2003 FORM 10-K The unaudited pro forma results for 2003 include $90.4 million of expense related to Centerpulse hip and knee litigation, $54.4 million of cash income tax benefits as a result of Centerpulse electing to carry back its 2002 U.S. federal net operating loss for 5 years versus 10 years, which resulted in more losses being carried forward to future years and less tax credits going unutilized due to the shorter carry back period and an $8.0 million gain on sale of Orquest Inc., an investment previously held by Centerpulse. The unaudited pro forma results are not necessarily indicative either of the results of operations that actually would have resulted had the Exchange Offers been in effect at the beginning of the respective years or of future results. events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows relating to the asset are less than its carrying amount. Depreciation of instruments is recognized as selling, general and administrative expense, consistent with the classification of instrument cost in periods prior to January 1, 2003. Prior to January 1, 2003, undeployed instruments were carried as a prepaid expense at cost, net of allowances for obsolescence ($54.8 million, net, at December 31, 2002), and recognized in selling, general and administrative expense in the year in which the instruments were placed into service. The new method of accounting for instruments was adopted to recognize the cost of these important assets of the Company’s business within the consolidated balance sheet and meaningfully allocate the cost of these assets over the periods benefited, typically five years. The effect of the change during the year ended December 31, 2003 was to increase earnings before cumulative effect of change in accounting principle by $26.8 million ($17.8 million net of tax), or $0.08 per diluted share. The cumulative effect adjustment of $55.1 million (net of income taxes of $34.0 million) to retroactively apply the new capitalization method as if applied in years prior to 2003 is included in earnings during the year ended December 31, 2003. The pro forma amounts shown on the consolidated statement of earnings have been adjusted for the effect of the retroactive application on depreciation and related income taxes. On June 25, 2003, the Company acquired the  TransFx External Fixation System product line from Immedica, Inc. for approximately $14.8 million cash, which has been allocated primarily to goodwill and technology based intangible assets. The Company has sold the  TransFx product line since early 2001 under a distribution agreement with Immedica. On March 2, 2004, the Company entered into an Amended and Restated Merger Agreement relating to the acquisition of Implex Corp. (‘‘Implex’’), a privately held orthopaedics company based in New Jersey, for cash. Each share of Implex stock will be converted into the right to receive cash having an aggregate value of approximately $108.0 million at closing and additional cash earn-out payments that are contingent on the growth of Implex product sales through 2006. The net value transferred at closing will be approximately $89 million, which includes adjustments for debt repayment, certain payments previously made by Zimmer to Implex pursuant to their existing alliance arrangement, escrow and other items. The acquisition will be accounted for under the purchase method of accounting. Reserves for obsolete and slow-moving inventory at December 31, 2003 and 2002 were $47.4 million and $45.5 million, respectively. Provisions charged to expense were $11.6 million, $6.0 million and $11.9 million for the years ended December 31, 2003, 2002 and 2001, respectively. Amounts written off against the reserve were $11.7 million, $7.1 million and $8.5 million for the years ended December 31, 2003, 2002 and 2001, respectively. Instruments are hand held devices used by orthopaedic surgeons during total joint replacement and other surgical procedures. Effective January 1, 2003, instruments are recognized as long-lived assets and are included in property, plant and equipment. Undeployed instruments are carried at cost, net of allowances for obsolescence. Instruments in the field are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method based on average estimated useful lives, determined principally in reference to associated product life cycles, primarily five years. In accordance with SFAS No. 144, the Company reviews instruments for impairment whenever Following the acquisition of Centerpulse, the Company established a common approach for estimating excess inventory and instruments. This change in estimate resulted in a charge to earnings of $3.0 million after tax in the fourth quarter. 4. CHANGE IN ACCOUNTING PRINCIPLE  Implex Corp. TransFx 5. INVENTORIES  2003 2002 Finished goods $384.3 $206.7 Raw materials and work in progress 90.8 50.9 Inventory step-up 52.6 – Inventories, net $527.7 $257.6 Inventories at December 31, 2003 and 2002, consist of the following (in millions): 44 ZIMMER HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)