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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission File Number 0-28240

EXACTECH, INC.

(Exact name of registrant as specified in its charter)

2320 NW 66TH COURT

GAINESVILLE, FL

32653

(Address of principal executive offices)

(352) 377-1140

(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 Stock, $.01 par value

Common Stock Purchase Rights

(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.  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

As of March 4, 2005, the number of shares of the registrant’s Common Stock outstanding was 11,153,752. The aggregate market value of the Common Stock held by non-affiliates of the registrant as of June 30, 2004 was approximately $139,802,000 based on a closing sale price of $21.70 for the Common Stock as reported on the NASDAQ National Market System on such date. For purposes of the foregoing computation, all executive officers, directors and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such executive officers, directors or 5 percent beneficial owners are, in fact, affiliates of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III (Items 10, 11, 12, and 13) is incorporated by reference from the registrant’s definitive proxy statement for its 2005 Annual Meeting of Shareholders (to be filed pursuant to Regulation 14A).

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TABLE OF CONTENTS

and

CROSS REFERENCE SHEET

CAUTIONARY STATEMENT RELATING TO FORWARD LOOKING STATEMENTS

This report contains various “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent the Company’s expectations or beliefs concerning future events, including, but not limited to, statements regarding growth in sales of the Company’s products, profit margins and the sufficiency of the Company’s cash flow for its future liquidity and capital resource needs. When used in this report, the terms “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or its management, are intended to identify forward-looking statements. These forward looking statements are further qualified by important factors that could cause actual results to differ materially from those in the forward looking statements. These factors include, without limitation, the effect of competitive pricing, the Company’s dependence on the ability of its third-party suppliers to produce components on a cost-effective basis to the Company, market acceptance of the Company’s products, the outcome of litigation, and the effects of governmental regulation. Results actually achieved may differ materially from expected results included in these statements as a result of these or other factors, including those factors discussed under “Risk Factors” in Item 7 of this report. Exactech undertakes no obligation to update, and the Company does not have a policy of updating or revising, these forward-looking statements. Except where the context otherwise requires, the terms “the Company,” or “Exactech” refer to the business of Exactech, Inc. and its consolidated subsidiaries.

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PART I

ITEM 1. BUSINESS

Exactech, Inc. (the “Company”, or “Exactech”) develops, manufactures, markets, distributes and sells orthopaedic implant devices, related surgical instrumentation and biologic materials to hospitals and physicians in the United States and internationally. The Company was founded by an orthopaedic surgeon in November 1985, and is incorporated under the laws of the State of Florida. The Company’s revenues are principally derived from sales and distribution of its joint replacement systems, including knee and hip implant systems, and distribution of biologic allograft materials.

The Company manufactures some components of its knee and hip joint replacement systems at its facility in Gainesville, Florida utilizing computer aided manufacturing equipment. Internal manufacturing is complemented by externally manufactured components through the formation of strategic alliances with suppliers and business partners. Other products and services are acquired and distributed through exclusive agreements, such as the Company’s agreements with Regeneration Technologies, Inc. (“RTI”), Link America, Inc. and its parent company, Waldemar Link GmbH & Co. (“Link”), Tecres, S.p.A (“Tecres”) and Biomatlante SARL (“Biomatlante”).

On October 30, 2003, for an investment of $1 million, the Company acquired a 16.7% minority interest in Altiva Corporation (“Altiva”), an early stage company which is building an asset portfolio through the acquisition of existing spinal products and systems as well as acquiring broad distribution rights to other existing spinal market technologies. As part of the agreement under which the Company purchased this minority interest, the Company has committed to make loans available to Altiva in an amount not to exceed $5 million for a period of five years as well as provide Altiva with, or guarantee on behalf of Altiva, a working capital credit line in an amount not to exceed $6 million. As of December 31, 2004, the Company had extended to Altiva the principal sum of $1.0 million under its commitment and has guaranteed an initial $3.0 million line of credit on behalf of Altiva with Merrill Lynch Business Financial Services, Inc. The guaranty is limited to a principal amount not to exceed $6.0 million and a term not to exceed October 30, 2008. The Company also entered into a Stockholders Agreement with Altiva and some stockholders of Altiva under the terms of which the Company was granted an option to purchase all of Altiva’s outstanding securities for a specified purchase price. See “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources”.

Orthopaedic Products Industry

According to a research report published by Gabelli & Company, Inc. in December 2003, the worldwide market for orthopaedic products in 2003 was estimated to be $16 billion, and is expected to grow at a rate of 10% to 13% annually over the next ten years. According to this study, four market segments in which the Company offers its products and services, knee reconstructive devices, hip reconstructive devices, biologic materials and other products (which includes instrumentation and other orthopaedic products), were estimated to be $3.2 billion, $2.9 billion, $0.8 billion and $4.3 billion, respectively, during 2003.

Management shares the belief that the industry will continue to grow due to an aging population in much of the world. The same report by Gabelli & Company highlighted US Census Bureau statistics that reveal the number of people who are over the age of 65 in the United States is projected to increase steadily to 70 million by the year 2030, as compared to 35 million in 2000. Increasing life spans impact the number of individuals with joints subject to failure, thereby increasing demand for joint replacement procedures.

Products

The Company’s joint replacement implant products are used by orthopaedic surgeons to repair or replace joints that have deteriorated as a result of injury or disease. Reconstructive joint surgery involves the modification of the area surrounding the affected joint and the insertion of a set of manufactured implant components to replace or augment the joint. During the surgery, the surgeon removes damaged cartilage and a portion of the bones that comprise the joint, prepares the remaining bone surfaces and surrounding tissue and then installs the implant. When necessary, the surgeon uses biologic allograft materials, like those distributed by Exactech, to repair bone defects and provide an environment to stimulate new bone growth. In many joint replacement procedures, acrylic bone cement is used to affix implant components to the prepared bone surfaces.

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The following table includes the net revenue and percentage of net sales for each of the Company’s product lines for the years ended December 31, 2004, 2003 and 2002:

Sales Revenue by Product Line

(dollars in thousands)

Knee Implants. The Company believes that its Optetrak^® knee system represents a major advance in knee implant design. The Optetrak^® knee system is a modular system designed to improve the movement of the knee cap, which is called patellar tracking, reduce the force between surfaces in a joint, also called articular contact stress, that leads to implant failure, and provide a functional range of motion.

The Optetrak^® system provides for a variety of femoral components which relate to the thighbone, or femur, region, and includes a total primary knee replacement system which is available with either a cruciate ligament sparing femoral component (in both cemented and porous coated designs and used in situations where the surgeon chooses to maintain certain ligaments) or a posterior stabilized femoral component (in both cemented and porous coated designs and used in situations where the surgeon chooses to eliminate certain ligaments). The Optetrak^® system also includes a constrained total knee system for revision surgery and primary surgery with severe deformities. The constrained version includes two types of femoral components: the constrained condylar modular femoral component and a constrained non-modular femoral component. The modular component includes stem and block augmentation to aid in repairing damaged or weakened bone. The constrained condylar femoral component was designed to provide greater constraint between the tibial and femoral components of the system to compensate for ligaments weakened or lost due to disease or as a result of failure of previous treatments. During 2004, the Company began full-scale marketing of an asymmetrical femoral component product line extension to the Optetrak^® system. This line extension includes a cruciate sparing, posterior stabilized and a new high flexion line. These asymmetrical line extensions will provide for differentiated right and left femoral components that the Company hopes will be successful in meeting surgeon preferences. In 2005, the company plans to further expand the Optetrak^® line with introduction of a unicondylar knee designed for cases where only one compartment of the knee is replaced, low profile instrumentation for reduced incision surgery and a rotating bearing knee system for international markets.

In March 2002, the Company commenced distributing Link’s line of implant products which includes the Link^®Endo-Model^TM Rotational Knee, designed to provide stability with controlled rotation for severe joint deterioration with insufficient ligament support and the Link^® Endo-Model^TM Sled Uni-Knee, designed for cases where only a portion of a joint warrants replacement.

Hip Implants. The Company’s line of hip implant and instrument products includes the AcuMatch^® Integrated Hip System which is designed to address the majority of requirements for total hip replacement, including primary and revision needs. The system includes the C-Series cemented femoral stem, the A-Series acetabular components for the hip socket, the P-Series press-fit femoral stem, the M-Series modular femoral stem, the L-Series femoral stem system, bipolar and unipolar partial hip replacement components, a variety of femoral heads and a cemented acetabular component. The AcuMatch^® cemented revision components include revision long stems and calcar replacement stems that were originally part of the AuRA^®Revision Hip System.

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The Company’s AcuMatch^® C-Series Cemented Femoral Stem is a forged cobalt chromium stem designed to improve stability and reduce dislocation complications by improving the head/neck ratio and restoring anatomic offset for patients requiring cemented total hip arthroplasty, or joint reconstructive surgery. The AcuMatch^® A-Series was designed to provide a comprehensive acetabular offering with sufficient polyethylene thickness to help lower stresses in the polyethylene liner. The AcuMatch^® M-Series modular femoral stem offers components that are 100% interchangeable, allowing the surgeon to customize the prosthesis at the time of surgery and according to the patient’s bony structures. This versatility and the manner in which the components mate can have a positive effect on patient outcomes. The AcuMatch^® P-Series Press Fit Femoral Stem System has multiple coating options for fixation to bone and features a scientifically sound solution to stiffness mismatch and rotational instability in the bone, potential underlying causes of post-operative residual thigh pain. The AcuMatch^® L-Series hip system features both cemented and press fit femoral components, as well as unipolar and bipolar endoprostheses, often used for the treatment of hip fractures. A low profile instrumentation system was launched during 2004 to support cases in which the surgeon may choose a smaller incision length.

The Link hip implant product lines distributed by the Company include the MP^TM Modular Femoral Revision stem, offering surgeons a product specifically designed and required for situations where there is deficient proximal bone (the top quarter of the femur). This unique design offers enhanced stability and fatigue strength over and above competitive stems indicated for similar clinical situations. Also distributed by the Company is the Link^® Saddle Prosthesis, a salvage type prosthesis designed to support the pelvic region when the acetabulum cannot be reconstructed, the Link SPII^® hip stem, and the Link^® Partial Pelvis.

Beginning in 2005, the Company plans to introduce initial components of the new Novation^™ hip system, which the Company feels will make its hip offerings more competitive. The Novation^™ hip system will ultimately feature press-fit and cemented primary femoral stems, press-fit revision stems, and a comprehensive acetabular system which will be designed to incorporate the use of enhanced polyethylene as well as future alternative bearing couples such as ceramic on ceramic and diamond on diamond. Both the ceramic and diamond bearing alternatives are expected to require a Food and Drug Administration (“FDA”)approval process that will extend beyond 2005.

Biologics. The Company is the exclusive, worldwide distributor of bone paste materials processed by RTI for use in non-spinal musculoskeletal orthopaedic procedures. These unique allograft materials are distributed as Opteform^® and Optefil^® and are clinically proven for effectively repairing bone and filling bone defects. During 2002, the Company obtained the distribution rights to Optefil^® as part of the settlement of its arbitration with RTI. During 2003, the Company continued to expand the breadth of its allograft materials line in cooperation with RTI by releasing the Optefil^® RT line and intends to release an Opteform^® RT line during early 2005. These Room Temperature, or RT, lines are allograft products that are distributed in a non-frozen form. As an addendum to the RTI distribution agreement, the Company also initiated distribution of Regenaform^® and Regenafil^® product lines during July 2003 for usage in oral and dental applications.

In March 2004, the Company received clearance from the FDA to market a new demineralized bone matrix, or DBM, based human allograft material. The Company intends a limited release of this material to market in early 2005. OpteCure^TM includes a synthetic bioabsorbable polymer carrier technology, previously licensed from Genzyme Corp.

In 2005, the Company intends to commence full-scale marketing of OpteMx^TM a Tri-Calcium Phosphate/Hydoxyapatite based synthetic bone graft extender licensed under an exclusive U.S. distribution agreement with Biomatlante.

Other Products. The AcuDriver^® Automated Osteotome System is an air-driven impact hand piece that assists surgeons during joint implant revision procedures by aiding in effective removal of failed prostheses and bone cement. The AcuDriver^® accomplishes this by providing the surgeon with precise positioning without the inconvenience and inconsistency of striking the osteotome with a mallet.

The Link^® S.T.A.R.^TM ankle is currently distributed under terms of an FDA approved Investigational Device Exemption (“IDE”); however, there is no assurance that Exactech will continue to

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distribute the S.T.A.R.^TM ankle product in the future. The Company also distributes Link surgical instrumentation that can be used in various orthopaedic procedures including shoulder, knee, spine, foot, ankle and hip arthroplasty.

The Cemex^® bone cement system features a unique self-contained delivery system that has been clinically proven in Europe for more than a decade. By integrating bone cement powder and liquid into a sealed mixing system, Cemex^® is designed to offer surgeons and operating room personnel simplicity, safety and reliability in bone cement. The Company distributes Cemex^® in the United States under an exclusive distribution agreement with the Italian manufacturer, Tecres S.p.A. In June 2004, Exactech gained FDA clearance and began marketing Cemex Genta, a bone cement containing antibiotics. In 2004 the Company announced that Tecres had received clearance from the FDA to market pre-formed cement hip and knee spacer products containing an antibiotic that is included in the Company’s distribution agreement. The InterSpace^TM hip and knee spacers are used in two stage revision procedures involving an infection with a previously implanted prosthesis and provides orthopaedic surgeons with a new, convenient way to treat this difficult problem. The Company began marketing the spacers in 2004.

In 2002, the Company acquired rights to a patented total shoulder system from Teknimed, S.A. (“Teknimed”), a French manufacturer of orthopaedic implants and processor of biological products. Teknimed continued to manufacture and distribute the shoulder system in Europe for the Company while Exactech established appropriate manufacturing support and upgraded the design. In November 2004, the company received FDA clearance for marketing the Equinoxe^TM shoulder system in the United States in limited release. Full market release is scheduled for the first quarter of 2005.

Marketing and Sales

The Company markets its orthopaedic implant products in the United States through fifty independent sales agencies and one domestic distributor. These agencies, along with their independently contracted personnel, serve as the Company’s sales representatives. Internationally, the Company markets its products through twenty-two distributors that currently distribute products in twenty-five countries. The customers for the Company’s products are hospitals, surgeons and other physicians and clinics.

The Company generally has contractual arrangements with its independent sales agencies whereby the agency is granted the exclusive right to sell the Company’s products in the specified territory. In turn, the agency is required to meet sales quotas to maintain its relationship with the Company. The Company typically pays its sales agencies a commission based on net sales. The Company is highly dependent on the expertise and customer relationships of its sales agencies. The Company’s sales organization is managed by six Regional Directors of Sales assigned to the East, Central, Midwest, Southeast, Southwest and West regions. The Company has a contractual arrangement with its domestic distributor that is similar to its arrangements with its sales agencies, except the Company does not pay the distributor commissions and the distributor purchases inventory from the Company for use in fulfilling customer orders. The Company currently offers its products in all fifty states, and the District of Columbia.

The Company provides inventories of its products to its United States sales agencies until sold or returned. These inventories are necessary for sales agents to market the Company’s products and fill customer orders. The size of the component to be used for a specific patient is typically not known with certainty until the time of surgery. Due to this uncertainty, a minimum of one of each size of each component in the system to be used must be available to each sales agency at the time of surgery. Accordingly, the Company is required to maintain substantial levels of inventory. The maintenance of relatively high levels of inventory requires the Company to incur significant expenditures of its resources. The failure by the Company to maintain required levels of inventory could have a material adverse effect on the Company’s expansion. As a result of the need to maintain substantial levels of inventory, the Company is subject to the risk of inventory obsolescence. In the event that a substantial portion of the Company’s inventory becomes obsolete, it would have a material adverse effect on the Company. The Company reviews its inventory for obsolescence on a regular basis and adjusts its inventory for impairment.

During 2004, 2003 and 2002, approximately 3%, 3% and 4%, respectively, of the Company’s sales were derived from a major hospital customer. During 2004, 2003, and 2002, one international distributor accounted for approximately 7%, 8% and 8%, respectively, of the Company’s sales.

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The Company generally has contractual arrangements with its international distributors pursuant to which the distributor is granted the exclusive right to market the Company’s products in the specified territory and the distributor is required to meet sales quotas to maintain its relationship with the Company. International distributors typically purchase product inventory and instruments from the Company for their use in marketing and filling customer orders.

For the years ended December 31, 2004, 2003 and 2002, international sales accounted for $15,659,000, $12,895,000, and $9,441,000, respectively, representing approximately 19%, 18% and 16%, respectively, of the Company’s sales. Of those international sales, sales to the Company’s Spanish distributor accounted for $5,973,000, $5,628,000, and $4,838,000 in 2004, 2003 and 2002, respectively. The Company intends to continue to expand its sales in international markets in which there is increasing demand for orthopaedic implant products.

Manufacturing and Supply

Early in its history, the Company utilized third-party vendors for the manufacture of all of its component parts, while internally performing product design, quality assurance and packaging. At present, the Company manufactures approximately 32% of its components in its manufacturing facility and headquarters in Gainesville, Florida. The Company has continued to increase the number of internally manufactured components. With the increase of internal manufacturing, the Company has experienced a greater degree of control of production costs, and it expects this trend to continue. The Company continually assesses the manufacturing capabilities and cost-effectiveness of its existing and potential vendors in its attempts to secure its supply chain and decrease dependency on key suppliers. For the years ended December 31, 2004, 2003 and 2002, the Company purchased approximately 49%, 66% and 69%, respectively, of its externally sourced component requirements from its top three suppliers. The Company does not maintain supply contracts with most of its manufacturers, and purchases components pursuant to purchase orders placed from time to time in the ordinary course of business. The Company has alternative sources for components. While the Company does not anticipate that it will encounter problems in obtaining adequate supplies of components, it cannot provide assurance that it will continue to be able to obtain components under acceptable terms and in a timely manner. Certain tooling and equipment unique to the Company’s products are supplied by the Company to its suppliers. Order backlog is not a material aspect of the Company’s business.

The Company’s internal manufacturing, assembly, packaging and quality control operations are conducted at its principal offices in Gainesville, Florida. Components received from its suppliers as well as internally manufactured are examined by Company personnel prior to assembly or packaging to ensure that the Company’s specifications and standards are maintained.

Patents and Proprietary Technology; License and Consulting Agreements

The Company holds United States and international patents covering several of its implant components, biologic materials technologies and some of its surgical instrumentation. The Company believes that patents and intellectual property will continue to be important in the orthopaedic industry. In this regard, the Company defends its intellectual property rights and believes that its patents and products do not and will not infringe patents or violate proprietary rights of others, although it is possible that its existing patent rights may not be valid or that infringement of existing or future patents or proprietary rights may occur. In the event some of the Company’s intellectual property and agreements relating to its products are deemed invalid, such action could have a material adverse effect on the Company’s financial condition and results of operations.

In connection with the development of its knee implant systems, the Company pays royalties to Dr. William Petty and Dr. Gary Miller, who are executive officers and principal shareholders of the Company. Dr. Petty also serves as Chairman of the Company’s Board of Directors. New employment agreements entered into between the Company and each of Drs. Petty and Miller on January 1, 2003 provide for the continuation of the royalty payments in addition to their regular compensation as executive officers. Compensation associated with these agreements is the only compensation paid by the Company to Drs. Petty and Miller.

The Company has entered into a verbal consulting agreement with Albert Burstein, Ph.D., a

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director of the Company, to provide services regarding many facets of the orthopaedic industry including product design rationale, manufacturing and development techniques and product sales and marketing. During 2004, the Company paid Dr. Burstein $180,000 as compensation under this consulting agreement.

Research and Development

During 2004, 2003 and 2002, the Company expended $4,788,000, $3,748,000 and $2,803,000, respectively, on research and development and anticipates that research and development expenses will continue to increase. The Company’s research and development efforts contributed to the successful integration of the AcuMatch^® hip systems, line extensions of the Optetrak^® knee system and design improvements targeted to improving internal manufacturing efficiency. The Company’s research and development efforts continue to focus on implant product line extensions, advanced biologic materials, extremity joint reconstruction and alternative bearing surfaces.

As an important part of its research and development efforts, the Company has developed strategic partnerships through agreements with Genzyme Biosurgery and Diamicron Corporation to bring expertise in advanced materials to the Company’s products. The agreement with Genzyme is for the development of polymer-based synthetic biomaterials that when delivered with other biologic products support the growth of new bone. Through its agreement with Diamicron, the Company intends to apply Diamicron’s polycrystalline diamond compact, or PDC, technology to its hip implants. This diamond technology holds the promise of improved mechanical and wear characteristics over currently available technology. This technology will likely require a number of years of development and regulatory clearance prior to the release of products for sale.

The Company believes that the purchase of intellectual property and product line assets augmented by additional development provides a cost-effective and efficient way to bring products to market and expects to continue to do so in the future to complement its internal product development.

Competition

The orthopaedic industry is highly competitive and dominated by a number of large companies with substantially greater financial and other resources than Exactech. The largest competitors in the orthopaedic market are DePuy, Inc., a division of Johnson and Johnson, Zimmer, Inc., a subsidiary of Zimmer Holdings, Inc., Stryker Howmedica Osteonics, a subsidiary of Stryker Corp., Smith and Nephew plc, and Biomet Orthopaedics, a subsidiary of Biomet, Inc. These five companies, according to The Medical and Healthcare Marketplace Guide 2002-2003, published by Dorland Healthcare Information, had an estimated aggregate market share of approximately 85% in 2001.

Companies in the industry compete on the basis of product features and design, innovation, service, the ability to maintain new product flow, relationships with key orthopaedic surgeons and hospitals, the strength of their distribution network and price. While price is a key factor in the orthopaedic market, there are other significant factors, including: surgeon preference, ease of use, clinical results, and service provided by the company and its representatives.

Product Liability and Insurance

The Company is subject to potential product liability risks that are inherent in the design, marketing and sale of orthopaedic implants and surgical instrumentation. The Company has implemented strict quality control measures and currently maintains product liability insurance in amounts that it believes are typical in the industry for similar companies. During 2002, the Company experienced substantial increases in insurance premiums primarily due to the conditions of the insurance market in general and specifically the medical device insurance market. During 2003, the Company experienced stabilization of these insurance premiums as a percentage of sales. The Company annually evaluates its levels of product liability insurance, as well as the amount of retention carried compared to other companies in the industry. Due to the volatility of the insurance marketplace, the value of the product liability insurance products delivered and the small number of providers of these products, there can be no guarantees as to whether the Company will be able to secure such coverage in the future at a cost deemed to be appropriate.

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Government Regulation

The Company is subject to government regulation in the United States and other countries in which it conducts business. For some products, and in some areas of the world, government regulation is significant, and there appears to be a general trend toward more stringent regulation throughout the world. Governmental regulatory actions can result in, among other things, warning letters, fines, injunctions, civil penalties, recalls or seizures of product, total or partial suspensions of production, refusals to grant future pre-market clearances or approvals, withdrawals or suspensions of current clearances or approvals, and criminal prosecution. It is Exactech’s practice to comply with all regulatory requirements governing its products and operations and to conduct its affairs in an ethical manner. Exactech devotes significant time, effort and expense addressing the extensive government and regulatory requirements applicable to its business and believes that it is no more or less adversely affected by existing government regulations than are its competitors.

The primary regulatory authority in the United States is the FDA. The development, testing, marketing and manufacturing of medical devices, including reconstructive devices, are regulated under the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act, the Safe Medical Devices Act of 1990, the FDA Modernization Act of 1997, the Medical Device User Fee and Modernization Act of 2002 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. The FDA is authorized to obtain and inspect devices, their labeling and advertising, and the facilities in which they are manufactured. The Company is registered with the FDA and believes that it is in substantial compliance with all applicable material governmental regulations.

The Company believes it is well positioned to face the changing international regulatory environment. The International Standards Organization, or ISO, has an internationally recognized set of standards aimed at ensuring the design and manufacture of quality products. The Company has successfully participated in ISO audits and obtained ISO registration. 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 Directives. Each of the Company’s products sold in Europe bears the CE mark.

The Company is subject to federal anti-kickback laws and regulations. These laws and regulations prohibit any knowing and willful offer, payment, solicitation or receipt of any form of remuneration, either directly or indirectly, in return for, or to induce referral of an individual for a service or product for which payment may be made by Medicare, Medicaid or another government sponsored health care program, or purchasing, leasing, ordering or arranging for, or recommending the purchase, lease or order of, any service or product for which payment may be made by a government-sponsored health care program. Violation of these laws is a felony, punishable by fines up to $25,000 per violation and imprisonment for up to five years. Civil penalties may also be imposed which exclude violators from participation in Medicare or state health programs. Regulators may challenge or review the Company’s current or future activities under these laws which would be costly and time consuming and could reduce cash flows and revenues.

Significant prohibitions against physician referrals were enacted by Congress in the Omnibus Budget Reconciliation Act of 1993. These laws prohibit, subject to specified exemptions, a physician or a member of his immediate family from referring Medicare or Medicaid patients to an entity providing “designated health services” in which the physician has an ownership or investment interest, or with which the physician has entered into a compensation arrangement. The penalties for violating these laws include a prohibition on payment by these government programs and civil penalties of as much as $15,000 for each violative referral and $100,000 for participation in a “circumvention scheme.” The violation of these laws by the Company could result in significant fines or penalties and exclusion from participation in the Medicare and Medicaid programs.

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 should enable it to continue to compete effectively within this increasingly regulated environment.

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Environmental Law Compliance

The Company’s operations are subject to numerous and increasingly stringent federal, state and local environmental laws and regulations concerning, among other things, the generation, handling, storage, transportation, treatment and disposal of toxic and hazardous substances and the discharge of pollutants into the air and water. Environmental permits and controls are required for some of the Company’s manufacturing operations and these permits are subject to modification, renewal and revocation by the issuing authorities. The Company does not have underground storage tanks and believes that its facilities are in substantial compliance with its permits and environmental laws and regulations and does not believe that future environmental compliance will have a material adverse effect on its business, financial condition or results of operations. The Company’s environmental capital expenditures and costs for environmental compliance may increase in the future as a result of changes in environmental laws and regulations or as a result of increased manufacturing activities at its facilities. The Company could be materially adversely affected by any failure to comply with environmental laws, including the costs of undertaking a clean up at a site to which its wastes were transported.

Employees

As of December 31, 2004, the Company employed 173 full time employees. The Company has no union contracts and believes that its relationship with employees is good.

Executive Officers of the Registrant

The executive officers of the Company, and their ages, as of March 7, 2005, are as follows:

William Petty, M.D. was a founder of the Company. He has been Chairman of the Board and Chief Executive Officer of the Company since its inception and President since January 2002. Dr. Petty was a Professor at the University of Florida College of Medicine from July 1975 to September 1998. Dr. Petty also served as Chairman of the Department of Orthopaedic Surgery at the University of Florida College of Medicine from July 1981 to January 1996. Dr. Petty has served as a member of the Hospital Board of Shands Hospital, Gainesville, Florida, as an examiner for the American Board of Orthopaedic Surgery, as a member of the Orthopaedic Residency Review Committee of the American Medical Association, on the Editorial Board of the Journal of Bone and Joint Surgery, and on the Executive Board of the American Academy of Orthopaedic Surgeons. He holds the Kappa Delta Award for Outstanding Research from the American Academy of Orthopaedic Surgeons. His book, Total Joint Replacement, was published in 1991. Dr. Petty received his B.S., M.S., and M.D. degrees from the University of Arkansas. He completed his residency in Orthopaedic Surgery at the Mayo Clinic in Rochester, Minnesota. Dr. Petty is the husband of Betty Petty and the father of David W. Petty.

Gary J. Miller, Ph.D. was a founder and has been Executive Vice President, Research and Development of the Company since February 2000. He was Vice President, Research and Development from 1986 until 2000 and was a Director from March 1989 through May 2003. Dr. Miller was Associate Professor of Orthopaedic Surgery and Director of Research and Biomechanics at the University of Florida College of Medicine from July 1986 until August 1996. Dr. Miller received his B.S. from the University of Florida, his M.S. (Biomechanics) from the Massachusetts Institute of Technology, and his Ph.D. in Mechanical Engineering (Biomechanics) from the University of Florida. He has held an Adjunct Associate Professorship in the College of Veterinary Medicine’s Small Animal Surgical Sciences Division since 1982 and was appointed as an Adjunct Associate Professor in the Department of Aerospace, Mechanics and Engineering Sciences in 1995. He was a consultant to the FDA from 1989 to 1992 and has served as a consultant to such companies as Johnson & Johnson Orthopaedics, Dow-Corning Wright and Orthogenesis.

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David W. Petty has been Executive Vice President, Sales and Marketing since February 2000. He has been employed by the Company in successive capacities in the areas of Operations and Sales and Marketing for the past seventeen years, serving as Vice President, Operations from April 1991 until April 1993 and Vice President, Marketing from 1993 until 2000. He also served as a Director from March 1989 until March 1996 and again from January 2002 until May 2003. Mr. Petty received his B.A. from the University of Virginia in 1988 and completed The Executive Program of the Darden School of Business in 1999. He is the son of Dr. and Ms. Petty.

Joel C. Phillips, CPA has been Chief Financial Officer of the Company since July 1998 and Treasurer since March 1996. Mr. Phillips was Manager, Accounting and Management Information Systems at the Company from April 1993 to June 1998. From January 1991 to April 1993, Mr. Phillips was employed by Arthur Andersen. Mr. Phillips received a B.S. and a Masters in Accounting from the University of Florida and is a Certified Public Accountant.

Betty Petty was a founder and has been Vice President, Human Resources and Administration since February 2000. She has also been Secretary of the Company since its inception and served as Treasurer and a Director until March 1996. Ms. Petty served in the dual capacities of Human Resources Coordinator and Director of Marketing Communications from the founding of the Company until 2001. She received her B.A. from the University of Arkansas at Little Rock and her M.A. in English from Vanderbilt University. Ms. Petty is the wife of Dr. Petty and the mother of David W. Petty.

The Company’s officers are elected annually by the Board of Directors and serve at the discretion of the Board.

Available Information

The Company’s Internet website address is www.exac.com. The Company makes available free of charge on or through its website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Section 16 insider holdings reports on Form 3, Form 4 and Form 5, and amendments to these reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the Securities and Exchange Commission (“SEC”). These reports may be found at http://www.exac.com/Investors/default.asp by selecting the option entitled “SEC FILINGS”. Additionally, the Company’s board committee charters and code of ethics are available on the Company’s website and in print to any shareholder who requests them. The Company does not intend for information contained in its web site to be part of this Annual Report on Form 10-K. In addition, the Securities and Exchange Commission maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.

ITEM 2. PROPERTIES

The Company’s principal executive offices, research and development laboratories and manufacturing facility is a 76,000 square foot building on approximately eight acres of land owned by it in Gainesville, Florida. The company owns a 14,000 square foot building on approximately one and one-half acres in Gainesville, Florida adjacent to its main facility. The Company is currently in the process of remodeling this facility to expand its manufacturing area. In January 2005, the Company acquired a 20,000 square foot facility on approximately two acres in Gainesville, Florida nearby to its main facility. This new facility was acquired to provide the Company with the ability to relocate and expand its distribution facility from the currently leased property serving that purpose.

The Company leases a number of facilities in the United States and Canada. Among these leased facilities is a 9,500 square foot distribution facility in Gainesville, Florida. The Gainesville distribution center lease was renewed in 2003 for a term of three years at an annual rate of $44,000, expiring July 31, 2006. The Company leases a 1,000 square foot office in Great Neck, New York for a term of two and one-half years at an annual rate of $26,000, expiring March 31, 2006. The Company leases a 4,200 square foot office and warehouse facility in Ontario, Canada for a term of five years at an annual rate of 23,000 CAD, expiring December 31, 2009, with an option to renew for an additional five year period.

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The Company owns approximately four and one-half acres of undeveloped land nearby to its existing facility in Gainesville, Florida for future expansion requirements.

ITEM 3. LEGAL PROCEEDINGS

There are various claims, lawsuits and disputes with third parties and pending actions involving various allegations against the Company incident to the operation of its business, principally product liability cases. The Company is currently a party to two product liability suits. Both claims seek unspecified damages related to the alleged defective design, manufacture and/or sale of the Company’s total joint arthroplasty products. These claims are currently in discovery stages. While the Company believes that these claims are without merit, and intends to vigorously defend them, the Company is unable to predict the outcome of such litigation. The Company therefore maintains insurance, subject to self-insured retention limits, for these and all such claims, and establishes accruals for product liability and other claims based upon the Company’s experience with similar past claims, advice of counsel and the best information available. At December 31, 2004, the Company’s accrual for product liability claims decreased $214,000 from December 31, 2003, when there were six active claims. 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. However, while it is not possible to predict with certainty the outcome of these cases, it is the opinion of management that, upon ultimate resolution, these cases will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

The Company’s insurance policies covering product liability claims must be renewed annually. Although the Company has been able to obtain insurance coverage concerning product liability claims at a cost and on other terms and conditions that are acceptable to the Company, the Company may not be able to procure acceptable policies in the future.

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

No matters were submitted to a vote of the Company’s security holders during the fourth quarter of the fiscal year ended December 31, 2004.

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s Common Stock trades on the Nasdaq National Market under the symbol “EXAC”. The following table sets forth, for the periods indicated, the high and low sales price of the Common Stock, as reported on the Nasdaq National Market:

No cash dividends have been paid to date by the Company on its Common Stock. The Company intends to retain all future earnings for the operation and expansion of its business and does not anticipate the payment of cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon a number of factors, including future earnings, results of operations, capital requirements, the Company’s financial condition and any restrictions under credit agreements existing from time to time, as well as such other factors as the Board of Directors may deem relevant. The Company’s line of credit with Merrill Lynch Business Financial Services, Inc. limits the Company’s ability to pay dividends.

As of March 4, 2005 the Company had approximately 227 shareholders of record. The Company believes there are in excess of 3,051 beneficial owners of the Company’s Common Stock.

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Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information as of December 31, 2004 with respect to compensation plans (including individual compensation arrangements) under which the Company’s equity securities are authorized for issuance.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

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ITEM 6. SELECTED FINANCIAL DATA

The selected financial data set forth below has been derived from the audited financial statements of the Company. This data should be read in conjunction with the financial statements, the notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the financial statements and related notes appearing elsewhere herein.

Overview of the Company

The Company develops, manufactures, markets and sells orthopaedic implant devices, related surgical instrumentation, supplies and biologic materials to hospitals and physicians in the United States and internationally. Exactech’s revenues are primarily derived from sales of its knee and hip joint replacement systems; however, revenues from worldwide distribution of biologic materials has increased

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as a percentage of the Company’s total revenues over the last five years, as the Company expands its current distribution from the ongoing introduction of new, advanced biologic materials and services. Revenue from sales of other products, including surgical instrumentation, Cemex^®bone cement, the InterSpace^™ pre-formed, antibiotic cement hip and knee spacers, and the Equinoxe^™ shoulder system are expected to contribute to the Company’s anticipated revenue growth.

The Company’s operating expenses consist of sales and marketing expenses, general and administrative expenses, research and development expenses, depreciation expenses and royalty expenses. The largest component of operating expenses, sales and marketing expenses, primarily consists of payments made to independent sales representatives for their services to hospitals and surgeons on the Company’s behalf. As a result of the nature of these sales and marketing expenses, these expenses tend to be variable in nature and related to sales growth. Research and development expenses primarily consist of expenditures on projects concerning knee, shoulder and hip implant product lines and biologic products and services. Royalty expenses consist primarily of expenditures made to the owners of patents and contributing surgeons who have licensed the use of their inventions or contributed their professional expertise to the Company for its product development and manufacturing uses. Knee implant products generally carry a higher royalty charge than other implant products.

In marketing its products, the Company uses a combination of traditional targeted media marketing and its primary marketing focus, direct customer contact and service to orthopaedic surgeons. Since surgeons are the primary decision maker when it comes to the choice of products and services that best meet the needs of their patients, the Company’s marketing strategy is focused on developing relationships and meeting the needs of the surgeon community in the orthopaedic industry. In cooperation with its organization of independent sales agencies in the United States and network of independent distributors internationally, the Company conducts this effort through continuing education forums, training programs and product development advisory panels.

Recent Events

In January 2005, the Company acquired the remaining 50% interest of its joint venture partner for the distribution of its products in China for an investment of $500,000. As a result, the Company owns a 100% interest in the foreign subsidiary, Exactech Asia Limited. Beginning in the first quarter ending March 31, 2005, the financial results of the Company’s foreign subsidiary will be consolidated into the Company’s overall financial condition, results of operations and cash flows.

Also in January 2005, the Company acquired a 20,000 square foot facility on approximately two acres in Gainesville, Florida nearby to its main facility for a cash payment of $857,000. This new facility was acquired to provide the Company with the ability to relocate and expand its distribution facility from the currently leased property serving that purpose.

In December 2004, the Company opened a branch office in Ontario, Canada, to expand the distribution of its products and services in the Canadian market. Currently, the Company is preparing the required regulatory applications and submissions to gain clearance to import and distribute its products to physicians and hospitals in Canada. The Company anticipates it will gain regulatory clearance and begin distribution in the second half of the year ending December 31, 2005.

Overview of 2004

Total revenue increased 15% to $81.8 million from $71.3 million in 2003. Gross profit margin decreased slightly to 67.2% in 2004 from 67.6% in 2003, primarily due to solid growth in our lower margin international sales, which increased 21%, representing 19% of total sales, as compared to 18% of total sales in 2003. As in 2003, 2004 increases in operating expenses were driven by research and development expenditures, which increased 28% from 2003, as the Company continued to move new product development projects forward. Overall, operating expenses increased 10% from 2003, less than the pace of our sales growth. Growth in income from operations was strong, up 29% from 2003. Income before provision for income taxes increased 18% to $12.1 million from $10.3 million in 2003. Net income increased 12% from the prior year, equaling the same 9% of net sales achieved in 2003.

On the balance sheet at the end of 2004, working capital increased 14% to $38.2 million from $33.6 million in 2003. Included in this increase in working capital, as expected, was an increase in

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inventory of $6.3 million in support of the Company’s continuing development efforts to expand its knee shoulder, and hip implant product lines, as well as biologic products and services. A new item on the balance sheet in 2004 is a note receivable due from Altiva for $1.0 million related to the Company’s funding of Altiva’s product line investments pursuant to the Company’s commitment. Current liabilities increased 20% to $11.7 million due to an increase in accounts payable for inventory and raw materials purchases. Deferred tax liabilities increased $1.1 million to $3.8 million at the end of 2004 primarily due to accelerated tax depreciation associated with the acquisition of manufacturing equipment and surgical instrumentation.

The following table includes the net revenue and percentage of net sales for each of the Company’s product lines for the years ended December 31, 2004, 2003 and 2002:

Sales Revenue by Product Line

(dollars in thousands)

The following table includes: (i) items from the Statements of Income for the year ended December 31, 2004 as compared to 2003, and the dollar and percentage change from year to year and the percentage relationship to net sales, and (ii) items from the Statements of Income for the year ended December 31, 2003 as compared to 2002, and the dollar and percentage change from year to year and the percentage relationship to net sales (dollars in thousands):

Comparative Statement of Income Data

Net Sales Revenue

Net sales revenue increased 15% in 2004 from 2003 as the Company continued to experience strong growth in the sale of its knee implant product lines, both in the United States and internationally. During 2004, sales of knee implant products increased 15% in the domestic market, and 30% internationally, as the Company benefited from increases in market share in Europe. Domestically, the Company continued to experience market share gains with its Optetrak^® knee augmented by increases in the average selling prices of its knee implant products in the range of 6% to 8%. In 2004, sales of hip

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implant products increased 5%, with domestic growth of 5% driven by increases in average selling prices in the range of 2% to 6%. Internationally, sales of hip implant products increased modestly by 2% from 2003. The Company expects sales of hip implant products to regain momentum in the second half of 2005, as it anticipates to realize revenues from the introduction of its new Novation^™ press fit hip system. Total biologics revenue increased 6% in 2004 from 2003 as the Company continued to expand its product line offering to include room temperature OpteformRT^® and OptefilRT^® bone paste. Sales revenue from other product lines increased 34% during 2004 as compared to 2003, primarily from increased sales of Cemex^® bone cement products to $2.6 million in 2004 from $718,000 in 2003. Cement sales include the InterSpace^TM hip and knee spacers which enabled the Company to gain access to new customers with these innovative products.

The increase in net sales revenue of 20% in 2003 from 2002 was also driven by strong growth in the Company’s knee implant product lines, both in the United States and internationally. During 2003, sales of knee implant products increased 23% in both the domestic and international markets. In the United States, the Company benefited from increased market share with its Optetrak^® comprehensive knee system, coupled with increases in average selling prices in the range of 4% to 6%. Internationally, the Company expanded its distribution in existing markets. While the overall increase in 2003 sales of hip implant products of 4% was disappointing, international sales of this product line grew 67% from 2002, as existing and new distributors expanded their product offering with the Company’s AcuMatch^® integrated hip systems. In the United States, sales of hip implants decreased 2% in 2003 from 2002, primarily due to the Company’s lack of an alternative acetabular bearing surface. The increase in biologics revenue of 34% in 2003 from 2002 resulted from expansion of the distribution channels along with expansion of the tissue service line to include Optefil^® bone paste. Sales revenue from other product lines increased 29% during 2003 as compared to 2002, primarily from increased sales of surgical instruments to new international distributors, along with a 41% increase in sales of Cemex^® bone cement as the Company achieved better market penetration in new and existing accounts.

Gross Profit

Gross profit margin decreased slightly in 2004 to 67.2% from 67.6% in 2003, primarily due to the strong growth in lower margin international sales and slower than expected ramp up of lower cost internally manufactured components for its knee implant products. The Company continues to expand the quantity of its joint replacement implant products it manufactures in its facility with the addition of equipment, facilities and personnel. The Company anticipates modestly increasing gross margins in the second half of 2005 due to the benefits of internal manufacturing.

The improvement in the gross profit margin to 67.6% in 2003 from 67.0% in 2002 was due to the benefits of lower cost internally manufactured components along with the increase in average sales prices. The Company continued to expand the quantity of its joint replacement implant products it manufactures in its facility with the addition of a limited second shift and the expansion of its production facility. In addition, the Company expects to realize the benefit of capacity expansion projects completed in 2004 resulting in an increase in the gross profit margin during the second half of 2005 in the range of 50 to 100 basis points.

Operating Expenses

Sales and marketing expenses increased 7% in 2004 from 2003, primarily as a result of increases in variable selling costs associated with sales growth, such as commissions paid to the Company’s independent agents; however, the increases in the variable costs were offset by a reduction in special marketing events of 13% as the Company did not host a large, worldwide surgeons conference in 2004 as it did in 2003. Looking forward, the Company is planning to support a worldwide surgeons conference in the second quarter of 2005. In 2003, sales and marketing expenses increased 23% from 2002, again, primarily as a result of increases in variable selling costs associated with sales growth. In addition to increases in variable expenses in 2003, the Company incurred expenses in connection with supporting a large continuing education conference for surgeons. The Company expects that sales and marketing expenses will return to the range of 29% to 30% as a percentage of sales in 2005 as the Company continues to increase its marketing programs in support of new product line introductions.

General and administrative expenses increased 11% in 2004 from 2003 primarily due to increases in the Company’s product liability costs, which increased 76%. The Company’s allowance for

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bad debts decreased 67% in 2004 as compared to 2003, primarily due to the write off in 2004 of a bankrupt hospital account balance included in the allowance in 2003 in the amount of $393,000. In 2004, the Company did not experience any bad debt expense as a result of a bankruptcy of any of its customer accounts. The Company does not anticipate any significant changes in its credit policies or its allowance for doubtful accounts in 2005. The 23% increase in general and administrative expenses in 2003 from 2002 was primarily attributable to increases in the Company’s allowance for uncollectible accounts receivable, which increased 65% and increases in product liability costs, which increased 124%. Looking forward, the Company expects general and administrative expenses to remain in the range of 9% to 10% of sales, slightly lower than the prior three years, as comparative growth rates in product liability insurance and costs are anticipated to be lower.

Research and development expenses increased 28% in 2004 from the prior year due to the Company’s continuing development efforts to bring new and advanced hip and biologic products to market. The Company’s primary development efforts have continued to focus on a new press fit hip stem system, a total shoulder system, a unicondylar knee system and several advanced biologic based materials. Research and development expenses increased 34% in 2003 from the prior year due to the Company’s continuing development efforts to bring new and advanced products to market. Looking ahead, the Company expects research and development expenses in 2005 of approximately 7% of sales, to support the active projects in the pipeline for its mobile bearing knee, new press fit and cemented hip systems, shoulder product line extensions, biologics and enhanced bearing surfaces technology.

Depreciation and amortization expenses increased 17% in 2004 when compared to 2003, as the Company invested $9.3 million in capital, including $2.2 million to purchase manufacturing equipment and $3.6 million in surgical instrumentation and $2.5 million in intellectual property. Depreciation and amortization expenses increased 19% in 2003 when compared to 2002, as the Company invested $10.8 million in capital, including $2.6 million to expand its facility, $1.0 million to purchase manufacturing equipment and $3.0 million in surgical instrumentation. Capital expenditures in 2005 are anticipated to range from $7 million to $9 million to continue to support new product launches and increased manufacturing capacity.

During 2004, royalty expenses increased 6% from 2003, primarily due to the strong sales growth in the Company’s knee implant products; however, this growth in expense was lower than sales growth due to contractual limitations contained within the knee products royalty agreements. During 2003, royalty expenses increased 16% from 2002, again, primarily due to the strong sales growth in the Company’s knee implant products. As a percentage of sales, royalty expenses were slightly lower in each respective year as a result of the agreement limitations and expiration of certain royalty agreements on the Company’s knee implant products. Looking forward, royalty expenses are anticipated to remain relatively constant at 3% of total sales.

Income from Operations

Income from operations increased 29% in 2004 from 2003, as growth in top line sales revenue was coupled with limited growth in operating expenses. Income from operations increased 15% in 2003 from 2002, as growth in operating expenses outpaced sales growth. Looking forward, the Company anticipates growth in sales and gross profit margin, coupled with lower growth in operating expenses, to result in income from operations in the range of 13% to 15% of sales.

Other Income and Expenses

Other income, net of other expenses, decreased 134% primarily due to the comparative reduction resulting from the receipt of the final litigation settlement payments from RTI of $1.0 million in 2003. In 2003, other income, net of other expenses, increased 212% primarily as a result of increases from the final litigation settlement payments from RTI, when compared to 2002. Looking forward, the Company expects other income, net of other expenses, to increase as interest expense is incurred on anticipated borrowing under its line of credit.

Equity Method Investee Gains and Losses

Losses from equity method investments in Altiva and Exactech Asia totaled $453,000 in 2004 as compared to $62,000 in 2003. During 2005, the Company expects losses related to its 16.7% ownership

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in Altiva to total between $400,000 to $600,000 and will be consolidating the full activities of Exactech Asia due to the purchase of the remaining 50% interest in January of 2005. Exactech Asia operations are expected to be approximately break even during 2005.

Taxes and Net Income

Income before provision for income taxes increased 18% in 2004 from 2003. The effective income tax rate, as a percentage of income before taxes, for 2004 was 35.7%, as compared to 36.1% in 2003, primarily as a result of the increased research and development credit. Income before provision for income taxes increased 21% in 2003 from 2002. The effective income tax rate for 2003 of 36.1%, as compared to 37.3% in 2002, was primarily the result of realization of the tax benefit of strong international sales growth, coupled with domestic sales growth in lower taxed states. In 2005, the Company expects an effective tax rate of approximately 36% as the new tax benefits for manufacturers are expected to offset expiration of extraterritorial income tax benefits.

As a result of the foregoing, the Company realized an increase in net income of 12% in 2004, representing 8.9% of sales and diluted earnings per share of $.63, as compared to 9.1% of sales and diluted earnings per share of $.57 in 2003. The 2003 net income increased 22% from 2002, which was 9.0% of net sales and diluted earnings per share of $.48.

Liquidity and Capital Resources

The Company has financed its operations through a combination of commercial debt financing, sales of equity securities and cash flows from its operating activities. At December 31, 2004, the Company had working capital of $38.2 million, an increase of 14% from $33.6 million at the end of 2003. As in 2003, working capital in 2004 increased primarily as a result of the Company’s investment in inventory, which increased $6.3 million to support implant product line expansion and increased distribution of biologics. The Company anticipates increases in inventory to continue in 2005 as new product line offerings are released, resulting in a projected increase in the range of $5 million to $7 million. The Company projects that cash flows from its operating activities and borrowing under its existing line of credit will be sufficient to meet is commitments and cash requirements in the following twelve months.

Operating Activities

Operating activities continued to provide net cash during 2004; however, the $6.2 million total for the year was a decrease of 26% from the $8.4 million of cash provided by operating activities during 2003, primarily as a result of the Company’s increased inventory and accounts receivable balances as compared to the prior year. Looking forward, the Company anticipates the investment in inventory to continue, with expected inventory balances at the end of 2005 to be in the range of $36 million to $38 million, dependent upon the release of active product line expansion development projects. As expected, the increase in inventory balances resulted in the Company’s inventory turns decreasing slightly to .96 from 1.03 during 2003. Inventory turns are anticipated to remain relatively unchanged in the following twelve months as the planned inventory build continues.

In 2004, the Company’s total accounts receivable balances increased 24% from 2003 and the total days sales outstanding (DSO) ratio, based on average accounts receivable balances, increased slightly to 67 from 66 during 2003. The Company’s allowance for doubtful accounts at December 31, 2004, decreased to $261,000 as compared to $782,000 at December 31, 2003, primarily as a result of the charge off of $393,000 related to the bankruptcy of one of the Company’s hospital customers. The Company expects increases in accounts receivable during 2005 to be consistent with sales growth, and is not anticipating any significant changes in its credit terms or policies related to its accounts receivable.

There are various claims, lawsuits, and disputes with third parties and pending actions involving various allegations against the Company incident to the operation of its business, principally product liability cases. The Company is currently a party to two product liability suits. Both claims seek unspecified damages related to the alleged defective design, manufacture and/or sale of the Company’s total joint arthroplasty products. These claims are currently in discovery stages. While the Company believes that these claims are without merit, and intends to vigorously defend them, the Company is unable to predict the outcome of such litigation. The Company therefore maintains insurance, subject to self-insured retention limits, for these and all such claims, and establishes accruals for product liability and

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other claims based upon the Company’s experience with similar past claims, advice of counsel and the best information available. At December 31, 2004, the Company’s accrual for product liability claims decreased $214,000 from December 31, 2003, when there were six active claims. 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. However, while it is not possible to predict with certainty the outcome of these cases, it is the opinion of management that, upon ultimate resolution, these cases will not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

Investing Activities

Investing activities used $10.4 million in net cash during 2004 as the Company made significant investments in manufacturing equipment, surgical instrumentation, product technology and Altiva Corporation. In 2004, investment in manufacturing equipment used cash of $2.2 million while surgical instrumentation used cash of $3.6 million, patented product technology acquisitions used cash of $2.5 million for patents for a biologics carrier and hip system manufacturing and design technologies, and funding for Altiva used net cash of $1.0 million. This use of cash represented a decrease of 10% from 2003 when the Company used net cash of $11.5 million for similar investments in equipment and technology. This continued investment was consistent with management’s growth strategy to support the Company’s product line expansion moving forward. In 2005, investment in capital acquisitions is estimated to be in the range of $8 million to $10 million to support product introductions and manufacturing capacity increases.

Financing Activities

During 2004, financing activities provided net cash of $1.2 million to the Company from borrowing under its commercial loan for equipping its current facility and issuance of common stock from option exercise activity. Borrowing on the commercial loan for equipping part of the expanded manufacturing facility provided net cash of $1.1 million, which was partially offset by principal payments on debt using net cash of $739,000. Cash provided by stock option exercise activity provided net cash of $876,000. Based on outstanding options that will vest and become exercisable in 2005, cash provided by the issuance of common stock upon the exercise of options is anticipated to be in the range of $750,000 to $1.5 million.

Exactech renewed its credit facility in July 2004 with Merrill Lynch Business Financial Services, Inc., which is secured by substantially all of Exactech’s assets. As a part of the renewal, the credit line limit was increased to a maximum amount of $21.0 million less amounts owed by Altiva Corporation to Merrill Lynch, payment of which has been guaranteed by Exactech (as described below). In addition to this maximum, the credit line may not exceed (a) the sum of 80% of the value of qualified accounts receivable, plus the lesser of (i) 50% of the value of finished goods inventory plus 25% of consigned inventory, which consigned inventory shall not exceed $4 million or (ii) $10.5 million, less (b) the maximum amount of guaranteed obligations for the benefit of Altiva with respect to obligations owed by Altiva to Merrill Lynch. The renewed credit line expires June 30, 2006. Borrowings under the Merrill Lynch credit facility bear interest at one-month LIBOR plus an applicable margin which ranges from 150 to 200 basis points depending upon Exactech’s ratio of funded debt to EBITDA. At December 31, 2004, there were no amounts outstanding under Exactech’s line and $917,000 was outstanding on the Altiva guaranteed line of credit bearing an interest rate of 3.89% (as described below).

In 1998, we entered into an industrial revenue bond financing secured by a letter of credit with a local lending institution for construction of our current facility. The balance due under the bond at December 31, 2004 was $2.4 million bearing a variable rate of interest of 2.1%. In November 2002, Exactech entered into a long-term commercial construction loan of up to $4.2 million, bearing interest at a rate equal to one month LIBOR plus 1.5%, with a local lending institution, secured by an existing letter of credit, to fund the expansion of our corporate facility. At December 31, 2004, there was $3.8 million outstanding under this loan bearing a variable rate of interest equal to 3.9%. During February 2003, the Company entered into an additional long-term loan of up to $1.5 million, bearing interest at a rate of one month LIBOR plus 1.75% with a minimum rate equal to 3.5%, with a local lending institution for purposes of acquiring office and manufacturing equipment for our facility expansion. At December 31, 2004, $1.3 million was outstanding under this loan bearing a variable rate of interest equal to 4.2%.

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The Company’s credit facility and other loans contain customary affirmative and negative covenants including certain financial covenants with respect to Exactech’s consolidated net worth, interest and debt coverage ratios and limits on capital expenditures and dividends in addition to other restrictions. The Company was in compliance with such covenants at December 31, 2004.

At December 31, 2004, Exactech had outstanding commitments for the purchase of inventory, raw materials and supplies of $7.4 million and $1.5 million of capital equipment, as well as purchase commitments related to certain distribution agreements of $1.4 million. Exactech’s outstanding commitment for future payments on patented product technology acquisitions was $1.2 million at December 31, 2004.

On October 30, 2003, Exactech acquired a 16.7% minority interest in Altiva Corporation. As part of the agreement, Exactech has committed to make loans available to Altiva in an amount not to exceed $5.0 million for a period of five years, the proceeds of which shall be used for the acquisition of various spine and spine-related product lines. Funding obligations under this commitment is upon the request of Altiva’s management and board of directors, and is subject to Exactech’s reasonable discretion to approve the product line or technology acquisition(s) by Altiva to be funded by the loan(s) requested. As of December 31, 2004, Exactech had extended to Altiva the principal sum of $1.0 million under this commitment. These loans can be converted by Exactech into shares of Series C Preferred Stock, par value $.01 (the “Series C Stock”), of Altiva, a newly-created class of Altiva’s capital stock of which Exactech is the only holder, at Exactech’s election any time between October 29, 2005 and October 28, 2008. The conversion ratio of the loans is structured such that if Exactech loans the full $5.0 million commitment, the conversion of all outstanding balances under the loans combined with shares of Series C Stock Exactech received in connection with its original investment, will give Exactech a 54.5% interest in Altiva. If less than a $5 million amount of principal is outstanding under the loan at the time Exactech elects to convert, the number of shares issued is subject to a proportionate adjustment. The Series C Stock to be issued to Exactech upon conversion of the loan is held solely by Exactech and has identical rights and privileges to the common stock of Altiva except that the Series C Stock has a superior liquidation preference with respect to dividends and upon liquidation of Altiva (up to the extent of Exactech’s investment in Altiva) and is convertible on a 1-for-1 basis into shares of Altiva’s common stock.

In addition, the Company has committed to provide Altiva with, or guarantee on behalf of Altiva, a working capital credit line in an amount up to $6.0 million, which is collateralized by substantially all of Altiva’s assets, subject to the prior liens of the lender that provides the working capital line to Altiva. Pursuant to this commitment, Exactech has guaranteed an initial $3.0 million line of credit with Merrill Lynch. This guaranty is limited to a principal amount not to exceed $6.0 million and a term not to exceed October 30, 2008. At December 31, 2004, there was $917,0000 outstanding under this line. Based upon the expected present values of probability weighted future cash flows of Altiva pursuant to requirements in Financial Accounting Standards Board (“FASB”) Interpretation No. 45 (“FIN 45”), Exactech has recorded a liability of $132,000 related to its guarantee of Altiva’s debt with Merrill Lynch.

Exactech, Altiva, all other holders of Altiva’s preferred stock and certain officers of Altiva have also entered into a stockholders agreement under the terms of which Exactech was granted an option, exercisable any time between October 29, 2005 and October 28, 2008, to purchase all of the outstanding shares of Altiva’s common stock, preferred stock and securities that are convertible into common stock or preferred stock, or all or substantially all of the assets of Altiva. The purchase price payable under this buyout option will be equal to 80% of the valuation of Altiva’s business (the “Altiva Valuation”), which valuation is subject to a floor of $25.0 million and adjustments for the amounts of indebtedness, cash and cash equivalents and accounts payable Altiva holds at the time the purchase price is calculated. The stockholders agreement provides that the Altiva Valuation will be calculated by applying a buyout multiple (the “Buyout Multiple”) to Altiva’s trailing twelve months revenue as of the date the purchase price is calculated. This Buyout Multiple is calculated by reference to an “Exactech Multiple” which is calculated by dividing Exactech’s average stock price for the preceding 90 days by Exactech’s trailing twelve-months revenue per share. Under the formulations set forth in the stockholders agreement with respect to the relationship between the Buyout Multiple and the Exactech Multiple, the Buyout Multiples would range from 1.5 to 4.0 based on the Exactech Multiple at that time.

The Company has evaluated its investment in Altiva Corporation at December 31, 2004 in accordance with the provisions of FIN 46R, and based upon this analysis, it is management’s opinion that Altiva does not qualify as a variable interest entity requiring consolidation. The Company will conduct its

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analysis of its investment in Altiva each interim period to determine if the fair value of its equity investment, guarantee of a line of credit and commitment to fund convertible debt constitutes more than 50% of the fair value of Altiva’s total equity, subordinated debt and other forms of subordinated financial support, thus requiring consolidation under FIN 46R. The Company is anticipating the consolidation of Altiva will be required in 2005 assuming that it continues the funding of product line acquisitions.

Contractual Obligations and Commercial Commitments

The following table indicates the Company’s contractual obligations at December 31, 2004 (in thousands):

At December 31, 2004, the Company did not have any off-balance-sheet financing arrangements or any unconsolidated, special purpose entities.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of its financial condition and results of operations is based on the Company’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The Company’s significant accounting policies are discussed in Note 2 of Notes to Financial Statements included in this report. In management’s opinion, the Company’s critical accounting policies include allowance for doubtful accounts, excess and obsolete inventories, intangible assets, subsidiary consolidation and accrued liabilities.

Allowance for Doubtful Accounts- The Company’s accounts receivable consist primarily of amounts due from hospitals. Amounts due from international distributors carry longer payment terms than domestic customers, typically due in 120 days. The Company performs credit evaluations on its customers and generally does not require collateral. The Company invoices sales to international distributors in U.S. dollars and is not subject to currency exchange rate risk on accounts receivable. The Company maintains an allowance for doubtful accounts to estimate the losses due to the inability to collect required payment from our customers for products and services rendered. In calculating the allowance, the Company utilizes a model that ages the accounts receivable and applies a progressively higher allowance percentage to each tier of receivables past due terms. Should the financial condition of our customers deteriorate, resulting in an impairment of their ability to pay, additional allowances may be required which would affect the Company’s future operating results due to increased expenses for the resulting uncollectible bad debt.

Excess and Obsolete Inventories- Inventories are valued at the lower of cost or market and include implants provided to customers and agents. The Company provides significant loaned implant inventory to non-distributor customers. Impairment charges for obsolete and slow moving inventories are recorded based upon an analysis of specific identification of obsolete inventory items and quantification of slow moving inventory items. For slow moving inventory, this analysis compares the quantity of inventory on hand to the annual sales of such inventory items. As a result of this analysis, the Company records an allowance to reduce the carrying value of any impaired inventory to its fair value, which becomes its new

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cost basis. Impairment charges for the years ended December 31, 2004, 2003 and 2002 were $382,000, $639,000 and $191,000, respectively. If the actual product life cycles, demand or general market conditions are less favorable than those projected by management, additional inventory impairment charges may be required which would affect future operating results due to increased costs from the resulting adjustment.

Intangible Assets- In assessing the value of the Company’s intangible assets, the Company must make assumptions regarding the estimated future cash flows, economic life and other factors to determine fair value of the respective assets. If these estimates or assumptions change in the future, the Company may be required to record an impairment charge for these assets in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets”. The Company analyzes its intangible assets for impairment issues on a quarterly and annual basis.

Subsidiary Consolidation- In accordance with the provisions of FASB Interpretation No. 46R “Consolidation of Variable Interest Entities- an interpretation of ARB No. 51”, the Company evaluates its equity investments on a quarterly basis to determine the necessity to consolidate the investment as a subsidiary of the Company.

Accrued Liabilities- The Company is subject to various claims, lawsuits, disputes with third parties and actions involving various allegations against the Company incident to the operation of its business, principally product liability claims. The Company accrues liabilities for such claims that are deemed to be probable and reasonably estimable, as required by SFAS No. 5 “Accounting for Contingencies”, based upon the Company’s experience with similar past claims, advice of counsel and the best information available. If one or both of these criteria are not met, the Company discloses the loss contingency if it is reasonably possible that a loss may be incurred, in accordance with SFAS No. 5. Should the outcome of any pending, threatened, or future litigation have an outcome unfavorable to the Company, it may affect future operating results due to the resulting increases in operating expenses associated with such litigation.

Risk Factors

Although it is not possible to predict or identify all risk factors inherent in the Company’s business, they may include those listed below, which should not be considered an exhaustive statement of all potential risks and uncertainties:

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Recent Accounting Pronouncements

See Note 2 of Notes to Financial Statements for information concerning recent accounting pronouncements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Exactech is exposed to market risk from interest rates. For our cash and cash equivalents, a change in interest rates affects the amount of interest income that can be earned. For our debt instruments, changes in interest rates affect the amount of interest expense incurred.

The following table provides information about the Company’s financial instruments that are sensitive to changes in interest rates. The amounts presented approximate the financial instruments’ fair market value as of December 31, 2004, and the weighted average interest rates are those experienced during the fiscal year ended December 31, 2004 (in thousands, except percentages):

Exactech invoices and receives payment from international distributors in U. S. dollars and is not subject to risk associated with international currency exchange rates on accounts receivable. In connection with some distribution agreements, the Company is subject to risk associated with international currency exchange rates on purchases of inventory payable in Euros. The Company has not traditionally invested in international currency derivatives. The U.S. dollar is considered the primary currency for the Company, and transactions that are completed in an international currency are translated into U.S. dollars and recorded in the financial statements. Translation gains or losses were not material in any of the periods presented and the Company does not believe it is currently exposed to any material risk of loss on this basis.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

TABLE OF CONTENTS

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MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders

    of Exactech, Inc.

Gainesville, Florida

Management of Exactech, Inc. (the “Company”), is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the financial statements in accordance with accounting principles generally accepted in the United States of America.

Our internal control system over financial reporting is supported by written policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the Company’s transactions and dispositions of the Company’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

As part of the preparation of the Company’s annual financial statements, management has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO Framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of those controls.

The Audit Committee of the Board of Directors, which is comprised solely of independent directors, has oversight responsibility for our financial reporting process and the audits of our financial statements and internal control over financial reporting. The Audit Committee meets regularly with management to review matters related to the quality and integrity of our financial reporting, internal control over financial reporting and the nature, extent, and results of management assessments and external audits. The Audit Committee recommended, and the Board of Directors approved, that the audited financial statements be included in this Annual Report on Form 10-K.

Based on this assessment, management has concluded that as of December 31, 2004, the Company’s internal control over financial reporting was effective. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Exactech, Inc.

Gainesville, Florida

We have audited the accompanying balance sheets of Exactech, Inc. (the “Company”) as of December 31, 2004 and 2003, and the related statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2005 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

DELOITTE & TOUCHE LLP

Certified Public Accountants

Jacksonville, Florida

March 14, 2005

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of

Exactech, Inc.

Gainesville, Florida

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Exactech, Inc. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the financial statements and financial statement schedules as of and for the year ended December 31, 2004 of the Company and our report dated March 14, 2005 expressed an unqualified opinion on those financial statements and financial statement schedules.

DELOITTE & TOUCHE LLP

Certified Public Accountants

Jacksonville, Florida

March 14, 2005

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EXACTECH, INC.

BALANCE SHEETS

DECEMBER 31, 2004 AND 2003

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)