the regulatory clearance and approval process) for hip,
knee and shoulder polyethylene components manufactured according to a patented
process and marketed under the trade name "ArCom." ArCom(R) polyethylene
components are machined from uniform compression molded bar stock manufactured
by the Company or molded directly from ultra-high molecular weight polyethylene
resin. The processes used to mold devices and manufacture bar stock are designed
to maximize the mechanical and wear properties of the polyethylene-bearing
material. In addition, the finished components are packaged in argon, an inert
gas, to avoid oxidative degradation during and after sterilization.

KNEE SYSTEMS. The Maxim(R) Total Knee System, the Company's
largest-selling knee system, incorporates cruciate retaining, posterior
stabilized and constrained components, and competes in the primary and revision
knee market segments.

The Company's AGC(R) Total Knee System, with over 15 years of positive
clinical results, is one of the most clinically successful total knee systems in
the orthopedic industry. The AGC(R) Total Knee System consists of cobalt
chromium alloy femoral and tibial components and polyethylene patella components
for patellar resurfacing. AGC(R) knee components are available either with or
without a porous titanium alloy surface, which is designed to enhance the
attachment of bone or bone cement to the implant surfaces. The Company, with
surgeon collaboration, has also developed surgical techniques and supporting
implantation instruments for the AGC(R) total knee and its other knee systems.
These instruments allow for accurate implantation of the components and improved
ligament and tendon balance in the knee.

The Company's offering of knee systems also includes the Repicci II(TM)
Unicondylar Knee System, the Company's first device specifically designed to
accommodate a minimally-invasive knee arthroplasty procedure. This system
incorporates self-aligning metal and polyethylene components. This innovative
procedure, which can often be performed on an outpatient basis, requires a
smaller incision and less bone removal, which may result in shorter recovery
time and reduced blood loss.

The Company's total knee product line includes the Finn(R) Knee Replacement
System. This system offers both resurfacing and segmental component options in a
wide range of sizes to address severe bone loss due to a previous total knee
failure or tumor resection. During early fiscal year 2002, Biomet Orthopedics
plans to release the Biomet(R) Oncology Salvage System ("OSS"). This system,
which builds upon the features of the Finn(R) Rotating Hinged Knee, provides
modular flexibility while reducing overall inventory demands. The OSS components
are designed to be used mainly in instances of severe bone loss or significant
soft tissue instability.

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The Ascent(TM) Total Knee System incorporates an open box posterior stabilized
femoral component with a swept anterior flange that can accept either a
posterior stabilized or constrained tibial bearing. This system is designed with
a deepened patella groove to enhance patella tracking and reduce lateral release
rates. The Ascent(TM) System addresses the needs of both the primary and
revision markets. All tibial bearing surfaces are made from the Company's
proprietary ArCom(R) polyethylene for optimum wear resistance.

The TRAC(R) Mobile Bearing Knee System, which has been successfully launched
in Europe and has completed the patient-enrollment phase of clinical studies in
the United States, is a unique knee system utilized primarily in total knee
arthroplasty for younger, more active patients. Its patented rotating platform
design allows greater anatomic flexibility of the knee.

In late fiscal year 2001, Biomet Orthopedics introduced the Biomet(R) Offset
Tibia Tray System. This product is designed to allow a surgeon to fit the tibial
component into an abnormally aligned tibia. The Offset Tibia Tray System expands
the primary and revision knee replacement capabilities of the Company's
AGC(R), Maxim(R) and Ascent(TM) Knee Systems.

HIP SYSTEMS. All femoral hip prostheses consist of a femoral head and
stem, which can be cast, forged or machined depending on the design and material
used. Because of variations in human anatomy and differing design preferences
among surgeons, femoral prostheses are manufactured by the Company in a variety
of sizes and configurations. The Company currently offers over twenty total hip
systems, most of which utilize titanium or cobalt chromium alloy femoral
components and the Company's patented ArCom(R) polyethylene-lined or
metal-on-metal acetabular components. Many of the femoral prostheses utilize a
porous coating which enhances the attachment of bone and bone cement to the
stem.

Biomet has received clearance under Section 510(k) of the Federal Food, Drug and
Cosmetic Act for many of its porous-coated hip components for cementless use.
These clearances are specifically for noncemented applications in skeletally
mature patients undergoing hip replacement surgery as a result of
noninflammatory degenerative joint diseases including osteoarthritis, avascular
necrosis, traumatic arthritis, slipped capital epiphysis, fused hip, fracture of
the pelvis and diastrophic variant.

One of Biomet's largest-selling reconstructive hip systems is the
Mallory-Head(R) Hip System, which is designed to meet surgeons' needs for both
primary and revision total hip arthroplasty. The primary femoral components
feature a specific proximal geometry for cementless indications and a slightly
different proximal ribbed geometry for those patients requiring fixation with
bone cement. The goal of each of these primary femoral stems is to allow for
proximal loading of the femur to recreate near-normal bone stresses.

The Mallory-Head(R) revision femoral components provide innovative solutions
for difficult revision cases, and have demonstrated outstanding clinical
results. The Mallory-Head(R) Calcar Replacement Prosthesis is offered in both
a one-piece and modular geometry, with design features such as a medial keel,
circumferential proximal porous coating and various distal stem lengths.
Modularity in the calcar revision prosthesis allows for individual customization
at the time of surgical intervention. An optional trochanteric bolt provides
additional rotational stability and implant fixation. This system provides the
surgeon with intraoperative flexibility to independently size the proximal and
distal femur with the appropriate implant size and shape, even in cases of
severe bone deficiency. This is accomplished by using interchangeable modular
subcomponents.

The Alliance(R) family of hip systems is designed to address the growing trend
among hospitals and surgeon groups toward standardization of total hip systems.
The Alliance(R) hip family provides the largest selection in the marketplace of
primary and revision stems available for implantation with a single set of
instrumentation. The Alliance(R) family of hip systems includes the Integral(R),
Bi-Metric(R), Answer(R), Hip Fracture(TM), Rx90(R), Osteocap RS(R),
Vision(R) and Progressive(TM) Hip Systems. During the second quarter of fiscal
year 2002, Biomet Orthopedics plans to introduce a newly designed and integrated
instrument set. Exact(TM) Instrumentation was developed to address the needs of
today's orthopedic community by promoting intraoperative flexibility and
increasing the efficiency, simplicity and consolidation of instrument use.

During fiscal year 2001, the Company launched the M(2)a(TM), metal-on-metal
hip system. This hip system combines a cobalt chrome head with a cobalt chrome
liner to produce a hip system that could potentially demonstrate less wear
debris than conventional systems. In laboratory testing, the M(2)a(TM) System
has shown a 20 to 100-fold volumetric reduction in wear compared to conventional
polyethylene articulation systems. The M(2)a(TM) System may be utilized on
most of Biomet's femoral components and has continued to evolve with the
introduction of larger diameter metal-on-metal head components. Another advanced
hip articulation being developed by the Company is a ceramic-on-ceramic total
hip system, which began the patient-enrollment phase of a clinical trial during
the first quarter of fiscal year 2001.

SHOULDER SYSTEMS. The Company offers several shoulder systems including
the Bi-Angular(R)/Bi-Polar Shoulder System. The Bi-Polar humeral head is
marketed for use in primary cases of noninflammatory degenerative joint disease,
rheumatoid arthritis, correction of severe functional deformity and fracture.
The Bi-Angular(R)/Bi-Polar Shoulder System was

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the first FDA-cleared bi-polar shoulder in the United States. This system will
be enhanced through the introduction of the Absolute(TM) Bi-Polar Shoulder in
the second quarter of fiscal year 2002.

Since its introduction in 1987, the Bio-Modular(R) Total Shoulder System has
proven to be clinically effective and versatile, and is the Company's
largest-selling shoulder system. This system was designed to simplify the
shoulder replacement procedure and surpass the durability and clinical outcome
requirements of previous designs. The Bio-Modular(R) System is scheduled to be
expanded during fiscal year 2002 with the addition of increased humeral head
styles to address rotator cuff deficiencies and updated instrumentation.

The Copeland(TM) Humeral Resurfacing Head is scheduled to be released in the
United States during the first quarter of fiscal year 2002. With 10 years of
positive clinical results in the United Kingdom, the Copeland(TM) Head was
developed to minimize bone removal in shoulder cases involving adequate bone
quality and limited damage from trauma or osteoarthritis to the articular
cartilage and joint surface.

DENTAL RECONSTRUCTIVE IMPLANTS. 3i develops, manufactures and markets
products for oral rehabilitation through the replacement of teeth, in addition
to hard and soft tissues. These products include dental reconstructive implants
and related instrumentation, regenerative products and materials and bone
substitute materials. 3i's flagship product, the OSSEOTITE(R) dental implant
system, features a patented micro-porous surface technology, which allows for
earlier loading and improved bone integration to the surface of the implant
compared to competitive dental implants.

Recent additions to 3i's offerings of restorative treatment options include the
GingiHue(TM) Post and the ZiReal(TM) Post. The GingiHue(TM) Post is a
gold-colored titanium nitride coated abutment, which optimizes the projection of
natural color to approximate the appearance of natural teeth. The ZiReal(TM)
Post, introduced during fiscal year 2001, offers a highly aesthetic restorative
option. This zirconia-based implant provides the natural translucence of ceramic
material, but with greater strength, durability and resistance to cracking than
conventional aluminum oxide ceramic abutments. Both of these products may be
used with conventional crown and bridge techniques.

3i's Biogran(R) bone graft material is utilized in conjunction with dental
implant procedures. This synthetic granular material, which is used to initiate
bone growth in areas of defects, transforms into hollow calcium phosphate bone
growth chambers. These chambers provide an environment in which osteogenesis
(new bone growth) occurs. As the granules resorb, they are replaced by new bone.

The Platelet Concentrate Collection System ("PCCS(TM)"), introduced during
fiscal year 2000, is a custom-designed compact centrifuge system for the rapid
preparation of autologous platelet concentrate. The PCCS(TM) centrifuge
maximizes platelet concentration, yield and viability from a small sample of
blood. 3i recently received clearance from the FDA for use of the platelet
concentrate in bone grafting procedures.

In April 2001, 3i announced a strategic alliance with Colbar Research &
Development, Ltd. ("Colbar") located in Ramat-Hasharon, Israel. Founded in
1994, Colbar is a privately-held company that focuses on the development of
biotechnology products. Colbar developed a unique, patented technology for the
production of the Ossix(TM) collagen-based product, to which 3i now holds the
exclusive worldwide distribution rights. The Ossix(TM) material is a resorbable
collagen membrane used in guided bone regeneration, which offers superior
handling characteristics and predictable clinical outcomes. The Ossix(TM)
membrane resists degradation for a full six months, and then gradually resorbs
within eight to ten months.

OTHER RECONSTRUCTIVE DEVICES. Biomet's Patient-Matched Implant
("PMI(R)") services group expeditiously designs, manufactures and delivers
one-of-a-kind reconstructive devices to orthopedic specialists. The Company
believes this service continues to enhance Biomet's reconstructive sales by
strengthening its relationships with orthopedic surgeons and augmenting its
reputation as a responsive company committed to excellent product design. In
order to assist orthopedic surgeons and their surgical teams in preoperative
planning, Biomet's PMI(R) group utilizes a three-dimensional ("3-D") bone and
soft tissue reconstruction imaging system. A patented technology owned by the
Company allows the use of Computed Tomography ("CT") data to produce 3-D
reconstructions for the design and manufacture of patient-matched implants.
Biomet also provides anatomic physical models based on patient CT data. With
this imaging and model-making technology, Biomet's PMI(R) group is able to
assist the physician prior to surgery by creating 3-D models. Within strict
deadlines, the model is used by engineers to create a PMI(R) design for the
actual manufacturing of the custom implant for the patient. Biomet continues to
advance the application of imaging technology for the design and production of
reconstructive devices for various joints in the body.

The Company is involved in a variety of research projects involving bone cements
and delivery systems. Currently, the Company sells bone cements, such as
Palacos(R) Refobacin and Palamed(R) G, principally in Europe. On June 1,
2000, Biomet began selling Palacos(R) Bone Cement in the United States.
Additionally, the Company is awaiting FDA clearance for the Generation 4(R)
Bone Cement System. The system provides acrylic bone cement in a pre-packaged,
vacuum-sealed pouch--known as the Vac Pac(R)--

Ossix(TM) is a trademark of Colbar Research & Development, Ltd.

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for contained mixing and delivery. This patented system is designed to offer the
surgeon ease of use, a lower incidence of waste, consistent cement preparation
and reduced exposure to irritating monomer vapors.

Bone cements and accessories marketed by the Biomet Merck Joint Venture include
the Palamed(R) and Copal(TM) bone cements and the Palamix(R) Bone Cement
Mixing System. Palamed(R) Bone Cement demonstrates improved handling and rapid
setting characteristics. Copal(TM) bone cement incorporates a combination of
Gentamicin and Clindamicin antibiotics into its formula and is especially
effective in revision reconstructive procedures. The Palamix(R) System
consists of a pre-packaged bone cement mixing and delivery system for precise
application of the cement in reconstructive procedures. The Company also markets
the Optivac(R) Vacuum Bone Cement mixing and delivery system. This system
provides a simple and effective means for mixing and delivering bone cement to
the surgical site. Although it is primarily marketed for use with Palacos(R)
Bone Cement, it can be used with other bone cements.

During fiscal year 2002, Biomet Orthopedics plans to launch the Discovery(TM)
Elbow System, a total elbow replacement system incorporating the Company's
patented ArCom(R) polyethylene in its molded bearing. The hinge mechanism in
the Discovery(TM) Elbow reduces the mechanical stresses observed in
simple-hinged elbow implants.

FIXATION PRODUCTS

The Company's fixation products include electrical stimulation devices that do
not address the spine, external fixation devices, craniomaxillofacial fixation
systems, internal fixation devices and certain bone substitute materials.

ELECTRICAL STIMULATION DEVICES. EBI is the market leader in the
electrical stimulation segment of the fixation market. The EBI Bone Healing
System(R) is a non-invasive device used in the treatment of recalcitrant bone
fractures (nonunions) which have not healed with conventional surgical and/or
non-surgical methods. In 1998, the FDA revised the definition of "nonunions,"
which are now defined as fractures with no visibly progressive signs of healing.
Previously, a nonunion could not be established until nine months had elapsed
with no signs of healing. In fiscal year 2000, the Health Care Financing
Administration ("HCFA") revised its policy covering electrical stimulation
therapy for fractures. Previously, HCFA covered electrical stimulation treatment
only after six or more months had elapsed without the fracture showing visible
signs of healing. This new policy allows for reimbursement for electrical
stimulation therapy three months after a fracture has occurred. The non-invasive
devices sold by EBI generally provide an alternative to surgical intervention in
the treatment of recalcitrant bone fractures, failed joint fusions and
congenital pseudarthrosis.

The EBI Bone Healing System(R) units produce low-energy pulsed electromagnetic
field ("PEMF") signals that induce weak pulsing currents in living tissues that
are exposed to the signals. These pulses, when suitably configured in amplitude,
repetition and duration, affect bone cells. EBI's non-invasive stimulator has
two components: a treatment head and the control unit. The treatment head
contains an electrical coil that is connected to the control unit. The control
unit transforms household current or battery power into a predetermined sequence
of pulsed currents that are induced into the fracture site through the treatment
head, which may be placed over a patient's cast, incorporated into the cast or
worn over the skin.

EBI introduced the EBI Bone Healing System(R) Model 2001, a newly-designed,
lighter and more patient-friendly model, during the fourth quarter of fiscal
year 1999. The EBI Bone Healing System(R) Model 2001 utilizes household
current, or a rechargeable power supply, which allows for complete patient
ambulation during treatment. This model usually incorporates the treatment coil
into the patient's cast, but the coil can be worn over the skin, if required.
The coil design is capable of treating the vast majority of nonunion fracture
locations. The Model 2001 is a small, lightweight and easy-to-use unit, which
was designed to encourage patient compliance and enhance clinical success.

EBI also manufactures the FLX(R) Flexible Treatment Coils for use with the EBI
Bone Healing System(R) Model 2001. The FLX(R) Flexible Treatment Coils are
lightweight and provide a slim profile that enhances patient comfort and
compliance during bone healing treatment regimens. Additionally, EBI offers a
series of coils to address shoulder, foot, ankle, clavicle and metatarsal site
applications and an elliptical coil to be used with external fixation systems.

EBI's OsteoGen(TM) Totally Implantable Bone Growth Stimulator is an adjunct
treatment when bone grafting and surgical intervention are required to treat a
recalcitrant fracture. During fiscal year 2001, EBI expanded this product line
by launching the OsteoGen D(TM) in both straight and mesh cathodes. This
device has dual leads/cathodes and twice as much current as previous models
making it a preferred treatment option for large fractures with multiple surface
areas.

The Company's acquisition of Biolectron, Inc. in September 2000, added the
OrthoPak(R) Bone Growth Stimulation System to EBI's bone growth stimulator
line. The OrthoPak(R) System, which was approved by the FDA in 1986, is a
small, lightweight non-invasive bone growth stimulator using capacitive coupling
technology.

Palacos(R), Palamed(R) and Palamix(R) are registered trademarks
of Hereaus Kulzer GmbH.

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EXTERNAL FIXATION DEVICES. External fixation is generally indicated to
immobilize fractures when traditional casting is not a viable solution. Since
its launch during fiscal year 1996, the DynaFix(R) External Fixation System has
received positive market acceptance and it is currently one of the leading
external fixation systems in the United States. The DynaFix(R) System is a
patented device for use in complicated trauma situations and in certain
limb-lengthening and deformity correction applications.

EBI released several new external fixation products in fiscal year 2001. The
WristFix(TM) Distal Radius Wrist Fixator is a sterile-packaged, single-use
radiolucent fixator designed to address less complicated distal radius
fractures. The DynaFix(R) System was expanded by the addition of various new
deformity clamps that allow for corrective osteotomies. EBI also introduced the
OptiROM(R) Elbow Fixation System, a unilateral system that provides controlled
range of motion for treating unstable elbows, and the Vision(TM) System
components, which enhance the capabilities of the OptiROM(R) System.

CRANIOMAXILLOFACIAL FIXATION SYSTEMS. The Company manufactures and
distributes craniomaxillofacial and neurosurgical titanium and resorbable
implants, along with associated surgical instrumentation, principally marketed
to craniomaxillofacial, neurosurgical and craniofacial surgeons through its
subsidiary, Walter Lorenz Surgical, Inc. ("Lorenz Surgical"). Lorenz Surgical
also offers specialty craniomaxillofacial surgical instruments, Hard Tissue
Replacement (HTR(R)) custom craniofacial implants and the Mimix(TM) Bone
Substitute Material for use in craniomaxillofacial surgery.

Lorenz Surgical manufactures and markets resorbable plate and screw systems for
craniomaxillofacial surgery in the United States, the European community, the
Pacific Rim, Canada, South America and South Africa. The LactoSorb(R)
Craniomaxillofacial Fixation System is a copolymer of poly-L-lactic acid and
polyglycolic acid. As a result of its innovative design, the LactoSorb(R)
System is comparable in strength to titanium plating systems at its initial
placement and is completely resorbed within 9 to 15 months after implantation.
Market response for the LactoSorb(R) System has been positive, especially in
pediatric reconstruction cases by eliminating the need for a second surgery to
remove the plates and screws. Lorenz Surgical intends to continue to expand and
enhance its line of LactoSorb(R) Resorbable Implants.

Mimix(TM) Bone Substitute Material is a synthetic tetra-calcium
phosphate/tri-calcium phosphate material. This material is most commonly used
for the repair of neurosurgical burr holes, craniotomy cuts and other cranial
defects, but also can be utilized in the restoration, or augmentation, of bony
contours in a craniofacial skeleton. Mimix(TM) Bone Substitute Material offers
optimal handling properties and achieves 90% of compressive strength during the
first hours of setting. To expand its offerings of biomaterial products, Lorenz
Surgical has signed an exclusive distribution agreement to distribute an
osteoinductive demineralized bone matrix. This product is expected to be
launched during the second quarter of fiscal year 2002.

During fiscal year 2001, Lorenz Surgical extended its comprehensive product line
incorporating distraction osteogenesis technologies for the face. These titanium
and LactoSorb(R) SE resorbable devices are designed to be utilized in
lengthening procedures for pediatric congenital defects of the craniofacial
skeleton.

The Lorenz Total TMJ Replacement System ("Lorenz TMJ") is a joint replacement
product for the treatment of patients with temporomandibular joint syndrome.
This product has received positive market response in Argentina, Australia,
Brazil, England, South Africa and Sweden. In the second quarter of fiscal year
2002, the Lorenz TMJ will be introduced in Germany, Italy and Spain. Regulatory
approval for the Lorenz TMJ is currently in process in the United States where
this product is in the sixth year of a clinical trial approved by the FDA.

Lorenz Surgical anticipates receiving 510(K) clearance from the FDA during
fiscal year 2002 to introduce a unique resorbable cranial flap fixation system.
This two-sided cranial flap fixation device will incorporate the
clinically-proven LactoSorb(R) resorbable material.

INTERNAL FIXATION DEVICES. The Company's internal fixation products
include devices such as nails, plates, screws, pins and wires designed to
temporarily stabilize traumatic bone injuries. These devices are used by
orthopedic surgeons to provide an accurate means of setting and stabilizing
fractures. They are intended as aids to healing and may be removed when healing
is completed; they are not intended to replace normal body structures.

The Uniflex(TM) Nailing System, which is the Company's largest-selling
internal fixation system, addresses a wide range of fractures utilizing one
product system. The Uniflex(R) Femoral Nailing System is used for internal
fixation of femoral fractures. The flexibility of the system enhances the load
transfer to the bone to further aid in the healing of the fracture. The
Unifiex(TM) Nailing System also includes tibial and humeral nailing systems.
In addition, the S.S.T.(R) Small Bone Locking Nail and the Vector(TM)
Intertrochanteric Nail, a compression nailing system, enhance the Company's
intramedullary fracture fixation family. Other internal fixation products
experiencing attention in the marketplace are the Biomet(R) Ankle Arthrodesis
Nail, the Low Profile Tibial Nail and the ReUnite(TM) resorbable products for
foot, ankle and hand applications.

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The Compression Hip Screw System was designed to provide strong and stable
internal fixation for a variety of intertrochanteric, subtrochanteric and
basilar neck fractures. The Vari-Angle Hip Fixation System (VHS(R)) is a
unique compression hip screw, which allows the hospital to carry less inventory,
while providing greater intraoperative selection of the optimum fixation angle.
During fiscal year 2001, the Company introduced the VHS(R) Supracondylar Cable
Plate, which is designed for internal fixation of distal femoral and
subtrochanteric fractures. The BMP(TM) Cable and Cable Plate System are used
intraoperatively, often as part of revision hip surgery, to reduce the risk of
fracture or to repair existing femoral fractures. System-specific
instrumentation for the BMP(TM) Cable System is precise and allows
reproducible results. Another addition to the Company's internal fixation
product line is the Ally(TM) Monofilament Cerclage System, which offers the
surgeon a monofilament wire option for cerclage in fracture repair or revision
surgery.

BONE SUBSTITUTE MATERIALS. When presented with a patient with a bony
defect, such as a fractured bone or bone loss due to removal of a tumor, the
treating surgeon may remove a portion of bone from the patient to use as a graft
to induce healing at the site of the defect. Bone substitute materials can
eliminate the pain created at the graft site, as well as the costs associated
with this additional surgical procedure. Depending on the specific use of the
bone substitute material, it can have reconstructive, fixation or spinal
applications.

The Company is engaged in several bone substitute material projects. Among those
projects is Endobon(R) Bone Substitute, a material with interconnecting
porosity available in indication-specific shapes. This material is free of
organic components due to the sintering process, which converts it into a
non-resorbable ceramic material designed for long-term stability after
implantation. The Endobon(R) material has regulatory approval in Europe and
has been approved for certain dental indications in the United States.

The Company is also developing a resorbable calcium-deficient hydroxyapatite
bone substitute material, currently referred to as Biocement D(TM). This
material exhibits a slower resorption profile and offers higher strength in
comparison to other resorbable compounds. In addition, the Company is developing
novel bone graft substitute materials, including Calcigen(TM) S (calcium
sulfate) bone substitute and Calcigen(TM) NaP (calcium sodium phosphate) bone
substitute. Both products are involved in ongoing pre-clinical studies for
orthopedic indications and are not yet approved in the United States. During the
third quarter of fiscal year 2001, these bone substitute materials were
introduced in Europe and Canada.

SPINAL PRODUCTS

Spinal products include electrical stimulation devices for spinal applications
and spinal fixation systems.

SPINAL FUSION STIMULATION SYSTEMS. Implantable, direct-current electrical
stimulation devices provide an adjunct to surgical intervention in the treatment
of spinal fusion applications. Spinal fusions are surgical procedures undertaken
to establish bony union between adjacent vertebrae. EBI's SpF(R) Implantable
Spinal Fusion Stimulators are used in conjunction with bone grafting to increase
the probability of fusion success. The implantable devices each consist of a
generator that provides a constant direct current to a titanium cathode placed
where bone growth is required. The SpF(R)-T Implantable Spinal Fusion
Stimulator incorporates a telemetry device which emits a signal to allow device
monitoring after implantation. The compact design of the SpF(R)-T stimulator
provides easier surgical implantation and explantation while increasing patient
comfort. EBI's SpF(R)-XL stimulator is designed to address multilevel fusions
of three to five levels. The XL model has longer leads and delivers 40 micro
amps of output. The XL line has been expanded to include several enhancements,
such as the SpF(R)-XLII Spinal Fusion Stimulator, which provides the same
benefits as the XL model, in a two-lead configuration; the SpF(R)-XLIIB Spinal
Fusion Stimulator, a miniature version of the SpF(R)-XLII stimulator; and the
SpF(R) Mesh Cathode, which is designed to increase the contact area between
the bone graft site and the host bone. EBI intends to continue to expand the
line of SpF(R) Spinal Fusion products in fiscal year 2002.

The Company's acquisition of Biolectron, Inc. in September 2000 provided EBI
with the SpinalPak(R) Spine Fusion Stimulation System. The SpinalPak(R)
System offers surgeons a patient-friendly device for situations in which
non-invasive stimulation is the appropriate option.

SPINAL FIXATION SYSTEMS. EBI's SpineLink(TM) Spinal Fixation System
addresses many of the inherent drawbacks of traditional rod and plate systems.
With the SpineLink(TM) System, each spine segment is addressed individually for
intrasegmental control. Through the use of a modular titanium link and
polydirectional screw, this unique system provides an intrasegmental solution to
spine fixation, enabling the surgeon to tailor the segmental construction to the
patient's anatomy. The SpineLink(TM) System optimizes accessibility to the bone
graft site while increasing the volume of graft that can be used in spinal
fusion surgery. The SpineLink(TM) System was enhanced with the addition of
SpineLink(TM) Cervical Fixation System addressing the cervical region of the
spine.

VHS(R) is a registered trademark of Implant Distribution Network, Ltd.

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EBI fully released the Omega 21(TM) Spinal Fixation System in the United
States during fiscal year 2000. This system augments EBI's domestic spinal
fixation product line by offering its customers a traditional rod and screw
system. EBI has continued to augment the Omega 21(TM) Spinal Fixation System
with new components, including expandable screws. During fiscal year 2001, EBI
introduced the VueLock(TM) Anterior Cervical Plate System, which is a titanium
alloy system featuring a unique, open design that allows for enhanced
intra-operative and post-operative visualization of the bone graft site. In
fiscal year 2002, EBI plans to continue to expand its array of spinal fixation
products.

OTHER PRODUCTS

The Company also manufactures and distributes several other products including
orthopedic support devices (also referred to as softgoods and bracing products),
arthroscopy products, operating room supplies, casting materials, general
surgical instruments, wound care products and other surgical products. EBI
manufactures and distributes an extensive line of orthopedic support products
under the EBI(R) Sports Medicine trade name. The Company manufactures and
markets a line of arthroscopy products through its Arthrotek, Inc. ("Arthrotek")
subsidiary.

ORTHOPEDIC SUPPORT DEVICES. EBI distributes a line of orthopedic support
devices under the EBI(R) Sports Medicine name, including traction framing
equipment, back supports, wrist and forearm splints, cervical collars, shoulder
immobilizers, slings, abdominal binders, knee braces and immobilizers, rib
belts, ankle supports and a variety of other orthopedic splints. Sales of these
softgoods and bracing products are assisted by the Support-on-Site (S.O.S.(TM))
stock and bill program, which efficiently handles the details of product
delivery for the healthcare provider.

ARTHROSCOPY PRODUCTS. Arthroscopy is a minimally-invasive orthopedic
surgical procedure in which an arthroscope is inserted through a small incision
to allow the surgeon direct visualization of the joint. This market is comprised
of five product categories: power instruments, manual instruments, visualization
products, soft tissue anchors, and procedure-specific instruments and implants.
Arthrotek's principal products consist of the WasherLoc(TM) Tibial Graft
Fixation Device, the PowerPump(R) 800 Endoscopic Visualization System and
accompanying cassettes, the Harpoon(R) Soft Tissue Anchor System, the Bone
Mulch(TM) Screw, manual instruments, the IES(R) 1000 System, LactoSorb(R)
resorbable arthroscopic fixation products and the CurvTek(R) Bone Tunneling
System. The IES(R) 1000 System is a fully-integrated arthroscopy system
consisting of a camera, light source, shaver, pump, monitor, printer and VCR
contained in a pre-wired cart. The PowerPump(R) 800 System provides surgeons
with the ability to independently control flow and pressure and to use the pump
in conjunction with other arthroscopy shaver systems.

During fiscal year 2001, Arthrotek introduced additional products in the line of
LactoSorb(R) resorbable arthroscopic fixation products such as the
LactoScrew(TM) Anchor, the Meniscus Screw, the RC Pop Rivet and the Revision
Gentle Threads(TM) Interference Screw, to address shoulder and knee soft
tissue repair indications. Arthrotek intends to continue to expand the line of
LactoSorb(R) resorbable arthroscopic products.

During fiscal year 2001, Arthrotek procured the CurvTek(R) Bone Tunneling
System as a result of the Company's acquisition of Biolectron, Inc. This unique
system is designed to create curved tunnels in bone for suture tie-down in the
reattachment of soft tissues to bone in shoulder and hip procedures.

OPERATING ROOM SUPPLIES. The Company's principal products in the
operating room supplies category are surgical suction devices, filters, glove
liners and drapes. The Redi-Vacette(R) Closed Wound Suction System provides
post-operative wound suction drainage following surgical procedures. The
Redi-Flow(R) Filter automatically strains the flow of body liquids during
surgery. The filter collects fine bone chips and tissue for subsequent
pathological evaluation and saves operating room time by reducing suction clogs
during surgical procedures. The Redi-Drape(R) protects the sterile operating
field from contamination, and provides a drainage bag and built-in instrument
pouches to assist the surgeon.

CASTING MATERIALS. EBI's SynthoCast(TM) HP (high performance) casting
material is lighter, stronger and more comfortable than conventional plaster
products. The SynthoCast(TM) tape offers pre-cut splints on a roll, which
saves time, controls waste and improves convenience for the patient and
physician. EBI has introduced an improved version of the SynthoCast(TM) HP
casting tape, which is uniquely designed to provide improved conformability and
faster setting capabilities.

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PRODUCT DEVELOPMENT

For the years ended May 31, 2001, 2000 and 1999, the Company expended
approximately $43,020,000, $40,208,000 and $38,723,000, respectively, on
research and development. It is expected that ongoing research and development
expenses will continue to increase. The Company's principal research and
development efforts relate to its reconstructive devices, electrical stimulation
products, spinal fixation products, revision products, dental reconstructive
implants, arthroscopy products, resorbable technology, biomaterials products and
gene therapy technologies in the musculoskeletal products field. The Company's
primary research and development facilities are located in Warsaw, Indiana;
Parsippany, New Jersey; and Darmstadt, Germany.

The Company's research and development efforts contributed to the introduction
in fiscal year 2001 of numerous new products, including the following products:
M(2)a(TM)-RingLoc Liner Options, PLR(TM) Proximal Loading Revision Hip
System, Patriot(TM) Modular Acetabular Cage, Biomet(R) Offset Tibial System,
Biomet(R) Oncology/Salvage System, Exceed(TM) Acetabular Cup, Scan
Classic(TM) II Hip System, Stanmore(TM) Long Hip Stem, Advantage(R) Hip
Cup, Aura II(R) Hip Stem, Eternity(R) Ceramic-on-Ceramic Hip Cup, Dual
Articular 2000 Knee System, Rotating Hinge Knee, Alpina(R) Anterior/Posterior
Stabilized Knee System, Oxford(R) Unicompartmental Knee Phase 3, Liverpool
Radial Head Replacement, FD Femoral Nail, Bio-Drive Cannulated Screws, Topkin
wound dressing, EBI Bone Healing System(R) Model 1026, EBI OsteoGen(TM)-D
40/M Mesh Cathode and EBI OsteoGen(TM)-D 40/S Straight Cathode, Wristfix
Distal Radius Fixator, deformity clamps for the DynaFix Rail System, Simple
Logic(TM) System, LactoSorb(R) Alveolar Distractor, LactoSorb(R) Ethmoid
Stent, LactoSorb(R) LeFort III Distractor, the Lorenz TMJ Replacement System,
LactoScrew(TM) Anchor, Meniscus Screw, the RC Pop Rivet and Revision Gentle
Threads(TM) Interference Screw.

During fiscal year 2002, the Company intends to release many new products,
including the following products: Exact(TM) Hip Instrumentation,
Calcigen(TM) NaP bone substitute, the Copeland(TM) Humeral Resurfacing Head,
Bio-Modular(R) Choice Shoulder System, Absolute(TM) Bi-Polar Shoulder,
expansions to the Bio-Modular(R) Total Shoulder System, the Discovery(TM)
Elbow System and EBI's custom ACL Knee Brace.

EBI conducts a program of research and development intended to maintain its
proprietary position and to expand the range of indications for its electrical
stimulation products. This program includes clinical investigations and funding
of basic research to study cells and simple biological systems. Typically, EBI
receives proprietary rights with respect to the data developed as the result of
research it sponsors. EBI also conducts similar research programs for all of its
products.

In 1999 the Company formed an alliance with Selective Genetics, Inc. ("Selective
Genetics") to develop gene therapy products for musculoskeletal repair
indications. Selective Genetics specializes in tissue repair and regeneration by
utilizing technologies for local gene transfer in any type of wound repair
environment. This alliance will provide the Company with an exclusive, worldwide
license covering the application of Selective Genetics' Gene Activated Matrix
("GAM(TM)") material for musculoskeletal repair indications including spinal
fusion, fracture repair, bone void filling, tendon repair and ligament repair
and a non-exclusive license for use of the GAM(TM) material with spine cages.
Efforts are currently concentrated on the completion of pre-clinical studies to
support a clinical trial for a product addressing acute tibial fractures. The
Company also made a minority equity investment in Selective Genetics, as more
fully described in Note C of the Notes to Consolidated Financial Statements.

GOVERNMENT REGULATION

Most aspects of the Company's business are subject to some degree of government
regulation in the countries in which its operations are conducted. The Company's
policy is to comply fully with all regulatory requirements applying to its
products and operations. For some products, and in some countries, government
regulation is significant, and, in general, there appears to be a trend toward
more stringent regulation throughout the world. The Company devotes significant
time, effort and expense addressing the extensive government and regulatory
requirements applicable to its business. Governmental regulatory actions can
result in the recall or seizure of products, suspension or revocation of the
authority necessary for the production or sale of a product, and other civil and
criminal sanctions.

In the United States, the development, testing, marketing and manufacturing of
medical devices - such as arthroscopy, reconstructive, electrical stimulation,
spinal and internal fixation devices, bone cements and bone substitute materials
- - are regulated under the Medical Device Amendments of 1976 to the Federal Food,
Drug and Cosmetic Act (the "1976 Amendments") and additional regulations
promulgated by the FDA and various other federal, state and local agencies. In
general, these statutes and regulations require that manufacturers adhere to
certain standards designed to ensure the safety and effectiveness of medical
devices.

Under the 1976 Amendments, each medical device manufacturer must be a
"registered device manufacturer" and must comply with regulations generally
applicable to labeling, quality assurance, manufacturing practices and clinical
investigations

GAM(TM) is a trademark of Selective Genetics, Inc.

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involving humans. The FDA is authorized to obtain and inspect devices, their
labeling and advertising, and the facilities in which they are manufactured in
order to assure that a device is not improperly manufactured or labeled. All of
the Company's manufacturing and assembly subsidiaries are registered with the
FDA.

In addition, the sale and marketing of medical devices are regulated by the FDA
under the 1976 Amendments, which classify medical devices based upon the degree
of regulation deemed appropriate and necessary. A device is classified as a
Class I, II or III device based on recommendations of advisory panels appointed
by the FDA. Class I devices are subject to general controls. Class II devices,
in addition to general controls, are subject to additional controls. Class III
devices require FDA premarket approval before they may be distributed, other
than in clinical trials.

The Company's reconstructive and fixation products are regulated as Class I,
Class II or Class III medical devices. The Company's spinal fixation systems and
bone cement are regulated as Class II or Class III medical devices. The
Company's electrical stimulation products are regulated as Class III medical
devices. The procedure for obtaining approval to commercially market a Class II
device involves the submission of a premarket notification under Section 510(k)
of the 1976 Amendments. If the FDA determines that the device is substantially
equivalent to a pre-enactment device or to a device subsequently classified in
Class I or Class II, it will grant clearance to commercially market the device.
If the FDA determines the device is not substantially equivalent to a
pre-enactment device, it is automatically placed into Class III, and will either
require reclassification or the submission of valid scientific evidence to prove
the device is safe and effective for human use. For Class III medical devices,
in order to conduct clinical trials, the manufacturer must submit to the FDA an
application for an Investigational Device Exemption ("IDE"). An approved IDE
exempts the manufacturer from certain otherwise applicable FDA regulations, and
grants approval for a clinical investigation, or human study, to generate
clinical data to prove the safety and efficacy of a device. When a manufacturer
believes that sufficient clinical data has been generated to prove the safety
and efficacy of the device, it may submit a premarket approval application
("PMA") to the FDA. The FDA reviews the PMA and determines whether it is in
fileable form and all key elements have been included. Following acceptance of
the PMA, the FDA continues its review process, which includes submission of the
PMA to a panel of experts appointed by the FDA to review the PMA and to
recommend appropriate action. The panel then recommends that the PMA be
approved, not approved or approved subject to conditions. The FDA may act
according to the panel's recommendations, or it may overrule the panel. In
approving a PMA, the FDA may require some form of post-market surveillance
whereby the manufacturer follows certain patient groups for two or more years,
making periodic reports to the FDA.

In addition, the possibility exists that certain devices marketed prior to 1976,
or devices substantially equivalent thereto, may require premarket approval if
the FDA requests. In this event, the manufacturer will be required to submit
proof of safety and efficacy for these devices within 90 days of the call for a
PMA.

The Safe Medical Device Act of 1990 (the "1990 Act") affects medical device
manufacturers in several areas, including post-market surveillance and device
tracking procedures. The 1990 Act was the first major change to the Federal
Food, Drug and Cosmetic Act since the 1976 Amendments. The 1990 Act gave the FDA
expanded emergency recall authority, required that a summary be made available
of the safety and effectiveness of devices in the 510(k) process, and added
design controls as a requirement of Good Manufacturing Practices. The 1990 Act
also granted the FDA the authority to require manufacturers to conduct
post-market surveillance on most permanent implants and devices that potentially
present a serious risk to human health. Management does not believe the 1990 Act
has had a material adverse effect on the Company or its operations.

On November 21, 1997 the FDA Modernization Act (the "Modernization Act") was
signed into law. The Modernization Act amended the Food, Drug and Cosmetic Act
in an effort to streamline the process of bringing safe and effective drugs,
medical devices and other therapies to the United States market. With respect to
medical devices, the Modernization Act requires the FDA to focus its resources
on the regulation of those devices that pose the greatest risk to the public and
offer the most significant benefits. The FDA must base its decisions on clearly
defined criteria and provide for appropriate interaction with the regulated
industry. The Modernization Act assumes that an enhanced collaboration between
the FDA and the regulated industry will accelerate the introduction of safe and
effective devices to the United States marketplace.

The Company is well-positioned to face the changing international regulatory
environment. The ISO 9000 series of standards is an internationally recognized
set of standards aimed at ensuring the design and manufacture of quality
products. A company that has passed an ISO audit and obtained ISC registration
is internationally recognized as having quality manufacturing processes. The
European Union requires that medical products bear a CE mark. The CE mark is an
international symbol, which indicates that the product adheres to European
Medical Device Regulations. ISO 9000 certification is a requirement for placing
the CE mark on the Company's products. Each of the Company's manufacturing
and/or assembly facilities are authorized to place the CE mark on their
products.

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In addition to the regulatory requirements affecting the manufacture and
distribution of the Company's products addressed above, governmental bodies in
the United States and throughout the world have expressed concern about the
costs relating to health care, and in some cases, have focused attention on the
pricing of medical devices. Government regulation regarding pricing of medical
devices already exists in some countries and may be expanded in the United
States and other countries in the future. The Company is subject to increasing
pricing pressures worldwide as a result of growing regulatory pressures, as well
as the expanding predominance of managed care groups and institutional and
governmental purchasers.

While the Company is unable to predict the extent to which its business may be
affected by future regulatory developments, it believes that its substantial
experience in dealing with governmental regulatory requirements and restrictions
throughout the world, its emphasis on efficient means of distribution and its
ongoing development of new and technologically-advanced products should enable
it to continue to compete effectively within this increasingly regulated
environment.

Although the regulatory requirements affecting the Company continue to increase,
it has always been the practice of the Company to comply with all regulatory
requirements governing its products and operations and to conduct its affairs in
an ethical manner. This practice is reflected in the Company's code of conduct
and the responsibility of the Audit Committee of the Board of Directors to
review the Company's systems of internal control, its process for monitoring
compliance with laws and regulations and its process for monitoring compliance
with its code of conduct.

SALES AND MARKETING

Reconstructive devices marketed by Biomet Orthopedics, Inc. are distributed in
the United States by a salesforce of approximately 440 persons, encompassing
approximately 90 independent commissioned sales representatives ("distributors")
and over 350 sales associates engaged principally in the business of supplying
orthopedic products to hospitals in their geographic areas. A few of these
distributors have formal contractual arrangements which limit the Company's
right to terminate the distributor and provide certain long-term benefits to the
distributor upon termination. Internationally, Biomet Orthopedics' products are
marketed through independent, commissioned sales representatives in Australia
and Canada; primarily through direct sales representatives in Argentina, Chile,
Costa Rica, Japan, Mexico, New Zealand and Puerto Rico; and through independent
distributors and specialty medical product dealers in other international
markets. The Company's products are distributed in approximately 100 countries
worldwide.

EBI products are distributed in the United States through the Company's
wholly-owned subsidiary, EBI, L.P., an Indiana limited partnership with offices
in Parsippany, New Jersey. EBI maintains a predominately direct salesforce of
approximately 422 people in assigned territories throughout the United States.
EBI products are also distributed through a growing distribution network in
Central and South America, Canada, Asia and Europe.

3i distributes its products through a direct sales force consisting of
approximately 100 salespersons in assigned territories in the United States,
Brazil, Canada, Denmark, France, Germany, Mexico, Scandinavia, Spain,
Switzerland and the United Kingdom. Throughout the rest of the world, 3i
products are sold through a network of dedicated independent distributors.

Biomet Merck, the European joint venture formed between Biomet and Merck KGaA,
distributes its products primarily through a direct salesforce in Austria,
Belgium, the Czech Republic, Denmark, Finland, France, Greece, Holland, Italy,
Norway, Poland, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Biomet Merck sells its products in other international markets primarily through
independent distributors.

Lorenz Surgical products are distributed in the United States through
approximately 90 independent, commissioned sales representatives and sales
associates engaged principally in the business of supplying craniomaxillofacial
products and surgical instruments to hospitals and surgeons in their geographic
areas. Additionally, Lorenz Surgical supplies a full line of hand-held
orthopedic surgical instruments for sale through the Biomet distribution
network. Lorenz Surgical products are marketed internationally through a growing
network of distributors and sales representatives and through direct operations
in Australia and Germany.

Arthrotek products are distributed in the United States primarily through
approximately 65 independent, commissioned sales representatives, 14 of whom are
devoted primarily to the representation of Arthrotek products. Arthrotek is
developing a salesforce of representatives who are well-trained and devote the
majority of their time selling Arthrotek products. Internationally, Arthrotek
products are marketed primarily through Biomet affiliate companies and a network
of distributors and sales representatives.

Elective surgery-related products appear to be influenced to some degree by
seasonal factors, as the number of elective procedures decline during the summer
months and the holiday seasons, with the exception of some elective pediatric
procedures scheduled to coincide with school breaks.

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Internationally, the Company's customers are the hospitals, surgeons, other
physicians and healthcare providers who employ its products in the course of
their practices. The business of the Company is dependent upon the relationships
maintained by its distributors and salespersons with these customers, as well as
the Company's ability to design and manufacture products that meet the
physicians' technical requirements at a competitive price.

For the fiscal years ended May 31, 2001, 2000 and 1999, the Company's foreign
sales were approximately $308,291,000, $311,289,000 and $279,392,000,
respectively, or 30%, 34% and 34% of net sales, respectively. During fiscal year
2001, foreign sales were reduced by $31.4 million due to foreign currency
translations. Additional data concerning net sales to customers, operating
income and long-lived assets by geographic areas are set forth in Note K of the
Notes to Consolidated Financial Statements included in Item 8 of this Report and
are incorporated herein by reference.

The Company consigns inventory throughout the world to its customers and to its
distributors and direct salespersons for their use in marketing its products and
in filling customer orders. As of May 31, 2001, inventory of approximately
$105,791,000 was consigned to these distributors, salespersons and customers.

Under Title VI of the Social Security Amendments of 1983 (the "1983
Amendments"), hospitals receive a predetermined amount of Medicare reimbursement
for treating a particular patient based upon the patient's type of illness
identified with reference to the patient's diagnosis under one or more of
several hundred diagnosis-related groups ("DRGs"). Other factors which affect a
specific hospital's reimbursement rate include the size of the hospital, its
teaching status and its geographic location. The Prospective Payment Assessment
Commission acts for Congress in evaluating, redefining and adjusting DRGs to
encompass technology changes and efficiencies experienced by hospitals. Biomet
Orthopedics products are primarily covered by DRG 209 (Major Joint and Limb
Reattachment Procedures-Lower Extremities) DRG 210 (Hip and Femur Procedures)
and DRG 491 (Major Joint and Limb Reattachment Procedures-Upper Extremities). To
date, the 1983 Amendments have not adversely affected the Company's
reconstructive device or electrical stimulation business. However, the future
impact of these amendments cannot be estimated at the present time. Biomet
products have also received approval for pass-through coding under the recently
enacted Hospital Outpatient Prospective Payment System.

COMPETITION

The business of the Company is highly competitive. Major competitors in the
reconstructive device segment include DePuy, Inc., a subsidiary of Johnson &
Johnson; Stryker Corp.; Zimmer, Inc., a subsidiary of Zimmer Holdings, Inc.;
Sulzer Orthopedics, Inc., a subsidiary of Sulzer Medica Ltd.; and Smith &
Nephew, Inc. Management believes these five companies, together with Biomet
Orthopedics, have the predominant share of the reconstructive device market.
Competition within the industry is primarily based on service and product
design, although price competition has become increasingly important in recent
years as providers have become more concerned with health care costs. The
Company believes that its prices for reconstructive devices are competitive with
those in the industry. The average selling prices in the United States of Biomet
Orthopedics' products have increased 2-3% over the past several quarters. The
Company believes its future success will depend upon its service and
responsiveness to its distributors and orthopedic specialists, and upon its
ability to design and market innovative and technologically-advanced products
that meet the needs of the marketplace.

EBI's spinal fixation systems compete with those of Interpore International,
Inc.; Stryker Spine, a division of Stryker Corporation; Medtronic/Sofamor Danek,
Inc., a subsidiary of Medtronic, Inc.; DePuy AcroMed Corporation, a subsidiary
of Johnson & Johnson; Synthes, Inc.; SpineTech, a subsidiary of Sulzer Medica
and others.

EBI's external fixation devices compete with other external fixation devices
primarily on the basis of ease of application and clinical results. EBI's
principal competitors in the external fixation market are Smith & Nephew
Richards, a division of Smith & Nephew PLC; Stryker Corp.; Synthes, Inc. and
Orthofix, Inc., a subsidiary of Orthofix International N.V. The Company's
internal fixation product lines compete with those of ACE Orthopedics, a
division of Johnson & Johnson; Zimmer, Inc., a subsidiary of Zimmer Holdings,
Inc.; Smith & Nephew PLC; and Synthes Inc.

3i products compete in the areas of dental reconstructive implants and related
products. Its primary competitors in the dental implant market include Nobel
Biocare AB, Straumann AG and Sulzer Orthopedics, Inc., a subsidiary of Sulzer
Medica Ltd.

EBI is the market leader in the bone growth stimulation market. EBI's electrical
stimulation products include implantable and non-invasive devices indicated for
spinal fusion applications and bone growth stimulation applications. The
invasive spinal fusion stimulation systems and bone growth stimulation products
are used as an adjunct to conventional surgical procedures to enhance the
success rates of these procedures. EBI's non-invasive bone growth stimulation
products are utilized in long-bone recalcitrant fractures as an alternative to
surgical procedures. Other companies offering products in the electrical
stimulation

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market include Orthofix, Inc., a subsidiary of Orthofix International N.V.;
OrthoLogic Corp.; and Exogen, Inc., a subsidiary of Smith & Nephew, Inc.
Competition in the electrical stimulation market is on the basis of product
design, service and success rates of various treatment alternatives. EBI's
non-invasive stimulators offer advantages over conventional surgery or invasive
products in that their use eliminates hospital, surgeon and operating room
costs, and these products can be used in the presence of infection without
creating a risk of additional infection. EBI's invasive stimulators offer the
advantage of conformance to surgical practice and do not require maintenance by
the patient.

Lorenz Surgical primarily competes in the craniomaxillofacial fixation and
specialty surgical instrumentation and neurosurgical cranial flap fixation
markets. Its competitors include Synthes Inc.; Stryker-Leibinger, a subsidiary
of Stryker Corp.; Bionx Implants, Inc.; Aesculap AG & Co.; ACE Surgical Supply
Company, Inc.; MacroPore, Inc.; KLS-Martin, L.P.; Osteomed Corp.; and Hu-Friedy
Dental.

Arthrotek products compete in the areas of power instruments, visualization
products, procedure-specific implants and instruments and manual instruments.
Competitors include Linvatec Corp., a subsidiary of CONMED Corporation; Bionx
Implants, Inc.; Stryker Corp.; Smith & Nephew Endoscopy, a division of Smith &
Nephew PLC; Arthrex, Inc.; and Olympus; Mitek, a division of Johnson & Johnson.

RAW MATERIALS AND SUPPLIES

The raw materials used in the manufacture of the Company's reconstructive
devices are principally nonferrous metallic alloys, stainless steel and
polyethylene powder. None of the Company's raw material requirements are limited
to any material extent by critical supply or single origins. However, suppliers
of polyethylene powder have become increasingly concerned due to perceived
product liability exposures in the medical device industry. Nonetheless, based
upon the Company's present relationship with such suppliers, a material shortage
of polyethylene powder is not anticipated in the foreseeable future. Also, the
demand for certain raw materials used by the Company, such as cobalt alloy and
titanium, is somewhat cyclical in nature. The primary buyers of these metallic
alloys are in the aerospace industry. If the demands of the aerospace industry
should increase dramatically, the Company could experience complications in
obtaining these raw materials. However, based on its current relationship with
its suppliers, the Company does not anticipate a material shortage in the
foreseeable future. Further, the Company believes that its inventory of raw
materials is sufficient to meet any short-term supply shortages of metallic
alloys.

EBI purchases all components of its electrical stimulators from approximately
250 outside suppliers, approximately 15 of whom are the single source of supply
for the particular product. In most cases, EBI believes that all components are
replaceable with similar components. In the event of a shortage, there are
alternative sources of supply available for all components, but some time would
likely elapse before EBI's orders could be filled. 3i purchases all materials to
produce its products from approximately 82 suppliers, approximately 21 of whom
are the single source of supply for the particular product. 3i believes that, in
the event of a shortage, there are alternative sources of supply for all
products and maintains an inventory of materials sufficient to meet any
short-term shortages of supply. The results of the Company's operations are not
materially dependent on raw material costs.

EMPLOYEES

As of May 31, 2001, the Company's domestic operations (including Puerto Rico)
employed approximately 2,990 persons, of whom approximately 1,700 are engaged in
production and approximately 1,290 in research and development, sales,
marketing, administrative and clerical efforts. The Company's international
subsidiaries employ approximately 1,430 persons, of whom approximately 650 are
engaged in production and approximately 780 in research and development, sales,
marketing, administrative and clerical efforts. None of the Company's principal
domestic manufacturing employees are represented by a labor union. The
production employees at its Bridgend, South Wales facility are organized.
Employees working at the facilities in Darmstadt and Berlin, Germany; Valence,
France; and Valencia, Spain are represented by statutory Workers' Councils which
negotiate labor hours and termination rights. The Workers' Councils do not
directly represent such employees with regard to collective bargaining of wages
or benefits. The Company believes that its relationship with all of its
employees is satisfactory. The establishment of Biomet's domestic operations in
north central Indiana, near other members of the orthopedic industry, provides
access to the highly skilled machine operators required for the manufacture of
Biomet products. The Company's European manufacturing locations in South Wales,
England, France, Spain and Germany also provide good sources for skilled
manufacturing labor. EBI's Puerto Rican operations principally involve the
assembly of purchased components into finished products using skilled labor.

13

15

PATENTS AND TRADEMARKS

Patents and other forms of intellectual property are taking on increased
importance in the musculoskeletal industry. Accordingly, management has placed
greater significance on patents and is taking steps to increase its acquisition
and protection of intellectual property rights. In addition, management is
actively enforcing its intellectual property rights consistent with strategic
objectives.

BIOMET, EBI, W'. LORENZ, AOA, 3i and ARTHROTEK are the Company's principal
registered trademarks in the United States, and federal registration has been
obtained or is in process with respect to various other trademarks associated
with the Company's products. The Company holds or has applied for registrations
of various trademarks in its principal foreign markets. Unless otherwise noted
in this Report, all trademarks contained herein are owned by Biomet, Inc. or one
of its affiliates.

14

16

ITEM 2. PROPERTIES.

The Company has the following properties:

15
17

16
18

(*)Operations at these facilities have ceased and the facilities are being
leased to other parties.

The Company believes that its facilities are adequate, well-maintained and
suitable for the development, manufacture and marketing of all its products.

17
19

ITEM 3. LEGAL PROCEEDINGS.

On January 18, 2001, the United States Court of Appeals for the Federal Circuit
(the "Federal Circuit") reinstated a $20 million punitive damages award against
the Company given to Raymond G. Tronzo by the United States District Court for
the Southern District of Florida (the "District Court") while affirming the
compensatory damage award of $520. In its decision in this matter, the District
Court had reduced the punitive damage award to $52,000. The Federal Circuit's
decision was based principally on procedural grounds, and concluded that a
relationship of 38,000 to 1 between the punitive award and the compensatory
award was legally permissible. On March 28, 2001, the Federal Circuit denied the
Company's combined petition for panel rehearing and petition for rehearing en
banc. The Company believes this result conflicts with controlling law, including
decisions of the United States Supreme Court. Accordingly, the Company is
seeking review of this case by the United States Supreme Court. This decision
does not affect the ongoing sales of any of Biomet's product lines. The Company
has recorded a one-time special charge during the third quarter of fiscal 2001
of $26.1 million in connection with the damage award, which includes interest
and related expenses.

In October, 1997 the Company received a subpoena from the United States
Department of Health and Human Services, Office of Inspector General
("HHS/OIG"), and the United States Attorney's Office for the Eastern District of
Pennsylvania ("USAO") in conjunction with an investigation of its financial
relationship with a physician group under the Medicare laws. The Company
received a subsequent subpoena in the same investigation in April 2000. The
subpoenas seek the production of documents referring or relating to any of
Pennsylvania Hospital and Thomas Jefferson Hospital, two of the Company's major
hospital customers in Philadelphia; a physician group practicing under the name
Orthopaedic Reconstructive Associates; and The Rothman Institute. The Company
also is aware that its distributor servicing the hospitals has received a
similar subpoena. The Company does not itself submit claims to or receive
reimbursements from Medicare, but the laws with respect to Medicare
reimbursement prohibit any person from paying or offering to pay any direct or
indirect remuneration intended to induce the purchase of products or services.
Those laws are complex and can be broadly construed to cover a wide range of
financial and business activities. The Company has not been advised of the
precise subject matter of the USAO and HHS/OIG investigation, but it has
long-standing research, product development, physician training, clinical
follow-up and data collection relationships with The Rothman Institute. The
Company is fully cooperating with USAO and HHS/OIG in this matter, and is unable
to predict what action, if any, might be taken in the future by the USAO and/or
HHS/OIG as a result of this investigation or what impact, if any, the outcome of
this matter might have on its financial position or business operations.

There are various other claims, lawsuits, disputes with third parties,
investigations and pending actions involving various allegations against the
Company incident to the operation of its business, principally product liability
and intellectual property cases. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters may be resolved
unfavorably to the Company. The Company establishes accruals for losses that are
deemed to be probable and subject to reasonable estimate. Based on the advice of
counsel to the Company in these matters, management believes that the ultimate
outcome of these matters and any liabilities in excess of amounts provided will
not have a material adverse impact on the Company's consolidated financial
position or on its future business operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not Applicable.

18
20

EXECUTIVE OFFICERS OF THE REGISTRANT

The name, age, business background, positions held with the Company and tenure
as an executive officer of each of the Company's executive officers are set
forth below. No family relationship exists among any of the executive officers.
Except as otherwise stated, each executive officer has held the position
indicated during the last five years.

19

21
PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

The following table shows the quarterly range of high and low sales prices for
the Company's Common Shares as reported by the Nasdaq Stock Market for each of
the three most recent fiscal years ended May 31, 2001. The approximate number of
shareholders of record as of July 20, 2001 was 6,528. All information provided
has been adjusted to reflect the 3-for-2 split of the Company's Common Shares
declared July 9, 2001.

High Low

2001
Fourth 30.67 23.67
Third 27.83 20.46
Second 26.92 19.08
First 23.50 14.97

2000
Fourth 17.54 12.04
Third 19.79 13.25
Second 16.79 10.96
First 19.39 15.50

1999
Fourth 20.33 15.58
Third 17.96 14.38
Second 17.13 11.54
First 15.21 12.46

The Company paid cash dividends of $.07, $.06 and $.05 per share on July 17,
2000, August 6, 1999, and August 7, 1998, respectively.

On July 9, 2001, the Company announced a cash dividend of $.09, payable July 27,
2001, to shareholders of record at the close of business on July 20, 2001.

20

22

ITEM 6. SELECTED FINANCIAL DATA

INCOME STATEMENT DATA
Years ended May 31,
(in thousands, except per share amounts)

2001 2000 1999 1998 1997

Net sales ..................................................... $1,030,663 $ 923,551 $ 830,835 $ 708,678 $ 625,958
Cost of sales ................................................. 296,063 281,351 262,362 226,829 203,428
--------------------------------------------------------------
Gross profit .............................................. 734,600 642,200 568,473 481,849 422,530

Selling, general and administrative expenses .................. 374,793 326,618 295,401 256,509 230,240
Research and development expense .............................. 43,020 40,208 38,723 39,731 26,279
Special charges ............................................... 26,100 11,700 48,447 - -
--------------------------------------------------------------
Operating income .......................................... 290,687 263,674 185,902 185,609 166,011

Other income, net ............................................. 19,989 17,018 13,899 23,452 8,796
--------------------------------------------------------------
Income before income taxes and minority interest .......... 310,676 280,692 199,801 209,061 174,807
Provision for income taxes .................................... 105,906 99,738 67,317 81,058 64,842
--------------------------------------------------------------
Income before minority interest ........................... 204,770 180,954 132,484 128,003 109,965
Minority interest ............................................. 7,224 7,183 7,458 144 -
--------------------------------------------------------------
Net income ................................................ $ 197,546 $ 173,771 $ 125,026 $ 127,859 $ 109,965
--------------------------------------------------------------

Earnings per share:
Basic ..................................................... $ .74 $ .66 $ .48 $ .49 $ .42
Diluted ................................................... .73 .65 .47 .48 .41
--------------------------------------------------------------

Shares used in the computation of earnings per share:
Basic ..................................................... 267,915 264,294 261,662 260,330 264,938
Diluted ................................................... 270,746 267,242 265,815 264,630 268,514
--------------------------------------------------------------

Cash dividends paid per common share .......................... $ .07 $ .06 $ .05 $ .05 $ .04

BALANCE SHEET DATA
At May 31,
(in thousands)

2001 2000 1999 1998 1997

Working capital ............................................... $ 726,557 $ 608,185 $ 497,010 $ 483,025 $ 400,259
Total assets .................................................. 1,489,311 1,218,448 1,110,940 879,382 650,230
Long-term obligations, including redeemable preferred stock ... - - 8,074 7,330 6,935
Shareholders' equity .......................................... 1,146,186 943,323 795,849 678,311 560,984

- - All share and per share data have been adjusted to give retroactive effect to
the three-for-two stock splits declared on July 9, 2001 and July 6, 2000.

- - Amounts after January 1, 1998 include the impact of Biomet Merck. Other
acquisitions during the five year period individually and in the aggregate
have not been material to the Company's operating results or financial
position.

21
23

ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION & RESULTS OF OPERATIONS

The following table shows the percentage relationship to net sales of items
derived from the Consolidated Statements of Income and the percentage change
from year to year.

Percentage
Percentage of Net Sales Increase (Decrease)
2001 2000
2001 2000 1999 vs. 2000 vs. 1999

Net sales .......................................... 100.0% 100.0% 100.0% 12% 11%
Cost of sales ...................................... 28.7 30.6 31.6 5 7
---------------------------
Gross profit ....................................... 71.3 69.4 68.4 14 13
Selling, general and administrative expenses ....... 36.3 35.3 35.5 15 11
Research and development expense ................... 4.2 4.3 4.6 7 4
Special charges .................................... 2.5 1.3 5.9 n/m n/m
---------------------------
Operating income ................................... 28.3 28.5 22.4 10 42
Other income, net .................................. 1.9 1.9 1.7 17 22
---------------------------
Income before income taxes and minority interest ... 30.2 30.4 24.1 11 40
Provision for income taxes ......................... 10.3 10.8 8.1 6 48
---------------------------
Income before minority interest .................... 19.9 19.6 16.0 13 37
Minority interest .................................. 0.7 0.8 0.9 1 (4)
---------------------------
Net income ......................................... 19.2% 18.8% 15.1% 14% 39%
---------------------------

n/m - Not Meaningful

FISCAL 2001 COMPARED TO FISCAL 2000*

On September 25, 2000, the Company through its EBI subsidiary acquired
Biolectron, Inc. for $90 million in cash. The Company accounted for this
acquisition as a purchase and the operating results have been consolidated from
the date of acquisition. Biolectron's sales are principally included in the
fixation and spinal product categories.

Net Sales - Net Sales increased 12% in 2001 to $1,030,663,000 from $923,551,000
in 2000. Excluding the effect of foreign currency translation adjustments, net
sales increased 15%. During the fourth quarter of 2001, the Company adopted
Emerging Issues Task Force ("EITF") 00-10 "Accounting for Shipping and Handling
Fees and Costs." This EITF requires certain shipping and handling fees billed to
customers to be recorded as revenue instead of as a reduction of shipping
expense. Accordingly, the Company has reclassified amounts billed to customers
from cost of sales to net sales for all periods presented, with no effect on net
income. All product categories experienced solid growth during the current year.
The Company's reconstructive sales increased 6% (10% excluding the effect of
foreign currencies) in 2001 to $614,308,000 from $580,239,000 in 2000. The
products experiencing the strongest growth are Biomet's knee products, including
the Repicci II(R) Unicondylar Knee System and the Ascent(TM) Total Knee
System; 3i's dental reconstructive implants, including the OSSEOTITE(R) Dental
Reconstructive Implant System; and bone cements and accessories. The domestic
introduction of Palacos(R) bone cement and the Optivac(R) Vacuum Mixing
System was responsible for sales growth of bone cement and accessory products.
The Company's fixation sales increased 12% to $202,152,000 in 2001 compared to
$180,336,000 in 2000. Products responsible for this increase are primarily
electrical stimulation systems, which include the EBI Model 2100 Bone Healing
System(R) and Biolectron's OrthoPak(R) System and Lorenz Surgical's
craniomaxillofacial products, led by the successful introduction of Mimix(TM)
bone substitute material. Spinal product sales increased 68% from $54,119,000 in
2000 to $91,103,000 in 2001. Products experiencing sales growth include EBI's
SpF(R) Spinal Fusion Stimulation System and Biolectron's SpinalPak(R) Spinal
Stimulation System, as well as recent introductions of the VueLock(TM)
Cervical Fixation System and the Omega 21(TM) Spinal Fixation System. The
Company's "other product" sales increased 13% (17% excluding the effect of
foreign currencies) to $123,100,000 in 2001 from $108,857,000 in 2000. Products
contributing to this growth are Arthrotek's procedure-specific products and
LactoSorb(R) resorbable products, Biolectron's CurvTek(R) Bone Tunneling
System and EBI's softgoods and bracing products. The Company's United States
sales increased 18% during the current year to $722,372,000 from $612,262,000 in
2000. Foreign sales increased 9% in local currencies, however, due to currency
exchange rates, the Company reported a 1% decrease to $308,291,000 from
$311,289,000 in 2000. In addition to currency exchange rates, foreign sales were
negatively influenced by the non-renewal of the distribution agreement with the
Japanese distributor of Biomet products during the current year.

Gross Profit - The Company's gross profit increased 14% in 2001 to $734,600,000
from $642,200,000 in 2000. Cost of sales as a percentage of sales decreased to
28.7% in 2001 compared to 30.6% in 2000. The decrease in cost of sales as a
percentage of net sales is a result of a higher growth rate in domestic sales as
well as improved manufacturing efficiencies and the inclusion of Biolectron's
products. The Company continues to make improvements in manufacturing processes,
including the purchase of newer, more efficient equipment.

Selling, General and Administrative Expenses - Selling, general and
administrative expenses increased 15% in 2001 to $374,793,000 compared to
$326,618,000 in 2000. As a percentage of sales, selling, general and
administrative expenses were 36.3% in 2001 and 35.3% in 2000.

* For purposes of this Management's Discussion and Analysis, the fiscal period
is June 1 - May 31.

22
24
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS (CONTINUED)

The primary factor contributing to this change was an increase in commission
expense on increased product sales. Other factors contributing to the increase
were higher staffing costs to expand salesforces worldwide, costs to open a
direct operation in Japan, increased amortization of intangibles and the
inclusion of Biolectron's operations.

Research and Development Expense - Research and development expense increased 7%
in 2001 from $40,208,000 in 2000 to $43,020,000 in 2001. The increase in
research and development expenses in 2001 was mainly due to the increase in
research and development personnel and other expenses associated with additional
personnel and the increase in new product introductions.

Special Charges - In 2001, the Company recorded a $26.1 million special charge
in connection with an appellate court's decision in the Tronzo Case. In 2000, a
special charge of $11.7 million was comprised of $2.7 million of merger costs
related to the 3i merger and $9.0 million for the final determination of the
interest element of the final judgment in the Orthofix litigation.

Operating Income - U.S. operating income increased 12% to $251,927,000 from
$224,385,000 reflecting the growth in sales in this geographic segment and
improved operating efficiencies. Non-U.S. operating income was flat at
$38,760,000 reflecting primarily the effect of foreign currency translations on
reported U.S. dollar results. Overall, operating income increased 10% to
$290,687,000 in 2001 from $263,274,000 in 2000.

Other Income, Net - Other income, net increased 17% in 2001 to $19,989,000 from
$17,018,000 in 2000. Increased investment income on cash and investments offset
by increased interest expense on short-term borrowings was largely responsible
for this increase.

Provision for Income Taxes - The provision for income taxes increased to
$105,906,000 for 2001, or 34.1% of income before income taxes, compared to
$99,738,000 in 2000, or 35.5% of income before income taxes. The decrease in the
effective rate was a result of organizational changes implemented last year in
the United States and internationally. The Company will continue to be adversely
affected by changes in the Puerto Rican local tax structure, which reduces over
time the historical U.S. tax benefits from operating in Puerto Rico.

Net Income - The factors mentioned above resulted in a 14% and 12% increase in
net income and basic earnings per share, respectively, for 2001 compared to
2000. Net income increased to $197,546,000 from $173,771,000 and basic earnings
per share increased to $.74 from $.66.

FISCAL 2000 COMPARED TO FISCAL 1999

On December 16, 1999, Implant Innovations International Corporation ("3i") was
merged into a subsidiary of the Company through a stock-for-stock exchange in
which 11.7 million Common Shares were issued for all of the issued and
outstanding shares of 3i. The merger has been accounted for as a
pooling-of-interests, and the discussion and analysis that follows reflects the
combined results of operations, cash flows and financial condition of the merged
operations.

Net Sales - Net sales increased 11% in 2000 to $923,551,000 from $830,835,000 in
1999. Excluding the effect of foreign currency translation adjustments, net
sales increased 13%. The increase in net sales reflects the increased demand for
the Company's products, most notably reconstructive devices (including 3i's
dental reconstructive implants), spinal implants, internal fixation and bone
healing devices, softgoods and bracing products and arthroscopy products. The
Company's United States sales increased 11% to $612,262,000 in 2000 from
$551,443,000 in 1999. The products experiencing strong U.S. growth were Biomet's
knee products, including reconstructive revision systems, 3i's dental
reconstructive implants, EBI's Bone Healing System(R) Model 2001, SpineLink(TM)
and Omega 21(TM) Spinal Fixation Systems, Arthrotek's arthroscopy products and
EBI's softgoods and bracing products. Foreign sales in local currencies
increased by 17%, but due to the currency exchange rates, the Company reported
an 11% increase to $311,289,000 in 2000 from $279,392,000 in 1999. Increases in
foreign sales of reconstructive devices, EBI's external fixation products and
Lorenz Surgical's craniomaxillofacial products contributed to this increase. The
Company's worldwide reconstructive device sales increased 11% during 2000 to
$580,239,000 from $521,365,000 in 1999. This increase was primarily a result of
Biomet's continued penetration of the reconstructive device market led by
revision products, the Repicci II(R) Unicondylar Knee, the Ascent(TM) Total Knee
System and 3i's penetration into the dental reconstructive implant market.
Fixation sales increased 11% from $162,825,000 in 1999 to $180,336,000 in 2000.
EBI's Bone Healing System(R) Model 2001 was largely responsible for the increase
in fixation product sales. Spinal product sales increased 20% to $54,119,000 in
2000 from $45,125,000 during 1999. The launch of the Omega 21(TM) Spinal
Fixation System in the United States and continued penetration and line
extensions of the SpineLink(TM) Spinal Fixation System contributed to this
increase. The Company's "other product" sales increased from $101,520,000 in
1999 to $108,857,000 in 2000, a 7% increase. Sales of Arthrotek's LactoSorb(R)
line of resorbable arthroscopic fixation products as well as EBI's line of
softgoods and bracing products were primarily responsible for this increase.

Gross Profit - The Company's gross profit increased 13% in 2000 to $642,200,000
from $568,473,000 in 1999. This increase was a result of increased sales of
higher margin products, including revision products, 3i's dental reconstructive
implants and EBI's fixation products, and increased in-house manufacturing
efficiencies. Cost of sales as a percentage of sales decreased to 30.2% in 2000
compared to 31.3% in 1999. The Company continues to invest heavily in improved,
more efficient manufacturing equipment and monitors inventory levels on a
consistent basis. As sales continue to grow and new products are introduced, the
Company has been able to maintain inventory growth at reasonable levels.

23
25

MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION & RESULTS OF OPERATIONS (CONCLUDED)

Selling, General and Administrative Expenses - Selling, general and
administrative expenses were $326,618,000 in 2000 compared to $295,401,000 in
1999, an increase of 11%. As a percentage of sales, selling, general and
administrative expenses were 35.5% in 2000 and 35.7% in 1999. An increase in
commissions on increased product sales was the primary reason for this increase.

Research and Development Expense - Research and development expense increased
3.8% to $40,208,000 in 2000 from $38,723,000 in 1999. This increase in research
and development expenditures was due to continued funding in gene therapy
technologies in the musculoskeletal field and increases in arthroscopy and
dental reconstructive implant development. The Company understands the
importance of research and development and the challenges placed upon companies
to be competitive in the marketplace. As such, the Company intends to continue
to invest heavily in the development of new products both domestically and
internationally.

Special Charges - In 2000, the Company recorded $11.7 million of special charges
which consisted of a $9 million charge to reflect the final determination of the
interest element of the Orthofix judgment and a $2.7 million charge for merger
related costs in connection with the 3i merger. In 1999, the Company recorded
$48.5 million in special charges consisting of a $55 million charge to reflect
the final judgment against the Company in the action brought by Orthofix, net of
$6.5 million in proceeds from 3i's recovery in a litigation matter.

Other Income, Net - Other income, net increased 22% to $17,018,000 in 2000 from
$13,899,000 in 1999. Increased investment income on cash and investments is
largely responsible for this increase.

Provision for Income Taxes - The provision for income taxes increased to
$99,738,000 for 2000, or 35.5% of income before income taxes, compared to
$67,317,000 in 1999, or 33.7% of income before income taxes. The increase in the
effective rate is due to Biomet Merck benefiting from a one-time $4.2 million
tax credit in 1999. Excluding this credit, the effective rate during 2000 was
comparable with prior years.

Net Income - The factors mentioned above resulted in a 39% and 38% increase in
net income and basic earnings per share, respectively, for 2000 compared to
1999. Net income increased to $173,771,000 from $125,026,000 and basic earnings
per share increased to $.66 from $.48.

LIQUIDITY & CAPITAL RESOURCES

The Company's cash and investments increased to $463,148,000 at May 31, 2001,
from $407,268,000 at May 31, 2000. Net cash from operating activities was
$190,506,000 in 2001 and $137,828,000 in 2000. The principal sources of cash
from operating activities were net income of $197,546,000, non-cash charges for
depreciation and amortization of $42,824,0000 and increases in accrued
litigation and other liabilities of $26,100,000 and $35,670,000, respectively.
This was offset by uses of operating cash in accounts and notes receivable,
inventories and deferred federal income taxes of $68,134,000, $37,648,000 and
$15,635,000, respectively.

Cash flows used in investing activities were $156,673,000 in 2001 compared to
$67,650,000 in 2000. The primary uses of cash for investing activities were
purchases of investments, capital expenditures and business acquisitions, most
notably Biolectron, partially offset by proceeds from sales and maturities of
investments.

Cash flows used in financing activities were $14,835,000 in 2001 compared to a
source from financing activities of $14,582,000 in 2000. The primary uses of
funds during the current year were a decrease in the unsecured line of credit
from a major European bank and a cash dividend of $.06 per share paid to
shareholders on July 17, 2000. The primary source of cash from financing
activities is proceeds on issuance of shares. On July 9, 2001, the Company
announced a cash dividend of $.09 per share payable July 27, 2001 to
shareholders of record at the close of business on July 20, 2001. The Company
maintains its cash and investments in money market funds, certificates of
deposits, commercial paper, debt instruments, mortgage-backed securities and
equity securities. The Company's investments are generally liquid and investment
grade. The Company is exposed to interest rate risk on its debt instruments,
fixed rate preferred equity securities and mortgage-backed securities.

The Company anticipates that uses of cash in fiscal 2002 for land, buildings and
equipment to be at levels at least as high as 2001 and 2000. The Company
continues to search for viable acquisition candidates that expand its worldwide
presence as well as offer product diversification. The Company expects to spend
in excess of $160 million over the next two fiscal years for capital
expenditures and research and development costs, including the commitment to
Selective Genetics to fund research and development efforts over a ten-year
period. Other significant fundings for the coming year include the expansion of
the Company's direct sales operation in Japan; new product introductions, which
were approximately 100 over the past year, and additional market penetration in
Latin America. Funding of these activities is expected to come from currently
available funds and cash flows generated from future operations.

24
26

ITEM 7A. QUANTITATIVE & QUALITATIVE DISCLOSURES
ABOUT MARKET RISK.

In the normal course of business, operations of the Company are exposed to
fluctuations in interest rates and foreign currencies. These fluctuations can
vary the cost of financing, investment yields and operations of the Company.

During fiscal year 2001, BioMer C.V., maintained a EUR 71 million unsecured line
of credit at a major European bank for its operations. Outstanding borrowings
under the line of credit bear interest at a variable rate of the lender's
interbank rate plus 1% and, accordingly, changes in interest rates would impact
the Company's cost of financing.

The Company does not have any investments that would be classified as trading
securities under generally accepted accounting principles. The Company's
non-trading investments, excluding cash and cash equivalents, consist of
certificates of deposit, debt securities, equity securities and mortgage-backed
securities. The debt securities include municipal bonds, with fixed rates, and
preferred stocks, which pay quarterly fixed rate dividends. These financial
instruments are subject to market risk in that changes in interest rates would
impact the market value of such investments. The Company generally does not
utilize derivatives to hedge against increases in interest rates which would
decrease market values, except for one of its investment managers who utilizes
U.S. Treasury bond futures options ("futures options") as a protection against
the impact of increases in interest rates on the fair value of preferred stocks
managed by that investment manager. The Company marks any outstanding futures
options to market and market value changes are recognized in current earnings.
The futures options generally have terms ranging from 90 to 180 days. Realized
gains on sales of futures options aggregated $69,600 for the year ended May 31,
2001, and unrealized gains on outstanding futures options at May 31, 2001,
aggregated $38,606.

Based on the Company's overall interest rate exposure at May 31, 2001, including
variable rate debt and fixed rate preferred stocks, a hypothetical 10 percent
change in interest rates applied to the fair value of the financial instruments
as of May 31, 2001, would have no material impact on earnings, cash flows or
fair values of interest rate risk sensitive instruments over a one-year period.

The Company's foreign currency risk exposure results from fluctuating currency
exchange rates, primarily the U.S. dollar against the European currencies. The
Company faces transactional currency exposures that arise when its foreign
subsidiaries (or the Company itself) enter into transactions, generally on an
intercompany basis, denominated in currencies other than their local currency.
The Company also faces currency exposure that arises from translating the
results of its global operations to the U.S. dollar at exchange rates that have
fluctuated from the beginning of the period. Historically, the Company has not
used financial derivatives to hedge against fluctuations in currency exchange
rates. Based on the Company's overall exposure for foreign currency at May 31,
2001, a hypothetical 10 percent change in foreign currency rates would not have
a material impact on the Company's balance sheet, net sales, net income or cash
flows over a one-year period.

25
27

ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA

BIOMET INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SCHEDULE

1. FINANCIAL STATEMENTS:
Report of Independent Accountants ............................................................................. 27
Consolidated Balance Sheets as of May 31, 2001 and 2000 ....................................................... 28
Consolidated Statements of Income for the years ended May 31, 2001, 2000 and 1999 ............................. 29
Consolidated Statements of Shareholders' Equity for the years ended May 31, 2001, 2000 and 1999 ............... 30
Consolidated Statements of Cash Flows for the years ended May 31, 2001, 2000 and 1999 ......................... 31
Notes to Consolidated Financial Statements ................................................................. 32-41

2. FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts for the years ended May 31, 2001, 2000 and 1999 ............... 42
Schedules others than those listed above are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.

3. SUPPLEMENTARY DATA:
Quarterly Results ............................................................................................. 43

26

28

BIOMET, INC. & SUBSIDIARIES
REPORT OF INDEPENDENT ACCOUNTANTS

[PRICEWATERHOUSECOOPERS LLP LOGO]

To the Board of Directors and Shareholders of Biomet, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Biomet, Inc. and its subsidiaries at May 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended May 31, 2001, in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule listed in the accompanying index presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois
July 9, 2001

27
29

BIOMET, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

At May 31,
(in thousands, except per share data)

2001 2000

ASSETS

Current assets:
Cash and cash equivalents ............................................................. $ 235,091 $ 213,606
Investments ........................................................................... 52,627 34,129
Accounts and notes receivable, less allowance for doubtful receivables
(2001 - $13,420 and 2000 - $8,241) .................................................. 324,848 249,792
Inventories ........................................................................... 277,601 240,162
Deferred and refundable income taxes .................................................. 48,982 25,811
Prepaid expenses and other ............................................................ 29,230 26,128
----------------------------
Total current assets ................................................................ 968,379 789,628
----------------------------
Property, plant and equipment:
Land and improvements ................................................................. 13,877 14,572
Buildings and improvements ............................................................ 92,459 88,103
Machinery and equipment ............................................................... 219,554 196,619
----------------------------
325,890 299,294
Less, Accumulated depreciation ........................................................... 140,139 116,037
----------------------------
Property, plant and equipment, net .................................................. 185,751 183,257
----------------------------
Investments .............................................................................. 175,430 159,533
Intangible assets, net of accumulated amortization (2001 - $23,183 and 2000 - $20,580) ... 8,848 9,100
Excess acquisition costs over fair value of acquired net assets, net of
accumulated amortization (2001 - $32,952 and 2000 - $22,869) .......................... 134,835 60,654
Other assets ............................................................................. 16,068 16,276
----------------------------
Total assets ........................................................................ $ 1,489,311 $ 1,218,448
----------------------------

LIABILITIES & SHAREHOLDERS' EQUITY

Current liabilities:
Short-term borrowings and current maturities of long-term obligations ................. $ 62,734 $ 70,546
Accounts payable ...................................................................... 21,008 25,612
Accrued income taxes .................................................................. 31,085 17,288
Accrued wages and commissions ......................................................... 33,030 24,224
Accrued litigation .................................................................... 26,100 -
Other accrued expenses ................................................................ 67,865 43,773
----------------------------
Total current liabilities ........................................................... 241,822 181,443

Deferred federal income taxes ............................................................ 5,783 5,386
Other liabilities ........................................................................ 423 423
----------------------------
Total liabilities ................................................................... 248,028 187,252
----------------------------
Minority interest ........................................................................ 95,097 87,873
----------------------------

Commitments and contingencies (Note L)

Shareholders' equity:
Preferred shares, $100 par value: Authorized 5 shares; none issued .................... - -
Common shares, without par value: Authorized 500,000 shares;
issued and outstanding 2001 - 269,124 shares and 2000 - 266,480 shares .............. 108,918 85,086
Additional paid-in capital ............................................................ 48,732 41,451
Retained earnings ..................................................................... 1,044,564 866,011
Accumulated other comprehensive loss .................................................. (56,028) (49,225)
----------------------------
Total shareholders' equity .......................................................... 1,146,186 943,323
----------------------------
Total liabilities and shareholders' equity .......................................... $ 1,489,311 $ 1,218,448
----------------------------

The accompanying notes are a part of the consolidated financial statements.

28
30

BIOMET, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

For the years ended May 31,
(in thousands, except per share amounts)

2001 2000 1999

Net sales .............................................. $ 1,030,663 $ 923,551 $ 830,835
Cost of sales .......................................... 296,063 281,351 262,362
---------------------------------------------
Gross profit ....................................... 734,600 642,200 568,473
Selling, general and administrative expenses ........... 374,793 326,618 295,401
Research and development expense ....................... 43,020 40,208 38,723
Special charges ........................................ 26,100 11,700 48,447
---------------------------------------------
Operating income ................................... 290,687 263,674 185,902
Other income, net ...................................... 24,099 20,211 15,810
Interest expense ....................................... (4,110) (3,193) (1,911)
---------------------------------------------
Income before income taxes and minority interest ... 310,676 280,692 199,801
Provision for income taxes ............................. 105,906 99,738 67,317
---------------------------------------------
Income before minority interest .................... 204,770 180,954 132,484
Minority interest ...................................... 7,224 7,183 7,458
---------------------------------------------
Net income ......................................... $ 197,546 $ 173,771 $ 125,026
---------------------------------------------
Earnings per share:
Basic .............................................. $ .74 $ .66 $ .48
Diluted ............................................ .73 .65 .47
---------------------------------------------
Shares used in the computation of earnings per share:
Basic .............................................. 267,915 264,294 261,662
Diluted ............................................ 270,746 267,242 265,815
---------------------------------------------

The accompanying notes are a part of the consolidated financial statements.

29

31

BIOMET, INC. & SUBSIDIARIES CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY

ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON SHARES PAID-IN RETAINED COMPREHENSIVE SHAREHOLDERS'
(in thousands, except per share amounts) NUMBER AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
---------------------------------------------------------------------

Balance at June 1, 1998 .................................... 261,063 $ 75,719 $ 20,586 $ 594,671 $(12,664) $ 678,312
----------
Net income .............................................. - - - 125,026 - 125,026
Change in unrealized holding value on investments,
net of $914 tax effect ............................... - - - - (1,257) (1,257)
Reclassification adjustment for gains included
in net income, net of $82 tax expense ................ - - - - 123 123
Currency translation adjustments ........................ - - - - (2,568) (2,568)
----------
Comprehensive income ................................. - - - - - 121,324
----------
Exercise of stock options ............................... 1,203 2,131 6,500 - - 8,631
Tax benefit from exercise of stock options .............. - - 1,211 - - 1,211
Cash dividends ($.05 per common share) .................. - - - (13,453) - (13,453)
Other ................................................... - - (26) (150) - (176)
---------------------------------------------------------------------
Balance at May 31, 1999 .................................... 262,266 77,850 28,271 706,094 (16,366) 795,849
----------
Net income .............................................. - - - 173,771 - 173,771
Change in unrealized holding value on investments,
net of $5,638 tax effect ............................. - - - - (10,467) (10,467)
Reclassification adjustment for gains included
in net income, net of $344 tax expense ............... - - - - 638 638
Currency translation adjustments ........................ - - - - (23,030) (23,030)
----------
Comprehensive income ................................. - - - - - 140,912
----------
Net earnings of 3i for the five months
ended May 31, 1999 ................................... - - - 2,076 - 2,076
Exercise of stock options ............................... 2,555 7,235 4,418 - - 11,653
Exercise of warrants and conversion of preferred stock .. 1,659 1 2,504 - - 2,505
Tax benefit from exercise of stock options .............. - - 6,258 - - 6,258
Cash dividends ($.06 per common share) .................. - - - (15,785) - (15,785)
Other ................................................... - - - (145) - (145)
---------------------------------------------------------------------
Balance at May 31, 2000 .................................... 266,480 85,086 41,451 866,011 (49,225) 943,323
----------
Net income .............................................. - - - 197,546 - 197,546
Change in unrealized holding value on investments,
net of $2,138 tax effect ............................. - - - - 3,967 3,967
Reclassification adjustment for gains included
in net income, net of $41 tax expense ................ - - - - 74 74
Currency translation adjustments ........................ - - - - (10,844) (10,844)
----------
Comprehensive income ................................. - - - - - 190,743
----------
Exercise of stock options ............................... 2,644 23,832 - - - 23,832
Tax benefit from exercise of stock options .............. - - 7,281 - - 7,281
Cash dividends ($.07 per common share) .................. - - - (18,993) - (18,993)
---------------------------------------------------------------------
Balance at May 31, 2001 .................................... 269,124 $108,918 $ 48,732 $1,044,564 $(56,028) $1,146,186
---------------------------------------------------------------------

The accompanying notes are a part of the consolidated financial statements.

30
32

BIOMET, INC. & SUBSIDIARIES CONSOLIDATED
STATEMENTS OF CASH FLOWS

For the years ended May 31,
(in thousands)

2001 2000 1999

Cash flows from (used in) operating activities:
Net income ................................................................... $ 197,546 $ 173,771 $ 125,026
Adjustments to reconcile net income to net cash from operating activities:
Depreciation ............................................................... 30,890 30,678 23,689
Amortization ............................................................... 11,934 9,088 8,385
Minority interest .......................................................... 7,224 7,183 7,458
Other ...................................................................... (1,936) (1,467) 5,672
Deferred federal income taxes .............................................. (15,635) (9,037) (3,323)
Tax benefit from exercise of stock options ................................. 7,281 6,258 1,211
Changes in current assets and liabilities, excluding effects of acquisitions
and dispositions:
Accounts and notes receivable ........................................... (68,134) (31,326) (24,459)
Inventories ............................................................. (37,648) (27,429) (26,689)
Accounts payable ........................................................ (2,786) (2,089) 5,604
Accrued litigation ...................................................... 26,100 (55,000) 55,000
Other ................................................................... 35,670 37,198 (23,758)
---------------------------------------
Net cash from operating activities .................................. 190,506 137,828 153,816
---------------------------------------

Cash flows from (used in) investing activities:
Proceeds from sales and maturities of investments ............................ 62,256 45,826 33,008
Purchases of investments ..................................................... (95,406) (46,491) (135,891)
Capital expenditures ......................................................... (35,261) (43,067) (53,570)
Acquisitions, net of cash acquired ........................................... (85,802) (22,177) (3,437)
Other ........................................................................ (2,460) (1,741) (12,812)
---------------------------------------
Net cash (used in) investing activities ............................. (156,673) (67,650) (172,702)
---------------------------------------

Cash flows from (used in) financing activities:
Increase (decrease) in short-term borrowings ................................. (13,792) 27,056 39,761
Payment of long-term obligations ............................................. (5,993) (7,664) (1,062)
Issuance of shares ........................................................... 23,832 11,658 2,131
Cash dividends ............................................................... (18,993) (16,468) (13,453)
---------------------------------------
Net cash from (used in) financing activities ........................ (14,946) 14,582 27,377
---------------------------------------
Effect of exchange rate changes on cash ......................................... 2,598 (3,235) 2,814
---------------------------------------
Increase in cash and cash equivalents ............................... 21,485 81,525 11,305
Cash and cash equivalents, beginning of year .................................... 213,606 132,081 120,776
---------------------------------------
Cash and cash equivalents, end of year .......................................... $ 235,091 $ 213,606 $ 132,081
---------------------------------------

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ................................................................... $ 4,076 $ 3,807 $ 1,974
Income taxes ............................................................... 109,822 69,555 90,318

Noncash investing and financing activities:
Liabilities assumed in business acquisitions ................................. 18,093 3,190 6,400
Capital leases entered into for the acquisition of property and equipment .... - - 1,619
Dividends accrued on redeemable preferred stock .............................. - 81 150
Redeemable preferred stock converted to common shares ........................ - 2,500 -

The accompanying notes are a part of the consolidated financial statements.

31
33
BIOMET, INC. & SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A: NATURE OF OPERATIONS.

Biomet, Inc. and its subsidiaries design, manufacture and market products used
primarily by musculoskeletal medical specialists in both surgical and
nonsurgical therapy, including reconstructive and fixation devices, electrical
bone growth stimulators, orthopedic support devices, operating room supplies,
general surgical instruments, arthroscopy products, spinal products, bone
cements and accessories, bone substitute materials, craniomaxillofacial implants
and instruments, and dental reconstructive implants and associated
instrumentation. Headquartered in Warsaw, Indiana, Biomet has manufacturing
and/or office facilities in over 50 locations worldwide. The Company currently
distributes products in more than 100 countries throughout the world. The
Company operates in one business segment but has three reportable geographic
segments.

NOTE B: ACCOUNTING POLICIES.

The following is a summary of the accounting policies adopted by Biomet, Inc.
and subsidiaries which have a significant effect on the consolidated financial
statements.

Basis of Presentation - The consolidated financial statements include the
accounts of Biomet, Inc. and its subsidiaries (individually and collectively,
the "Company"). All foreign subsidiaries are consolidated on the basis of an
April 30 fiscal year. Investments in affiliates in which the Company does not
have the ability to significantly influence the operations are accounted for on
the cost method, the carrying amount of which is not less than market.
Investments in affiliates in which the Company does have the ability to
significantly influence the operations, but does not control, are accounted for
on the equity method. The financial statements of BioMer C.V. (a joint venture)
are consolidated because the Company has the ability to control the operations
of this entity. The minority shareholder's interest in BioMer C.V. is reflected
as minority interest.

Use of Estimates - The consolidated financial statements are prepared in
conformity with generally accepted accounting principles and, accordingly,
include amounts that are based on management's best estimates and judgments.

Translation of Foreign Currency - Assets and liabilities of foreign subsidiaries
are translated at rates of exchange in effect at the close of their fiscal year.
Revenues and expenses are translated at the weighted average exchange rates
during the year. Translation gains and losses are accumulated within other
comprehensive income (loss) as a separate component of shareholders' equity.
Foreign currency transaction gains and losses, which are not material, are
included in other income, net.

Cash and Cash Equivalents - The Company considers all highly liquid investments
with original maturities of three months or less to be cash equivalents.

Investments - Highly liquid investments with insignificant interest rate risk
and with original maturities of three months or less are classified as cash and
cash equivalents. Certificates of deposit with maturities greater than three
months and less than one year are classified as short-term investments.
Certificates of deposit with maturities greater than one year are classified as
long-term investments. The Company accounts for its investments in debt and
equity securities under Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities," which
requires certain securities to be categorized as either trading,
available-for-sale or held-to-maturity. Available-for-sale securities are
carried at fair value with unrealized gains and losses recorded within other
comprehensive income (loss) as a separate component of shareholders' equity.
Held-to-maturity securities are carried at amortized cost. The Company has no
trading securities. The cost of investment securities sold is determined by the
specific identification method. Dividend and interest income are accrued as
earned.

Inventories - Inventories are stated at the lower of cost or market, with cost
determined under the first-in, first-out method.

Property, Plant and Equipment - Property, plant and equipment are carried at
cost less accumulated depreciation. Depreciation is computed based on the
estimated useful lives using the straight-line method. Gains or losses on the
disposition of property, plant and equipment are included in income. Maintenance
and repairs are expensed as incurred.

Intangible Assets - Intangible assets consist primarily of patents, trademarks,
product technology, acquired license agreements and other identifiable
intangible assets obtained through acquisition and are carried at cost less
accumulated amortization. Amortization of intangibles is computed based on the
straight-line method over periods ranging from three to fifteen years.

Excess Acquisition Costs Over Fair Value of Acquired Net Assets - Excess
acquisition costs over the fair value of acquired tangible and intangible net
assets (goodwill) are amortized using the straight-line method over periods
ranging from eight to twenty years. The carrying value of goodwill is reviewed
as circumstances warrant by the Company based on the expected future
undiscounted operating cash flows of the related business unit. The Company
believes no material impairment of goodwill exists at May 31, 2001.

Income Taxes - Deferred income taxes are determined using the liability method.
No provision has been made for U.S. and state income taxes or foreign
withholding taxes on the undistributed earnings (approximately $108 million at
May 31, 2001) of foreign subsidiaries because it is expected that such earnings
will be reinvested overseas indefinitely. Upon distribution of those earnings in
the form of dividends or otherwise, the Company would be subject to U.S. income
taxes (subject to an adjustment for foreign tax credits), state income taxes and
withholding taxes payable to the various foreign countries. Determination of the
amount of any unrecognized deferred income tax liability on these undistributed
earnings is not practical.

32
34
BIOMET, INC. & SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE B: ACCOUNTING POLICIES, CONCLUDED.

Fair Value of Financial Instruments - The carrying amounts of cash and cash
equivalents, receivables, short-term borrowings, long-term obligations, accounts
payable and accruals that meet the definition of a financial instrument
approximate fair value. The fair value of investments is disclosed in Note D.

Revenue Recognition, Concentrations of Credit Risk and Allowance for Doubtful
Receivables - Revenue is recognized when the product is shipped to the
healthcare provider. The Company provides credit, in the normal course of
business, to hospitals, private and governmental institutions and healthcare
agencies, insurance providers and physicians. The Company maintains an allowance
for doubtful receivables and charges actual losses to the allowance when
incurred. The Company invests the majority of its excess cash in certificates of
deposit with financial institutions, money market securities, short-term
municipal securities and common stocks. The Company does not believe it is
exposed to any significant credit risk on its cash and cash equivalents and
investments. At May 31, 2001 and 2000, cash and cash equivalents and investments
included $26 million and $65 million, respectively, of cash deposits and
certificates of deposit with financial institutions in Puerto Rico. Also, at May
31, 2001 and 2000, investments included $11 million and $18 million,
respectively, of municipal bonds issued by state and local subdivisions in
Puerto Rico.

Stock-Based Compensation - The Company has not adopted the measurement
requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," for
stock option grants to Team Members and, accordingly, has made all of the
required pro forma disclosures for the years ended May 31, 2001, 2000 and 1999.

Comprehensive Income - Other comprehensive income refers to revenues, expenses,
gains and losses that under generally accepted accounting principles are
included in comprehensive income but are excluded from net income as these
amounts are recorded directly as an adjustment to shareholders' equity. The
Company's other comprehensive income is comprised of unrealized gains (losses)
on available-for-sale securities, net of tax, and foreign currency translation
adjustments.

The components of accumulated other comprehensive income (loss) at May 31, 2001
and 2000 are as follows:
(in thousands)
2001 2000
Net unrealized holding gain (loss) on investments..... $ (5,180) $ (9,221)
Cumulative translation adjustment..................... (50,848) (40,004)
-------- --------
$(56,028) $(49,225)
-------- --------

Special Charges - The special charges of $26.1 million for the year ended May
31, 2001 results from the appellate court's decision in the Tronzo case (see
Note L). Special charges of $11.7 million for the year ended May 31, 2000 are
comprised of $2.7 million of merger costs related to the 3i merger (see Note C)
and $9.0 million for the final determination of the interest element of the
final judgment in the Orthofix litigation (see Note L). The special charges of
$48.5 million for the year ended May 31, 1999 were comprised of a $55 million
final judgment against the Company in the action brought by Orthofix, net of
$6.5 million in proceeds from 3i's recovery in a litigation matter.

Accounting Pronouncements - The Company adopted EITF 00-10 "Accounting for
Shipping and Handling Fees and Costs." This EITF requires certain shipping and
handling fees billed to customers to be recorded as revenue instead of as a
reduction of shipping expense. Accordingly, the Company has reclassified amounts
billed to customers from cost of sales to net sales for all periods presented to
account for this new accounting guideline, with no effect on net income. This
reclassification did not exceed $3 million in any year.

The Company adopted EITF 00-15 "Classification in the Statement of Cash Flows of
the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified
Employee Stock Option." This EITF requires the income tax benefit on stock
options to be classified as a component of operating cash flow Accordingly, the
Company has reclassified, for all years presented, this amount in the statement
of cash flow from a financing activity to an operating activity.

In June of 2001 the Financial Accounting Standards Board (FASB) approved the
issuance of Statement 141, "Business Combinations", and Statement 142, "Goodwill
and Other Intangible Assets". FASB Statement 141, among other things, requires
that all business combinations be accounted for using the purchase method; use
of the pooling-of-interests method is prohibited. The provisions of FASB
Statement 141 will apply to all business combinations initiated after June 30,
2001. FASB Statement 142, among other things, requires that goodwill not be
amortized but should be tested for impairment at least annually. FASB Statement
142 must be applied by Biomet in fiscal year 2003; however, early adoption is
permitted. The Company has not assessed the effect that the adoption of SFAS
Statement 142 will have on its financial position or results of operations.

During fiscal year 2001 the Company adopted the provision of FASB Statement 133
"Accounting for Derivative Instruments and Hedging Activities" without any
material impact on its financial position or results of operations.

33
35
BIOMET, INC. & SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE C: BUSINESS COMBINATIONS.

Biolectron - On September 25, 2000, the Company, through its EBI subsidiary,
acquired Biolectron, Inc. for $90 million in cash. Biolectron's products
principally address the spinal fusion, fracture healing and arthroscopy market
segments. Substantially all of Biolectron's results are included in the U.S.
geographic segment. The Company accounted for this acquisition as a purchase and
the operating results of Biolectron have been consolidated from the date of
acquisition. The acquisition cost was allocated to the fair value of the net
tangible and identifiable intangible assets including $4.4 million to acquired
product technology. Acquired product technology is amortized over 13 years and
goodwill of $76.0 million, arising from this acquisition, is amortized over 20
years.

Implant Innovations International Corporation - On December 16, 1999, the
Company and Implant Innovations International Corporation ("3i") completed a
merger transaction. The Company issued 11.7 million Common Shares for all of
3i's issued and outstanding shares. 3i and its subsidiaries design, develop,
manufacture, market, and distribute dental reconstructive products. 3i's
corporate headquarters and manufacturing facility are located in Palm Beach
Gardens, Florida, and it has sales offices in Canada, Europe and Mexico. The
business combination has been accounted for as a pooling-of-interests whereby
all prior period financial statements of the Company have been restated to
include the combined financial position, results of operations and cash flows of
the Company and 3i. 3i's fiscal year-end was December 31 and, accordingly, the
financial information for the fiscal year ended May 31, 1999 include 3i's
financial information for its calendar year ended December 31, 1998. For the
year ended May 31, 2000, the reporting period of 3i's statements of income and
cash flows has been conformed to the Company's May 31 fiscal year. As a result,
3i's results of operations for the five-month period ended May 31, 1999, have
been excluded from the reported results of operations and, therefore, have been
added to the Company's retained earnings in the year ended May 31, 2000. 3i had
net sales, expense and net income of $31,193,000, $29,181,000, and $2,076,000,
respectively, for the five-month period ended May 31, 1999. For 1999 net sales
and net income of 3i were $70,488,000 and $8,676,000, respectively. For the
period June 1, 1999 through the date of acquisition, December 16, 1999, net
sales and net income were $42,825,000 and $4,511,000, respectively. The Company
recorded a one-time pre-tax charge of $2.7 million for merger-related costs
during the third quarter of fiscal year 2000.

Other Acquisitions - During fiscal years 2001, 2000 and 1999, the Company has
completed several acquisitions of foreign distributors and/or businesses. The
acquisitions were accounted for using the purchase method of accounting with the
operating results of the acquired businesses included in the Company's
consolidated financial statements from the date of acquisition. Goodwill
recognized in connection with these acquisitions aggregated $4.1 million, $19.8
million and $1.3 million for the years ended May 31, 2001, 2000 and 1999,
respectively and is amortized over 15 years. Pro forma financial information
reflecting all acquisitions accounted for as purchases has not been presented as
it is not materially different from the Company's historical results.

Investment in Affiliate - In April 1999, the Company entered into an agreement
with Selective Genetics, Inc. ("Selective Genetics"). Under the terms of the
agreement, the Company paid $5 million cash for Series C preferred stock of
Selective Genetics. In April 2000, the Company made an additional investment of
$640,000 to acquire shares of Series D preferred stock of Selective Genetics.
The Company accounts for this investment on the cost method. Under the
agreement, the Company will fund as incurred certain defined research and
development efforts of Selective Genetics over a ten-year period (see Note L) in
exchange for license rights to market certain products to be manufactured by
Selective Genetics. Amounts funded under the agreement are charged to research
and development expense.

34

36
BIOMET, INC. & SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE D: INVESTMENTS.

At May 31, 2001, the Company's investment securities were classified as follows:

At May 31, 2000, the Company's investment securities were classified as follows:

Proceeds from sales of available-for-sale securities were $32,251,000,
$7,340,000 and $17,618,000 for the years ended May 31, 2001, 2000 and 1999,
respectively. There were no sales of held-to-maturity securities for the years
ended May 31, 2001, 2000 and 1999. The cost of marketable securities sold is
determined by the specific identification method. For the year ended May 31,
2001, gross realized gains and (losses) on sales of available-for-sale
securities were $2,172,000 and $(584,000), respectively. Gross realized gains
and (losses) for the year ended May 31, 2000 were $1,581,000 and $(330,000),
respectively. Gross realized gains and (losses) for the year ended May 31, 1999
were $1,635,000 and $(384,000), respectively. The Company's investment
securities at May 31, 2001 include $49,665,000 of debt securities and $2,962,000
of mortgage-backed obligations all maturing within one year, and $3,100,000 of
certificates of deposit, $117,564,000 of debt securities, $12,752,000 of equity
securities and $42,014,000 of mortgage-backed securities all maturing past one
year.

Investment income (included in other income, net) consists of the following: (in
thousands)

35

37
BIOMET, INC. & SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE E: INVENTORIES.

Inventories at May 31, 2001 and 2000 consist of the following:
(in thousands)
2001 2000
Raw materials ................................. $ 32,024 $ 28,511
Work-in progress .............................. 31,082 28,962
Finished goods ................................ 108,704 101,307
Consigned distributor ......................... 105,791 81,382
-------- --------
Total ....................................... $277,601 $240,162
-------- --------

NOTE F: DEBT.

At May 31, 2001 and 2000, short-term borrowings, including current maturities of
long-term obligations, consist of the following:
(in thousands)
2001 2000
Bank line of credit - BioMer C.V. ............. $61,740 $68,718
Current maturities of long-term obligations ... 994 1,828
------- -------
Total ....................................... $62,734 $70,546
------- -------

BioMer C.V. has a EUR 71 million unsecured line of credit with a major European
bank. This line of credit is used to finance its European operations and
interest on outstanding borrowings is payable monthly at the lender's interbank
rate plus 0.7% (effective rate of 5.79% and 4.25% at May 31, 2001 and 2000,
respectively).

3i leases certain equipment under capital leases and the capital lease
obligations have been classified as a current liability at May 31, 2001, since
the Company intends to repay the capital lease obligations during the next
twelve months.

NOTE G: TEAM MEMBER BENEFIT PLANS.

The Company has an Employee Stock Bonus Plan for eligible Team Members of the
Company and certain subsidiaries. The amounts expensed under this plan for the
years ended May 31, 2001, 2000 and 1999 were $4,401,000, $2,845,000, and
$2,652,000, respectively.

The Company also has a defined contribution profit sharing plan which covers
substantially all of the Team Members within the continental U.S. and allows
participants to make contributions by salary reduction pursuant to Section
401(k) of the Internal Revenue Code. The Company may match up to 75% of the Team
Member's contribution up to a maximum of 5% of the Team Member's compensation.
Prior to the merger, 3i maintained a defined contribution profit sharing plan
which covered substantially all of its full-time employees. The 3i plan was
frozen as of the merger date and the 3i Team Members became eligible to
participate in the Company's 401(k) plan. The amounts expensed under these
profit sharing plans for the years ended May 31, 2001, 2000 and 1999 were
$4,008,000, $3,252,000, and $2,051,000, respectively.

NOTE H: STOCK OPTION PLANS.

The Company has various stock option plans: the 1984 Employee Stock Option Plan,
as amended, the 1992 Employee and Non-Employee Director Stock Option Plan, the
1992 Distributor Stock Option Plan and the 1998 Qualified and Non-Qualified
Stock Option Plan. At May 31, 2001, the only plan with shares available for
grant is the 1998 Qualified and Non-Qualified Stock Option Plan.

Under the stock option plans, options may be granted to key employees, directors
and distributors, at the discretion of the Stock Option Committee, and generally
become exercisable in annual or biannual increments beginning one or two years
after the date of grant in the case of employee options and in annual increments
beginning at the date of grant for distributor options. In the case of options
granted to an employee of the Company who is a 10% or more shareholder, the
option price is an amount per share not less than 110% of the fair market value
per share on the date of granting the option, as determined by the Stock Option
Committee. No options have been granted to employees who are 10% or more
shareholders. The option price for options granted to all other employees and
directors is an amount per share not less than the fair market value per share
on the date of granting the option. The term of each option granted expires
within the period prescribed by the Stock Option Committee, but shall not be
more than five years from the date the option is granted if the optionee is a
10% or more shareholder, and not more than ten years for all other optionees.
All rights under the distributor options terminate upon the termination of an
optionee's distributorship with the Company unless such termination results from
retirement, disability or death. For the years ended May 31, 2001, 2000 and
1999, the amount of compensation expense applicable to options granted to
distributors was not material to the consolidated financial statements.

36

38
BIOMET, INC. & SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE H: STOCK OPTION PLANS, CONCLUDED.

The following table, which includes options under 3i's stock option plans,
summarizes stock option activity:

Number Weighted-Average
of Shares Exercise Price
---------- --------------
Outstanding, June 1, 1998 ............ 8,246,486 $ 6.51
Granted .......................... 2,983,605 13.66
Exercised ........................ (1,511,526) 5.57
Terminated ....................... (711,327) 5.73
----------

Outstanding, May 31, 1999 ............ 9,007,238 8.71
Granted .......................... 3,214,876 12.05
Exercised ........................ (2,449,720) 5.41
Terminated ....................... (364,067) 8.67
----------

Outstanding, May 31, 2000 ............ 9,408,327 10.82
Granted .......................... 2,366,990 20.33
Exercised ........................ (2,694,668) 10.99
Terminated ....................... (370,232) 11.31
----------

Outstanding, May 31, 2001 ............ 8,710,417 $ 13.81
----------

Options outstanding at May 31, 2001, are exercisable at prices ranging from
$4.00 to $29.95 and have a weighted-average remaining contractual life of 4.9
years. The following table summarizes information about stock options
outstanding at May 31, 2001.

At May 31, 2000 and 1999, there were exercisable options outstanding to purchase
2,399,000 and 2,467,500 shares, respectively, at weighted-average exercise
prices of $9.16 and $5.91, respectively.

As permitted by SFAS No. 123, the Company accounts for its employee stock
options using the intrinsic value method. Accordingly, no compensation expense
is recognized for the employee stock-based compensation plans, except for $6.5
million in fiscal year 1999 which related to certain Team Members who were
allowed to surrender shares obtained through the exercise of an option to
satisfy the exercise value. If compensation expense for the Company's employee
stock options issued in fiscal years 2001, 2000 and 1999 had been determined
based on the fair value method of accounting, pro forma net income and diluted
earnings per share would have been as follows:

Under SFAS No. 123, the fair value of each option is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions used for grants in 2001, 2000 and 1999: (1) expected life of
option of 3.6 years; (2) dividend yield of .42%, .40% and .36%; (3) expected
volatility of 36%, 35% and 33%; and (4) risk-free interest rate of 4.47%, 6.28%
and 5.62%, respectively.

37

39
BIOMET, INC. & SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE I: SHAREHOLDERS' EQUITY & EARNINGS PER SHARE.

On December 16, 1999, the Company issued 11.7 million common shares in
connection with the business combination with 3i (see Note C).

On July 9, 2001, the Company announced a $.09 per share cash dividend, payable
July 27, 2001, to shareholders of record on July 20, 2001, and a three-for-two
stock split payable August 6, 2001 to shareholders of record on July 30, 2001.
On July 6, 2000, the Company announced a three-for-two stock split payable
August 8, 2000 to shareholders of record on July 18, 2000. All shares and all
per share data have been adjusted to give retroactive effect to all stock
splits.

In December 1999, the Board of Directors of the Company adopted a new
Shareholder Rights Plan (the "Plan") to replace a 1989 rights plan that expired
on December 2, 1999. Under the Plan, rights have attached to the outstanding
common shares at the rate of one right for each share held by shareholders of
record at the close of business on December 28, 1999. The rights will become
exercisable only if a person or group of affiliated persons (an "Acquiring
Person") acquires 15% or more of the Company's common shares or announces a
tender offer or exchange offer that would result in the acquisition of 30% or
more of the outstanding common shares. At that time, the rights may be redeemed
at the election of the Board of Directors of the Company. If not redeemed, then
prior to the acquisition by the Acquiring Person of 50% or more of the
outstanding common shares of the Company, the Company may exchange the rights
(other than rights owned by the Acquiring Person, which would have become void)
for common shares (or other securities) of the Company on a one-for-one basis.
If not exchanged, the rights may be exercised and the holders may acquire
preferred share units or common shares of the Company having a value of two
times the exercise price of $175.00. Each preferred share unit carries the same
voting rights as one common share. If the Acquiring Person engages in a merger
or other business combination with the Company, the rights would entitle the
holders to acquire shares of the Acquiring Person having a market value equal to
twice the exercise price of the rights. The Plan will expire in December 2009.
The Plan is intended to protect the interests of the Company's shareholders
against certain coercive tactics sometimes employed in takeover attempts.

Earnings per share for the years ended May 31, 2001, 2000 and 1999 are computed
as follows:
(in thousands, except per share amounts)

38

40

BIOMET, INC. & SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE J: INCOME TAXES.

The components of income before income taxes are as follows:
(in thousands)

The provision for income taxes is summarized as follows:
(in thousands)

Current: 2001 2000 1999
Federal......................................................................... $ 100,483 $ 88,996 $ 55,174
State, including Puerto Rico.................................................... 13,736 13,622 12,168
Foreign......................................................................... 7,322 6,157 3,298
-------------------------------------
121,541 108,775 70,640
Deferred............................................................................ (15,635) (9,037) (3,323)
-------------------------------------
Total........................................................................... $ 105,906 $ 99,738 $ 67,317
-------------------------------------
Effective tax rate.................................................................. 34.1% 35.5% 33.7%
-------------------------------------

A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:

The components of the net deferred tax asset and liability at May 31, 2001
and 2000 are as follows:
(in thousands)

Current deferred tax asset: 2001 2000
Accounts and notes receivable................................................... $ 13,227 $ 8,063
Inventories..................................................................... 17,139 14,499
Accrued expenses................................................................ 18,616 3,249
-----------------------
Current deferred tax asset.................................................... $ 48,982 $ 25,811
-----------------------
Long-term deferred tax asset (liability):
Depreciation.................................................................... $ (4,158) $ (4,166)
Financial accounting basis of net assets of acquired companies different
than tax basis................................................................ (4,958) (4,521)
Other......................................................................... 3,333 3,301
-----------------------
Long-term deferred tax liability............................................ $ (5,783) $ (5,386)
-----------------------

39

41

BIOMET, INC. & SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE K: SEGMENT DATA.

The Company operates in one business segment, musculoskeletal products, which
includes the designing, manufacturing and marketing of reconstructive products,
fixation devices, spinal products and other products. Other products consist
primarily of Arthrotek's arthroscopy products, EBI's softgoods and bracing
products, general instruments and operating room supplies. The Company manages
its business segments primarily on a geographic basis. These geographic segments
are comprised of the United States, Europe and Other. Other geographic segments
include Canada, South America, Mexico, Japan and the Pacific Rim. The Company
evaluates performance based on operating income of each geographic segment.
Identifiable assets are those assets used exclusively in the operations of each
geographic segment. Revenues attributable to each geographic segment are based
on the location in which the sale originated.

Net sales of musculoskeletal products by product category and reportable
geographic segment results are as follows:
(in thousands)

2001 2000 1999
Reconstructive products............. $ 614,308 $ 580,239 $ 521,365
Fixation devices.................... 202,152 180,336 162,825
Spinal products..................... 91,103 54,119 45,125
Other products...................... 123,100 108,857 101,520
------------------------------------
$1,030,663 $ 923,551 $ 830,835
------------------------------------

Net sales to customers:
United States................... $ 759,465 $ 662,146 $ 597,336
Europe.......................... 239,136 236,047 215,913
Other........................... 32,062 25,358 17,586
------------------------------------
$1,030,663 $ 923,551 $ 830,835
------------------------------------

Operating income:
United States................... $ 251,927 $ 224,385 $ 159,716
Europe.......................... 34,772 34,841 22,910
Other........................... 3,988 4,448 3,276
------------------------------------
$ 290,687 $ 263,674 $ 185,902
------------------------------------

Long-lived assets:
United States................... $ 204,231 $ 129,978 $ 121,363
Europe.......................... 109,758 121,350 113,719
Other........................... 17,640 5,635 4,723
------------------------------------
$ 331,629 $ 256,963 $ 239,805
------------------------------------

United States export sales, primarily to European countries, aggregated
$37,093,000, $49,884,000 and $45,893,000 for the years ended May 31, 2001, 2000
and 1999, respectively. These sales are included in United States sales to
customers above. The decrease in U.S. export sales for the year ended May 31,
2001 compared to the year end May 31, 2000 is attributable to the acquisition of
foreign distributors and the changeover to direct representation in various
foreign countries (principally Korea and Japan).

40

42
BIOMET, INC. & SUBSIDIARIES NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)

NOTE L: COMMITMENTS & CONTINGENCIES.

BioMer C.V. Put Option - Pursuant to the terms of the Joint Venture Agreement
with Merck KGaA, the Company granted Merck KGaA a put option whereby Merck KGaA
has the right to elect to require the Company to purchase all, but not less than
all, of Merck KGaA's interest in BioMer C.V. Merck KGaA may exercise the put
option by giving notice to the Company at any time during (a) the period
beginning on May 1, 2001 and ending on May 10, 2008, or (b) a period of 180 days
following receipt by Merck KGaA of notice from the Company that "a change of
control" of the Company (as defined in the Joint Venture Agreement) has occurred
prior to May 1, 2023. The put exercise price, which is payable in cash, is the
greater of (i) a formula value based on earnings of BioMer C.V. and multiples,
as defined in the Joint Venture Agreement, or (ii) the net book value of all the
assets of BioMer C.V. less all liabilities of BioMer C.V. multiplied by Merck
KGaA's ownership percentage.

Medical Insurance Plan - The Company maintains a self-insurance program for
covered medical expenses for all Team Members within the continental U.S. The
Company is liable for claims up to $125,000 per insured annually. Self-insurance
costs are accrued based upon the aggregate of the liability for reported claims
and a management-determined estimated liability for claims incurred but not
reported.

Liability Insurance - Since 1989, the Company has self-insured against product
liability claims, and at May 31, 2001 the Company's self-insurance limits were
$3,000,000 per occurrence and $5,000,000 aggregate per year. Liabilities in
excess of these amounts are the responsibility of the Company's insurance
carrier. Self-insurance costs are accrued based on reserves set in consultation
with the insurance carrier for reported claims and a management-determined
estimated liability for claims incurred but not reported. Based on historical
experience, management does not anticipate that incurred but unreported claims
would have a material impact on the Company's consolidated financial position.

Litigation - On January 18, 2001, the United States Court of Appeals for the
Federal Circuit (the "Federal Circuit") reinstated a $20 million punitive
damages award against the Company given to Raymond G. Tronzo by the United
States District Court for the Southern District of Florida ("the District
Court") while affirming the compensatory damage award of $520. In its decision
in this matter, the District Court had reduced the punitive damage award to
$52,000. The Federal Circuit's decision was based principally on procedural
grounds, and concluded a finding that a relationship of 38,000 to 1 between the
punitive award and the compensatory award was legally permissible. On March 28,
2001, the Federal Circuit denied the Company's combined petition for panel
rehearing and petition for rehearing en banc. The Company believes this result
conflicts with controlling law, including decisions of the United States Supreme
Court. Accordingly, the Company is seeking review of this case by the United
States Supreme Court. This decision does not affect the ongoing sales of any of
Biomet's product lines. The Company has recorded a one-time special charge
during the third quarter of fiscal 2001 of $26.1 million in connection with
these damage awards which includes interest and related expenses.

On June 30, 1999, the United States Court of Appeals for the Third Circuit (the
"Third Circuit") significantly reduced the judgment previously entered against
the Company in an action brought by Orthofix SRL ("Orthofix") against the
Company and certain of its wholly-owned subsidiaries. The litigation related to
events surrounding the expiration of a distribution agreement under which the
Company distributed Orthofix's external fixation devices in the United States.
The final judgment of $55 million, including estimated interest of $5.1 million,
was accrued at May 31, 1999 and that amount plus $9.0 million related to the
final determination of interest was paid during the year ended May 31, 2000.

There are various other claims, lawsuits, disputes with third parties,
investigations and pending actions involving various allegations against the
Company incident to the operation of its business, principally product liability
and intellectual property cases. Each of these matters is subject to various
uncertainties, and it is possible that some of these matters may be resolved
unfavorably to the Company. The Company establishes accruals for losses that are
deemed to be probable and subject to reasonable estimate. Based on the advice of
counsel to the Company in these matters, management believes that the ultimate
outcome of these matters and any liabilities in excess of amounts provided will
not have a material adverse impact on the Company's consolidated financial
position or on its future business operations.

Other Commitments - As discussed in Note C, the Company has a commitment to fund
certain research and development efforts of Selective Genetics, not to exceed
$2.5 million annually and $22.5 million over a ten-year period ending April
2009.

41
43
BIOMET, INC. & SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

for the years ended May 31, 2001, 2000 and 1999
(in thousands)

Col. A Col. B Col. C Col. D Col. E

Additions
---------
(1) (2)
Charged to
Description Balance at Charged to other Balance at
beginning of costs and accounts - Deductions - end of
period expenses describe describe period
------------ ---------- ---------- ------------- ----------

Allowance for
doubtful receivables:

For the year ended
May 31, 2001 $ 8,241 $ 11,166 $ 1,606 (B) $ 13,360(A) $ 13,420
319(C)
6,086 (E)
======== ======== ======== ======== ========

For the year ended
May 31, 2000 $ 7,262 $ 8,415 $ 994(B) $ 7,750(A) $ 8,241
177(C)
503(D)
======== ======== ======== ======== ========

For the year ended
May 31, 1999 $ 6,518 $ 10,239 $ 130(B) $ 9,567(A) $ 7,262
58(C)
======== ======== ======== ======== ========

Notes:

(A) Uncollectible accounts written off

(B) Collection of previously written off accounts

(C) Effect of foreign currency translation adjustment

(D) Change in 3i's allowance for the five-month period to conform 3i's
calendar year-end with the Company's May 31 fiscal year-end

(E) Acquisitions

42

44
QUARTERLY RESULTS (UNAUDITED)

(in thousands, except earnings per share)

1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year

2001
Net sales .................... $ 231,134 $ 244,361 $ 267,162 $ 288,006 $1,030,663
Gross profit ................. 162,966 173,334 192,121 206,179 734,600
Net income ................... 48,427 51,798 38,205 59,116 197,546
Earnings per share:
Basic .................... .18 .19 .15 .22 .74
Diluted .................. .18 .19 .14 .22 .73

2000
Net sales .................... $ 213,430 $ 225,448 $ 233,659 $ 251,014 $ 923,551
Gross profit ................. 148,243 156,349 162,517 175,091 642,200
Net income ................... 41,172 38,786 43,192 50,621 173,771
Earnings per share:
Basic .................... .16 .15 .16 .19 .66
Diluted .................. .15 .15 .16 .19 .65

1999
Net sales .................... $ 193,609 $ 202,217 $ 210,429 $ 224,580 $ 830,835
Gross profit ................. 131,885 137,693 143,552 155,343 568,473
Net income ................... 34,391 37,150 38,342 15,143 125,026
Earnings per share:
Basic .................... .13 .14 .15 .06 .48
Diluted .................. .13 .14 .15 .06 .47

- - All per share data have been adjusted to give retroactive effect to the
three-for-two stock splits declared on July 9, 2001 and July 6, 2000.

- - The operating results for the third quarter of fiscal 2001 were adversely
impacted by a $26.1 million special charge related to the appellate court's
decision in the Tronzo case.

- - The operating results for the second quarter of fiscal 2000 were adversely
impacted by a $9 million special charge related to the final determination of
the interest element of the final Orthofix judgment.

- - The operating results for the third quarter of fiscal 2000 were adversely
impacted by a $2.7 million special charge relating to the closing of the
merger with 3i.

- - The operating results for the fourth quarter of fiscal 1999 were adversely
impacted by a $55 million special charge related to the appellate court's
decision against the Company in the Orthofix litigation and positively
impacted by a $6.5 million special credit which represented 3i's share of
certain litigation proceeds.

43

45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information included under the caption "Election of Directors" in the
Company's definitive Proxy Statement filed pursuant to Regulation 14A in
connection with its 2001 Annual Meeting of Shareholders (the "Proxy Statement")
is incorporated herein by reference in response to this item.

Information regarding executive officers of the Company is included in Part I of
this Report under the caption "Executive Officers of the Registrant."

ITEM 11. EXECUTIVE COMPENSATION.

The information included under the captions "Election of Directors -
Compensation of Directors" and "Executive Compensation" in the Proxy Statement
is incorporated herein by reference in response to this item.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information contained under the captions "Stock Ownership" in the Proxy
Statement is incorporated herein by reference in response to this item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information contained under the caption "Certain Transactions" in the Proxy
Statement is incorporated herein by reference in response to this item.

44
46
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) THE FOLLOWING FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE ARE
INCLUDED IN ITEM 8 HEREIN.

(1) FINANCIAL STATEMENTS:
Report of Independent Accountants
Consolidated Balance Sheets as of May 31, 2001 and 2000
Consolidated Statements of Income for the years ended May 31, 2001,
2000 and 1999
Consolidated Statements of Shareholders' Equity for the years ended
May 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended May 31,
2001, 2000 and 1999
Notes to Consolidated Financial Statements

(2) FINANCIAL STATEMENT SCHEDULE:
Schedule II - Valuation and Qualifying Accounts

(3) EXHIBITS:
Refer to the Index to Exhibits on p. 48.

(b) REPORTS ON FORM 8-K.

None.

45

47
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on August 16, 2001.

BIOMET, INC.

By: /s/ DANE A. MILLER
--------------------------------------------------------
Dane A. Miller
President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on August 16, 2001.

By: /s/ NILES L. NOBLITT
--------------------------------------------------------
Niles L. Noblitt, Director

By: /s/ DANE A. MILLER
--------------------------------------------------------
Dane A. Miller, Director
(Principal Executive Officer)

By: /s/ JERRY L. FERGUSON
--------------------------------------------------------
Jerry L. Ferguson, Director

By: /s/ M. RAY HARROFF
--------------------------------------------------------
M. Ray Harroff, Director

By: /s/ KENNETH V. MILLER
--------------------------------------------------------
Kenneth V. Miller, Director

By: /s/ JERRY L. MILLER
--------------------------------------------------------
Jerry L. Miller, Director

By: /s/ L. GENE TANNER
--------------------------------------------------------
L. Gene Tanner, Director

46

48

By: /s/ THOMAS F. KEARNS, JR
--------------------------------------------------------
Thomas F. Kearns, Jr., Director

By: /s/ CHARLES E. NIEMIER
--------------------------------------------------------
Charles E. Niemier, Director

By: /s/ DANIEL P. HANN
--------------------------------------------------------
Daniel P. Hann, Director

By: /s/ MARILYN TUCKER QUAYLE
--------------------------------------------------------
Marilyn Tucker Quayle, Director

By: /s/ C. SCOTT HARRISON
--------------------------------------------------------
C. Scott Harrison, Director

By: /s/ PROF. DR. BERNHARD SCHEUBLE
--------------------------------------------------------
Prof. Dr. Bernhard Scheuble, Director

By: /s/ GREGORY D. HARTMAN
--------------------------------------------------------
Gregory D. Hartman, Senior Vice President - Finance
(Principal Financial Officer)

By: /s/ JAMES W. HALLER
--------------------------------------------------------
James W. Haller, Controller
(Principal Accounting Officer)

47

49

BIOMET, INC.

FORM 10-K

MAY 31, 2001

INDEX TO EXHIBITS

NUMBER ASSIGNED
IN REGULATION S-K, ITEM 601 TITLE OF EXHIBITS

(2) No exhibit

(3) 3.1 Amended Articles of Incorporation filed July 23,1982.
(Incorporated by reference to Exhibit 3(a) to Biomet, Inc. Form
S-18 Registration Statement, File No. 2-78589C).

3.2 Articles of Amendment to Amended Articles of Incorporation filed
July 11, 1983. (Incorporated by reference to Exhibit 3.2 to
Biomet, Inc. Form 10-K Report for year ended May 31, 1983, File
No. 0-12515).

3.3 Articles of Amendment to Amended Articles of Incorporation filed
August 22, 1987. (Incorporated by reference to Exhibit 3.3 to
Biomet, Inc. Form 10-K Report for year ended May 31, 1987, File
No. 0-12515).

3.4 Articles of Amendment to the Amended Articles of Incorporation
filed September 18, 1989. (Incorporated by reference to Exhibit
3.4 to Biomet, Inc. Form 10-K Report for year ended May 31,
1990, File No. 0-12515).

3.5 Amended and Restated Bylaws as Amended December 13, 1997.
(Incorporated by reference to Exhibit 3.6 to Biomet, Inc. Form
10-K Report for year ended May 31, 1998, File No. 0-12515)

(4) 4.1 Specimen certificate for Common Shares. (Incorporated by
reference to Exhibit 4.1 to Biomet, Inc. Form 10-K Report for
year ended May 31, 1985, File No. 0-12515).

4.2 Rights Agreement between Biomet, Inc. and Lake City Bank as
Rights Agent, dated as of December 16, 1999. (Incorporated by
reference to Exhibit 4 to Biomet, Inc. Form 8-K Report dated
December 16, 1999, File No. 0-12515).

(9) No exhibit.

(10) 10.1 Employee Stock Option Plan, as last amended December 14, 1991.
(Incorporated by reference to Exhibit 10.1 to Biomet, Inc. Form
10-K Report for year ended May 31, 1992, File No. 0-12515).

10.2 Form of Employee Stock Option Agreement. (Incorporated by
reference to Exhibit 10.2 to Biomet, Inc. Form 10-K Report for
year ended May 31, 1991, File No. 0-12515).

10.3 Employee and Non-Employee Director Stock Option Plan, dated
September 18, 1992. (Incorporated by reference to Exhibit 19.1
to Biomet, Inc. Form 10-K Report for year ended May 31, 1993,
File No. 0-12515).

10.4 Form of Stock Option Agreement under the Employee and
Non-Employee Stock Option Plan dated September 18, 1992.
(Incorporated by reference to Exhibit 4.03 to Biomet, Inc. Form
S-8 Registration Statement, File No. 33-65700).

10.5 401(k) Profit Sharing Plan filed January 19,1996. (Incorporated
by reference to Form S-8 Registration Statement, File No.
333-00331).

10.6 Biomet, Inc. 1998 Qualified and Non-Qualified Stock Option Plan
adopted August 3, 1998. (Incorporated by reference to Exhibit
10.6 to Biomet, Inc. Form 10-K Report for year ended May 31,
1998, File No. 0-12515.)

(11) No exhibit.

(12) No exhibit.

48
50

(13) No exhibit.

(16) No exhibit.

(18) No exhibit.

(21) 21.1 Subsidiaries of the Registrant.

(22) No exhibit.

(23) 23.1 Consent of PricewaterhouseCoopers LLP

(24) No exhibit.

(99) No exhibit.

49