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                                   FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
   OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 2000

[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
   ACT OF 1934

For the transition period from          to

                        Commission file number: 0-26538

                           ENCORE MEDICAL CORPORATION
             (Exact name of Registrant as specified in its charter)

<TABLE>
      <S>                                       <C>
      DELAWARE                                  65-0572565
      (State or other jurisdiction of           (I.R.S. Employer
      incorporation or organization)            Identification No.)

      9800 METRIC BLVD.
      AUSTIN, TEXAS                             78758
      (Address of principal executive offices)  (Zip code)
</TABLE>

                                  512-832-9500
              (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, $0.001 par value
                                   $5 Warrant
                                   $7 Warrant

  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. Yes      No X

  The aggregate market value of the voting and non-voting common equity held by
non-affiliates of Encore Medical Corporation, computed by reference to the last
sales price of such stock as of March 15, 2001, was $9,661,304.
<PAGE>

  Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of March 15, 2001, the latest practicable date.

<TABLE>
<CAPTION>
                                  Title                              Outstanding
                                  -----                              -----------
      <S>                                                            <C>
      Common Stock, par value $0.001................................  8,854,965
</TABLE>

                      DOCUMENTS INCORPORATED BY REFERENCE

  List hereunder the following documents, if incorporated by reference, and the
Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) any annual report to security holders; (2) any proxy or
information statement; and (3) any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933:

  PORTIONS OF THE PROXY STATEMENT TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION PURSUANT TO REGULATION 14A UNDER THE SECURITIES EXCHANGE ACT OF 1934
IN CONNECTION WITH THE COMPANY'S ANNUAL MEETING OF SHAREHOLDERS ARE
INCORPORATED BY REFERENCE INTO PART III HEREOF (TO THE EXTENT SET FORTH IN
ITEMS 10, 11, 12 AND 13 OF PART III OF THIS ANNUAL REPORT ON FORM 10-K.)

  This annual report on Form 10-K of Encore Medical Corporation for the year
ended December 31, 2000 contains certain 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 are intended to
be covered by the safe harbors created thereby. To the extent that such
statements are not recitations of historical fact, such statements constitute
forward-looking statements that, by definition, involve risks and
uncertainties. In any forward-looking statement, where Encore Medical
Corporation expresses an expectation or belief as to future results or events,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but there can be no assurance that the statement of
expectation or belief will be achieved or accomplished.

  The following are factors that could cause actual results or events to differ
materially from those anticipated, and include, but are not limited to: general
economic, financial and business conditions; commodity prices; the success and
costs of advertising and promotional efforts; changes in and compliance with
governmental healthcare and other regulations; changes in tax laws; the ability
to obtain financing for one or more acquisitions; the ability to successfully
complete and integrate one or more acquisitions; technological obsolescence of
one or more products; changes in product strategies; the availability of
management personnel and other important employees; and the costs and effects
of legal proceedings.

Item 1. Business

Overview

  Encore Medical Corporation ("EMC") is in the business of becoming a broad
based, diversified medical products company that will design, manufacture and
market high quality medical products around the world. From its roots as an
orthopedic implant company, it is expanding into additional areas of orthopedic
patient care and surgical products. It will be accomplishing this mission
through a series of acquisitions targeted at profitable, well positioned
companies that can allow it to build several platforms in the medical products
industry. This strategy is expected to begin implementation during the first
half of 2001.

  During 2000 and at all times prior to 2000, EMC has had only a single
operating subsidiary. This company, Encore Orthopedics, Inc. ("Encore" or the
"Company"), designs, markets and distributes orthopedic products and supplies.
Its products are used primarily by orthopedic medical specialists to treat
patients with musculoskeletal conditions resulting from degenerative diseases,
deformities, traumatic events and participation in sporting events. Encore's
products cover a broad variety of orthopedic needs and include hip, knee and

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shoulder implants to reconstruct damaged joints, trauma products to reconstruct
bone fractures, and spinal implants to aid in the repair of the spinal column.

  Encore was formed in April 1992, when several executives with significant
experience in the orthopedics industry joined with a small original equipment
manufacturer of orthopedic implants and related instruments. Encore's first
product, the Foundation(R) Knee System, was introduced in Europe in late 1992
and in the United States in February 1993 after receiving Food and Drug
Administration ("FDA") 510(k) approval. Encore also obtained registration for
this product in Japan, where sales began in late 1994. Since that time Encore
has developed and obtained regulatory approval for over 108 additional
orthopedic total joint products, trauma products, biologic products, spinal
products, and product improvements. Encore is also awaiting 510(k) and IDE/PMA
approval on several other products.

  In May 1996, Encore completed its first acquisition when it acquired the
assets and liabilities of Applied Osteo Systems, Inc. ("AOS"). The acquisition
expanded Encore's product line into trauma products. This expansion into trauma
products was furthered by the acquisition of Biodynamic Technologies, Inc.
("BTI") in March 1999.

  On March 25, 1997, Encore became a public company when the stockholders of
Encore approved the merger of Encore with and into Healthcare Acquisition,
Inc., a wholly owned subsidiary of Healthcare Acquisition Corp., ("HCAC"), with
Encore being the surviving entity. As part of the transaction, HCAC became
known as Encore Medical Corporation. HCAC was formed in 1995 to invest in a
healthcare business and completed its initial public offering in March 1996.
Encore currently employs approximately 110 people worldwide.

  Encore's latest venture is in the spinal implant marketplace. This new market
anticipates industry growth rates of 20% per year for the next several years.
Encore gained access to its first spinal products through an exclusive United
States distribution agreement with Scient'x, a Paris-based spinal products
manufacturer. It began to distribute the Scient'x product line in the second
quarter of 2000. It further expanded its product offering with an exclusive
United States distribution agreement with Medicrea, another French spinal
products manufacturer. These products were introduced into the United States by
Encore during the second half of 2000.

Industry Background

  Certain of the information contained in this Form 10-K, generally, and in
this section concerning the definition, size and development of the various
product markets in which Encore participates, and Encore's general expectations
concerning the development of such product markets, both domestically and
internationally, are based on estimates prepared by Encore using data from
various sources (primarily Medical Data International, Inc., Dain Raucher
Wessel, US Bancorp, Merrill Lynch, Piper Jaffray and Knowledge Enterprises, as
well as data from Encore's internal research), which data Encore has no reason
to believe are unreliable, and on assumptions made by Encore, based on such
data, and Encore's knowledge of the orthopedic product industry, which Encore
believes to be reasonable.

  Over the last two decades, the orthopedic products market, which consists of
implants for joint replacement, spinal implants, trauma products, certain
arthroscopic, sports medicine and soft goods products, bone cement and related
products and instrumentation, has experienced significant growth in both
revenues and unit sales. Recent advances in technology require the addition to
the orthopedic products market tissue technology image-guided surgery,
osteobiologics and diagnostic products related to osteoporosis. Based on this
expanded scope, in 2000, the worldwide market for orthopedic products produced
approximately $11.0 billion in revenue. In the United States, the orthopedic
products market represented approximately $6.3 billion in revenue in 2000. From
1992 to 1998 the average annual revenue growth rate was approximately 10%. Unit
growth accounted for approximately half of this growth; the remainder of the
growth was attributable to technology driven price increases.


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  Joint reconstruction products accounted for approximately $2.7 billion of the
overall orthopedic market in the U.S. in 2000 and approximately $4.7 billion
worldwide. Among the joint replacement products, hip and knee replacement
products account for approximately 95% of worldwide revenues (with
approximately $4.5 billion in worldwide sales in 2000) and shoulder replacement
and other related products (spinal, elbow, wrist, finger, toe, ankle and
ligament prostheses) account for approximately 5% of worldwide revenues (with
approximately $250 million in worldwide sales in 2000). The trauma, or fracture
fixation, segment of the orthopedic products market approached $1.4 billion in
2000, representing approximately 7% growth over 1999. The trauma product market
is divided between internal and external fixation products. In 2000, internal
fixation products accounted for about 79% of the revenues from the sale of all
trauma products.

  Of particular note is the dynamic growth of both the spinal and
tissue/osteobiological market segments. It is estimated that the U.S. spinal
market exceeded $1 billion in 2000 and was approaching $1.5 billion worldwide.
Rapid advances in technology and product design are predicted to produce growth
rates nearing 20% per year for several years. Interbody fusion devices have
contributed greatly to this rapid growth, achieving approximately a 19% market
share since appearing on the market in 1996.

  The remaining segments of the orthopedic products market (soft goods, cast
room products, power and hand instruments, arthroscopy, etc.) account for
approximately 30% of the revenue for the total orthopedic products market.

  The international orthopedic market remains concentrated in a few primary
areas. The United States alone accounts for approximately 56% of the worldwide
market, and five countries, the United States, Germany, France, Japan and the
United Kingdom, account for approximately 80% of the worldwide market for such
products.

Strategy

  Encore has established its knee, hip and shoulder total joint products as the
core of its product line. Encore's management believes that it must offer a
complete line of reconstructive total joint implant products, along with
specialty trauma, biologic and spinal products, to remain competitive in the
orthopedic products marketplace. Encore will continue to design and acquire
technology to assemble complete, high quality, competitively-priced, globally-
designed product lines and will continue to expand its network of independent
sales agents and direct sales representatives for the sale of its products in
the United States and its customer relationships worldwide. Encore's goal is to
increase its penetration in the United States and foreign markets by
introducing line extensions to its already broad array of total joint
replacement products, entering the revision total hip market, growing its line
of trauma products, concentrating on specialty and niche products, and entering
the biologic and spinal implant marketplace through internal development,
distribution agreements and the acquisition of existing products or companies.

  Outside the United States, Encore's strategy is to explore alternative
avenues for distribution in Europe and Japan and enter into new distribution
agreements in other parts of the world. For both its United States and its
international products, Encore will continue to work with a team of experienced
orthopedic surgeons to help design and promote its products, develop clinical
results, assist in marketing the products and participate in educational
programs focusing on Encore's products.

Products

  Encore currently designs, manufactures and markets a wide variety of
orthopedic reconstructive joint products, trauma products, spinal products and
instruments used by surgeons to perform orthopedic surgery. Encore plans to
continue to develop or acquire new hip, knee and shoulder systems as well as
new trauma products, spinal products, and line extensions that address the
differing preferences of surgeons, and new systems for new indications. Encore
embarked in the fourth quarter of 2000 on a product rationalization review
whereby it reviewed all of its existing product lines and offerings to
determine which were appropriate to continue to offer and which were necessary
to discontinue based on lack of sales performance or product line overlap.

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 Reconstructive Knee Products

  Encore currently offers the Foundation(R) Knee System in both cruciate
sparing and posterior stabilized versions, for both primary and revision
applications, all of which are designed to duplicate as closely as possible the
anatomical function of the patient's knee, thereby improving its range of
motion and stability. Encore's knee systems are used to replace the
articulating surfaces of the knee: the knee cap (patella), top of the shin bone
(tibia), and bottom of the thigh bone (femur). The knee system consists of
eight different sizes of knee components, which are made of cobalt chrome
alloy, titanium alloy and high-density polyethylene. Sales of knee products
accounted for approximately 52% of total sales in 2000.

 Reconstructive Hip Products

  Encore is currently marketing five internally designed hip systems. These
include the Foundation(R) Hip System, the Vitality(R) Hip Stem, the Linear(R)
Hip Stem, the Stamina(R) Hip Stem and the Revelation(TM) Hip Stem. Encore's hip
implant consists of the same basic parts as the normal hip, including a femoral
stem (thighbone) with a spherical femoral head (ball) and an acetabular cup
(socket) on which the femoral head articulates. Sales of hip products accounted
for approximately 30% of total sales in 2000.

 Reconstructive Shoulder Products

  Encore markets its internally designed Foundation(R) Shoulder System.
Encore's shoulder implant consists of the same basic parts as the normal
shoulder, including a humeral stem with a spherical humeral head (ball) and a
glenoid component on which the humeral head articulates. Sales of shoulder
products accounted for approximately 4% of total sales in 2000.

 Trauma--Fixation Products

  Encore has built its trauma product line through a series of acquisitions.
The first acquisition, Applied Osteo Systems in 1996, gave Encore the
True/Flex(R) intramedullary nails, a patented system of intramedullary nails
used in repairing bone fractures, primarily for use in correcting upper
extremity fractures, and the True/Lok(TM) external fixation system, developed
by Texas Scottish Rite Hospital. Encore has recently begun to sell True/Flex(R)
intramedullary nail products in the higher volume market for products used in
correcting lower extremity conditions. The acquisition of Biodynamic
Technologies, Inc. ("BTI") in March 1999 allowed Encore to offer a more
complete line of specialty products for use in the treatment of upper extremity
orthopedic trauma and added other trauma products used in the hip and ankle
areas of the body. Sales of trauma products accounted for approximately 8% of
total sales in 2000.

 Instrumentation

  Approximately 4% of 2000 sales were the instrumentation used to implant the
above products. Virtually all of these sales were outside the United States.
These sales are classified as reconstructive sales in the financial statement
footnotes related to segment information.

 Spinal Products

  In 1999 Encore entered into a distribution agreement to begin selling spinal
products pursuant to an exclusive distribution agreement for the United States
for products produced by Paris-based Scient'x. The Scient'x line contains many
products for which Encore began to obtain FDA approval to market in 1999. The
FDA approval process continued into the first half of 2000. The Isolock(TM) and
Isobar(TM) systems consist of rods, plates, cortical screws, and pedicle screws
used to achieve fusion of the spine. The cervical spine is addressed with the
PCB(TM) Cervical Plate System. These product lines will continue to expand as
more products are developed and U.S. regulatory approval is obtained. In
addition, Encore now markets the PASS Spinal System, designed and manufactured
by Medicrea, a French company based in La Rochelle, France. FDA

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approval for this product line was obtained during the third quarter of 2000
and marketing efforts and sales of this product commenced during the fourth
quarter of 2000. Sales of spinal products accounted for approximately 2% of
total sales in 2000.

Marketing and Sales

  Encore's products are currently marketed and sold in the United States,
Germany, certain countries in the Middle East, and Japan. In the United States,
products are sold to hospitals and orthopedic surgeons through a network of
independent commissioned sales agents and direct representatives. Outside the
United States, Encore's total joint products are sold through distributors.
Beginning in 1999 and continuing in 2000, Encore began rebuilding its
international sales force which in the past had been exclusively with the PLUS
Endoprothetik AG family based in Switzerland. The distribution agreement
between Encore and PLUS Endoprothetik AG ("PLUS-Switzerland") concluded as of
December 31, 2000. However, one affiliate of PLUS-Switzerland, EndoPLUS GmbH,
continues to sell Encore products in Germany. This rebuilding is being
accomplished on a territory by territory basis. During 1999, customers were
added for France and the Middle East, however the French customer was
terminated in early 2001. It is Encore's practice to now require that
international customers carry the complete line of Encore total joint and
trauma products. This differs from past practice when PLUS-Switzerland only
carried the Foundation(R) Total Knee System. In Japan, certain of Encore's
trauma products are sold by Century Medical, Inc. while Senko Medical Trading
Co. carries both the Encore total joint products and the remainder of the
Encore trauma products.

  Encore's management is continuing to look for opportunities to expand the
international market for Encore's products and will continue its efforts to
identify international markets in which its U.S.-designed products can obtain
rapid acceptance with surgeons, hospitals and other buyer groups. Encore's
management will also continue to seek markets that have sufficient profit
potential, size and market conditions.

  Encore strives to place its United States sales agents in sales territories
whose populations contain significant concentrations of individuals over 55
years of age. As of December 31, 2000, Encore had independent sales agents
selling either reconstructive products, trauma products, spinal products or all
of these systems, in 25 sales territories in 17 states of the United States.
Sales agents are generally granted a contract with a term of one to five years.
Agents are typically paid a sales commission of 20% of the selling price of all
products sold and are eligible for bonuses if sales exceed certain preset
objectives. Each of Encore's sales agents are assigned an exclusive sales
territory. Some of the sales agents may sell non-competing lines of orthopedic
products manufactured by other companies, but no agent may carry competing
product lines. Encore provides its agents with product inventories on
consignment for their use in marketing its products and for filling customer
orders. All sales agents are required to participate in periodic product and
sales training courses given by Encore at its corporate offices in Austin,
Texas, as well as at other locations around the United States.

  Encore has developed an on-line inventory control system and a comprehensive
distribution support system that provides for instrument and inventory loaners
in order to enable sales agents to service low volume territories. Encore is
also developing a dedicated field support group to provide rapid response to
technical issues.

Affiliated Surgeons

  A key aspect in Encore's development, marketing and sale of its products is
the use of designing and consulting surgeons. Each major product is supported
by several designing surgeons who assist Encore not only with the design of the
product, but who also give demonstrations using the product, assist in
developing marketing materials and participate at symposia addressing both
clinical and economic aspects of the product. The designing surgeons working on
a product are compensated with an aggregate royalty of approximately 5%, which
is typically split among the group members. The designing and consulting
surgeons may also receive stock options. Encore has encouraged interaction
among the surgeons with visits to designing surgeons' institutions (e.g.,
viewing surgeries, training meetings and regional workshops) by attempting to
regionalize the

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designing surgeon groups. Encore also has established relationships with
consulting surgeons, who perform various consulting services for Encore. Such
services include conducting clinical studies on various products, analysis of
economic issues relating to use of the products, establishment of protocols for
use of the products and participation at various symposia. Current consulting
surgeons do not receive royalty payments but may be granted stock options under
the 1997 Surgeon Advisory Stock Option Plan. Consulting surgeons are also
occasionally paid consulting fees for their services to Encore in support of
Encore products.

Research and Development

  Encore conducts extensive research and development programs at its facility
in Austin, Texas. Such activities are focused on making improvements to
existing products, developing new products using new materials and surgical
applications and obtaining regulatory approval to market products in the United
States and around the world.

Competition

  The market for orthopedic products is highly competitive and is dominated by
a number of large companies, each of which have research and development,
sales, marketing and manufacturing capabilities greater than those of Encore.
These competitors also feature a wider range of product offerings than Encore,
and many have the endorsement of leading orthopedic surgeons for their
products.

  In the last ten years, new technologies and product concepts have been
introduced into the orthopedic market at a rapid rate, often before prior
technologies and concepts have been fully integrated. Many of Encore's
competitors have entered into various agreements and joint ventures with other
companies to develop innovative products for the industry. Furthermore, most
orthopedic product companies are attempting to develop new implant surfaces to
enhance bone ingrowth and are experimenting with new materials such as
hydroxylapatite and ceramics. It is the opinion of Encore's management that
this evolution in high technology products will continue for the foreseeable
future.

  In addition to the race for technology, orthopedic product companies must now
devote attention to the prices of their products. Price has become increasingly
important as a competitive factor, due particularly to governmental and third
party payors' adoption of prospective payment systems. Thus, although Encore's
management believes that the design and quality of its products compare
favorably with those of its competitors, should Encore be unable to offer
products with the latest technological advances at relatively modest prices,
its ability to successfully compete with its competitors could be materially
and adversely affected. Currently, Encore competes favorably on price with most
of its competitors.

Manufacturing

  Encore's management believes that Encore must be a low-cost manufacturer in
order to effectively compete and that its manufacturing system must be flexible
and responsive to ongoing supply demands. Encore uses both in-house
manufacturing capabilities and relationships with third-party vendors to supply
products. The third-party vendors may have special manufacturing capabilities
(e.g., casting, forging, porous coating or sterilization) or may be general
suppliers of finished components. With the exception of those vendors supplying
special capabilities, the choice of in-house or vendor supply is based on
available in-house capacity, lead time control, and cost control.

  Encore's in-house capacity includes CNC machine tools, belting, polishing,
cleaning, packaging and quality control. Encore obtained ISO 9001 qualification
and Medical Device Directive "CE" certification in 1996. At present, the
machining capacity is used to produce about 75% of the implant units; third
party manufacturers produce the remainder. The primary raw materials used in
the manufacture of Encore's reconstructive products are cobalt chromium alloy,
stainless steel alloys, titanium alloy and ultra high molecular weight
polyethylene. Encore has alternate sources for all of its vendors and suppliers
and believes that adequate capacity exists at its suppliers to meet all
anticipated needs.

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  All implants and instruments go through in-house quality control, cleaning
and packaging operations. Quality control measures begin with an inspection of
all raw materials and castings to be used. Each piece is appropriately
inspected at each step of the manufacturing process. As a final step, products
pass through a "clean room" environment designed and maintained to reduce
product exposure to particulate matter.

Intellectual Property

  Encore holds one United States patent, covering a tibia base plate design
used in connection with its Foundation(R) Knee System. It also has
approximately ten (10) exclusive patent licenses, which protect Encore both in
the United States and in several foreign countries. Encore has twelve (12)
trademarks registered in the United States, one of which is also registered in
Germany, Switzerland, Austria, China, Japan and the European Community, and
another one that is also registered in Japan. Encore also depends on numerous
unregistered trademarks, some of which have been submitted for registration in
the United States. In the future, Encore will apply for such additional patents
and trademarks as it deems appropriate. Finally, Encore relies on non-patented
proprietary know-how, trade secrets, process and other proprietary information,
which it protects through a variety of methods, including confidentiality
agreements and proprietary information agreements.

Government Regulation

  Encore's products are subject to rigorous government agency regulation in the
United States and certain other countries. In the United States, the FDA
regulates the testing, labeling, manufacturing and marketing of medical devices
to ensure that medical products distributed in the United States are safe and
effective for their intended uses. The FDA also regulates the export of medical
devices manufactured in the United States to international markets. Encore's
products are subject to such FDA regulation.

  Under the Food, Drug and Cosmetic Act, as amended, medical devices are
classified into one of three classes depending on the degree of risk imparted
to patients by the medical device. Class I devices are those for which safety
and effectiveness can be assured by adherence to General Controls, which
include compliance with Good Manufacturing Practices ("GMPs"), facility and
device registrations and listings, reporting of adverse medical events, and
appropriate truthful and non-misleading labeling, advertising and promotional
materials. Some Class I devices also require pre-market review and clearance by
the FDA through the 510(k) Premarket Notification process described below.
Class II devices are subject to General Controls, as well as premarket
demonstration of adherence to certain performance standards or other special
controls as specified by the FDA. Premarket review and clearance by the FDA is
accomplished through the 510(k) Premarket Notification procedure. In the 510(k)
Premarket Notification procedure, the manufacturer submits appropriate
information to the FDA in a Premarket Notification submission. If the FDA
determines that the device is "substantially equivalent" to a device that was
legally marketed prior to May 28, 1976, the date upon which the Medical Device
Amendments of 1976 were enacted, or to another similar commercially available
device subsequently cleared through the 510(k) Premarket Notification process,
it will grant clearance to commercially market the device. It generally takes
three to 6 months from the date of submission to obtain clearance of a 510(k)
Premarket Notification submission, but the process may take longer. If the FDA
determines that the device, or its "labeled" intended use, is not
"substantially equivalent," the FDA will automatically place the device into
Class III.

  A Class III product is a product that has a wholly new intended use or is
based on advances in technology for which the device's safety and effectiveness
cannot be assured solely by the General Controls, performance standards and
special controls applied to Class I and II devices. These devices often require
formal clinical investigation studies to assess their safety and effectiveness.
A Pre-Market Approval ("PMA") from the FDA is required before the manufacturer
of a Class III product can proceed in marketing the product. The PMA process is
much more extensive than the 510(k) Premarket Notification process. In order to
obtain a PMA, Class III devices, or a particular intended use of any such
device, must generally undergo clinical trials pursuant to an application
submitted by the manufacturer for an IDE. An approved IDE exempts the
manufacturer from the otherwise applicable FDA regulations and grants approval
for the conduct of human clinical investigation in order to generate the
clinical data necessary to scientifically evaluate the safety and efficacy of
the Class III device or intended use.

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  When a manufacturer believes that sufficient pre-clinical and clinical data
has been generated to prove the safety and efficacy of the new device or new
intended use, it may submit a PMA application to the FDA. An FDA review of a
PMA application generally takes one to two years from the date the PMA
application is accepted for filing, but the process may take significantly
longer. In approving a PMA application, the FDA may also require some form of
post-market surveillance whereby the manufacturer follows certain patient
groups for a number of years, making periodic reports to the FDA on the
clinical status of those patients. This helps to ensure that the long-term
safety and effectiveness of the device are adequately monitored for adverse
events. Most pre-amendment devices (those marketed prior to the enactment of
the Medical Device Amendment of 1976) are, in general, exempt from such
Premarket Approval requirements, as are Class I and Class II devices.

  Encore's products include both pre-amendment and post-amendment Class I, II
and III medical devices. All currently marketed devices hold the relevant
exemptions or premarket clearances or approvals, as appropriate, required under
federal medical device law.

  Encore's manufacturing processes are also required to comply with GMP
regulations that cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging and shipping of
Encore's products. Further, Encore's facilities, records and manufacturing
processes are subject to periodic unscheduled inspections by the FDA or other
agencies. Failure to comply with applicable U.S. medical device regulatory
requirements could result in, among other things, warning letters, fines,
injunctions, civil penalties, repairs, replacements, refunds, recalls or
seizures of products, total or partial suspensions of production, refusal of
the FDA to grant future pre-market clearances or approvals, withdrawals or
suspensions of current clearances or approvals and criminal prosecution. There
are currently no adverse regulatory compliance issues or actions pending with
the FDA, and no FDA GMP audits conducted at Encore's facilities have resulted
in any adverse compliance enforcement actions.

  Encore must obtain export certificates from the FDA before it can export
certain of its products and is subject to regulations in many of the foreign
countries in which it sells its products. These include product standards,
packaging requirements, labeling requirements, import restrictions, tariff
regulations, duties and tax requirements. Many of the regulations applicable to
Encore's devices and products in such countries are similar to those of the
FDA. The national health or social security organizations of certain countries
require Encore's products to be qualified before they can be marketed in those
countries. To date, Encore has not experienced any difficulty in complying with
these regulations. Encore has also implemented policies and procedures allowing
it to position itself for the changing international regulatory environment.
The ISO 9000 series of standards has been developed as an internationally
recognized set of guidelines that are aimed at ensuring the design and
manufacture of quality products. A company that passes an ISO audit and obtains
ISO registration becomes internationally recognized as well run and functioning
under a competent quality system. In certain foreign markets, it may be
necessary or advantageous to obtain ISO 9000 series certification, which is in
some ways analogous to compliance with the FDA's GMP requirements. The European
Community promulgated rules requiring medical products to receive a CE mark by
mid-1998. A CE mark is an international symbol of adherence to certain
standards and compliance with applicable European medical device requirements.
ISO 9000 series certification is one of the prerequisites for CE marking for
most of Encore's products. ISO 9001 is the highest level of ISO certification,
covering both the quality system for manufacturing, as well as the quality
system for product design controls. Encore has received an ISO 9001
certification and "CE" certification.

  Certain provisions of the Social Security Act, commonly known as the
"Medicare Fraud and Abuse Statute," prohibit entities, such as Encore, from
offering, paying, soliciting or receiving any form of remuneration in return
for the referral of Medicare or state health program patients or patient care
opportunities, or in return for the recommendation, arrangement, purchase,
lease or order of items or services that are covered by Medicare or state
health programs. Violation of this statute is a felony, punishable by fines of
up to $25,000 per violation and imprisonment of up to five years. In addition,
the U. S. Department of Health and Human Services may impose civil penalties
excluding violators from participation in Medicare or state health programs.
Many states have adopted similar prohibitions against payments intended to
induce referrals of Medicaid and other third party payor patients.

                                       9
<PAGE>

  Subject to certain exemptions, federal physician self-referral legislation
prohibits 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. Penalties
for violations include a prohibition on payment by these government programs
and civil penalties of as much as $15,000 for each referral in violation of the
statute and $100,000 for participation in a "circumvention scheme."

Item 2. Properties

Encore owns no real property; however, Encore leases an approximately 70,000
square foot facility in Austin, Texas for its corporate headquarters,
manufacturing facilities and warehouse for its business operations. This lease
is a 10-year lease that commenced on April 1, 1997, with the option to renew
for five years and with an option to terminate the lease after 5 years upon the
payment of the unamortized leasehold improvement costs. The Company's monthly
lease payments are approximately $35,422, for an annual lease payment of
approximately $425,064, which amounts do not include the Company's share of
applicable common area maintenance, property taxes and public utility charges.

Item 3. Legal Proceedings

During the year 2000, Encore was a defendant in a lawsuit styled Wright Medical
Technology, Inc. v. Encore Orthopedics, Inc., et al., C. A. No. 99CV4900(SSB),
filed in the United States District Court of New Jersey. In this case, Wright
alleged that Encore tortuously interfered with certain of Wright's contractual
relationships and conspired to cause a former Wright sales person to breach its
contract with Wright. This case was settled without any admission of liability
in October 2000. Concurrently with the settlement, Encore entered into an
Exclusive Supply and Distribution Agreement with Wright covering the
WRIGHTLOCK(R) spinal product line. Encore purchased a certain amount of
stocking inventory and gained the worldwide exclusive rights to distribute this
product line. In addition, Encore acquired certain rights to intellectual
property related to the product line. Based on Encore's evaluation of its
potential lines, including an analysis of the potential uses of the acquired
intellectual property, the Company recognized a charge of $700,000 during the
fourth quarter of 2000 related to the impairment of this intellectual property.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders through the solicitation of
proxies or otherwise.

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

The Company's Common Stock and $5 Warrants are traded on the NASDAQ National
Market System under the symbols "ENMC" and "ENMCW," respectively. EMC also has
outstanding $7 Warrants which are not traded on a public market. The following
tables set forth for the periods indicated the high and low sales prices of the
Company's Common Stock and $5 Warrants as reported on the NASDAQ National
Market since January 1, 1999:

<TABLE>
<CAPTION>
                                                       Common Shares $5 Warrants
                                                       ------------- -----------
                                                        High   Low   High   Low
                                                       ------------- ----- -----
<S>                                                    <C>    <C>    <C>   <C>
2000
First Quarter......................................... $ 4.46 $ 2.00 $1.63 $0.31
Second Quarter........................................ $ 3.13 $ 1.88 $0.75 $0.38
Third Quarter......................................... $ 2.50 $ 1.56 $0.44 $0.31
Fourth Quarter........................................ $ 2.63 $ 1.38 $0.44 $0.13
1999
First Quarter......................................... $ 3.75 $ 2.88 $0.88 $0.63
Second Quarter........................................ $ 3.41 $ 2.69 $0.63 $0.47
Third Quarter......................................... $ 3.00 $ 2.25 $0.56 $0.34
Fourth Quarter........................................ $ 2.50 $ 1.75 $0.38 $0.19
</TABLE>


                                       10
<PAGE>

As of March 15, 2001, the Company had approximately 79 shareholders of record
of the Company's Common Stock. There are in excess of 1,200 beneficial owners
of the Company's Common Stock. As of March 15, 2001, the Company had
approximately 12 shareholders of record of the Company's $5 Warrants. There are
in excess of 300 beneficial owners of the Company's $5 Warrants. As of March
15, 2001, the Company had approximately 61 holders of record of the Company's
$7 Warrants and approximately 70 beneficial owners. The Company's $7 warrants
expire by their own terms as of March 25, 2001.

Item 6. Selected Financial Data

The following sets forth selected financial data with respect to EMC for the
periods indicated. The data as of December 31, 1996, 1997, 1998, 1999 and 2000
and for each of the five years in the period ended December 31, 2000, have been
derived from EMC's audited historical consolidated financial statements. The
selected financial data should be read in conjunction with the financial
statements and related notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
report.

<TABLE>
<CAPTION>
                                             Year Ended December 31,
                                     ----------------------------------------
                                      2000     1999    1998    1997    1996
                                     -------  ------- ------- ------- -------
                                      (in thousands, except per share data)
<S>                                  <C>      <C>     <C>     <C>     <C>
Statement of Operations Data
Sales............................... $30,113  $26,095 $28,990 $24,440 $17,621
Gross margin........................  15,130   17,902  19,408  16,504  11,563
Income (loss) from operations.......  (4,009)   3,015   3,201   2,500   2,129
Income (loss) before extraordinary
 item...............................  (3,263)   1,619   1,777   1,857   1,033
Net income (loss)...................  (3,263)   1,619   1,777   1,259   1,033
Basic earnings (loss) per common
 share..............................    (.36)    0.18    0.20    0.16   (0.04)
Shares used in computing basic
 earnings (loss) per share..........   8,990    9,117   9,088   8,033   5,463
Diluted earnings (loss) per share...    (.36)    0.16    0.17    0.12   (0.04)
Shares used in computing diluted
 earnings (loss) per share..........   8,990   10,219  10,611  10,253   5,463

Balance Sheet Data
Working capital..................... $21,615  $20,680 $17,954 $14,682 $10,012
Total assets........................  38,494   36,915  30,556  25,721  20,275
Current portion of note payable and
 long-term debt.....................   3,232      734   1,265     612   2,764
Long-term debt, less current
 portion............................  14,283   12,047   5,603   3,244   6,013
Stockholders' equity................  17,820   21,074  19,824  18,024   6,589
</TABLE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

General

  Encore develops, manufactures, markets and sells orthopedic implant devices
and related surgical instrumentation to hospitals and stocking distributors. In
the past five years, Encore has introduced its total joint replacement and
trauma products to the marketplace and established both domestic and
international distribution. Encore's strategy reflects its founders' beliefs
that Encore must design and market high quality orthopedic products to a
worldwide audience. Encore's past financial results are reflective of its
efforts to develop the necessary infrastructure and relationships to make
Encore a competitive participant in the orthopedics industry.

  Encore has invested in building a flexible infrastructure consisting of
experienced personnel, business and management information systems, and floor
space to provide the highest level of customer responsiveness at the lowest
possible cost. The most current technology is employed to provide the
visibility required throughout the Company to plan for and manage rapid growth.

                                       11
<PAGE>

  Encore has expanded its full line of total joint implants to cover knee, hip
and shoulder applications. In addition, in May 1996, Encore acquired all of the
assets and liabilities of Applied Osteo Systems, Inc. ("AOS"), an orthopedic
company with products in the trauma implant area, in a transaction accounted
for as a pooling of interest. In March 1999, Encore acquired substantially all
of the stock of BTI, a company that had developed several trauma products. This
acquisition was accounted for as a purchase. Encore merged with Healthcare
Acquisition Corp. ("HCAC") in March 1997, which was treated as a
recapitalization of Encore for financial statement purposes.

  Encore has developed a network of independent sales representatives and
direct sales persons that sell Encore's products throughout the United States.
Encore has also established relationships with several international customers.
Encore must receive 510(k) or PMA approval from the FDA for every product that
it desires to sell in the United States and similar regulatory approvals in
other countries in which it sells its products. Encore has received such
approvals for all of its products that it currently markets.

Results of Operations

 Year Ended December 31, 2000 Compared to Year Ended December 31, 1999.

  Sales were $30,113,000 for the year ended December 31, 2000, representing an
increase of $4,018,000 or 15% compared to total sales of $26,095,000 for the
year ended December 31, 1999. Both international and U.S. sales increased
during the year. International sales increased 42% in the year ended December
31, 2000 when compared to the year ended December 31, 1999. This was due to the
rebuilding of the international sales force, primarily in Japan, as well as the
addition of sales forces in certain countries in the Middle East and France. In
the United States, sales increased 5% for the year when compared to the prior
year. While agents that were with Encore for the entire year showed strong
increases over the prior year's sales, Encore was not as successful as it
anticipated in increasing the number of sales agents or representatives
actively selling Encore products. In an effort to focus the sales force on
productive agents, there were a number of sales representatives whose
agreements with Encore were terminated during 2000.

  Sales of reconstructive devices, knees, hips, and shoulders, each showed a
significant increase in sales in 2000 when compared to 1999. Knee sales
increased 10% over the prior year, hip sales increased 20% over the prior year,
and shoulder sales increased 11% over the prior year. This was a result of
several agents showing stronger sales year over year and the introduction of
revision hip products.

  However, trauma sales showed an overall decrease of 10% from the prior year.
This was primarily due to the fact that there had been a large order during
1999 for the Japanese customer of the Ultimax(TM) line of trauma products which
was not repeated during 2000.

  Spinal product sales increased to over $500,000 during the year of 2000,
which was a result of obtaining the necessary FDA approvals for the Scient'x
product lines during the first quarter of 2000 and beginning to sell the
Medicrea product lines during the second half of 2000.

  Gross margin during 2000 was negatively impacted by two different items.
First, with the increased percentage of international sales, as compared to
U.S. sales, gross margin decreased because U.S. sales generate a greater gross
margin than sales outside the United States. Secondly, during the fourth
quarter of 2000, Encore conducted an extensive evaluation of its product lines
and decided to rationalize the products it was offering for sale. As a result
of this product rationalization, there was $4,203,000 of additional reserves
added to the inventory reserve for slow moving, discontinued and obsolete
items. Gross margin, as a percentage of sales, was 50% when the inventory
charge is included, and 64% without the inventory charge. This compares to a
gross margin of 69% of sales for 1999.

  Selling, general and administrative expenses increased by $2,104,000 or 16%
over 1999. A portion of this increase came from an increase of commission and
royalty expenses related to higher sales. Additional increases in selling
expenses related to a national sales meeting and surgeon meetings which had not
been held in prior years.

                                       12
<PAGE>

  Research and development expenses increased by $147,000 over the amount spent
in 1999. This represents an increase of 9%. Significant activities undertaken
during the year resulted in the Keystone(TM) Modular Hip System being approved
by the FDA during 2000, as well as a number of IDE clinical studies being
conducted. Additionally, several products are in the process of being
developed.

  An additional charge of $2,001,000 was taken in the fourth quarter of 2000
which relates to specific items that are not part of the normal selling,
general and administrative, or research and development expenses. The most
significant was a charge of $700,000 related to impairment of intangible
assets. Additional components of this charge include $439,000 which relates to
post retirement obligations for former employees and $383,000 which relates to
doubtful accounts connected to a French customer.

  As a result of these other charges and the increase in the inventory reserve
taken in 2000, operating income showed a loss of $4,009,000. However, absent
these charges, operating income would have been $2,195,000. This amount is
$820,000 or 27% less than operating income for 1999.

  Interest expense increased by $369,000 in 2000 compared to 1999. This was due
to a full year of interest expense related to the notes incurred in the
acquisition of BTI, whereas only nine months of interest expense was incurred
during the year of 1999 related to these notes. In addition, the average amount
outstanding on the line of credit during 2000 was greater than the average
amount outstanding during 1999.

  The total effect of the increase in sales, offset by the increase in expenses
as well as the charges to inventory reserves and other charges outlined above
resulted in EMC having a net loss for the year of $3,263,000.

 Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.

  Sales were $26,095,000 for the year ended December 31, 1999, representing a
decrease of $2,895,000 or 10% compared to total sales of $28,990,000 for the
year ended December 31, 1998. This decrease in absolute sales reflects two
different trends for Encore sales. On one hand, U.S. sales increased 6% over
1998. More productive sales territories, an increase in the number of sales
territories and an increase in the number of products offered for sale fueled
the increase in U.S. sales. On the other hand, outside the U.S., sales
decreased 35% compared to the year ended December 31, 1998. This was mainly due
to the significant decrease in the sales of Encore's former primary distributor
for Europe. This relationship was changed in the summer of 1999 and Encore
became engaged in pursuing alternative avenues for international distribution
to remedy this situation. During 1999 Encore entered into distribution
agreements for France and the Middle East and engaged in negotiations with
other distributors for other countries in Europe. In addition, Encore
terminated its relationship with its distributor for total joint products in
Japan as of December 31, 1998. During 1999, Encore located and contracted with
a new, highly experienced sales distribution company for carrying not only
Encore's total joint lines of products, but also its new trauma products that
it acquired when it acquired the trauma specialty company BTI. This sales force
will complement the other Japanese sales force that is distributing Encore's
specialty trauma line of intramedullary rods and an external fixation system.

  Overall, while sales of reconstructive products decreased 14% to $23,490,000
in 1999, this decrease masks the significant increase in hip sales for Encore.
These products were significantly aided by the addition of several new products
that were introduced during 1998 and showed strong sales growth in 1999. The
overall decrease in total joint sales was fueled by decreased sales of the
Foundation(R) Total Knee Systems which were the only product being sold by
Encore's former European distributor. Another strong indication of the progress
that Encore made during 1999 is that trauma product sales increased 56.9% over
1998. This increase was a result of having a broader product line, in part due
to the acquisition of BTI, and having the products gain more acceptance
throughout the United States. Another factor in the increased U.S. sales was
the transition from a non-exclusive to an exclusive sales force. Going forward,
rapid geographical expansion in the United States, an improvement in the
quality of the sales force, adding new international distributors who will
carry the full Encore product line and introduction of new products will fuel
additional increases in sales in both the total

                                       13
<PAGE>

joint and trauma segments of the business. Additionally, Encore received
several of the needed FDA approvals to market spinal products during the later
half of 1999 and was able to bring these products to the United States during
2000.

  As an indication of the fiscal management and cost control that Encore
exercised during 1999, gross margin as a percent of sales increased in 1999
even though sales overall decreased. Gross margin was 68.6% of sales in 1999
compared to 66.9% of sales for 1998. This was due both to the increase in U.S.
sales, which generate a greater gross margin than sales outside the U.S., and
continued monitoring of manufacturing costs.

  Even with a decrease in sales for 1999, Encore kept up its strong research
and development program since it recognizes that new products are the lifeblood
of expansion of an orthopedics company. As a percentage of sales, research and
development expenses increased to 6.3% in 1999 from 5.8% in 1998. Activities
included a joint design effort with Saint Gobain Desmarquest Fine Ceramics to
develop a ceramic knee femoral component to address the issue of polyethylene
wear in the knee, clinical trials for a ceramic/ceramic hip system and a
metal/metal hip system, development of a mobile bearing knee, development of a
revision hip system and regulatory submissions for spine.

  Part of controlling expenses in a year when sales decreased was that selling,
general and administrative expenses decreased by $1,284,000, or 9%, in 1999
when compared to the same period in 1998. While a part of this decrease came
from lower commissions and royalties associated with the overall decrease in
sales, significant portions of the savings came from management efforts
undertaken in 1999. For example, the Company incurred costs in 1998 relating to
consigned inventory discrepancies. Discrepancy charges in 1999 were
insignificant.

  As a result of the fiscal management of Encore during a year of decreasing
sales, operating income as a percent of sales increased 0.6% to 11.6% as
compared to 1998 of 11%. So even though sales decreased by 10%, operating
income only decreased 5.8% to $3,015,000, as compared to $3,201,000 for the
year ended December 31, 1998.

  Interest expense increased by $523,000 in 1999 compared to 1998. This was due
to an increase during 1999 in the average line of credit balance over the same
period last year and the addition of interest on notes payable related to the
acquisition of BTI on March 30, 1999. Other income increased $229,000 in 1999
due to licensing income and favorable foreign exchange gains.

  The total effect of the decrease in sales coupled with the strong fiscal
management of Encore was that net income as a percent of sales increased to
6.2% in 1999 from 6.1% in 1998. In pure dollar terms, net income for the year
ended December 31, 1999, decreased to $1,619,000 from $1,777,000 in 1998.

Capital Expenditures

  Encore has invested significantly over the past several years on building a
state-of-the-art, fully integrated orthopedic implant company. These
expenditures have included the investment in surgical instrumentation, machine
tools to increase manufacturing capacity, computer hardware and software, and
equipment required to support a growing organization. Over the last several
years, Encore has acquired machine tools primarily through capital leases.
Encore has made significant investments in surgical instrumentation, as such
instrumentation is necessary to implant Encore reconstructive products. Also,
the size of the sales force and the increases in the product lines have
necessitated increases in the need for additional surgical instruments. In the
United States, these instruments are capitalized and depreciated. They are used
by the sales force to aid in sales. Internationally, these instruments are sold
or leased to international customers. The amounts of surgical instruments
capitalized in 1998, 1999 and 2000 were $1,590,000, $1,373,000 and $1,280,000,
respectively. Other capital expenditures during those periods were $1,321,000,
$731,000 and $414,000, respectively.

                                       14
<PAGE>

  As a growing organization, Encore has devoted significant capital resources
to expanding and improving its management information systems through additions
of hardware and software. In addition, during 1999, Encore dealt with Y2K
issues. The expenditures for these computer expansions and improvements were
approximately $194,000 in 2000, $249,000 in 1999 and $370,000 in 1998.

Liquidity

  Since its inception, the Company has financed its operations through the sale
of equity securities, borrowings and cash flow from operations. The Company has
available to it a $13 million revolving credit facility. This facility will
decrease during the year on a quarterly basis to $10.5 million. In addition, it
has a number of financial covenants that must be met on a quarterly basis. As
of December 31, 2000, the Company had drawn approximately $12 million. As of
December 31, 2000, the Company was in compliance with all of the financial
covenants. While the Company's current forecast shows that the Company will be
able to meet the financial covenants during 2001 and will be able to keep the
need for outstanding debt under the maximum ceilings for amounts outstanding,
there is no assurance that the forecasts will prove accurate or that the bank's
requirements will be able to be met. In, addition, there is no assurance that
another credit facility will be available as a replacement to the current
facility. There exists the possibility that EMC will need to obtain additional
equity financing, although there is no assurance as to the amount, availability
or cost of such financing. A distinguishing feature of the Credit Facility is
that Encore's cash management services are intermingled with it on a daily
basis. Encore's bank accounts sweep funds to either reduce or increase the loan
balance, as needed, and invests any excess funds if the loan balance equals
zero, in a money market account. As such, the outstanding loan balance is
adjusted daily based on the net amount of cash receipts versus cash outlays,
while the cash balance at Wells Fargo remains at zero as long as Encore is a
net borrower. This sweep feature has the effect of minimizing interest cost and
automatically investing any excess funds.

  The Company's continued growth has resulted in an increase in its capital
requirements. This growth is now primarily funded by the Credit Facility and
cash generated from operations to meet its working capital needs. As of
December 31, 2000, the Company had net working capital of approximately $22
million as compared to approximately $21 million at December 31, 1999. This
increase was primarily due to increases in inventory and accounts receivable,
offset by an increase in the current portion of long-term debt.

  During the third quarter of 1998 and continuing through 1999 and into 2000,
EMC began actively purchasing its equity securities, both common stock and $5
Warrants, in connection with the buyback program it announced at the beginning
of 1998. This program was initiated because EMC management and the Board of
Directors felt that EMC's equity was undervalued. EMC repurchased 310,800,
185,200 and 43,500 shares of common stock in 1998, 1999 and 2000 respectively,
and 231,800 and 81,500 $5 Warrants during 1998 and 1999, respectively. EMC did
not repurchase any $5 Warrants during 2000.

Forward Looking Statements

  The foregoing Management's Discussion and Analysis contains various "forward
looking statements" within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 that represent
EMC's expectations or beliefs concerning future events, including, but not
limited to, statements regarding growth in sales of Encore's products, profit
margins and the sufficiency of EMC's cash flow for its future liquidity and
capital resource needs. 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, Encore's dependence on the
ability of its third-party manufacturers to produce components on a basis that
is cost-effective to Encore, market acceptance of Encore's products, the
ability to attract and retain competent employees, technological obsolescence
of one or more products, changes in product strategies, the availability to
locate acceptable acquisition candidates and then finance and integrate those
acquisitions, and effects of government regulation. Results actually achieved
may differ materially from expected results included in these statements as a
result of these or other factors.

                                       15
<PAGE>

Recently Issued Accounting Pronouncements

  In the fourth quarter of 2000, EMC adopted Staff Accounting Bulletin ("SAB")
No. 101, Revenue Recognition in Financial Statements, which provides guidance
in applying generally accepted accounting principles to certain revenue
recognition issues. The adoption of SAB 101 did not have a material impact on
EMC's financial position or overall trends in results of operations.

  In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivatives and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133, as amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB
Statement No. 133", is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. EMC does not currently engage or plan to engage
in hedging activities or intend to own or plan to purchase any derivative
instruments.

  In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 ("Interpretation No. 44"), "Accounting for Certain
Transactions Involving Stock Compensation--an interpretation of APB Opinion 25"
which is generally effective July 1, 2000. Interpretation No. 44 clarifies the
application of APB Opinion 25 for certain matters, specifically (a) the
definition of an employee for purposes of applying APB Opinion 25, (b) the
criteria for determining whether a plan qualifies as a non-compensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. Management does not
anticipate that the adoption of Interpretation No. 44 will have a material
impact on the financial position or the results of operations.

Item 7A. Market Risk Disclosure

  Not Applicable

Item 8. Financial Statements and Supplementary Data

<TABLE>
<CAPTION>
                                                                          Page
                                                                          ----
<S>                                                                       <C>
Report of Independent Accountants........................................  17
Consolidated Balance Sheets at December 31, 2000 and 1999................  18
Consolidated Statements of Operations for the Three Years Ended December
 31, 2000................................................................  19
Consolidated Statements of Changes in Stockholders' Equity for the Three
 Years Ended December 31, 2000...........................................  20
Consolidated Statements of Cash Flows for the Three Years Ended December
 31, 2000................................................................  21
Notes to Consolidated Financial Statements...............................  22
</TABLE>

                                       16
<PAGE>

                       Report of Independent Accountants

To the Board of Directors and
Stockholders of Encore Medical Corporation

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows present fairly, in all material respects, the financial position of
Encore Medical Corporation and its subsidiaries at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

                                          PRICEWATERHOUSECOOPERS LLP

Austin, Texas
February 22, 2001


                                       17
<PAGE>

                           ENCORE MEDICAL CORPORATION

         Consolidated Balance Sheets (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 2000    1999
                                                                ------- -------
<S>                                                             <C>     <C>
Assets
Current assets:
  Cash and cash equivalents.................................... $     1 $     1
  Accounts receivable, net of allowance for doubtful accounts
   of $339 and $112, respectively..............................   5,417   4,454
  Inventories, net.............................................  20,291  19,090
  Prepaid expenses and other current assets....................     674     929
                                                                ------- -------
    Total current assets.......................................  26,383  24,474
Property and equipment, net....................................   5,408   6,218
Intangible assets, net.........................................   4,698   5,396
Other assets...................................................   2,005     827
                                                                ------- -------
    Total assets............................................... $38,494 $36,915
                                                                ======= =======
</TABLE>
Liabilities and Stockholders' Equity
<TABLE>
<S>                                                            <C>      <C>
Current liabilities:
  Current portion of long-term debt........................... $ 3,232  $   734
  Accounts payable and accrued expenses.......................   3,159    3,060
                                                               -------  -------
    Total current liabilities.................................   6,391    3,794
Long-term debt, net of current portion........................  14,283   12,047
                                                               -------  -------
    Total liabilities.........................................  20,674   15,841
                                                               -------  -------
Stockholders' equity:
  Common stock, $0.001 par value, 35,000,000 shares
   authorized; 9,348,000 and 9,340,000
   shares issued, respectively................................       9        9
  Additional paid-in capital..................................  19,405   19,379
  Deferred compensation.......................................    (185)    (288)
  Retained earnings...........................................      12    3,275
  Less cost of repurchased stock, warrants and rights
   (322,000 and 278,000 shares, respectively).................  (1,421)  (1,301)
                                                               -------  -------
    Total stockholders' equity................................  17,820   21,074
                                                               -------  -------
    Total liabilities and stockholders' equity................ $38,494  $36,915
                                                               =======  =======
</TABLE>

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


                                       18
<PAGE>

                           ENCORE MEDICAL CORPORATION

 Consolidated Statements of Operations (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                           Year Ended
                                                          December 31,
                                                     -------------------------
                                                      2000     1999     1998
                                                     -------  -------  -------
<S>                                                  <C>      <C>      <C>
Sales............................................... $30,113  $26,095  $28,990
Cost of sales.......................................  14,983    8,193    9,582
                                                     -------  -------  -------
    Gross margin....................................  15,130   17,902   19,408

Operating expenses:
  Selling, general and administrative...............  15,360   13,256   14,540
  Research and development..........................   1,778    1,631    1,667
  Other charges.....................................   2,001      --       --
                                                     -------  -------  -------
    (Loss) income from operations...................  (4,009)   3,015    3,201
Other income (expense):
  Interest income...................................      26        7      --
  Interest expense..................................  (1,346)    (977)    (454)
  Other income......................................     277      222      --
                                                     -------  -------  -------
(Loss) income before income taxes...................  (5,052)   2,267    2,747
(Benefit) provision for income taxes................  (1,789)     648      970
                                                     -------  -------  -------
    Net (loss) income............................... $(3,263) $ 1,619  $ 1,777
                                                     =======  =======  =======


Net (loss) income per common and common equivalent
 share:
Basic earnings (loss) per share--
  Basic earnings (loss) per share................... $  (.36) $   .18  $   .20
                                                     =======  =======  =======
  Shares used in computing basic earnings (loss) per
   share............................................   8,990    9,117    9,088
                                                     =======  =======  =======
Diluted earnings (loss) per share--
  Diluted earnings (loss) per share................. $  (.36) $   .16  $   .17
                                                     =======  =======  =======
  Shares used in computing diluted earnings (loss)
   per share........................................   8,990   10,219   10,611
                                                     =======  =======  =======
</TABLE>

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

                                       19
<PAGE>

                           ENCORE MEDICAL CORPORATION

   Consolidated Statements of Changes in Stockholders' Equity (in thousands)

<TABLE>
<CAPTION>
                                                                       Repurchased Stock,     Total
                          Common Stock  Additional Deferred Retained  Warrants and Rights     Stock-
                          -------------  Paid-in   Compen-  Earnings  -------------------    holders'
                          Shares Amount  Capital    sation  (Deficit)  Shares      Amount     Equity
                          ------ ------ ---------- -------- --------  ---------  ----------  --------
<S>                       <C>    <C>    <C>        <C>      <C>       <C>        <C>         <C>
Balance at December 31,
 1997...................  9,047  $    9  $18,546    $(418)  $  (113)       --    $      --   $18,024
                          -----  ------  -------    -----   -------   --------   ----------  -------
Issuance of common
 stock..................    201     --       342      --        --         --           --       342
Deferred compensation...    --      --        24      (24)      --         --           --       --
Amortization of deferred
 compensation...........    --      --       --       132       --         --           --       132
Purchase of treasury
 stock..................    --      --       --       --        --        (366)      (1,545)  (1,545)
Issuance of treasury
 stock..................    --      --       283      --         (8)       256          747    1,022
Tax benefit associated
 with stock options.....    --      --        72      --        --         --           --        72
Net income..............    --      --       --       --      1,777        --           --     1,777
                          -----  ------  -------    -----   -------   --------   ----------  -------
Balance at December 31,
 1998...................  9,248       9   19,267     (310)    1,656       (110)        (798)  19,824
                          -----  ------  -------    -----   -------   --------   ----------  -------
Issuance of common
 stock..................     92     --       124      --        --         --           --       124
Deferred compensation...    --      --        28      (28)      --         --           --       --
Amortization of deferred
 compensation...........    --      --       --       133       --         --           --       133
Purchase of treasury
 stock..................    --      --       --       --        --        (217)        (677)    (677)
Issuance of treasury
 stock..................    --      --       (71)     (83)      --          49          174       20
Tax benefit associated
 with stock options.....    --      --        31      --        --         --           --        31
Net income..............    --      --       --       --      1,619        --           --     1,619
                          -----  ------  -------    -----   -------   --------   ----------  -------
Balance at December 31,
 1999...................  9,340       9   19,379     (288)    3,275       (278)      (1,301)  21,074
                          -----  ------  -------    -----   -------   --------   ----------  -------
Issuance of common
 stock..................      8     --        13      --        --         --           --        13
Deferred compensation...    --      --        39      (39)       --        --           --       --
Amortization of deferred
 compensation...........    --      --       --       142       --         --           --       142
Purchase of treasury
 stock..................    --      --       --       --        --         (44)        (120)    (120)
Tax expense associated
 with stock options.....    --      --       (26)     --         --        --           --       (26)
Net loss................    --      --       --       --     (3,263)       --           --    (3,263)
                          -----  ------  -------    -----   -------   --------   ----------  -------
Balance at December 31,
 2000...................  9,348  $    9  $19,405    $(185)  $    12       (322)  $   (1,421) $17,820
                          =====  ======  =======    =====   =======   ========   ==========  =======
</TABLE>

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

                                       20
<PAGE>

                           ENCORE MEDICAL CORPORATION

              Consolidated Statements of Cash Flows (in thousands)

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                       -----------------------
                                                        2000     1999    1998
                                                       -------  ------  ------
<S>                                                    <C>      <C>     <C>
Cash flows from operating activities:
Net (loss) income....................................  $(3,263) $1,619  $1,777
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
   Depreciation and amortization.....................    2,948   2,683   1,945
   Impairment of intangible asset....................      700     --      --
   Loss on disposal of assets........................      397     --        6
  Changes in operating assets and liabilities:
   (Increase) decrease in accounts receivable........     (963)  1,898  (1,234)
   Increase in inventories...........................   (1,201) (2,296) (2,817)
   (Increase) decrease in prepaid expenses and other
    assets...........................................   (1,623) (1,410)    142
   Increase (decrease) in accounts payable and
    accrued expenses.................................       98  (1,574)     23
                                                       -------  ------  ------
    Net cash (used in) provided by operating
     activities......................................   (2,907)    920    (158)
                                                       -------  ------  ------
Cash flows from investing activities:
Acquisition of Biodynamic Technologies, Inc..........      --   (1,068)    --
Purchases of property and equipment..................   (1,694) (2,103) (2,765)
Proceeds from sale of assets.........................      --        5      12
                                                       -------  ------  ------
    Net cash used in investing activities............   (1,694) (3,166) (2,753)
                                                       -------  ------  ------
Cash flows from financing activities:
Tax (provision) benefit associated with stock
 options.............................................      (26)     31      72
Proceeds from issuance of common stock...............       13      37     342
Payments to acquire treasury stock...................     (120)   (570) (1,545)
Proceeds from issuance of treasury stock.............       --      --   1,022
Payment on payable to a related party................       --    (800)   (300)
Proceeds from debt...................................    5,160   4,219   3,699
Payments on debt.....................................     (426)   (671)   (387)
                                                       -------  ------  ------
    Net cash provided by financing activities........    4,601   2,246   2,903
                                                       -------  ------  ------
    Net decrease in cash and cash equivalents........      --      --       (8)
    Cash and cash equivalents at beginning of year...        1       1       9
                                                       -------  ------  ------
    Cash and cash equivalents at end of year.........  $     1  $    1  $    1
                                                       =======  ======  ======
Supplemental disclosures of cash flow information:
Cash paid for:
  Interest...........................................  $ 1,346  $  977  $  454
  Income taxes.......................................      211     969     625
Supplemental schedule of non-cash investing and
 financing activities:
Noncash equity transactions..........................  $   --   $  --   $  184
Capital lease obligations related to equipment leases
 entered into during the year........................       46     310     560
Acquisition of Biodynamic Technologies, Inc.
  Fair value of assets acquired......................            5,002
  Cash paid for net assets of Biodynamic
   Technologies, Inc.................................           (1,068)
                                                                ------
    Liabilities assumed..............................            3,934
</TABLE>

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

                                       21
<PAGE>

                           ENCORE MEDICAL CORPORATION

                   Notes to Consolidated Financial Statements

1. Basis of Presentation and Summary of Significant Accounting Policies

Description of Business

Encore Medical Corporation ("EMC"), a Delaware corporation, through its primary
operating subsidiary, Encore Orthopedics, Inc. ("Encore" or the "Company"),
designs, manufactures, markets and sells products for the orthopedic implant
industry primarily in the United States, Europe and Asia.

The Company's products are subject to regulation by the Food and Drug
Administration ("FDA") with respect to their sale in the United States, and the
Company must obtain FDA authorization to market each of its products before
they can be sold in the United States. Additionally, the Company is subject to
similar regulations in many of the international countries in which it sells
products.

Principles of consolidation

The consolidated financial statements include the accounts of EMC and its
wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash consists of deposits with financial institutions. EMC considers all highly
liquid investments with original maturities of less than three months to be
cash equivalents.

Inventories

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

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets which range from three to seven years.
Leasehold improvements and assets subject to capital lease are amortized using
the straight-line method over the terms of the leases or lives of the assets,
if shorter. Maintenance and repairs are expensed as incurred.

Intangible Assets

Intangible assets consist of goodwill, agency rights and purchased technology
and are carried at cost less accumulated amortization. Amortization of
intangibles is computed based on the straight-line method over periods ranging
from five to fifteen years. Certain intangibles relate to signing costs of
sales agencies which are amortized over the life of the agency contract.
Intangible assets are reviewed for impairment whenever the facts and
circumstances indicate that the carrying amount may not be recoverable.

                                       22
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Revenue Recognition

The Company's products are sold through a network of sales representatives and
foreign customers. Revenues from sales made by representatives, who are paid
commissions upon the ultimate sale of the products, are recorded at the time
the product is utilized in a surgical procedure. Revenues from sales to foreign
customers are recorded when the product is shipped to the customer. The
customers, who sell the products to other customers, take title to the products
and have no special rights of return.

In the fourth quarter, EMC adopted Staff Accounting Bulletin ("SAB") No. 101,
Revenue Recognition in Financial Statements, which provides guidance in
applying generally accepted accounting principles to certain revenue
recognition issues. The adoption of SAB 101 did not have a material impact on
EMC's financial position or overall trends in results of operations.

Research and Development

Research and development expenses relate primarily to the technological
development and enhancement of reconstructive, trauma and spinal devices.
Research and development costs are charged to expense as incurred.

Income Taxes

EMC accounts for income taxes under the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized and measured using
enacted tax rates in effect for the year in which the differences are expected
to be recognized. Valuation allowances are established when necessary to reduce
deferred tax assets to amounts which are more likely than not to be realized.

Earnings (Loss) Per Share

In accordance with Statement of Financial Accounting Standards ("SFAS") No.
128, basic earnings (loss) per common share has been computed using the
weighted average number of shares of common stock outstanding during the period
and excludes any dilutive effects of options. Diluted earnings (loss) per share
is computed using the weighted average number of common and common stock
equivalent shares outstanding during the period. Common equivalent shares are
excluded from the computation if their effect is anti-dilutive. The number of
common share equivalents outstanding is computed using the treasury stock
method. Because EMC has incurred a net loss for the year ended December 31,
2000, the effect of 914,340 common stock equivalents were anti-dilutive.

Fair Value of Financial Instruments

The carrying amounts of EMC's financial instruments, including cash and cash
equivalents, trade accounts receivable and payable, and long-term debt
approximate fair values. EMC estimates the fair value of its long term fixed
rate debt generally using discounted cash flow analysis based on EMC's current
borrowing rate for debt with similar maturities, terms and characteristics.

Acquisitions

On March 30, 1999, the Company and Biodynamic Technologies, Inc. ("BTI")
executed a stock purchase agreement whereby Encore purchased substantially all
of the outstanding stock of BTI in exchange for cash and promissory notes
payable to the former shareholders of BTI. This acquisition has been accounted
for as a purchase and, accordingly, the results of BTI have been included in
the accompanying financial statements beginning March 30, 1999. The terms of
the agreement required a total cash payment of $1,068,000 and issuance of notes
payable of $3,166,000. For financial reporting purposes, $140,000 of the
purchase price was recorded as purchased technology, which is being amortized
over seven years, and $4,190,000 was recorded as goodwill, which is being
amortized over 15 years. BTI did not have significant operations relative to
the Company prior to the merger. Therefore, pro forma presentation of the
combined results of operations for periods presented is not considered
meaningful and has been omitted.

                                       23
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Stock-based compensation plans

  EMC has adopted the disclosure-only provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation." As allowed by SFAS No. 123, EMC continues to
apply the provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock issued to Employees" and related interpretations in accounting for
its plans. Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of EMC's stock at the date of the
grant over the amount an employee must pay to acquire the stock. Stock based
awards for non-employees are accounted for under the provisions of SFAS No. 123
and Emerging Issues Task Force Consensus 96-18 (EITF 96-18).

2. Other charges

  The components of other charges included in the consolidated statements of
operations for the year ended December 31, 2000 are as follows (in thousands):

<TABLE>
      <S>                                                                <C>
      Impairment of intangibles......................................... $  700
      Post retirement benefits for former employees.....................    439
      Provision for doubtful accounts...................................    383
      Other.............................................................    479
                                                                         ------
                                                                         $2,001
                                                                         ======
</TABLE>

  During the fourth quarter of 2000, the Company recorded a charge of $700
related to the impairment of intangibles acquired in connection with a lawsuit
settlement and concurrent distribution agreement reached with Wright Medical
Technology, Inc. During the fourth quarter of 2000, the Company agreed to
provide certain health insurance benefits to certain employees associated with
their leaving the Company and recorded a charge of $439,000 related to these
post-employment benefits.

3.  Accounts Receivable

  A summary of the activity in Encore's allowance for doubtful accounts is
presented below (in thousands):

<TABLE>
<CAPTION>
                                                                For the Year
                                                               Ended December
                                                                    31,
                                                               ----------------
                                                               2000  1999  1998
                                                               ----  ----  ----
      <S>                                                      <C>   <C>   <C>
      Balance, beginning of year.............................  $112  $145  $109
      Provision for bad debt expense.........................   234    18    36
      Write-offs charged to allowance........................    (7)  (51)  --
                                                               ----  ----  ----
      Balance, end of year...................................  $339  $112  $145
                                                               ====  ====  ====
</TABLE>


                                       24
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Inventories

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                December 31,
                                                               ----------------
                                                                2000     1999
                                                               -------  -------
<S>                                                            <C>      <C>
Components and raw materials.................................. $ 4,482  $ 3,953
Work in process...............................................   2,162    1,097
Finished goods................................................  18,322   14,811
                                                               -------  -------
                                                                24,966   19,861
Less--reserve for obsolescence................................  (4,675)    (771)
                                                               -------  -------
                                                               $20,291  $19,090
                                                               =======  =======
</TABLE>

  During the fourth quarter of 2000, Encore conducted an extensive evaluation
of its product lines and decided to rationalize the products it was offering
for sale. As a result of this product rationalization effort, EMC recorded a
charge to cost of sales of $4,203,000.

  A summary of the activity in Encore's inventory reserve for slow moving,
discontinued and obsolete items is presented below (in thousands):

<TABLE>
<CAPTION>
                                                               For the Year
                                                              Ended December
                                                                   31,
                                                             ------------------
                                                              2000   1999  1998
                                                             ------  ----  ----
<S>                                                          <C>     <C>   <C>
Balance, beginning of year.................................. $  771  $923  $642
Provision charged to cost of sales..........................  4,292   577   756
Write-offs charged to reserve...............................   (388) (729) (475)
                                                             ------  ----  ----
Balance, end of year........................................ $4,675  $771  $923
                                                             ======  ====  ====
</TABLE>

5. Property and Equipment

Property and equipment consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 2000     1999
                                                                -------  ------
<S>                                                             <C>      <C>
Equipment...................................................... $ 4,505  $4,393
Furniture and fixtures.........................................   2,291   2,072
Leasehold improvements.........................................     606     580
Surgical instrumentation.......................................   7,261   6,857
                                                                -------  ------
                                                                 14,663  13,902
Less--accumulated depreciation and amortization................  (9,255) (7,684)
                                                                -------  ------
                                                                $ 5,408  $6,218
                                                                =======  ======
</TABLE>

  Depreciation and amortization expense relating to property and equipment for
the years ended December 31, 2000, 1999 and 1998 was approximately $2,143,000,
$2,026,000 and $1,699,000, respectively.

                                       25
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


6. Intangible Assets

Intangible assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 2000     1999
                                                                -------  ------
<S>                                                             <C>      <C>
Goodwill....................................................... $ 4,190  $4,190
Agency rights..................................................   1,250   1,250
Purchased technology...........................................     439     645
                                                                -------  ------
                                                                  5,879   6,085
Less--accumulated amortization.................................  (1,181)   (689)
                                                                -------  ------
                                                                $ 4,698  $5,396
                                                                =======  ======
</TABLE>

  Amortization expense relating to intangible assets for the years ended
December 31, 2000, 1999 and 1998 was $663,000, $524,000 and $114,000,
respectively.

7. Accounts Payable and Accrued Expenses

  Accounts payable and accrued expenses consist of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                 --------------
                                                                  2000    1999
                                                                 ------- ------
<S>                                                              <C>     <C>
Accounts payable................................................ $ 1,119 $1,393
Accrued wages and related expenses..............................     262    206
Accrued commissions.............................................   1,165  1,076
Accrued royalties...............................................     254    168
Accrued taxes...................................................     186    217
Other accrued liabilities.......................................     173    --
                                                                 ------- ------
                                                                 $ 3,159 $3,060
                                                                 ======= ======
</TABLE>

                                       26
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


8. Long-Term Debt and Leases

Long-Term Debt

  Long-term debt (including capital lease obligations) consists of the
following (in thousands):

<TABLE>
<CAPTION>
                                                               December 31,
                                                             -----------------
                                                               2000     1999
                                                             --------  -------
<S>                                                          <C>       <C>
$13,000,000 revolving credit facility from a financial
 institution; interest at the lesser of the institution's
 base rate plus 1.5% or LIBOR plus 4% (8.63% at December 31,
 2000), payable monthly; collateralized by all assets of
 Encore and guaranteed by EMC; commitment fee of 1.25% of
 unused balance, payable monthly; due May 2002; available
 borrowings at December 31, 2000 of $813,000, calculated as
 the credit limit less total borrowings and letters of
 credit of $64,000.......................................... $ 12,123  $ 8,760
8.9% unsecured notes payable to individuals in connection
 with the BTI
 acquisition, payable in varying quarterly installments
 through March 31, 2005.....................................    2,686    3,000
9.5% unsecured note payable to a corporation, payable in
 quarterly installments of $213,250 plus interest through
 September 30, 2002                                             1,619      --
Capital lease obligations, collaterized by related
 equipment..................................................      554      934
Other.......................................................      533       87
                                                             --------  -------
                                                               17,515   12,781
Less--current portion.......................................   (3,232)    (734)
                                                             --------  -------
                                                             $ 14,283  $12,047
                                                             ========  =======
</TABLE>

  The debt agreement related to the revolving credit facility contains
warranties and covenants and requires maintenance of certain financial ratios.
Default on any warranty or covenant could affect the ability to borrow under
the agreement and, if not waived or corrected, could accelerate the maturity of
any borrowings outstanding under the applicable agreement. The Company was in
compliance with all debt covenants and warranties as of December 31, 2000.

  Since its inception, the Company has financed its operations through the sale
of equity securities, borrowings and cash flow from operations. The Company has
available to it a $13 million revolving credit facility. This facility will
decrease during the year on a quarterly basis to $10.5 million. In addition, it
has a number of financial covenants that must be met on a quarterly basis. As
of December 31, 2000, the Company had drawn approximately $12 million. While
the Company's current forecast shows that the Company will be able to meet the
financial covenants during 2001 and will be able to keep the need for
outstanding debt under the maximum ceilings for amounts outstanding, there is
no assurance that the forecasts will prove accurate or that the bank's
requirements will be able to be met. In addition, there is no assurance that
another credit facility will be available as a replacement to the current
facility. There exists the possibility that EMC will need to obtain additional
equity financing, although there is no assurance as to the amount, availability
or cost of such financing.

  At December 31, 2000, the aggregate amount of annual principal maturities of
long-term debt (excluding capital lease obligations) is as follows (in
thousands):

<TABLE>
<CAPTION>
   Year Ended December 31,
   <S>                                                                  <C>
     2001.............................................................. $  2,994
     2002..............................................................   11,834
     2003..............................................................      729
     2004..............................................................      830
     2005 and thereafter...............................................      574
                                                                        --------
                                                                        $ 16,961
                                                                        ========
</TABLE>

                                       27
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Leases

  The Company leases building space, manufacturing facilities and equipment
under non-cancelable lease agreements that expire at various dates. At December
31, 2000, future minimum lease payments are as follows (in thousands):

<TABLE>
<CAPTION>
                                                             Capital Operating
                                                             Leases   Leases
                                                             ------- ---------
   Year Ending December 31,
   <S>                                                       <C>     <C>
     2001...................................................  $ 277   $  446
     2002...................................................    209      509
     2003...................................................     97      507
     2004...................................................     38      488
     2005 and thereafter....................................    --     1,099
                                                              -----   ------
     Total minimum lease payments...........................    621   $3,049
                                                                      ======
     Less--amounts representing interest....................    (67)
                                                              -----
     Net minimum lease payments.............................    554
     Less--current portion of obligations under capital
      leases................................................   (238)
                                                              -----
                                                              $ 316
                                                              =====
</TABLE>

  Rental expense under operating leases totaled approximately $733,000,
$669,000 and $616,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.

  Leased equipment and furniture and fixtures under capital leases, included in
property and equipment in the accompanying financial statements, is as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                 December 31,
                                                                ---------------
                                                                 2000     1999
                                                                -------  ------
<S>                                                             <C>      <C>
Equipment...................................................... $ 1,656  $1,656
Furniture and fixtures.........................................     664     618
Less--accumulated amortization.................................  (1,226)   (958)
                                                                -------  ------
                                                                $ 1,094  $1,316
                                                                =======  ======
</TABLE>

9. Capital Stock

Preferred Stock

  Preferred stock may be issued at the discretion of the Board of Directors
(the "Board") of EMC with such designation, rights and preferences as the Board
may determine from time to time. The preferred stock may have dividend,
liquidation, conversion, voting or other rights that may be more expansive than
the rights of the holders of the common stock. At December 31, 2000, EMC has
1,000,000 shares of authorized preferred stock, none of which has been issued.

Stock Option Plans

  EMC has seven stock option plans. All options granted under the plans are
exercisable for common stock in EMC as described below. EMC has recorded
deferred compensation for the fair value of grants made to individuals other
than employees and is amortizing such amount to income over the vesting period
or contract period for the options. Deferred compensation amortization was
approximately $142,000, $133,000 and $132,000 for the years ended December 31,
2000, 1999 and 1998, respectively.

                                       28
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The 1996 Incentive Option Plan provides for the grant of a variety of equity
related awards, including, but not limited to, incentive stock options, non-
qualified stock options, stock appreciation rights and restricted stock, to key
employees of EMC and its subsidiaries. The 1997 Distributor Advisory Panel
Stock Option Plan provides for the grant of stock options to those who are
sales representatives and distributors of EMC and its subsidiaries' products.
The 1997 Surgeon Advisory Panel Stock Option Plan provides for the grant of
stock options to those who are serving as members of EMC or its subsidiaries'
surgeon advisory panel. The 2000 Non-Employee Director Stock Option Plan
provides for the grant of options to non-employee Directors of EMC.

  In addition, EMC has the following stock option plans under which EMC is no
longer issuing new options but which, nevertheless, have outstanding options.
The 1992 Stock Option Plan provided for the grant of both incentive and non-
qualified stock options to directors, employees and certain other persons
affiliated with Encore. The 1993 Distributor Stock Option Plan provided for the
grant of stock options to those who were sales representatives and distributors
of Encore's products, and the 1993 Surgeon Advisory Panel Stock Option Plan
provided for the grant of stock options to those who were serving as members of
Encore's surgeon advisory panel.

  The stock options granted under all of these plans are granted at or in
excess of fair market value on the date of grant, vest ratably over a
predefined period, and expire no more than 10 years from the date of grant. At
December 31, 2000, EMC had reserved a total of 5,370,524 shares of common stock
for the plans.

  Had compensation cost for all stock option grants been determined based on
their fair value at the grant dates consistent with the method prescribed by
SFAS No. 123, "Accounting for Stock-Based Compensation," EMC's net (loss)
income and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                            For the Year Ended December 31,
                                            ----------------------------------
                                               2000        1999        1998
                                            ----------  ----------  ----------
<S>                             <C>         <C>         <C>         <C>
Net income (loss)               As reported $   (3,263) $    1,619  $    1,777
                                  Pro forma     (3,486)      1,401       1,713
Net income (loss) per share
  Basic:                        As reported       (.36)       0.18        0.20
                                  Pro forma       (.39)       0.15        0.19
  Diluted:                      As reported       (.36)       0.16        0.17
                                  Pro forma       (.39)       0.14        0.16

  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 2000, 1999 and 1998:

<CAPTION>
                                               2000        1999        1998
                                            ----------  ----------  ----------
<S>                             <C>         <C>         <C>         <C>
Dividend yield.................                    -- %        -- %        -- %
Expected volatility............                   65.0%       65.0%       55.0%
Risk-free interest rate........                    6.0%        6.0%       6.01%
Expected life..................              1-5 years   1-4 years   1-4 years
</TABLE>

                                       29
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


A summary of the activity in EMC's stock option plans is presented below:

<TABLE>
<CAPTION>
                                         Year ended December 31,
                         -----------------------------------------------------------
                                2000                1999                1998
                         ------------------- ------------------- -------------------
                                    Weighted            Weighted            Weighted
                                    Average             Average             Average
                                    Exercise            Exercise            Exercise
                          Shares     Price    Shares     Price    Shares     Price
                         ---------  -------- ---------  -------- ---------  --------
<S>                      <C>        <C>      <C>        <C>      <C>        <C>
Employee Options
Outstanding, beginning
 of year................ 3,234,539   $2.26   3,257,112   $2.20   2,858,808   $1.83
Granted--
  At market.............   448,900    1.93     180,500    2.33     669,000    3.55
  Above market..........       --      --          --      --          --      --
Exercised...............    (8,692)   1.62     (80,840)   1.61    (184,574)   1.42
Canceled................  (330,813)   3.04    (122,233)   2.13     (86,122)   4.59
                         ---------           ---------           ---------
Outstanding, end of
 year................... 3,343,934    2.10   3,234,539    2.26   3,257,112    2.20
                         =========           =========           =========
Options exercisable at
 year end............... 2,793,984           2,735,039           2,709,115
Weighted-average fair
 value of options
 granted during the
 year--
  At market.............             $2.33               $2.38               $3.47
  Above market..........               --                  --                  --
Other Than Employee
 Options
Outstanding, beginning
 of year................   793,803   $4.17     957,070   $4.10     896,010   $4.10
Granted--
  At market.............       --      --       70,000    3.97     282,500    4.07
  Above market..........    20,000    3.07      36,500    4.39         --      --
Exercised...............       --      --          --      --      (18,767)   2.82
Canceled................  (200,013)   5.05    (269,767)   4.38    (202,673)   4.76
                         ---------           ---------           ---------
Outstanding, end of
 year...................   613,790    3.85     793,803    4.17     957,070    4.10
                         =========           =========           =========
Options exercisable at
 year end...............   553,098             607,478             544,115
Weighted-average fair
 value of options
 granted during the
 year--
  At market.............             $ --                $3.45               $3.75
  Above market..........              2.56                2.84                 --
</TABLE>

                                       30
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The following table summarizes information about stock options outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
                                   Options Outstanding       Options Exercisable
                             ------------------------------- -------------------
                                        Weighted-
                                         Average
                                        Remaining  Weighted-           Weighted-
                                       Contractual  Average             Average
  Range of Exercise Prices    Number      Life       Price    Number     Price
  ------------------------   --------- ----------- --------- --------- ---------
                                         (Years)
<S>                          <C>       <C>         <C>       <C>       <C>
  $0.56 to $1.90............ 2,097,388    3.41       $1.28   1,771,138   $1.20
  $2.00 to $3.95............ 1,003,597    4.91        2.66     781,980    2.65
  $4.23 to $4.91............   626,000    2.69        4.66     575,166    4.68
  $5.00 or more.............   230,739    3.83        5.44     218,798    5.43
                             ---------                       ---------
                             3,957,724                       3,347,082
                             =========                       =========
</TABLE>

HCAC $7 Warrants

  In 1997, Healthcare Acquisition Corporation ("HCAC") $7 warrants were issued
for each common and preferred share of Encore in connection with the merger
with HCAC. These warrants are convertible into one share of common stock for
each warrant and expire on March 25, 2001. EMC conducted a tender offer for
these $7 warrants and the rights to acquire the $7 warrants in December 1998.
Of the 1,673,948 total $7 warrants and rights, 978,383 shares were tendered and
purchased by EMC for a total consideration of $239,080. EMC had 660,947 $7
warrants and rights outstanding at December 31, 2000.

Other HCAC Transactions

  HCAC issued 3,850,000 warrants (the "$5 warrants") in connection with a
public offering in March 1996. These warrants have an exercise price of $5.00
per share and are convertible into one share of common stock for each warrant.
These warrants expire on March 8, 2003, but are callable by EMC for $0.01 per
warrant at such time as the common shares of EMC have traded at a price of
$8.50 per share for 20 consecutive trading days. EMC repurchased 231,800 and
81,500 of these $5 warrants in 1998 and 1999, respectively. EMC did not
repurchase any $5 warrants in 2000. EMC had 3,536,700 $5 warrants outstanding
at December 31, 2000.

  Additionally, in connection with the public offering, HCAC issued 150,000
unit options to the underwriters of the offering. These unit options allow the
holder to receive one share of common stock and two $5 warrants for each unit
option. These unit options have an exercise price of $6.60. The unit options
and the $5 warrants connected with the unit options expire on March 8, 2001.

Treasury Stock

  EMC began acquiring shares of its common stock and $5 warrants in connection
with a stock repurchase program announced in January 1998. That program
authorizes EMC to purchase up to one million common shares or $5 warrants from
time to time on the open market or pursuant to negotiated transactions at price
levels EMC deems attractive. EMC purchased 185,200 shares for $495,000 and
43,500 shares for $120,000 in 1999 and 2000, respectively. EMC purchased 81,500
$5 warrants for $68,000 in 1999 and none in 2000. The purpose of the stock and
warrant repurchase program is to help EMC achieve its long-term goal of
enhancing stockholder value.

                                       31
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


10. Segment Information

  EMC reports segments utilizing SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which requires segments be identified
utilizing a "management" approach. The management approach designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of EMC's reportable segments. It also
requires disclosures about products and services, geographic areas and major
customers.

  While the Company sells its many products in many different markets, its
management has chosen to organize the Company by geographic areas and, as a
result has determined that it has one reportable segment. All selling and
administrative expenses, interest income, interest expense, depreciation and
amortization are recorded in the United States. In addition, all identifiable
assets are located in the United States.

  During the three years ended December 31, 2000, the Company's international
sales were primarily to a few foreign customers, two of which have accounted
for approximately 28%, 23% and 25%, respectively, of total Company sales during
such periods. Following are the Company's international sales by geographic
area (in thousands) and the percentage of total Company sales generated by two
customers:

<TABLE>
<CAPTION>
                                             For the Year Ended December 31,
                                             ----------------------------------
                                                2000        1999        1998
                                             ----------  ----------  ----------
<S>                                          <C>         <C>         <C>
Net Sales:
United States............................... $   19,605  $   18,672  $   17,557
Europe......................................      5,606       5,784       9,660
Asia........................................      4,902       1,639       1,773
                                             ----------  ----------  ----------
                                             $   30,113  $   26,095  $   28,990
                                             ==========  ==========  ==========
Customer A..................................         14%         19%         21%
Customer B..................................         14%          4%          4%

  The majority of the international sales were located in Germany and Japan,
each of which country accounted for approximately 10% of Encore's revenues for
the years ended December 31, 2000, 1999, and 1998.

  Net sales of orthopedic products by product category are as follows (in
thousands):

<CAPTION>
                                             For the Year Ended December 31,
                                             ----------------------------------
                                                2000        1999        1998
                                             ----------  ----------  ----------
<S>                                          <C>         <C>         <C>
Reconstructive.............................. $   26,969  $   23,395  $   27,374
Trauma--Fixation............................      2,281       2,541       1,616
Spine, Biologics and Other..................        863         159         --
                                             ----------  ----------  ----------
                                             $   30,113  $   26,095  $   28,990
                                             ==========  ==========  ==========
</TABLE>

                                       32
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


11. Income Taxes

  The income tax provision (benefit) consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                           For the Year Ended
                                                              December 31,
                                                           --------------------
                                                             2000    1999  1998
                                                           --------  ----  ----
<S>                                                        <C>       <C>   <C>
Current income taxes:
  Federal................................................. $   (437) $531  $724
  State...................................................      --     57    82
                                                           --------  ----  ----
                                                               (437)  588   806
                                                           --------  ----  ----
Deferred income taxes:
  Federal.................................................   (1,205)   63   173
  State...................................................     (147)   (3)   (9)
                                                           --------  ----  ----
                                                             (1,352)   60   164
                                                           --------  ----  ----
                                                           $ (1,789) $648  $970
                                                           ========  ====  ====
</TABLE>

  The difference in the income tax provision (benefit) and the amounts
determined by applying the federal statutory tax rate to income (losses) before
income taxes result from the following (in thousands):

<TABLE>
<CAPTION>
                                                          For the Year Ended
                                                             December 31,
                                                         ----------------------
                                                           2000     1999   1998
                                                         ---------  -----  ----
<S>                                                      <C>        <C>    <C>
Tax at statutory rate................................... $  (1,718) $ 781  $934
Add (deduct) the effect of --
  FSC benefit...........................................       (17)  (100)  (58)
  State income taxes....................................       (97)    36    48
  Nondeductible expenses and other, net.................        50    (37)   85
  Utilization of R&D credit.............................        (7)   (32)  (39)
                                                         ---------  -----  ----
                                                         $ (1,789)  $ 648  $970
                                                         =========  =====  ====
</TABLE>

  The components of deferred income tax assets and liabilities are as follows
(in thousands):

<TABLE>
<CAPTION>
                                                                  December 31,
                                                                  -------------
                                                                   2000   1999
                                                                  ------  -----
<S>                                                               <C>     <C>
Deferred tax assets:
  Minimum tax credit carryforward................................ $  529  $  34
  Inventory and other reserves...................................    858    406
  Accrued compensation and allowances............................    503    193
  Net operating loss carryforward................................     92    --
  Other..........................................................     10      2
                                                                  ------  -----
    Deferred tax assets..........................................  1,992    635
Deferred tax liability:
  Depreciation...................................................   (340)  (335)
                                                                  ------  -----
    Net deferred tax asset....................................... $1,652  $ 300
                                                                  ======  =====
</TABLE>

                                       33
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


12. Earnings Per Share

  Following is a reconciliation of the basic and diluted per share computations
(dollars in thousands, except for per share amounts):

<TABLE>
<CAPTION>
                                            For the Year Ended December 31,
                                           -----------------------------------
                                              2000        1999        1998
                                           ----------  ----------- -----------
<S>                                        <C>         <C>         <C>
Net (loss) income--basic.................. $   (3,263) $     1,619 $     1,777
Effect of dilutive securities.............        --           --          --
                                           ----------  ----------- -----------
Net (loss) income--diluted................ $   (3,263) $     1,619 $     1,777
                                           ==========  =========== ===========
Shares used in computing basic earnings
 (loss) per share.........................  8,990,251    9,117,356   9,088,294
Common stock equivalents..................        --     1,101,763   1,522,396
                                           ----------  ----------- -----------
Shares used in computing diluted earnings
 (loss) per share.........................  8,990,251   10,219,119  10,610,690
                                           ==========  =========== ===========
Earnings (loss) per share
  Basic................................... $    (0.36) $      0.18 $      0.20
                                           ==========  =========== ===========
  Diluted................................. $    (0.36) $      0.16 $      0.17
                                           ==========  =========== ===========
</TABLE>

  Options and warrants to purchase 3,957,724 and 4,647,647 shares of common
stock, respectively, were outstanding at December 31, 2000, but were not
included in the computation of diluted EPS because the exercise of such options
and warrants would be anti-dilutive.

13. Unaudited Quarterly Consolidated Financial Data

<TABLE>
<CAPTION>
                                                      Three Months Ended
                                                ------------------------------
                                                                 Sep
                                                Mar 31, Jun 30,  29,   Dec 31,
                                                 2000    2000    2000   2000
                                                ------- ------- ------ -------
<S>                                             <C>     <C>     <C>    <C>
Net sales...................................... $ 8,501 $ 7,194 $6,993 $ 7,425
Gross profit................................... $ 5,526 $ 4,768 $4,462 $   374
Operating income (loss)........................ $   917 $   566 $  640 $(6,132)
Net income (loss).............................. $   457 $   217 $  288 $(4,225)
Basic earnings (loss) per share................ $  0.05 $  0.02 $ 0.03 $ (0.47)
Weighted average shares--basic.................   9,023   9,022  8,996   8,996
Diluted earnings (loss) per share.............. $  0.05 $  0.02 $ 0.03 $ (0.47)
Weighted average shares--diluted...............  10,165  10,006  9,697   8,996
<CAPTION>
                                                      Three Months Ended
                                                ------------------------------
                                                Apr 2,  Jul 2,  Oct 1, Dec 31,
                                                 1999    1999    1999   1999
                                                ------- ------- ------ -------
<S>                                             <C>     <C>     <C>    <C>
Net sales...................................... $ 6,831 $ 6,661 $6,235 $ 6,368
Gross profit................................... $ 4,635 $ 4,545 $4,280 $ 4,442
Operating income............................... $   883 $   792 $  733 $   607
Net income..................................... $   516 $   404 $  379 $   320
Basic earnings per share....................... $  0.06 $  0.04 $ 0.04 $  0.04
Weighted average shares--basic.................   9,166   9,094  9,139   9,126
Diluted earnings per share..................... $  0.05 $  0.04 $ 0.04 $  0.03
Weighted average shares--diluted...............  10,480  10,304 10,196   9,938
</TABLE>

                                       34
<PAGE>

                           ENCORE MEDICAL CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


14. Related Party Transactions

  Effective April 1, 1992, a stockholder of the Company sold to the Company
certain intellectual property, including trade secrets, manufacturing
processes, instrumentation, technical knowledge and patent rights for a knee
device for $2,000,000. The Company contracted to pay annually the greater of an
amount equal to 1.08% of the total gross sales related to sales of any knee
systems incorporating material elements of this knee device (not to exceed
$2,000,000) or certain fixed payments (without interest) through March 31,
1999. The Company recorded the related asset at the stockholder's basis of $0
and reflected $2,000,000 in long-term debt. The excess of consideration paid
over the stockholder's basis was charged to stockholders' equity.

15. Legal Proceedings

  During the year 2000, Encore was a defendant in a lawsuit styled Wright
Medical Technology, Inc. v. Encore Orthopedics, Inc., et al., C. A. No.
99CV4900(SSB), filed in the United States District Court of New Jersey. In this
case, Wright alleged that Encore tortuously interfered with certain of Wright's
contractual relationships and conspired to cause a former Wright sales person
to breach its contract with Wright. This case was settled without any admission
of liability in October 2000. Concurrently with the settlement, Encore entered
into an Exclusive Supply and Distribution Agreement with Wright covering the
WRIGHTLOCK(R) spinal product line. Encore purchased a certain amount of
stocking inventory and gained the worldwide exclusive rights to distribute this
product line. In addition, Encore acquired certain rights to intellectual
property related to the product line. Based on Encore's evaluation of its
product lines, including analysis of the potential uses of the acquired
intellectual property, the Company recognized a charge of $700,000 during the
fourth quarter of 2000 related to the impairment of this intellectual property.

16. Commitments and Contingencies

  As of December 31, 2000, EMC had entered into purchase commitments for
inventory, capital acquisitions and other services totaling $1,534,000 in the
ordinary course of business.

  EMC is, from time to time, subject to claims and suits for damages arising in
the normal course of business. EMC maintains insurance which management
believes would cover most claims.

17. Employee Benefit Plans

  EMC has a qualified defined contribution plan, which allows for voluntary
pre-tax contributions by employees. EMC pays all general and administrative
expenses of the plan and may make contributions to the plan. EMC made matching
contributions of approximately $273,000, $262,000 and $276,000 to the plan in
2000, 1999 and 1998, respectively, based on 100% of the first 6% of employee
contributions. EMC provides certain medical expense coverage to certain former
executives. During 2000, EMC recorded a charge of $439,000 for estimated
liabilities related to these postemployment benefits, as required under SFAS
112.

                                       35
<PAGE>

                           ENCORE MEDICAL CORPORATION

Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure

  None in the past two years.

Item 10. Directors and Executive Officers of the Registrant

  The information set forth under the caption "Election of Directors" contained
in EMC's definitive Proxy Statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934 for its 2001 Annual Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference.

Item 11. Executive Compensation

  The information set forth under the sub-captions "Directors Continuing in
Office" and "Executive Compensation" contained in EMC's Proxy Statement is
incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management

  The information set forth under the caption "Stock Ownership" contained in
EMC's Proxy Statement is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

  The information set forth under the sub-caption "Certain Transactions"
contained in EMC's Proxy Statement is incorporated herein by reference.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Financial Statements
  The financial statements filed as part of this report are listed under Item
  8.

(b) Reports on Form 8-K
  A Form 8-K was filed on October 4, 2000, relating to the appointment of a
  new chief executive officer and president.

                                       36
<PAGE>

(c) Exhibits:

<TABLE>
<CAPTION>
 Exhibit
 No.     Description
 ------- -----------
 <C>     <S>
 2       Agreement and Plan of Merger dated as of November 12, 1996, by and
         among Healthcare Acquisition Corp. ("HCAC"), Healthcare Acquisition,
         Inc. and Encore Orthopedics, Inc., as amended by an Amendment dated
         February 14, 1997(3)
 3.1     Certificate of Incorporation of Healthcare Acquisition Corp.(1)
 3.2     Amendment to the Certificate of Incorporation of HCAC(3)
 3.3     Bylaws of HCAC(1)
 4.1     Form of HCAC Common Stock Certificate(2)
 4.2     Form of Certificate for HCAC $5.00 Warrant(2)
 4.3     Form of Unit Purchase Option granted to GKN Securities Corp. and
         Gaines, Berland Inc(2)
 4.4     Warrant Agreement between Continental Stock Transfer and Trust Company
         and HCAC with respect to the HCAC $5.00 Warrants(1)
 4.5     Form of Encore Medical Corporation $7.00 Warrant(3)
 4.6     Warrant Agreement, by and between Encore Medical Corporation and
         Continental Stock Transfer and Trust Company with respect to the HCAC
         $7.00 Warrants(3)
 4.7     Form of Encore Medical Corporation Common Stock Certificates(5)
 10.1    Investment Management Trust Agreement between IBJ Schroder Bank &
         Trust Company and HCAC(1)
 10.2    Stock Escrow Agreement between Continental Stock Transfer and Trust
         Company and HCAC(1)
 10.3    Letter Agreement between GKN Securities Corp. and each of the initial
         stockholders of HCAC(1)
 10.4    Encore Medical Corporation 1996 Incentive Stock Plan(3)
 10.5    Employment Agreement between Encore and Nick Cindrich, dated August
         26, 1994(5)
 10.6    Severance Agreement between Encore and Nick Cindrich, dated September
         27, 1995, as amended on March 18, 1997(5)
 10.7    Employment Agreement between Encore and Craig L. Smith, dated August
         26, 1994(5)
 10.8    Severance Agreement between Encore and Craig L. Smith, dated September
         19, 1995, as amended on March 18, 1997(5)
 10.9    [intentionally omitted]
 10.10   [intentionally omitted]
 10.11   Employment Agreement between Encore and Ken Ludwig, Jr., dated August
         26, 1994(5)
 10.12   Severance Agreement between Encore and Ken Ludwig, Jr., dated
         September 19, 1995, as amended on March 18, 1997(5)
 10.13   Employment Agreement between Encore and August Faske, dated August 26,
         1994(5)
 10.14   Severance Agreement between Encore and August Faske, dated September
         20, 1995, as amended on March 18, 1997(5)
 10.15   Employment Agreement between Encore and Harry L. Zimmerman, dated
         August 26, 1994(5)
 10.16   Severance Agreement between Encore and Harry L. Zimmerman, dated
         September 19, 1995, as amended on March 18, 1997(5)
 10.17   Employment Agreement between Encore and J.D. Webb, Jr., dated August
         26, 1994(5)
 10.18   Severance Agreement between Encore and J.D. Webb, Jr., dated September
         19, 1995, as amended on March 18, 1997(5)
 10.19   Employment Agreement between Encore and Greg Kaseeska, dated March 1,
         1998(6)
 10.20   Severance Agreement between Encore and Greg Kaseeska, dated March 1,
         1998(6)
 10.21   Employment Agreement between Encore and Kathy Wiederkehr, dated April
         1, 1997(6)
 10.22   Severance Agreement between Encore and Kathy Wiederkehr, dated April
         1, 1997(6)
 10.23   Employment Agreement between Encore and Robert Buckley, dated December
         1, 1998(6)
 10.24   Severance Agreement between Encore and Robert Buckley dated December
         1, 1998(6)
 10.25   Employment Agreement between Encore and Jean-Paul Burtin, dated
         December 1, 1998(6)
 10.26   Severance Agreement between Encore and Jean-Paul Burtin, dated
         December 1, 1998(6)
</TABLE>

                                       37
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
 No.     Description
 ------- -----------
 <C>     <S>
 10.27   Second Amendment to Severance Agreement between Encore and Nick
         Cindrich dated December 31, 1998(6)
 10.28   Second Amendment to Severance Agreement between Encore and Craig Smith
         dated December 31, 1998(6)
 10.29   Second Amendment to Severance Agreement between Encore and August
         Faske dated December 31, 1998(6)
 10.30   Second Amendment to Severance Agreement between Encore and Harry L.
         Zimmerman dated December 31, 1998(6)
 10.31   Second Amendment to Severance Agreement between Encore and Kenneth
         Ludwig, Jr. dated December 31, 1998(6)
 10.32   Second Amendment to Severance Agreement between Encore and J.D. Webb,
         Jr. dated December 31, 1998(6)
 10.33   Amendment to Severance Agreement between Encore and Greg Kaseeska
         dated December 31, 1998(6)
 10.34   Amendment to Severance Agreement between Encore and Kathy Wiederkehr
         dated December 31, 1998(6)
 10.35   Employment Agreement between Encore and Kenneth W. Davidson, dated
         October 1, 2000
 10.36   Severance Agreement between Encore and Kenneth W. Davidson, dated
         October 1, 2000
 21      Schedule of Subsidiaries of Encore Medical Corporation
 23.1    Consent of Accountants

--------

 (1)     Filed as an exhibit to Amendment No. 1 to HCAC's Registration
         Statement on Form S-1 (33-92854) filed with the SEC on July 14, 1995
 (2)     Filed as an exhibit to Amendment No. 2 to HCAC's Registration
         Statement on Form S-1 (33-92854) filed with the SEC on February 20,
         1996
 (3)     Filed as an exhibit to HCAC's Registration Statement on Form S-4 (333-
         22053) filed with the SEC on February 19, 1997
 (4)     Filed as an exhibit to Company Form 8-K filed with the SEC on May 30,
         1997
 (5)     Filed as an exhibit to Company Form 10-K filed with the SEC on March
         30, 1998
 (6)     Filed as an exhibit to Company Form 10-K filed with the SEC on March
         23, 1999
</TABLE>

                                       38
<PAGE>

                                   SIGNATURES

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

                                          ENCORE MEDICAL CORPORATION

         March 29, 2001
                                          By:          /s/ Ken Davidson
                                             ----------------------------------
                                                        Ken Davidson
                                              Chairman of the Board and Chief
                                                     Executive Officer

         March 29, 2001
                                          By:          /s/ August Faske
                                             ----------------------------------
                                                        August Faske
                                                  Chief Financial Officer

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

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
         /s/ Jay M. Haft                        Director            March 27, 2001
______________________________________
             Jay M. Haft

                                                Director
______________________________________
             Joel Kanter

        /s/ Dennis Enright                      Director            March 28, 2001
______________________________________
            Dennis Enright

        /s/ Craig L. Smith                      Director            March 29, 2001
______________________________________
            Craig L. Smith

         /s/ John Abeles    -                   Director            March 26, 2001
______________________________________
             John Abeles

        /s/ Nick Cindrich                       Director            March 28, 2001
______________________________________
            Nick Cindrich

        /s/ Richard Martin                      Director            March 27, 2001
______________________________________
            Richard Martin

</TABLE>


                                       39