UNITED STATES



SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ------------------------------------------------------------------------------------



For the fiscal year ended December 31,
2003



| ̈ |  | 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)





|DELAWARE                                                        |  | 65-0572565                          
|--------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of

incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               
|9800 METRIC BLVD. AUSTIN, TEXAS                                 |  | 78758                               
|(Address of principal executive offices)                        |  | (Zip code)                          



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



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 1I of this Form 10-K or any  amendment  to this Form
10-K. Yes  ____  No  X



Indicate by check mark whether the  registrant  is an  accelerated  filer (as defined in Exchange Act Rule
12b-2).  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,  2004,  was
$250,279,324.  As of March 15, 2004, the registrant had 42,821,115 shares of its common stock outstanding.

---

# ENCORE MEDICAL CORPORATIONAnnual Report on Form 10-KFor the year ended
December 31, 2003

# TABLE OF CONTENTS

|        |                                                                                                              |     
|------- | ------------------------------------------------------------------------------------------------------------ | ----
|        | PART I.                                                                                                      | Page
|Item 1  | Business                                                                                                     | 4   
|Item 2  | Properties                                                                                                   | 22  
|Item 3  | Legal Proceedings                                                                                            | 22  
|Item 4  | Submission of Matters to a Vote of Security Holders                                                          | 23  
|        |                                                                                                              |     
|        | PART II.                                                                                                     |     
|Item 5  | Market for Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 23  
|Item 6  | Selected Financial Data                                                                                      | 24  
|Item 7  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        | 24  
|Item 7A | Quantitative and Qualitative Disclosures About Market Risk                                                   | 35  
|Item 8  | Financial Statements and Supplementary Data                                                                  | 35  
|Item 9  | Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure                         | 57  
|Item 9A | Controls and Procedures                                                                                      | 57  
|        | PART III.                                                                                                    |     
|Item 10 | Directors and Executive Officers of the Registrant                                                           | 57  
|Item 11 | Executive Compensation                                                                                       | 57  
|Item 12 | Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               | 57  
|Item 13 | Certain Relationships and Related Transactions                                                               | 58  
|Item 14 | Principal Accounting Fees and Services                                                                       | 58  
|        |                                                                                                              |     
|        | PART IV.                                                                                                     |     
|Item 15 | Exhibits, Financial Statement Schedules and Reports on Form 8-K                                              | 58  

---

# NOTE ON INCORPORATION BY REFERENCE

Information pertaining to certain Items in Part III of this report
 is incorporated by reference to portions of the Company's definitive Proxy Statement
for its 2004 Annual Meeting of Stockholders to be filed within 120 days after the end of the year
covered by this annual report of Form 10-K, pursuant to Regulation 14A.

# FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K of
Encore Medical Corporation (Encore, the Company or we)
for the year ended December 31, 2003 contains forward-looking statements, principally in
the sections entitled Managements Discussion and Analysis of Financial
Condition and Results of Operations and Business. Generally, you can
identify these statements because they use words like anticipates,
believes, expects, future, intends,
plans, and similar terms. These statements reflect only our current
expectations. Although we do not make forward-looking statements unless we believe we have
a reasonable basis for doing so, we cannot guarantee their accuracy, and actual results
may differ materially from those we anticipated due to a number of uncertainties, many of
which are unforeseen, including, among others, the risks we face as described on the
following pages and elsewhere in this filing. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this annual report. These
forward-looking statements are 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, and
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 we express 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.

We believe it is important to
communicate our expectations to our investors. There may be events in the future, however,
that we are unable to predict accurately or over which we have no control. The risk
factors listed on the following pages, as well as any cautionary language in this annual
report, provide examples of risks, uncertainties and events that may cause our actual
results to differ materially from the expectations we describe in our forward-looking
statements. 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; 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.

The following are either (i) our
registered trademarks or trademarks for which we have pending applications or common law
rights to, or (ii) registered trademarks or pending trademarks for which we have licenses
to use:

3D Matrix®, 911 First
Response®, Adapta®, Auto-Flex®,
Auto-Trac, B.A.T.H., Cellex,
Chattanooga, Chattanooga and Graphic(Columbian
app),Chattanooga Europe, Chieftain®, Clear
Cut, ColPaC®, Cover-Sling®,
CPS, Cyclone, Cyclone (and design),
Cyclone ACP, DTS, Dura-Stick®,
Dura-Stim, EMG Retrainer®, E Encore (and design), E2 Fix®,Encore®, Encore Orthopedics (and
design)®, EPIK®, ErgoBasic,
ErgoStyle, ErgoWave®, ES 2000, Ever Green
Because Its Our World Too®, Excelerator,
FlexiPAC®, Fluido, Fluidotherapy®,
Foundation®, HotPac, Hydrocollator®,
Hydrocollator (and design)®, Hydrocollator
Colpac®,Industrys Choice®, Intelect®,
Intelect Legend, Intellect Transport,
Isobar, Kallassy Ankle Support®, Keramos,
Keramos (and design), Keystone®, Linear®,
Maximum Poly®, Myossage®, Navigator®,
Nylatex®, OptiFlex®, OptiFlex S,
Opti-Ice, Osteomill®, Para-Care®,
PASS, Power Flex®, PowerPlay,
PresSsion®, Pre-Vent, RAM,
Quick-fit, Rebound®, Revelation®,
Reverse®, Reverse (stylized), RSP®,
Secure-All®, Sensaflex, Spinalator®, Sports
Supports®, Sports Supports (and design)®,
Stabilizer, Stamina®, Stealth®, Steam
Pack®, TheraTherm®, 3DKnee,
Triax®, Triton®, True/Fix®,
True/Flex®, Tru/Lok, Tru-Trac®, Turtle
Neck®, TX®, Vectra®, Vectra
Genisys, Vitality®, VitalStim,
Warmn Form®, Wellness by Design®, and
WRIGHTLOCK®.

---

# PART I.

# ITEM 1. BUSINESS

# OVERVIEW

Encore Medical Corporation, a Delaware
corporation, and its wholly owned subsidiaries (indivudally referred to as "us," "we,"
"our company," "the Company," or "Encore"), is a diversified orthopedic
company that designs, manufactures and distributes a comprehensive range of high quality
orthopedic devices, sports medicine equipment and other related products for the
orthopedic industry. We sell our products to orthopedic surgeons, physical and
occupational therapists and other orthopedic specialists who use our products to treat
patients with musculoskeletal conditions resulting from degenerative diseases,
deformities, traumatic events and sports related injuries. Our surgical implants are used
in reconstructive surgical procedures for the knee, hip, shoulder and spine. Our soft
goods and rehabilitation products are used before surgery to offset the progression of an
orthopedic condition. After surgery, our rehabilitation and soft goods products are used
to assist the patient in recovery and to protect against further injury. As a result, we
believe our products address a wide spectrum of the orthopedic continuum of care.

We have marketed and distributed our
products through our three operating divisions, our Surgical Division, our Chattanooga
Group Division and our Soft Goods Division. Our Surgical Division provides implant
products across all three major segments of the orthopedic surgical market, including
reconstructive joint products, such as hip, knee and shoulder implants; trauma products;
and spinal implants. Our Chattanooga Group Division is a leader in domestic sales of many
of the products used for orthopedic rehabilitation. Our Soft Goods Division provides
orthopedic soft goods that are used to assist in the repair and rehabilitation of soft
tissue and bone, and protect against injury. Total revenue from all three divisions was
$108.1 million in 2003 and $95.5 million in 2002.
Our income from operations was $9.2 million in 2003 and $7.1 million in 2002. Beginning in
2004 our soft goods products will be marketed and distributed as part of our Chattanooga
Group Division to improve operational effectiveness and focus.

Throughout our history, we have
strongly emphasized research and development to expand the product line of our Surgical
Division. Since our inception, we have developed and obtained regulatory approval for over
100 products and product improvements. We continue to develop internally new products to
enhance our organic growth. For example, we commenced the sale of several new products in
2003, including the 3DKnee System, our data-driven design total knee replacement. In
addition to a continued focus on product innovation within our Surgical Division, our
Chattanooga Group Division will continue its historical pattern of investing in product
development. For example, we recently began selling VitalStim, a product used for the
treatment of dysphagia, a swallowing disorder, and a new line of world-class
electrotherapy equipment.

We have used strategic business
acquisitions to broaden our product offering and to increase our customer base. Since July
1, 2001, we have completed two significant acquisitions that have allowed us to expand our
business into two new product segments of the orthopedic market  orthopedic soft
goods and rehabilitation equipment  both of which complement our Surgical Division.
In July 2001, we purchased the orthopedic soft goods, patient safety devices and pressure
care product lines of Kimberly-Clark Corporation. In February 2002, we purchased
Chattanooga Group, Inc., a provider of orthopedic rehabilitation products, which became
our Chattanooga Group Division. These acquisitions provide us access to a wide range of
distribution partners and allow us the opportunity to sell our existing products to an
expanded customer base. With the completion of these two acquisitions, we provide a
comprehensive range of orthopedic devices and related products to orthopedic specialists
operating in a variety of treatment settings.

# INDUSTRY BACKGROUND

The worldwide orthopedic market was
estimated to be approximately $17.1 billion in 2002 with sales in the United States
accounting for approximately $10.5 billion. While we participate in the overall orthopedic
market, for the twelve months period ended December 31, 2003, we derived approximately 33%
of our revenue from sales of our orthopedic implants through our Surgical Division. The
worldwide orthopedic implant market is expected to grow from $4.6 billion in 2002 to $7.2
billion in 2009 and the number of procedures is expected to grow from 2.0 million in 2002 to
2.6 million in 2009.

Orthopedic implants include
reconstructive joint products such as hip, knee, and shoulder implants, all of which are
expected to experience market growth over the next several years. Worldwide hip implant
sales are expected to grow at a 6.2% annual growth rate from 2002 to 2009 and average
selling prices are expected to increase from $2,173 in 2002 to $2,769 in 2009. Over the
same time period, worldwide sales of knee implants are expected to increase by 6.9%
annually with the average selling price expected to increase from $2,698 in 2002 to $3,152
in 2009, primarily due to advancements in technology. Though a smaller market opportunity,
worldwide shoulder implant sales are expected to experience a 7.9% annual growth rate from
$178.7 million in 2002 to $304.5 million in 2009. We participate in each of these markets.

Several factors are driving growth in
the orthopedic industry, these factors include:

| | Favorable demographics. An aging population is driving growth in the orthopedics market. For
example, a majority of reconstructive implants are performed on patients who are aged 65
and over. In addition, as people are living longer, more active lives, they are engaging
in sports and activities such as running, softball, skiing, rollerblading, golf and
tennis, which result in injuries with greater frequency and at an earlier age than ever
before.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Improving
technologies. Advances in technologies and procedures have expanded the scope and
applications of products addressing the orthopedic market. For example, joint
reconstruction was historically reserved for older patients who tend to be less active
and who typically place less stress on their implants. However, with new technologies
that prolong the expected life of implants and conserve patients existing bone,
surgeons are increasingly able to accommodate younger and more active patients. In
addition, developments in alternative surface interfaces that reduce wear, such as
ceramic-on-ceramic and metal-on-metal, have created products that are superior to
traditional implants, and encourage surgeons to implant them earlier in a patients
life. Further, new developments in minimally invasive hip and knee implant surgical
procedures encourage patients and their surgeons to turn to implants earlier in the
overall treatment process.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Increased
pricing and replacement procedure volume. We believe new technologies such as
ceramic-on-ceramic acetabular hip implants, typically command a premium price to
traditional implants. In addition, with the average lifespan of many reconstructive joint
implants being 15 to 20 years, a revision replacement device must be implanted once an
older device loses its effectiveness. These revision replacement procedures represent a
growing proportion of total reconstructive procedures, as the first large group of
patients to receive reconstructive joint devices was in the 1980s, and these devices are
generally due for replacement. Because these revision replacement implants are more
complex, they are typically more expensive to produce but yield higher prices. As a
result, the orthopedic implant market has benefited from a positive mix shift, through
both the introduction of new products and the increased sales of revision products.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# OUR STRATEGY

Our objective is to strengthen our
position as a provider of a comprehensive range of orthopedic devices, sports medicine
equipment and related products to orthopedic surgeons, physical and occupational
therapists and other orthopedic specialists operating in a variety of treatment settings.
To achieve this objective, we intend to:

| | Expand
U.S. market coverage of our Surgical Division.    We intend to
expand our coverage and further penetrate the U.S. surgical device market. We are
actively recruiting sales representatives to continue to expand the geographic areas in
which we sell. As of December 31, 2003, we had 115 sales representatives who cover
territories that represent all or part of 35 states. This is an increase of approximately
25% in the number of our sales representatives since December 31, 2002. We believe that
there is significant growth potential for us if we can enter additional states and
penetrate new markets in the states we presently serve. In recruiting sales
representatives, we seek individuals who have strong relationships with orthopedic
surgeons, which provide us with additional opportunities to develop new relationships,
increase overall market awareness of our products, and increase sales.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Develop
and launch new products.    We plan to continue to develop and
launch new products through internal development and potential acquisitions. In our
Surgical Division, we intend to expand our reconstructive joint and spinal product lines
to more fully meet the needs of orthopedic surgeons and to cover additional types of
surgical procedures. In 2002, we launched the Cemented Calcar Hip System. In 2003,
we released the EPIK unicondylar knee, the 3DKnee System, and the Cyclone Anterior
Cervical Plate. In addition, we continue to advance our clinical study on the Reverse
Shoulder Prosthesis. Our Chattanooga Group Division intends to maintain its leadership
position through continued innovation and development of our electrotherapy, patient care
and other product offerings. During 2003, our Chattanooga Group Division introduced
VitalStim, a therapeutic product for the treatment of dysphagia, a swallowing disorder,
as well as the DTS Compression System, a therapeutic chiropractic table system. We
believe that our close interaction with our customers enables us to learn of
opportunities for new technologies as they develop in the marketplace.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursue
strategic acquisitions.    We intend to expand our business
through selected acquisitions of complementary businesses, products or technologies in
the orthopedic industry. Since July 2001, we have made two strategic acquisitions that
significantly enhanced our product offerings and expanded our customer base. The first
was the acquisition of the orthopedic soft goods, patient safety device, and pressure
care product lines from Kimberly-Clark Corporation and the second was the acquisition of
Chattanooga Group, Inc. We will continue to pursue acquisitions of companies or product
lines that are complementary to our product mix, sales and distribution network, or
manufacturing capabilities. However, we do not have any acquisition commitments or
agreements at this time.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Expand
international distribution capabilities.    Although
approximately half of the worldwide sales of orthopedic devices and related products
occur outside the United States, only approximately 13.0% of our sales during 2003 was
derived from international sales. Consequently, we believe there are opportunities to
expand our business outside the United States. We are seeking new distributors in Europe
and other foreign markets. We may consider acquisitions of companies that have already
established an international distribution infrastructure. However, we do not have any
acquisition commitments or agreements at this time.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Improve
operating performance of each division.    One significant
contributor to the growth of our operating income will be our continued ability to
leverage and improve the efficiency of our operating infrastructure. We have implemented
profit enhancement programs in each of our divisions to increase our operating
margins.  Each of our divisions has already experienced margin improvement. Comparing the
gross margins as a percentage of sales of each of our divisions for the years
ended December 31, 2003 and December 31, 2002, the Surgical Division increased to 70.0%
from 69.0%, the Chattanooga Group Division increased to 41.6% from 40.4%, and the Soft
Goods Division increased to 33.3% from 30.9%.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# OUR PRODUCTS

We design, manufacture, market and
distribute orthopedic devices and related products for the orthopedic industry. Our
products are used primarily by orthopedic surgeons, physical and occupational therapists
and other orthopedic specialists who treat patients with musculoskeletal conditions
resulting from degenerative diseases, deformities, traumatic events and sports related
injuries. During 2003, our Surgical Division accounted for 32.9% of total sales, our
Chattanooga Group Division accounted for 53.2% of total sales and our Soft Goods Division
accounted for 13.9% of total sales.

Surgical Division

We currently design, manufacture and
market a wide variety of orthopedic reconstructive joint products, trauma products, spinal
implant products and instruments used by surgeons to perform orthopedic surgery.

Reconstructive Joint
Products.    We offer reconstructive joint products in three
general areas: knees, hips and shoulders. In 2003, knee products accounted for 40.2% of
our Surgical Division sales, hip products accounted for 33.9% of our Surgical Division
sales, and shoulder products accounted for 8.8% of our Surgical Division sales. The
following table summarizes our current Surgical Division reconstructive joint product
offerings:

|Product Segment | Description                      | Brand Name                                  
|--------------- | -------------------------------- | --------------------------------------------
|Knees           | Primary total joint replacement  | Foundation Primary Knee System              
|                |                                  | Foundation PS Primary Knee                  
|                |                                  | 3DKnee System                               
|                |                                  |                                             
|                | Revision total joint replacement | Foundation Revision Knee System             
|                |                                  |                                             
|                | Unicondylar joint replacement    | EPIK Unicondylar Knee                       
|                |                                  |                                             
|Hips            | Primary replacement stem         | Foundation Hip Stem                         
|                |                                  | Linear Hip Stem                             
|                |                                  | Revelation Hip Stem                         
|                |                                  | Vitality Hip Stem                           
|                |                                  | Cemented Calcar Hip Stem                    
|                |                                  |                                             
|                | Acetabular cup system            | FMP Acetabular System                       
|                |                                  | Metal-on-Metal Acetabular                   
|                |                                  | Keramos Ceramic-on-Ceramic Acetabular System
|                |                                  |                                             
|                | Revision joint replacement       | Keystone Hip System                         
|                |                                  |                                             
|Shoulders       | Primary total joint replacement  | Foundation Shoulder System                  
|                |                                  | Reverse Shoulder Prosthesis                 
|                |                                  |                                             
|                | Fracture repair system           | Foundation 4-Part Shoulder System           
|                |                                  |                                             
|                | Revision total joint replacement | Foundation Revision Shoulder System         

Trauma
Products.    Our trauma products are designed to address difficult
surgical requirements brought about by disease, fracture and deformity. In 2003, trauma
products accounted for approximately 5.4% of our total Surgical Division sales. Our trauma
products include:

| |  True/Flex
Upper Extremity Intramedullary Nail System:  a system of surgical nails used in
repairing bone fractures, primarily for use in correcting upper extremity fractures;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  True/Lok
External Fixation System:  an external fixation system developed by Texas
Scottish Rite Hospital; and
| | ----------------------------------------------------------------------------------------------------------------

| |  True/Fix
Internal Fixation Products:  a complete line of specialty products for use in
the treatment of upper extremity orthopedic trauma and additional trauma products used in
the hip and ankle areas of the body.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Spinal Implant
Products.    Within the United States we distribute spinal implant
products designed and manufactured by Medicrea, a French company whose spinal implant
products are used in lumbar and cervical fusion. The PASS Poly-Axial Spinal System,
designed and manufactured by Medicrea, consists of a lumbar pedicle screw system used to
achieve fusion of the spine. In addition, we recently introduced the
Cyclone Anterior Cervical Plate used in cervical spine fusion. In 2003,
sales of spinal products accounted for approximately 9.4% of our total Surgical Division
sales.

Chattanooga Group Division

Our Chattanooga Group Division is a
leading provider of rehabilitation products used by a variety of healthcare professionals
involved in the field of physical medicine. In 2003, sales of our Chattanooga Group
Division were as broken down as follows:  patient care products accounted for
46.9% sales; electrotherapy products, including the new
dysphagia products accounted for 31.4% of sales; physical
therapy tables and traction products accounted for 14.9% of sales; and chiropractic products accounted for 6.8%
of sales. The following table summarizes many of our current Chattanooga Group Division
product offerings:

|Product Segment         | Description               | Brand Name   
|----------------------- | ------------------------- | -------------
|Patient Care            | Dry heat therapy          | Fluidotherapy
|                        | Hot/cold therapy          | Hydrocollator
|                        | Paraffin wax therapy      | Para-Care    
|                        | Continuous passive motion | OptiFlex     
|                        | Moist heat therapy        | TheraTherm   
|                        | Compression therapy       | PresSsion    
|                        |                           |              
|Electrotherapy          | Electrotherapy/ultrasound | Intelect     
|                        |                           | Vectra       
|                        |                           | CPS          
|                        |                           |              
|                        | Electrodes                | Dura-Stick   
|                        |                           |              
|Dysphagia               | Electrotherapy            | VitalStim    
|                        |                           |              
|Physical Therapy Tables | Treatment Tables          | Triton       
|                        |                           | Adapta       
|                        |                           |              
|                        | Traction                  | TX           
|                        |                           | Triton       
|                        |                           | Tru-Trac     
|                        |                           |              
|Chiropractic            | Treatment Tables          | ErgoStyle    
|                        |                           | ErgoWave     
|                        |                           | ErgoBasic    
|                        |                           | ES2000       
|                        |                           | DTS          

Soft Goods Division

Our Soft Goods Division offers orthopedic soft goods,
 patient safety devices and patient care products, which are used to
assist in the repair and rehabilitation of soft tissue and bone, to protect patients
from injury and to aid patients in their recovery from orthopedic trauma and surgery. In 2003,
sales for our Soft Goods Division were broken down as follows:  orthopedic soft goods products
 accounted for 63.4% of sales,
patient safety devices accounted for 29.8% of sales, and pressure
care products accounted for 6.8% of sales. The following table summarizes many of our current Soft Goods Division product offerings:

|Product Segment        | Description                      | Brand Name                 
|---------------------- | -------------------------------- | ---------------------------
|Orthopedic Soft Goods  | Cervical, spine and shoulder     | 911 First Response         
|                       | products                         | Chieftain                  
|                       |                                  | Turtle Neck                
|                       |                                  |                            
|                       | Elbow, wrist and hand products   | Sports Supports            
|                       |                                  | B.A.T.H.                   
|                       |                                  |                            
|                       | Lumbar, spine and torso products | Sports Supports            
|                       |                                  | Warm N Form                
|                       |                                  |                            
|                       | Upper leg and knee products      | Sports Supports            
|                       |                                  | Power Play                 
|                       |                                  | Quick Fit                  
|                       |                                  |                            
|                       | Lower leg, foot and ankle        | Kallassy Ankle Support     
|                       | products                         | Excelerator Ankle Splint   
|                       |                                  | Excelerator Fracture Walker
|                       |                                  |                            
|Pressure Care Products | Knee, heel and elbow protectors  | Pre-Vent                   
|                       |                                  |                            
|Patient Safety Devices | Body belts and limb holders      | Secure-All                 

# RESEARCH AND DEVELOPMENT

Our research and development programs focus on the development of new products, as well as the enhancement of existing products
with the latest technology and updated designs. We are continually seeking to develop new technologies to improve durability, performance and usability of existing products. In
addition to our own research and development, we receive new product and invention ideas, especially in procedure-specific areas, from orthopedic surgeons, inventors and other
orthopedic specialists. For ideas that we deem promising from a clinical and commercial perspective, we seek to obtain rights to these ideas through entering into either
assignment or licensing agreements. We conduct research and development programs at our facilities in Austin, Texas and Chattanooga, Tennessee.

We spent approximately
 $5.0 million in 2003, $3.4 million in 2002,
 and $1.7 million in 2001 for research and development. As of December 31, 2003, our research and development department had 38 employees.

# MARKETING AND SALES

Each of our three divisions has developed its own sales and distribution channels. The combination of these three
divisions provides us the opportunity to sell our products to a variety of treatment settings across new and potentially complementary distribution networks.

Surgical Division

Our Surgical Division products are currently marketed and sold in the United States to hospitals and orthopedic surgeons
through a network of 115 independent commissioned sales representatives who cover territories in all or part of approximately 35 states. We are actively recruiting sales
agents and representatives to continue to expand the geographic areas in which we sell. Generally, our sales representatives sell either reconstructive and trauma products or
spinal products. However, a few of our sales representatives sell all of these products. Sales agents are generally granted a contract with a term of one to five years. Additional
representatives work for these agents. Agents are typically paid a sales commission and are eligible for bonuses if sales exceed certain preset objectives. We assign our
sales agents to an exclusive sales territory. Substantially all of our sales agents agree not to sell competitive products. Typically we can terminate our agreements with sales
agents prior to the expiration of our agreements only with cause, which includes failure to meet specified periodic sales targets. The few sales agents who are
permitted to sell competitive products are terminable at will. We provide our agents with product inventories on consignment for their use in marketing our products and for filling
customer orders.

Outside the United States, our surgical products are sold through distributors principally in Europe and Japan. While we
previously had a distribution arrangement that covered substantially all of Europe, we terminated our relationship with that European distributor in the fourth quarter of 2000
because, based on the decline in European sales by that distributor, we determined that over time we could develop a more effective European distribution network on a
country-by-country basis. In Japan, Senko Medical Trading Co. carries our total joint products and most of our trauma products while the rest of our trauma products are
sold by Century Medical, Inc. During 2003, we added three new distributors in Germany, Greece, and Venezuela which began carrying our total joint products.

To a significant extent, sales of our surgical products depend on the preference of orthopedic surgeons and other sports
medicine professionals. We have developed and maintained close contractual relationships with a number of widely recognized orthopedic surgeons who not only assist us with
designing our products, but who also assist us in marketing our products. These orthopedic surgeons may give demonstrations utilizing our products, assist in the development of our
marketing materials, participate in symposia addressing both clinical and economic aspects of our products, speak about our products at medical seminars, train other surgeons in the
use and implantation of our products, and provide us with feedback on the industrys acceptance of our products. Surgeons who assist us in designing our products are generally
compensated with a royalty. Our consulting surgeons, depending on the particular services provided in support of our products, are paid consulting fees for their services. As a
portion of their compensation, these surgeons may also receive stock options under our 1997 Surgeon Advisory Panel Stock Option Plan.

Chattanooga Group Division

Our rehabilitation products are currently marketed and sold through a worldwide network of over 6,000 dealers, which
are managed by our internal sales people. These dealers sell Chattanooga Group Division products to a variety of healthcare professionals including physical therapists, athletic
trainers, chiropractors and sports medicine physicians. Except for distributors outside of the United States, the Chattanooga Group Division does not maintain formal distribution
contracts. In addition, no particular distributor accounts for more than 4.7% of Chattanooga Group Division sales. Distributors purchase products from Chattanooga Group
Division at discounts ranging from 30% to 50% off the published list price. We maintain an internal marketing and sales support program to support our dealer network. This network
is comprised of a group of individuals who provide dealer and end-user training, develop promotional materials, and attend over 30 trade shows each year.

Soft Goods Division

Our Soft Goods Division products are sold primarily to hospitals through third-party distributors. These distributors include
large, national third-party medical/surgical distributors such as Cardinal Health, Owens & Minor, Inc., McKesson, the Henry Schein companies and Physician Sales and Service
(PSS), regional medical/surgical distributors such as The Burrows Company and Professional Hospital Supply, and medical product buying groups. These distributors generally resell
the products to hospitals, hospital buying groups, integrated delivery networks, primary care networks and orthopedic physicians for use by patients. In addition, we have entered
into national or regional contracts to sell our products to large healthcare providers and group purchasing organizations, such as Consorta, Concentra, Broadlane, MedAssets HSCA,
Amerinet, and the United States government. Under these contracts, we provide discounted pricing to the buying groups and are designated to the members of the particular buying
group as an authorized, and sometimes preferred, source for specific products. Because members of these buying groups are not obligated to purchase our products, we utilize an
independent commissioned sales force to market our products directly to the members of these buying groups. Our Soft Goods Division has limited international sales to
distributors in Canada, England, Puerto Rico, France, Portugal and several other countries. We leverage the sales and distribution of our Soft Goods Division products to
build brand awareness and strengthen our reputation in markets targeted for the sale of higher priced Surgical Division products.

# MANUFACTURING

We use both in-house manufacturing capabilities and relationships with third-party vendors to supply our products. Generally,
we use third-party vendors that have special manufacturing capabilities. In addition, we use third party vendors when we believe it is appropriate based on certain factors,
including our in-house capacity, lead time control, and cost control. We believe there are alternate sources for all our vendors and suppliers and believe that adequate capacity
exists at our current suppliers to meet all of our anticipated needs.

Surgical Division

Our in-house capacity for our Surgical Division includes computer controlled machine tools, belting, polishing,
cleaning, packaging and quality control. We obtained internationally recognized ISO 9001 qualification and the European Community Medical Device Directive CE
certification for this division in 1996.
 Our U.S. manufacturing operations also comply with FDA QSR regulations. The primary raw materials used in the manufacture of our surgical products are
cobalt chromium alloy, stainless steel alloys, titanium alloy and ultra high molecular weight polyethylene.
 All Surgical Division implants and instruments go through in-house
quality control, cleaning and packaging operations. Quality control measures begin
with an inspection of raw materials and castings prior to use, and pieces are inspected at various
intervals in the manufacturing process. As a final step, our products pass
through a clean room environment designed and maintained to clean our products and reduce product exposure to
particulate matter and bio burden.

Chattanooga Group Division

Our Chattanooga Group Division manufactures products which account for a majority of that divisions sales in its
manufacturing facilities located in Chattanooga, Tennessee. These facilities are capable of utilizing various manufacturing processes, including metal fabrication, coating,
electronic assembly, mechanical assembly, wood working, sewing and a variety of others. The manufacturing facilities for our Chattanooga Group Division are ISO 9001 certified.
Our U.S. manufacturing operations for rehabilitation equipment products also comply with FDA QSR regulations. We utilize Asian subcontractors to manufacture a significant amount
of our electronic components.

Soft Goods Division

For our Soft Goods Division, we supply all of the raw materials and equipment necessary to make our products to a
manufacturing supplier in Mexico. They in turn supply the labor component necessary to assemble and finish our soft goods products. This vendor employs the laborers and manages
the assembly process, subject to the supervision of our onsite personnel. We currently have no manufacturing operations in any foreign country other than Mexico. We entered into
our agreement with the manufacturer located in Acuna, Mexico, on July 1, 2001. That agreement remains in effect through June 30, 2004, and may be renewed for a term of one to
three years by mutual agreement between us and the manufacturer. We pay the manufacturer based on labor hours, and we have promised to purchase from the manufacturer a minimum of
$506,250 of labor per year.

# AFFILIATED SURGEONS

A key aspect in our development, marketing and sale of our surgical products is the use of designing and consulting
surgeons. Each major product is supported by several designing surgeons who assist us 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. These professionals often
assist the Company by, speaking about our products at medical seminars,
 assisting in the training of other professionals in the use and implantation of
these products and providing us with
feedback on the industrys acceptance of our products. We also have established relationships with consulting surgeons who perform various consulting services for us.
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. The designing surgeons working on a product are compensated with a royalty, which is typically split among the group members.
Consulting surgeons are also paid consulting fees for their services to us in support of our products. The designing and consulting surgeons may also receive stock options.

# INTELLECTUAL PROPERTY

We hold numerous United States and foreign patents covering a wide range of our products. We own a majority of these patents
and have licensed rights to the remainder, either on an exclusive or non-exclusive basis. The quantity of intellectual property we own significantly increased as a result of our
acquisition of Chattanooga Group, Inc. and our purchase of our orthopedic soft goods product lines from Kimberly-Clark Corporation. We have over 50 trademarks registered
in the United States, a number of which are also registered in countries around the world, such as China, Japan, Australia, Germany, Switzerland, Austria, and/or other countries in
the European Community. We also assert ownership of numerous unregistered trademarks, some of which have been submitted for registration in the United States and foreign countries.
In the future, we will apply for such additional patents and trademarks as we deem appropriate. However, we cannot guarantee whether our existing or future patents, if any,
will afford adequate protection, whether any existing patent applications will result in issued patents, or whether our patents will be circumvented or invalidated.

Additionally, we seek to protect our non-patented know-how, trade secrets, processes and other proprietary confidential
information, through a variety of methods, including having our employees and consultants sign invention assignment agreements and confidentiality agreements and having our
independent sales agents and distributors sign confidentiality agreements. However, these methods may not provide us with adequate protection. Because many of our products are
regulated, proprietary information created during our development of a new or improved product may have to be disclosed to the FDA or another U.S. or foreign regulatory agency
in order to have the lawful right to market such product. Our proprietary information may also become known to, or be independently developed by, our competitors, or our
proprietary rights in intellectual property may be challenged, any of which could have a material adverse effect on our business, financial condition and results of operations.

We have distribution rights to certain products that are manufactured by others and hold both exclusive and nonexclusive
licenses under third party patents and trade secrets that cover some of our existing products and products under development. As of December 31, 2003, sales from these
distribution agreements and licenses represent a small portion of our overall sales.

There can be no assurance that the validity of any of the patents or other intellectual property owned by or licensed to us
would be upheld if challenged by others in litigation. Due to these and other risks described previously, we do not rely solely on our patents and other intellectual property
to maintain our competitive position. We believe that development of new products and improvement of existing ones is and will continue to be more important than having our
products covered by patents in maintaining our competitive position.

# COMPETITION

The market for orthopedic products is highly competitive and somewhat
 fragmented. Some of our competitors, either alone or in
conjunction with their respective parent corporate groups, have research and development,
sales, marketing and manufacturing capabilities that are larger than ours, which could
provide those companies with a competitive advantage over our company. Recently, product pricing has
 become increasingly important as a competitive factor, particularly due to
governmental and third-party payors adoption of prospective payment systems.

Due to the prior success of our Surgical Division and the market leadership of our Chattanooga Group Division, our history
of innovative product development, and the extensive experience of our management team, we believe we are capable of effectively competing in the orthopedic market in the future.
Further, the comprehensive range of products we offer enables us to reach a diverse customer base and to utilize multiple distribution channels in an attempt to fuel our
growth across the orthopedic market. Further, our recent acquisitions
in the rehabilitation area, continue to fuel name recognition of our company and our products.

Surgical Division

The market for orthopedic products similar to those produced by our Surgical Division is dominated by a number of large
companies, including Biomet, Inc., DePuy, Inc. (a Johnson & Johnson company), Medtronic, Inc., Smith & Nephew, Stryker Corporation, and Zimmer Holdings, Inc. Our
Surgical Division also faces competition from companies in size similar to ours, such as
Wright Medical Technology, Inc. and Exactech Inc.

Many of our larger competitors offer
a wider range of products than those offered by our Surgical Division, and many of their
products have the endorsement of leading orthopedic surgeons. Due to recent advances,
new technologies and product concepts have been introduced into the orthopedic market at an
increasingly rapid rate. Often, new technologies and product concepts are introduced before the previous technologies and concepts have been fully integrated into the
orthopedic market. Due to the increasing costs of research and development related to these recent advances, many of our competitors have entered into various agreements and
joint ventures with each other, which may allow them to develop innovative products while sharing the research and development costs. As a result, our competitors who enter into
such agreements may have a competitive advantage over our Surgical Division. It is the opinion of our management that this evolution in our industry of high technology products
will continue for the foreseeable future.

Chattanooga Group Division

While in many rehabilitation market segments,
 the Chattanooga Group Division holds a leading market share position, its
primary competitors in the rehabilitation marketplace are Dynatronics Corporation, Mettler Electronics Corporation, Richmar Corporation, Ability One
Products Corp., (a wholly owned subsidiary of Patterson Dental Company), Enraf-Nonius B.V., and Acorn
 Engineering Company.

Soft Goods Division

Competitors in the soft good products segment of the orthopedic market include DeRoyal Industries, Inc., dj Orthopedics, Inc.,
and Zimmer Holdings, Inc. Competition in the patient safety product segment includes DeRoyal Industries, Inc. and the Posey Company.

# GOVERNMENT REGULATION

Our 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. Most of our medical
devices 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 Quality System Regulations (QSRs), 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)
Pre-market Notification process described below. Class II devices are subject to General Controls, as well as pre-market demonstration of adherence to certain performance
standards or other special controls as specified by the FDA. Pre-market review and clearance by the FDA is accomplished through the 510(k) Pre-market Notification procedure.
In the 510(k) Pre-market Notification procedure, the manufacturer submits appropriate information to the FDA in a Pre-market 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) Pre-market Notification process, it will grant clearance to commercially market
the device. It generally takes three to six months from the date of submission to obtain clearance of a 510(k) Pre-market 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) Pre-market 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
Investigational Device Exemption (IDE). An IDE allows the investigational device to be used in a clinical study in order to collect safety and effectiveness data
required to support a PMA application or a 510(k) Pre-market Notification submission to the FDA.
 Only a small percentage of 510(k)Pre-market Notification submissions require clinical data to support the
application. Investigational use also includes clinical evaluation of certain modifications or new intended uses of legally marketed devices. All clinical evaluations
of investigational devices, unless exempt, must have an approved IDE before the study is initiated. An approved IDE permits a device to be shipped lawfully for the purpose of
conducting investigations of the device without complying with other requirements of the Food, Drug and Cosmetic Act that would apply to devices in commercial distribution.

When a manufacturer believes that sufficient pre-clinical and clinical data have been generated to substantiate 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 PMA requirements, as are Class I and Class II devices.

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

Our manufacturing processes are also required to comply with QSR regulations that cover the methods and documentation of the
design, testing, production, control, quality assurance, labeling, packaging and shipping of our products. Further, our 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. Currently, we
have no adverse regulatory compliance issues or actions pending with the FDA, and no FDA QSR audits conducted at our facilities have resulted in any adverse compliance enforcement
actions.

We must obtain export certificates from the FDA before
 we can export certain of our products and are subject to regulations
in many of the foreign countries in which we sell our products. These include product standards, packaging
requirements, labeling requirements, import restrictions, tariff
regulations, duties and tax requirements. Many of the regulations applicable to our devices and products in
 such countries are similar to those of the FDA. The national
health or social security organizations of certain countries require our products to be qualified before
they can be marketed in those countries. To date, we have not experienced
any difficulty in complying with these regulations.

We have implemented policies and procedures allowing us to position ourselves for the changing international regulatory
environment. The ISO 9001 and ISO 13485 standards have been developed as internationally recognized guidelines
that are aimed at ensuring the design and manufacture of quality products.  A company that passes an ISO audit
and obtains ISO certification becomes internationally recognized as operating under a competent quality system.  A
CE mark is a European system of adherence to the European Medical Device Directive.  The European
Community promulgaged rules requiring medical products to receive a CE Mark by mid 1998.  The Surgical Division
and the Chattanooga Group Division have received ISO 9001 and ISO 13485 certification and thereby are allowed
to place a CE mark on our products.

Certain provisions of the Social Security Act, commonly known as the Medicare Fraud and Abuse Statute, prohibit
entities, such as ours, 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.

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.

# EMPLOYEES

As of December 31, 2003, we had approximately 450 employees. Our workforce is not unionized. We have not experienced any
strikes or work stoppages and our management considers our relationship with our employees to be good.

# RISK FACTORS

You should carefully consider the following risk factors, in addition to the other information contained in this annual
report. Investing in our common stock involves a high degree of risk and you may lose part or all of your investment in our shares.

Please read the section on
Forward Looking Statements.

We have a history of net losses and may not be profitable in the future.

We have had a history of net losses.
 For the year ended December 31, 2003, we incurred a net loss of approximately $2.5 million,
which included approximately $7.7
million ($5.5 million after tax) in prepayment penalties and unamortized warrant and debt
issuances costs associated with prepayment of our outstanding debt. For the year ended
 December 31, 2002 our net income was $6,000. Our net income for the year ended
December 31, 2001 was $548,000, excluding a $3.7 million charge resulting from the issuance
of 132,353 shares of our Series A Preferred Stock on June 12, 2001.  We
incurred a net loss of $3.2 million attributable to our
common stock for the year ended December 31, 2001. We cannot assure you that we will not
continue to incur net losses for the foreseeable future, which could cause our stock price
to decline and adversely affect our ability to finance our business in the future. For additional
 information, you should read the discussion under Item 7:  Managements
Discussion and Analysis of Financial Condition and Results of Operations.

If we fail to compete successfully against our competitors, our sales and operating results may be negatively affected and we
may not achieve future growth.

The markets for our products are highly competitive. The market for our Surgical Division products is dominated by a small
number of large companies. In each of our other divisions, there are both large and small companies with which we compete. We may not be able to meet the prices offered by our
competitors or offer products similar to or more desirable than those offered by our competitors. Many of our competitors have:

| |  |  | greater financial and other resources;
| | - |  | --------------------------------------

| |  |  | more widely accepted products;
| | - |  | ------------------------------

| |  |  | superior ability to maintain new product flow;
| | - |  | ----------------------------------------------

| |  |  | greater research and development and technical capabilities;
| | - |  | ------------------------------------------------------------

| |  |  | patent portfolios that may present an obstacle
to our conduct of business;
| | - |  | --------------------------------------------------------------------------

| |  |  | stronger name recognition;
| | - |  | --------------------------

| |  |  | larger sales and distribution networks; and/or
| | - |  | ----------------------------------------------

| |  |  | international manufacturing facilities,
thereby avoiding the transportation costs and foreign import duties associated with shipping
domestically manufactured products to international customers.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The factors set forth above may be material to our ability to develop and sell our products. Our failure to compete
effectively in developing and selling our products would have an adverse effect on our results of operations.

Our future success requires the continued development or licensing of new products and the enhancement of existing
products.

The market for orthopedic devices and related products is characterized by new product development and corresponding
obsolescence of existing products. Our competitors may develop new medical procedures, technology or products that are more effective than our current technology or products or
that render our technology or products obsolete or uncompetitive, which could have a material adverse effect on us. We may not be able to develop successful new products or
enhance existing products, obtain regulatory clearances and approval of such products, market such products in a commercially viable manner or gain market acceptance for such
products. The failure to develop or license and market new products and product enhancements could materially and adversely affect our competitive position, which could
cause a significant decline in our sales and profitability.

We rely on independent sales agents and third-party distributors to market and sell most of our products. If we fail to
establish new sales and distribution relationships or maintain our existing relationships, or if our independent sales agents and third-party distributors fail to commit sufficient
resources or are otherwise ineffective in selling our products, our results of operations and future growth will be adversely impacted.

Our success depends largely upon marketing arrangements with our independent sales agents and distributors. These persons
may terminate their relationships with us or devote insufficient sales efforts to our products. We do not control the efforts these persons make to sell our products. Our
failure to attract and retain skilled independent sales agents and distributors would have an adverse effect on our results of operations.

We anticipate that a significant portion of the growth in our Surgical Division will require affiliating with additional
sales agents. We will face significant challenges and risks in training, managing and retaining additional qualified sales and marketing agents. We may not be able to retain a
sufficient number of additional qualified personnel to create increased demand for our products. If we are unable to grow effectively our sales and marketing team to sell our
orthopedic devices and related products, our growth may be negatively affected.

Our quarterly operating results are subject to substantial fluctuations, and you should not rely on them as an indication
of our future results.

Our quarterly operating results may vary significantly due to a combination of factors, many of which are beyond our control.
These factors include:

| |  |  | demand for our products;
| | - |  | ------------------------

| |  |  | our ability to meet the demand for our products;
| | - |  | ------------------------------------------------

| |  |  | increased competition;
| | - |  | ----------------------

| |  |  | the number, significance and timing of introduction of new products and enhancements by us or our competitors;
| | - |  | --------------------------------------------------------------------------------------------------------------

| |  |  | our ability to develop, introduce and market new and enhanced versions of our products on a timely basis;
| | - |  | ---------------------------------------------------------------------------------------------------------

| |  |  | changes in pricing policies by us or our competitors;
| | - |  | -----------------------------------------------------

| |  |  | changes in the treatment practices of our surgeon customers;
| | - |  | ------------------------------------------------------------

| |  |  | the timing of significant orders and shipments;
| | - |  | -----------------------------------------------

| |  |  | availability of raw materials;
| | - |  | ------------------------------

| |  |  | work stoppages or strikes in the health care industry; and
| | - |  | ----------------------------------------------------------

| |  |  | general economic factors.
| | - |  | -------------------------

Our quarterly sales and operating results have varied significantly in the past three years primarily as a result of our
July 2001 acquisition of the assets which now comprise our Soft Goods Division and our acquisition of Chattanooga Group, Inc. in February 2002. We believe that quarterly sales
and operating results may vary significantly in the future. Period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon
as indications of future performance. We cannot assure you that our sales will increase or be sustained in future periods or that we will be profitable in any future period. Any
shortfalls in sales or earnings in any given period from levels expected by securities or industry analysts could have an immediate and significant adverse effect on the trading
price of our common stock, and any other of our securities which we may issue in the future.

If our designing and consulting surgeons do not continue their affiliation with us, we may be unable to develop, design
and test new medical devices or enhance our existing medical devices.

We have existing designing and consulting arrangements with surgeons who are well recognized by other surgeons and
orthopedic specialists. We have developed and maintain close relationships with these surgeons.
These professionals often assist the Company by speaking about our products
at medical seminars, assisting in the training of other professionals in the use and/or fitting of our products and providing us with feedback on the industrys acceptance
of our new products. If these arrangements terminate or are not renewed, our ability to develop, design and test new medical devices or enhancements to our existing medical
devices, and our ability to operate successfully, could be materially and adversely affected. We cannot assure you that we will be successful in maintaining or renewing our
designing and consulting arrangements with our current surgeons.

If surgeons do not recommend our surgical products, our sales may decline or we may be unable to increase our sales or
generate profits.

An important factor in the overall demand for our surgical products is the recommendation by surgeons of these products to
hospitals, patients and other surgeons. We may not obtain the necessary recommendations from surgeons. Acceptance of our surgical products depends on educating the medical
community as to the distinctive characteristics, perceived benefits, clinical efficacy and cost-effectiveness of our surgical products compared to the products offered by our
competitors and on training surgeons in the proper application of our surgical products.

If product liability lawsuits are brought against us and we do not have adequate insurance, our business may be harmed.

The manufacture and sale of medical devices exposes us to significant risk of product liability claims, lawsuits and product
recalls. In the past, as well as currently, we have been and are the subject of a number of product liability claims and lawsuits relating to our products. In the future, we may
be subject to additional product liability claims, which could be costly and divert attention of management. We currently maintain product liability insurance with coverage
limits of $20 million per occurrence and an annual aggregate maximum of $20 million. Insurance is expensive, continues to increase in cost, and in the future may not be
available on acceptable terms, if at all. Our existing product liability insurance coverage may be inadequate to protect us from any liabilities we might incur, and we are
exposed to the risk that our claims may be excluded and that our insurers may become insolvent. If a product liability claim or series of claims is brought against us for
uninsured liabilities or in excess of our insurance coverage, our business could suffer materially and cause our stock price to fall. In addition, as a result of a product
liability claim, we may have to recall some of our products, which could result in significant costs to us and cause our stock price to fall.

Efforts to acquire other companies or product lines could adversely affect our operations and financial results.

While we have no commitments or agreements to acquire other companies or product lines, we may pursue acquisitions of
other companies or additional product lines. Our ability to grow through acquisitions depends upon our ability to identify, negotiate, complete and integrate suitable
acquisitions and to obtain any necessary financing, all of which can present difficulties. There can be no assurance that we will be able to identify and make acquisitions on
acceptable terms or that we will be able to obtain financing for such acquisitions on acceptable terms. Even if we complete acquisitions, we may experience:

| |  |  | difficulties in integrating any acquired companies, personnel and product lines into our existing business;
| | - |  | -----------------------------------------------------------------------------------------------------------

| |  |  | delays in realizing the benefits of any acquired company or product lines;
| | - |  | --------------------------------------------------------------------------

| |  |  | diversion of our management's time and attention from other business concerns;
| | - |  | ------------------------------------------------------------------------------

| |  |  | limited or no direct
prior experience in new markets or countries we may enter;
| | - |  | -------------------------------------------------------------------------------

| |  |  | higher costs of integration than we anticipated;
| | - |  | ------------------------------------------------

| |  |  | assumption of undisclosed liabilities;
| | - |  | --------------------------------------

| |  |  | adverse market reaction;
| | - |  | ------------------------

| |  |  | difficulties in retaining key
employees of the acquired business who are necessary to manage these acquisitions; or
| | - |  | -------------------------------------------------------------------------------------------------------------------

| |  |  | additional risks
we may assume in connection with our acquisitions.
| | - |  | -------------------------------------------------------------------

In addition, an acquisition could
materially impair our operating results by causing us to incur debt or requiring us to
amortize acquired assets. We cannot assure you that we will be able to identify and consummate any future acquisitions or that any acquisition we
consummate will be successful.

We have succeeded to contingent obligations as a result of the Chattanooga Group acquisition and may have to use our cash
to satisfy such obligations.

Chattanooga Group, Inc. is the subject of a
Department of Commerce investigation of its export practices with respect to
unlawfully trading with an embargoed country, and unlawfully preparing export documentation. The stock
purchase agreement for the Chattanooga Group, Inc. provides that
the former owners shall pay us out of escrowed proceeds from their sale of stock for reasonable
 expenses and fines we actually incur in defending the investigation where such
reasonable expenses and fines are greater than the amount that was accrued on the financial
 statements of Chattanooga Group, Inc. as of the date we acquired the company.
To the extent we incur monetary fines,  costs, and legal expenses related to the Department of Commerce
investigation the sellers from
whom we purchased the capital stock of  Chattanooga  Group Inc have agreed to
indemnify us and to pay all reasonable  costs,  expenses,
settlements,  and fines in excess of the $167,000,  which as of December 31, 2003,  was the  remaining
 amount of what was accrued as a
liability on  Chattanooga  Group Inc.s  financial  statements  as of the date of the  acquisition
up to a maximum of $5 million.  With
respect to the legal  expenses,  the sellers are only  obligated to indemnify and  reimburse us for the
legal  expenses of the law firm
currently  handling  the  investigation  or any other law firm of their  choice.  If upon  final
determination  or  settlement  of the
Department of Commerce  investigation  we ultimately  incur total expenses or fines in
an amount less than the  approximately  $167,000
accrual,  we shall owe the sellers the  remainder  of the  accrual.  When we acquired  Chattanooga  Group,  Inc.,  $2.5  million of the
sellers' sale  proceeds were placed in escrow to satisfy the sellers'  indemnity  obligations  to us, and currently in accordance  with
the terms of the purchase agreement $600,000 remains in escrow through February 8, 2005 for such purpose.

Therefore, we will not be entitled to any such payment from escrowed proceeds until we
 have incurred additional expenses related to the investigation in an approximate amount of
$167,000. When we acquired Chattanooga Group, Inc., proceeds of up to a maximum of $2.5 million from the former owners sale of stock to us were placed in escrow to satisfy
their indemnity obligations to us. There currently remains approximately $600,000 in escrow for such purpose. We cannot assure you, however, that any fines or expenses
incurred by the Chattanooga Group as a result of this investigation will be less than the amount placed in escrow by the former owners of Chattanooga Group, Inc. to satisfy their
indemnity obligations to us, nor can we assure you that the remaining amounts in escrow will continue to be available as a possible source of indemnification. Furthermore, we do
not appear to have the right to seek indemnification from the former owners of Chattanooga Group, Inc. for fines and expenses of the Department of Commerce investigation beyond
fines and expenses paid from the escrowed proceeds.

Our debt agreements impose restrictions on us which may limit or prohibit us from engaging in certain transactions.
If a default were to occur, our lenders could accelerate the amounts of debt outstanding, and holders of our secured indebtedness could force us to sell our assets to satisfy all
or part of what is owed.

Covenants relating to our $25 million Bank of
America senior credit facility and our $24 million senior subordinated notes
credit facility (of which $5 million currently is outstanding as of December 31, 2003) held by CapitalSource Finance LLC
restrict our ability to pay dividends, restrict our ability to engage in various
operational matters, and require us to maintain specified financial ratios and
satisfy specified financial tests. Our ability to meet these financial ratios and tests
may be affected by events beyond our control. These covenants and restrictions could limit
 our ability to obtain future financing, make needed capital expenditures or other
investments, repurchase our outstanding debt or equity, withstand a future downturn in our business or in the economy, dispose of operations, engage in strategic acquisitions or
mergers or otherwise conduct necessary corporate activities. Various transactions that we may view as important opportunities, such as possible acquisitions, are also subject to
the consent of lenders under the senior credit facility and under the senior subordinated notes which consent may be withheld or granted subject to conditions specified at the time
that may affect the attractiveness or viability of the transaction.

We amended and restated our agreements
with both of our lenders effective as of September 26, 2003 upon repayment of the original debt. These amendments
improved our cost of borrowing and modified our financial covenants in a manner which generally increases the likelihood of our compliance. There can be no assurance that we
will remain in compliance with these cash flow and other financial covenants or be able to obtain a waiver of default or amendments to our credit agreements in the future.

If a default under our Bank of America credit facility were to occur, the lenders under the credit facility could
accelerate the amounts outstanding under the credit facility and our other lenders, principally CapitalSource Finance LLC as holder of the senior subordinated notes, could
declare immediately due and payable all amounts borrowed under other instruments such as the senior subordinated notes that could contain certain provisions for cross-acceleration
or cross-default. Similarly, a default under the senior subordinated notes could permit
 CapitalSource Finance LLC, as holder, to accelerate amounts outstanding and our lenders,
principally the lenders under the Bank of America senior credit facility, could declare immediately
due and payable all amounts borrowed under the Bank of America senior credit facility
because of cross-acceleration and cross-default rights of those lenders. In addition, the lenders under these agreements could terminate their commitments to lend to us. If the
lenders under these agreements accelerate the repayment of borrowings, we may not have sufficient liquid assets at that time to repay the amounts then outstanding under our
indebtedness or be able to find additional alternative financing. Even if we could obtain additional alternative financing, the terms of the financing may not be favorable or
acceptable to us.

The existing indebtedness under our senior credit facility and our senior subordinated notes is secured by substantially all
of our assets. Should a default or acceleration of this indebtedness occur, the holders of this indebtedness could sell the assets to satisfy all or a part of what is owed. Our Bank
of America senior credit facility also contains provisions prohibiting the modification of our outstanding senior subordinated notes held by CapitalSource Finance LLC, as well as
limiting the ability to refinance these notes.

If we lose one of our key suppliers or one of our contract manufacturers stops making our products, we may be unable
to meet customer orders for our products in a timely manner or within our budget.

We rely on a limited number of foreign and domestic suppliers for the raw materials and components used in our products.
One or more of our suppliers may decide for reasons beyond our control to cease supplying us with raw materials and components. FDA regulations may require additional testing of
any raw materials or components from new suppliers prior to our use of these materials or components and in the case of a device with a pre-market approval, we may be required to
obtain prior FDA permission, either of which could delay or prevent our access or use of such raw materials or components. If we are unable to obtain materials we need from our
suppliers and we cannot obtain these materials from other sources, we may be unable to manufacture our products for a period of time or within our manufacturing budget, which
could negatively impact our results of operations.

The products sold by our Soft Goods Division are primarily manufactured by a company located in Acuna, Mexico, which provides
the required labor to us on a contract basis. If our agreement with the Mexican company terminated and we were otherwise unable to find suitable contract labor, it could have a
material adverse effect on our business, financial condition and results of operations.

Our Soft Goods Divisions reliance on our contract manufacturing facility in Mexico exposes us to related risks and
uncertainties, including difficulties in staffing and managing international operations; controlling quality of manufacture; political, social, and economic instability;
interruptions and limitations in telecommunication services; product and/or material transportation delays or disruption; trade restrictions and changes in tariffs; import and
export license requirements and restrictions; fluctuations in currency exchange rates; and potential adverse tax consequences. If any of these risks materialize, our international
manufacturing operations and results from our Soft Goods Division, as well as our operating results, may be harmed.

If we cannot retain our key personnel,
 many of whom have been with us for less than four years, we may not be able to
manage and operate successfully and we may not be able to meet our strategic objectives.

Our continued success depends, in part, upon key managerial, scientific, sales and technical personnel, as well as our
ability to continue to attract and retain additional highly qualified personnel. We compete for such personnel with other companies, academic institutions, government
entities and other organizations. We cannot assure you that we will be successful in retaining our current personnel or in hiring or retaining qualified personnel in the
future.

Many of our existing management personnel
 have been employed by us for four years or less, including Kenneth W.
Davidson, our Chief Executive Officer, who joined us in October 2000, Paul Chapman, our President and Chief Operating Officer, who joined us when we acquired Chattanooga Group,
Inc. in February 2002 and became our President on May 20, 2003, Jack Cahill, our Executive Vice President, President-Surgical Division, who joined us in January 2001, and Scott
Klosterman, our Executive Vice President, President-Chattanooga Group who joined us in February 2002. These executives have substantial experience and expertise in our business.
Our future success depends to a significant extent on the ability of our executive officers and other members of our management team to operate effectively, both
individually and as a group. We cannot be certain that we will be able to efficiently allocate responsibilities or that the new members of our executive team will succeed in
their roles.

Issuances of our securities are subject to federal and state securities laws, and certain holders of common stock issued
by us in prior offerings may be entitled to rescind their purchases.

From January 1997 through June 2003, certain participants in our 401(k) Profit Sharing Plan purchased shares of our common
stock for inclusion in their respective 401(k) plan accounts. By failing to register properly our 401(k) plan or the shares purchased thereunder, we may not have complied with
various requirements of applicable federal securities laws. In such situations a number of remedies may be available to regulatory authorities and the participants for whose
accounts the trustee of the 401(k) plan purchased shares of our common stock, including, without limitation, a right of rescission, civil penalties, a restraining order or
injunction, and a court order to pay restitution and costs.
 As a result, we agreed with the underwriters of our public offering which closed August 11, 2003, that in the event
that the daily per share closing price of our common stock (as quoted on the Nasdaq National Market or any national securities exchange on which shares of our common stock
are listed or admitted for trading) falls below $4.00 at any time on or prior to May 31, 2004 we would commence a rescission offer with respect to shares of our common stock sold
to participants under our 401(k) plan within the time period covered by the rescission offer.

Substantially all of the shares that were purchased by 401(k) plan participants within the time period which would be covered
by the rescission offer were purchased at a price of less than $4.00 per share. Even assuming the closing price of our stock were to decline to $3.70 per share prior to May
31, 2004 (thus triggering our obligation to make the rescission offer), we would be required to make an aggregate payment of less than $5,000, and the resulting recorded
charge to our earnings would be less than $500, if all offerees whose shares were purchased for their 401(k) plan account at a price in excess of $3.70 per share
(approximately 1,200 shares) were to accept the offer. If, at the time we are required to conduct the rescission offer, and the closing price of our common stock were to be
less than $3.70 per share, the amount we would be required to pay and the corresponding charge to our earnings would increase.

As of the date hereof, no claims for rescission have been made against us. We cannot assure you, however, that we will not
otherwise be subject to possible claims, litigation, penalties or fines relating to such sales. Any claims, litigation, penalties or fines which could be asserted against us
relating to these sales could have a material adverse effect on our liquidity and results of operations.

We derive a portion of our sales from operations in international markets, which may be subject to political, economic and
social instability.

Approximately 13% of our sales for the year ended December 31, 2003 was derived from our international operations. One
component of our growth strategy is to expand our international sales efforts. However, to the extent we are successful in expanding our international sales and operations, this
will increasingly expose us to risks inherent in operating in foreign jurisdictions, including:

| |  |  | imposition or increase of investment and other restrictions by foreign governments;
| | - |  | -----------------------------------------------------------------------------------

| |  |  | potential adverse tax consequences, including the imposition or increase of withholding and other taxes on remittances and
              other payments by foreign subsidiaries;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | the imposition of additional foreign governmental controls or regulations on the sale of our orthopedic devices and related
              products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | increased instances of political, social and economic instability;
| | - |  | ------------------------------------------------------------------

| |  |  | currency risk between the U.S. Dollar and foreign currencies;
| | - |  | -------------------------------------------------------------

| |  |  | a shortage of high-quality international salespeople and distributors;
| | - |  | ----------------------------------------------------------------------

| |  |  | changes in tariffs and other trade restrictions or barriers;
| | - |  | ------------------------------------------------------------

| |  |  | exposure to different legal, regulatory and political standards in multiple countries; and
| | - |  | ------------------------------------------------------------------------------------------

| |  |  | acts of terrorism and acts of war, particularly in light of the terrorist attacks of September 11, 2001.
| | - |  | --------------------------------------------------------------------------------------------------------

If our patents and other intellectual property rights do not adequately protect our products, we may lose market
share to our competitors and be unable to operate our business profitably.

We rely on a combination of patents, trade secrets, copyrights, trademarks, license agreements and contractual provisions to establish and protect our intellectual property rights in our products and the processes for the development, manufacture and marketing of our products. These legal means,
however, afford only limited protection and may not adequately protect our rights. In addition, we cannot assure you that any of our pending patent or trademark applications will issue. The U.S. Patent and Trademark Office may deny or require significant narrowing of claims in our pending patent applications, and patents issuing from the pending patent
applications, if any, may not provide us with significant commercial protection. We could incur substantial costs in proceedings before the U.S. Patent and Trademark Office. These proceedings could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued patents. In addition, the laws of some of
the countries in which our products are or may be sold may not protect our products and intellectual property to the same extent as U.S. laws, if at all. We may be unable to protect our rights in trade secrets and unpatented proprietary technology in these countries.

In addition, we hold patent and other intellectual property licenses from third parties for some of our products and on technologies that are necessary in the designing and manufacturing of some of our products. The loss of such licenses would prevent us from manufacturing, marketing and
selling these products, which could harm our business.

Other parties may have filed applications for or been issued patents and in the future may obtain additional patents and intellectual property rights related to products that compete with or are similar to our products. We may not be aware of all patents potentially adverse to our interests that
may have been issued to others, and there can be no assurance that such patents do not exist or have not been filed or issued. If patents have been or are issued to others containing preclusive or conflicting claims and such claims are ultimately determined to be valid, we may be required to obtain licenses thereto or to develop or acquire alternate
technology, which would have a material adverse affect on us.

There can be no assurance that the validity of any of the patents or other intellectual property owned by or licensed to us would be upheld if challenged by others in litigation or that our products, even if covered by our patents or other intellectual property, would not infringe patents owned by
others.

We seek to protect our trade secrets, know-how and other unpatented proprietary technology, in part, with confidentiality agreements and invention assignment with our employees, our designing and consulting surgeons and our other consultants. Our agreements with independent sales agents and distributors also contain confidentiality agreements. We cannot assure you, however, that:

| |  |  | these agreements will not be breached;
| | - |  | --------------------------------------

| |  |  | we will have adequate remedies for any breach;
| | - |  | ----------------------------------------------

| |  |  | the FDA or another governmental agency may require disclosure of such information in order for us to have the right to
              market a product; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | trade secrets,  know-how and other  unpatented  proprietary  technology  will not otherwise  become known to or  independently
              developed by our competitors.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Also, our competitors may allege that our products infringe their patents leading to voluntary or involuntary loss of sales from
those products. In addition, the cost to prosecute infringements of our patents or the cost to defend our products against patent infringement actions by others could be
substantial.

If we lose any future intellectual property lawsuits, a court could require us to pay significant damages or prevent us from
selling our products.

Litigation involving patents and other intellectual property rights is common in the orthopedic industry, and companies in
this industry have used intellectual property litigation in an attempt to gain a competitive advantage. In the future, we may become a party to lawsuits involving patents
or other intellectual property. If we lose one of these proceedings, a court, or a similar foreign governing body, could require us to pay significant damages to third parties,
require us to seek licenses from third parties and pay ongoing royalties, require us to redesign our products, or prevent us from manufacturing, using or selling our products. In
addition to being costly, protracted litigation to defend or prosecute our intellectual property rights could seriously detract from the time our management would otherwise
devote to running our business. Intellectual property litigation relating to our products could cause our customers or potential customers to defer or limit their purchase or use
of the affected products until resolution of the litigation.

We may be liable for contamination or other harm caused by hazardous materials that we use.

Our research and development and manufacturing processes involve the use of hazardous materials. We are subject to federal,
state and local regulation governing the use, manufacture, handling, storage and disposal of hazardous materials. We cannot completely eliminate the risk of contamination or injury
resulting from hazardous materials, and we may incur liability as a result of any contamination or injury. In addition, under some environmental laws and regulations, we
could also be held responsible for all of the costs relating to any contamination at our past or present facilities and at third-party waste disposal sites. We may incur
significant expenses in the future relating to any failure to comply with environmental laws. Any such future expenses or liability could have a significant negative impact on
our financial condition.

If a natural or man-made disaster strikes our manufacturing facilities, we may be unable to manufacture our products for a
substantial amount of time, which could cause our sales to decline.

We principally rely on our manufacturing facilities in Austin, Texas and Chattanooga, Tennessee, as well as a
contract manufacturer located in Acuna, Mexico. These facilities and the manufacturing equipment we use to produce our products would be difficult to replace and could require
substantial lead-time to repair or replace. Our facilities may be affected by natural or man-made disasters. In the event one of our facilities was affected by a disaster, we
would be forced to rely on third-party manufacturers or shift production to our other manufacturing facilities. We currently carry insurance to protect us against disasters.
However, such insurance may not be sufficient to cover all of our potential losses or may become unavailable on acceptable terms, if available at all.

To remain competitive we may have to move more of our manufacturing operations to foreign countries.

We currently have no manufacturing operations in any foreign country other than Mexico. The cost of transporting some of our
products to foreign countries is currently borne by our customers, who are usually required to pay foreign import duties on the products. As a result, the cost of these
products to customers who use or distribute them outside the United States is often greater than the cost of products manufactured in that country. In addition, foreign
manufacturers of competitive products often receive various local tax concessions, which lower their overall manufacturing costs. In order to compete successfully in the event we
are successful in expanding our international sales and operations, we may be required to open or acquire manufacturing operations abroad, which would be costly to implement and
would increase our exposure to the risks of doing business in international countries. If we were to do this, we may not be able to operate successfully our foreign manufacturing
operations, which could have a material adverse effect on our international operations and on our overall business, financial condition, results of operations and future prospects.

Our business plan relies on certain assumptions about the market for our products, which, if incorrect, may adversely
affect our profitability.

Our ability to achieve our business objectives is subject to a variety of factors, many of which are beyond our control. For
example, we believe that the relative increase in the aging of the general population and increasingly active lifestyles will continue and that these trends will increase the need
for our orthopedic implant products. The projected demand for our products could materially differ from actual demand if our assumptions regarding these trends and
acceptance of our products by the medical community prove to be incorrect or do not materialize or if non-surgical treatments gain more widespread acceptance as a viable
alternative to orthopedic implants.

We are subject to substantial government regulation that could have a material adverse effect on our business.

Government regulation in the United States and other countries is a significant factor affecting the research, development, manufacture
and marketing of our products. In the United States, the FDA has broad authority to regulate the development, manufacture, marketing and sale of medical devices. Overseas, these
activities are subject to foreign governmental regulation, which is in many respects similar to regulation in the United States but which vary from country to country. U.S. and foreign
regulation continues to evolve, which could result in additional burdens on our operations. Failure to comply with applicable regulations can, among other things, result
in fines, suspension or withdrawal of regulatory approvals, product recalls, operating restrictions, and criminal prosecution. Additionally, the cost of maintaining personnel
and systems necessary to comply with applicable regulations is substantial.

Many of our products required or will require regulatory approval prior to being marketed. The process of obtaining these
approvals can be lengthy and expensive. We may not be able to obtain or maintain necessary approvals for testing or marketing our products. Moreover, regulatory approvals, if
granted, may include significant limitations on the indicated uses for which our products may be marketed or other restrictions or requirements that reduce the value to us of the
products. Regulatory authorities may also withdraw product approvals if we fail to comply with regulatory standards or if any problems related to our products develop following
initial marketing. We are also subject to strict regulation with respect to our manufacturing operations. This regulation includes testing, control and documentation
requirements, and compliance with the current good manufacturing practice is monitored through inspections by regulatory authorities. Delays in the receipt of, or failure to
receive necessary approvals, the loss of previously obtained approvals, or failure to comply with existing or future regulatory requirements could have a significant negative
effect on our financial condition and results of operations.

Certain federal laws regarding Medicare, Medicaid and physician self-referrals are far-reaching and we may be required to
alter one or more of our practices to be in compliance with these laws. Health care fraud and abuse regulations are complex and even minor, inadvertent irregularities in
submissions can potentially give rise to claims that the statute has been violated. Any violations of these laws could result in a material adverse effect on our business,
financial condition and results of operations. If there is a change in law, regulation or administrative or judicial interpretations, we may have to change our business practices
or our existing business practices could be challenged as unlawful, which could have a material adverse effect on our business, financial condition and results of operations.

Modifications to our marketed devices may require FDA regulatory clearances or approvals and may require us to cease
marketing or recall the modified devices until such clearances or approvals are obtained.

When required, the products we market in the United States have obtained pre-market notification under Section 510(k) of the Federal
Food Drug & Cosmetics Act or were exempt from the 510(k) Pre-market Notification process. We have modified some of our products and product labeling since obtaining
510(k) clearance, but we do not believe these modifications require us to submit new 510(k) Pre-market Notifications. However, if the FDA disagrees with us and requires us to submit a
new 510(k) Pre-market Notification for modifications to our existing products, we may be the subject of enforcement actions by the FDA and be required to stop marketing the
products while the FDA reviews the 510(k) Pre-market Notification. If the FDA requires us to go through a lengthier, more rigorous examination than we expect, our
product introductions or modifications could be delayed or canceled, which could cause our sales to decline. In addition, the FDA may determine that future products will require the
more costly, lengthy and uncertain Pre-market Approval(PMA), process. Products that are approved through the PMA process generally need FDA approval before they may be modified.

Our products may be subject to product recalls even after receiving clearance or approval, which would harm our
reputation and our business.

The FDA and foreign regulatory authorities have the authority to request and, in some cases, require the recall of
products in the event of material deficiencies, design defects or manufacturing defects. A government mandated or voluntary recall by us could occur as a result of component
failures, manufacturing errors, design defects, or any other incidents related to our medical devices, including, but not limited to, adverse event recalls, cease and desist
communications and any other product liability issues related to our medical devices. Any product recall would divert managerial and financial resources and harm our reputation
with customers and our business.

If adequate levels of reimbursement from third-party payors for our products are not obtained, surgeons and
patients may be reluctant to use our products, and our sales may decline.

Our sales depend largely on government health care programs such as Medicare and Medicaid and private health insurers
reimbursing patients medical expenses. Surgeons, hospitals and other health care providers may not purchase our products if they do not receive satisfactory reimbursement
from these third-party payors for the cost of the procedures using our products. Consequently, we may be unable to sell our products on a profitable basis if third-party
payors deny coverage or reduce their current levels of reimbursement.

Payors continue to review their coverage policies carefully for existing and new therapies and can, without notice, deny
coverage for treatments that include the use of our products. Health care providers may attempt to control costs by (i) authorizing fewer elective surgical procedures, including
joint reconstructive surgeries, (ii) by requiring the use of the least expensive implant available, or (iii) reducing the reimbursement for or limiting the number of authorized
visits for rehabilitation procedures.

Outside of the United States, reimbursement systems vary significantly by country. Many foreign markets have
government-managed health care systems that govern reimbursement for new devices and procedures. Canada and some European countries, in particular France, have tightened
reimbursement rates. If adequate levels of reimbursement from third-party payors outside of the United States are not obtained, international sales of our products may decline.

If a significant number of shares of our common stock are sold into the market, the market price of our common stock could
significantly decline, even if our business is doing well.

Our stockholders may sell their common stock, and our employees, directors, officers, sales representatives and
distributors may exercise their stock options in order to sell the common stock underlying their options in the market
under a registration statement we have filed with the Securities and Exchange
 Commission.
Sales of a substantial number of shares of our common stock in the public market or the perception that such sales may occur could depress the market price of our common stock
and impair our ability to raise additional capital through the sale of our equity
 securities. As of December 31, 2003, Galen Partners beneficially owned
 approximately 23.6%
of our outstanding shares of common stock. Officers, directors and our principal
 stockholders owning an aggregate of approximately 14,942,404 shares of our common stock
have agreed that they will not, without the prior written consent of the underwriters in our public offering, directly or indirectly sell any of these restricted shares, or any of
the 1,306,641 shares of our common stock that we may issue upon the exercise of outstanding options or warrants held by such officers, directors, and principal
stockholders, for 180 days after the closing of our public offering of common stock on December 17, 2003.

Our certificate of incorporation, our bylaws and Delaware law contain provisions that could discourage, delay, or prevent a
takeover attempt.

Provisions of our certificate of incorporation, our bylaws and Delaware law may discourage, delay or prevent another
company from merging with us or from acquiring us, even if our stockholders were to consider such merger or acquisition to be favorable.

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# ITEM 2. PROPERTIES

We own two pieces of real property in Chattanooga, Tennessee. These include a 160,000 square foot facility which
houses the headquarters and principal manufacturing operations of the Chattanooga Group Division, as well as a 60,000 square foot building that houses additional manufacturing
operations for the Chattanooga Group Division. We lease an approximately 70,000 square foot facility in Austin, Texas for our corporate headquarters, manufacturing facilities
and warehouse for our Surgical Division and Soft Goods Division business operations.

The lease term, which commenced on April 1, 1997, is for a period of ten years, and we have an option to renew the lease for
an additional term of five years. Our monthly lease payments are approximately $41,000 for an annual lease payment of approximately $492,000, exclusive of our share of applicable
common area maintenance, property taxes and public utility charges, which collectively are approximately $10,000 per month.

# ITEM 3. LEGAL PROCEEDINGS

From time to time, we are plaintiffs or defendants in various litigation matters in the ordinary course of business, some of
which involve claims for damages that are substantial in amount. We believe that the disposition of claims currently pending will not have a material adverse effect on our
financial position or results of operations. With respect to the matters discussed below, although we are currently unable to predict the outcome, we do not believe the disposition
of these matters will have a material adverse effect on our financial position or results of operations.

Akthea S.A.R.L. Matter

In the fall of 2001, we began a number of legal proceedings against Akthea S.A.R.L. (Akthea), our former
Surgical Division product distributor in France. The nature of the claims revolve around monies that were not paid to us by Akthea in connection with the distribution agreement
and lease agreement that were entered into by the parties. We filed a complaint in the United States District Court in Texas related to the lease agreement issues. We also filed
a request for arbitration with the International Chamber of Commerce Court of Arbitration in Paris related to the distribution agreement issues. On February 25, 2002, we were
awarded a default judgment against Akthea in the United States District Court in the amount of $377,000. With respect to the distribution agreement issues, our request for
arbitration sought monies owed under the distribution agreement and an injunction prohibiting Akthea from initiating additional actions similar to those described in the
paragraph below. The arbitration panel issued a preliminary ruling granting us damages for Aktheas breach of the payment provisions of the distribution agreement. On July 21,
2003, the arbitration panel issued its final ruling granting our claim for other costs as well as injunctive relief.

While Akthea interposed no counterclaims in the actions described in the preceding paragraph, in 2002, Akthea
initiated two civil proceedings in Nanterre, France against us and others. The two civil cases have been stayed in favor of the arbitration already commenced between the parties,
and we have been awarded costs in obtaining these stays. Akthea has appealed the imposition of the stays of the two French civil cases, which appeal has been denied.
Additionally, Akthea requested that the responsible French regulatory authority institute criminal proceedings against us based on Aktheas claims that our implant products
are combined with other products and such combination does not comply with the French public health codes. The French authorities declined to act on Aktheas request to
pursue a criminal investigation.

Department of Commerce Investigation of
Chattanooga Group, Inc.

We are the subject of a Department of Commerce investigation of Chattanooga Group, Inc.s export practices with respect to
unlawfully trading with an embargoed country, and unlawfully preparing export documentation. The Department of Commerce investigation commenced prior to our February
2002 acquisition of Chattanooga Group, Inc. To the extent we incur monetary fines, costs and legal expenses related to the Department of Commerce investigation, the sellers from
whom we purchased the capital stock of Chattanooga Group, Inc. have agreed to indemnify us and to pay all reasonable costs, expenses, settlements and fines in excess of the
$167,000, which, as of December 31, 2003, was the remaining amount of what was accrued as a liability on Chattanooga Group Inc.s financial statements as of the date of the
acquisition up to a maximum of $5.0 million. With respect to the legal expenses, the sellers are only obligated to indemnify and reimburse us for the legal expenses of the law
firm currently handling the investigation or any other law firm of their choice. If upon final determination or settlement of the Department of Commerce investigation we
ultimately incur total expenses or fines in an amount less than the approximately $167,000 accrual, we shall owe the sellers the remainder of the accrual. When we acquired
Chattanooga Group, Inc., $2.5 million of the sellers sale proceeds were placed in escrow to satisfy the sellers indemnity obligations to us, and currently in
accordance with the terms of the purchase agreement $600,000 remains in escrow through February 8, 2005 for such purpose. In addition, we, as a successor in interest to
Chattanooga Group, Inc., and our officers and employees might be subject to any criminal charges which could be commenced as a result of this investigation. The Department of
Commerce also may revoke our export licenses or otherwise restrict our ability to export our products.

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

On December 4, 2003, a special meeting of our stockholders was held to vote on two proposals.  The first proposal was to amend our
certificate of incorporation to increase the number of authorized shares of our common stock. A total number of 32,844,952 votes were cast
for this proposal, 1,248,090 votes were cast against this proposal, and no votes were withheld.  There were 6,733 abstentions and no
broker non-votes with regard to this proposal.  The second proposal was to amend our 1997 Distributor Advisory Panel Stock Option
Plan to increase the number of shares of our common stock authorized for issuance under such plan.  A total of 26,857,006 votes were cast
for this proposal, 2,666,000 votes were cast against this proposal, and no votes were withheld.  There were 22,401 abstentions and 4,554,368
broker non-votes with regard to this proposal.

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# PART II.

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

Shares of our common stock are traded on
 the Nasdaq National Market System under the symbol ENMC. The following tables set forth
for the periods indicated the high and low sales prices of our common stock as reported on the Nasdaq National Market since January 1, 2002.

|               | Common Shares |      
|-------------- | ------------- | -----
|               | High          | Low  
|2003           |               |      
|First Quarter  | $3.50         | $1.89
|Second Quarter | $4.16         | $1.98
|Third Quarter  | $7.83         | $3.36
|Fourth Quarter | $8.74         | $5.75
|2002           |               |      
|First Quarter  | $4.20         | $2.80
|Second Quarter | $5.33         | $3.05
|Third Quarter  | $3.62         | $2.35
|Fourth Quarter | $3.64         | $1.68

As of March 15, 2004, there were
approximately 78 stockholders of record of our common stock and approximately 3,000 beneficial owners of our common stock.

Historically, we have not paid any dividends on
 our common stock, and we currently do not anticipate paying any dividends on
the outstanding shares of our common stock in the near future. Further, our ability to pay
 a dividend on the outstanding shares of our common stock is limited by the terms of our
Senior Credit Facility (see note 9 to the Consolidated Statements). See Managements Discussion and Analysis of Financial Condition and Results of Operations.

# ITEM 6. SELECTED
FINANCIAL DATA

The following table sets forth
selected financial data with respect to the Company as of and for the periods indicated
and has been derived from our
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 in this report.

|                                                             |  | Year Ended December 31, |   |         |  
|------------------------------------------------------------ |  | ----------------------- | - | ------- | -
|
|Statement of Operations Data                                 |  |                         |   |         |  
|Sales                                                        |  |                         | $ | 108,059 |  
|Gross margin                                                 |  |                         |   | 53,772  |  
|Income (loss) from operations                                |  |                         |   | 9,215   |  
|Net income (loss)                                            |  |                         | $ | (2,517  | )
|Beneficial conversion feature related to Series A            |  |                        
|Preferred Stock                                              |  |                         |   | --      |  
|Net income (loss) attributable to common stock               |  |                         |   | (2,517  | )
|Basic earnings (loss) per common share                       |  |                         | $ | (0.12   | )
|Shares used in computing basic earnings (loss) per     share |  |                         |   | 20,848  |  
|Diluted earnings (loss) per share                            |  |                         | $ | (0.12   | )
|Shares used in computing diluted earnings (loss)             |  |                        
|per share                                                    |  |                         |   | 20,848  |  
|Balance Sheet Data                                           |  |                         |   |         |  
|Working capital                                              |  |                         | $ | 79,367  |  
|Total assets                                                 |  |                         |   | 136,380 |  
|Current portion of long-term debt                            |  |                         |   | 1,088   |  
|Long-term debt, net of current portion                       |  |                         |   | 5,383   |  
|Stockholders' equity                                         |  |                         | $ | 113,109 |  

| | _______________________________________                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1This
amount includes other charges of which $917,000 related to compensation expense
associated with our stock exchange program, which is comprised of $37,000 included as
cost of goods sold; $186,000 included as research and development expenses; and $694,000
included as selling, general, and administration.

The above 2001 figures include $8.9 million in sales for the Soft Goods Division that was acquired in July 2001. The 2002 data
includes $46.1 million in sales related to the Chattanooga Group Division. See Notes 1 and 14 of the Audited Financial Statements for additional information related to these
acquisitions.

---

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

# Introduction

This managements discussion and analysis of financial condition and results of operations is intended to
an understanding of our results of operations, financial condition and where appropriate, factors that may affect future performance. We will discuss and provide our
analysis of the following:

- Overview of Business and 2003 Results
- Key Industry Trends, Events and Uncertainties
- Results of Operations
- Critical Accounting Policies and Estimates
- Recent Accounting Pronouncements
- Significant Demands
- Liquidity and Capital Resources
- Contractual Obligations, Commercial Commitments and Leases

The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes for those
financial statements as well as the other financial data included elsewhere in this Form 10-K.

# Overview of Business and 2003 Results

We are a diversified orthopedic company that designs, manufactures, markets and distributes a comprehensive range of high
quality orthopedic devices, sports medicine equipment and other related products for the orthopedic industry. Our products are used primarily by orthopedic surgeons, physical and
occupational therapists and other orthopedic specialists who treat patients with musculoskeletal conditions resulting from degenerative diseases, deformities, traumatic
events and sports-related injuries. We currently market and distribute our products through three operating divisions, our Surgical Division, our Chattanooga Group Division
and our Soft Goods Division. Our Surgical Division offers reconstructive joint products, including hip, knee and shoulder implants, trauma products and spinal implants. Our
Chattanooga Group Division is a leader in domestic sales of many of the orthopedic rehabilitation products in the market. Our Soft Goods Division provides orthopedic soft
goods that are used to assist the patient in recovery from injury or a surgical procedure and to protect against further injury. Our three divisions enable us to reach a diverse
customer base through multiple distribution channels and give us the opportunity to provide a comprehensive range of orthopedic devices and related products to orthopedic
specialists operating in a variety of treatment settings.

In October 2000, we announced our strategy to expand our business through selected acquisitions of businesses
or products in the orthopedic industry. We have completed two significant acquisitions since that time that have allowed us to extend our business into two new product segments
of the orthopedic market, orthopedic soft goods and rehabilitation equipment, both of which complement our Surgical Division. In July 2001, we purchased the orthopedic soft
goods, patient safety devices and pressure care product lines of Kimberly-Clark Corporation. Our Chattanooga Group Division was created in February 2002 when we purchased
Chattanooga Group, Inc., a provider of orthopedic rehabilitation products for over 50 years. Our Chattanooga Group Division offers a wide variety of rehabilitation and home
health products making it capable of providing turn-key clinics for orthopedic professionals.

We have financed our two most recent acquisitions through the sale of equity securities and incurring additional debt. Our soft
goods acquisition was financed principally through a portion of the proceeds from the sale of 132,353 shares of Series A Preferred Stock. Our rehabilitation equipment acquisition
was financed with debt borrowed under a credit agreement with Bank of America, National Association, and a note and equity purchase agreement with CapitalSource Finance LLC. We
expect that we will continue to utilize some combination of both debt and equity funding as we continue to implement our strategy of growth through acquisition.

The nature of our business requires significant investment in inventory, capital and new product development. Our customers
expect us to maintain sufficient inventory on hand at all times to meet their needs. Our domestic customers in the Surgical Division require consignment product be placed at or
near their respective locations. Our remaining customers across all product lines demand short delivery schedules for their orders. We also are subject to significant needs for
capital investment in manufacturing equipment and facilities and for the instrument sets required by our Surgical Division customers. Finally, we have placed a strong emphasis on
our research and development efforts for new products. In our Surgical Division, we have developed numerous products and have obtained regulatory approval for over 100 products
and product improvements focused on the orthopedic total joint, trauma and spinal segments of the surgical market. The Chattanooga Group Division historically has, and
continues to, emphasize new product introductions. During 2003, we introduced the VitalStim product line in the Chattanooga Group Division and the
Keramos ceramic-on-ceramic hip in the Surgical Division. Other important products introduced in the Surgical Division included the Reverse® Shoulder
Prostheses for use in shoulder implants and the Cyclone Anterior Cervical Plate used in cervical spine fusion as well as the 3DKneesystem.

In 2003, we posted record sales and exceeded forecasted amounts for both revenues
and operating income. The financial success achieved in our 2003 performance includes our continued increase in domestic Surgical Division sales as we continue to build our United
States sales force for reconstruction, trauma, and spinal products. The 2003 results also include a full year of results for our Chattanooga Group Division, which is a leading
designer, manufacturer, and distributor of rehabilitation products.

In 2003, sales increased 13 percent to $108.1 million compared to $95.5 million for 2002. Gross margin as a percent of sales increased
to 49.8 percent in 2003 compared to 48.2 percent in 2002. Operating income improved 30 percent to $9.2 million in 2003 compared to $7.1 million in 2002. Operating cash flow
increased by $1.3 million to $10.9 million for the year ended 2003. All three of our divisions contributed to our improved operating performance. The Surgical and Chattanooga
Divisions provided the improvement in sales while all three divisions posted gross margin improvements. We also controlled our operational spending across all three divisions and
managed our operating assets to improve operating income and cash flow.

During 2003, we completed two public offerings of our common stock. In our first offering, completed August 11, 2003, we sold
10,637,500 shares and raised gross proceeds of $42.6 million, $39.0 million net of underwriting discounts and associated offering costs. We used these proceeds to repay our
indebtedness to CapitalSource Finance LLC and Bank of America and for general corporate purposes. In conjunction with this offering, all of our outstanding Series A Preferred Stock was converted to common stock,
thereby simplifying our capital structure. Our second offering, completed December 17, 2003, raised $37.5 million from the sale of 6,000,000 shares of common stock.
The proceeds from this offering will be used for working capital and other general corporate purposes, including possible acquisitions. We began 2003 with $37.7 million of
debt and $0.3 million of cash. As a result of these two offerings, we ended 2003 with $45.1 million in cash and investments and only $6.5 million of debt.

# Key Industry Trends, Events and Uncertainties

The orthopedic industry has been experiencing a growth trend which we expect to continue over the short and long term. Two
primary contributing factors to this trend are the aging population and technological innovation. The baby boom generation continues to age and, along with them, the need for
reconstructive implants, sports medicine, rehabilitation equipment and related products is growing. In addition, people are living longer and more active lives thereby increasing
the frequency of injury and reducing the age at which orthopedic products and services are required. Technological innovation is also fueling growth in this industry. Improvements
are continually introduced to expand the life of implants and minimize the invasiveness of the surgery required. These innovations are reducing the average age when a patient will
consider the use of implantable orthopedic devices.

On October 2, 2003, Zimmer Holdings Inc. announced the completion of its acquisition of Centerpulse AG. Both of these
companies were included in the core of largest companies in our industry. This acquisition presents both challenges and opportunities. Although not a new challenge for our
organization, the joining of two of our largest competitors may place us at a competitive disadvantage in the marketplace. However, as these organizations merge their operating,
sales, marketing and administrative departments, opportunities will arise to obtain good resources and talent that for one reason or another may no longer be with the combined
organization.

# Results of Operations

The following table sets forth our
statements of operations as a percentage of sales for the periods indicated:

|                                                                  | Year Ended December 31, |        |       
|----------------------------------------------------------------- | ----------------------- | ------ | ------
|                                                                  | 2003                    | 2002   | 2001  
|Sales                                                             | 100.0%                  | 100.0% | 100.0%
|Cost of goods sold                                                | 50.2                    | 51.8   | 41.9  
|                                                                  |                         |        |       
|Gross margin                                                      | 49.8                    | 48.2   | 58.1  
|Operating expenses                                                |                         |        |       
|Selling, general and administrative                               | 36.6                    | 37.2   | 46.6  
|Research and development                                          | 4.6                     | 3.6    | 4.1   
|Other charges                                                     | --                      | --     | 3.8   
|                                                                  |                         |        |       
|Income from operations                                            | 8.6                     | 7.4    | 3.6   
|Interest income                                                   | 0.1                     | 0.1    | 0.4   
|Interest expense                                                  | (4.9)                   | (7.5)  | (3.0) 
|Early extinguishment of debt                                      | (7.1)                   | --     | --    
|Other income                                                      | 0.1                     | 0.3    | 0.8   
|                                                                  |                         |        |       
|Income (loss) before income taxes                                 | (3.2)                   | 0.3    | 1.8   
|Provision (benefit) for income taxes                              | (0.9)                   | 0.3    | 0.5   
|                                                                  |                         |        |       
|Net income (loss)                                                 | (2.3)                   | 0.0    | 1.3   
|Beneficial conversion feature related to Series A preferred stock | --                      | --     | (8.7) 
|                                                                  |                         |        |       
|Net income (loss) attributable to common stock                    | (2.3%)                  | 0.0%   | (7.4%)
|                                                                  |                         |        |       

Year Ended December 31,
2003 Compared to Year Ended December 31, 2002

Sales.Sales for the year ended December 31, 2003 were $108.1 million compared to $95.5 million in 2002, an increase of 13%. This increase was primarily a result
          of increases in the Surgical and Chattanooga Group Divisions, which contributed 33% and 53% of total sales, respectively.

The Company continues to increase its market penetration in domestic surgical sales as it continues to build its United States
sales force for reconstruction, trauma, and spinal products. In the Surgical Division, the Company had sales of $35.5 million for the year ended December 31, 2003 compared to $31.9
million in 2002, an increase of 11 percent. Domestic Surgical Division sales for 2003 grew more than 7 percent to $29.8 million compared to $27.7 million in 2002. The year over year
growth rate in this division increased in each quarter, from flat in the first quarter (when compared to the first quarter of 2002), to 6.1 percent in the second quarter, 9.4
percent in the third quarter, and 14.1 percent in the fourth quarter. The primary contributor to improved domestic sales performance in this division is the increase in the
number and quality of sales representatives selling our product from 92 at the end of 2002 to 115 at the end of 2003. International sales also improved over the prior year from $4.2
million in 2002 to $5.7 million in 2003. More than two-thirds of this increase can be attributed to increased purchases from our largest international distributor in Japan. The remaining
increase is the result of adding new distributors outside the U.S. in new territories.

In the Chattanooga Group Division, the 2003 results include a full year of operations as part of the Company. The Chattanooga
Group Division had sales of $57.5 million in 2003 compared to sales during the 2002 period of $46.1 million, representing a 25 percent increase for the division. The Chattanooga
Group Divisions 2003 results represent a growth rate of approximately 10 percent compared to 2002 when the division had total revenue of $52.1 million (including the six week
period prior to the Companys February 8, 2002 acquisition of the Chattanooga Group, Inc.). Including the pre-acquisition period of 2002, the Chattanooga Group Divisions
domestic sales increased 8 percent for 2003 over 2002 while international sales increased 39 percent for 2003 over 2002. This divisions growth is primarily due to the
introduction of new products and increased penetration in international markets.

The Soft Goods Division contributed sales of $15.0 million for the year compared to sales in 2002 of $17.5 million. This
decrease is primarily a result of customers increasing inventory levels in 2002 and then reducing their inventory levels to more normalized levels during the beginning of 2003.
The quarterly distribution of sales in this division illustrates this point as follows:
 first quarter $3.4 million, second quarter $3.5 million, third quarter $4.1
million and fourth quarter $4.0 million.

The following table sets forth the geographic mix for each of our divisions sales. The amounts shown for the
Chattanooga Group Division includes the six-week period prior to the Companys February 8, 2002 acquisition of the Chattanooga Group, Inc. so as to make the comparisons
more meaningful.

|                           | Domestic |         | International | Total    |          |        |           |           |        
|-------------------------- | -------- | ------- | ------------- | -------- | -------- | ------ | --------- | --------- | -------
|                           |          |         |               |          |          |        |           |           |        
|                           |          |         | %             |          |          | %      |           |           | %      
|                           | 2003     | 2002    | Growth        | 2003     | 2002     | Growth | 2003      | 2002      | Growth 
|                           |          |         |               |          |          |        |           |           |        
|Surgical Division          | $29,754  | $27,729 | 7.3%          | $  5,743 | $  4,160 | 38.1%  | $  35,497 | $  31,889 | 11.3%  
|Chattanooga Group Division | 51,221   | 47,569  | 7.7%          | 6,311    | 4,532    | 39.3%  | 57,532    | 52,101    | 10.4%  
|Soft Goods Division        | 12,996   | 15,828  | (17.9%)       | 2,034    | 1,629    | 24.9%  | 15,030    | 17,457    | (13.9%)
|                           |          |         |               |          |          |        |           |           |        
|Total                      | $93,971  | $91,126 | 3.1%          | $14,088  | $10,321  | 36.5%  | $108,059  | $101,447  | 6.5%   
|                           |          |         |               |          |          |        |           |           |        

Gross margin. Gross margin as
a percentage of sales grew 1.6 percentage points to 49.8% in 2003 from 48.2% in 2002. This
increase was primarily due to favorable product mix resulting from increased sales in the
Surgical Division which has the highest gross margins of our divisions, increased sales of
new products with higher margins, and continued efforts to improve manufacturing costs.
The gross margin improvement was felt across the Company. Gross margin as a percentage of
sales improved for all divisions in 2003 over 2002. The Surgical Divisions gross
margin as a percentage of sales increased from 69.0% in 2002 to 70.0% in 2003 due largely
to sales mix in favor of new products that yield higher margins and efforts to reduce
manufacturing costs. Gross margin as a percentage of sales for the Chattanooga Group
Division increased 1.2 percentage points to 41.6% for the year ended December 31, 2003 due
to lower manufacturing costs. The gross margin percentage for the Soft Goods Division
improved from 30.9% in 2002 to 33.3% in 2003 as a result of cost reductions and the launch
of several new, higher margin products.

Research and Development.
Research and development expenses increased to $5.0 million, or 4.6% of total revenues,
for the year ended December 31, 2003 from $3.4 million, or 3.6% of total revenues, for the
year ended December 31, 2002. This dollar increase of 48% was primarily due to expanded
efforts to develop new products across all divisions including the Keramos
ceramic-on-ceramic acetabular hip replacement, the Reverse Shoulder Prosthesis for use in
shoulder implants, the 3DKnee System, the Cyclone anterior cervical plate and three
electrotherapy products  the Intelect Legend XT, Vectra Genisys, and Intelect
Transport.

Selling, General and
Administrative. In absolute dollar terms, selling, general, and administrative
expenses increased 11% for the year, to $39.5 million in 2003 from $35.6 million in 2002.
As a percentage of sales, selling, general, and administrative expenses declined from 37.2% in 2002
to 36.6% in 2003. The reduction of selling, general, and administrative expenses as a
percent of sales is do to continued cost reduction efforts, including, but not
limited to, controlling warehouse and distribution costs, which declined by almost
$600,000, or 24% year over year. As a result of increased sales and new agent
relationships, commissions and royalties expense increased by approximately $1.4 million
primarily due to increases in both the Surgical and Chattanooga Group Divisions. Sales and
marketing expense increased by a total of $1.9 million, in line with the increase in sales
and related activities in the Surgical and Chattanooga Group Divisions and sales force
reorganization activities in the Soft Goods Division. The Company did incur significant
costs related to compliance with new requirements for corporate governance and reporting
as a result of the Sarbanes-Oxley Act of 2002. Most of the remaining increase for selling,
general, and administrative expenses is do to the inclusion of a full year of
Chattanooga Group Division expenses compared to a shortened period in 2002 and increased
payroll costs related to performance incentives.

Operating Income.Operating
income increased $2.1 million, or 30%, from $7.1 million in 2002 to $9.2 million in 2003.
Improved sales and margin drove this improvement in our operating results.

Interest Expense. Interest
expense declined $1.9 million from $7.2 million in 2002 to $5.3 million in 2003. This is
the result of the elimination of a significant portion of the Companys long term debt by
the end of the third quarter. During the fourth quarter, interest expense was $170,000.
During the third quarter, the Company completed a public offering of common stock raising
gross proceeds of $42.6 million. The net proceeds of this offering were used to pay
approximately $38.5 million of outstanding debt.

Early extinguishment of debt.We recorded expenses in the third quarter of 2003 due to the early repayment
of our outstanding debt using proceeds from the secondary offering completed in August.
All but approximately $650,000 of the $7.7 million charge represented a non-cash expense
for unamortized warrant and debt issue costs.

Net Income (Loss). We recorded a net loss for the year of
$2.5 million compared to net income of $6,000 in 2002. However, our fourth quarter result
is worthy of note here as it is more indicative of our future operating performance. We
recorded net income of $2.0 million for our fourth quarter 2003 compared to $5,000 in the
fourth quarter of 2002. There are two factors contributing to this improvement. First, the
improvement in our operating income as discussed above and second, the elimination of our
interest expense. The adjusted income, excluding the charges for early extinguishment
of debt, is $3.0 million.

The  following  table,  which has been  presented on a non-GAAP  basis,  has been  provided to reconcile the Companys net loss for the
twelve-month  period ended  December 31, 2003 to adjusted income.  The adjusted income  excludes the impact of the expensing of
prepayment  penalties and unamortized  warrant and debt issue costs associated with the early  extinguishment  of debt during the third
quarter of 2003 (of which only  $650,000 was cash).  The adjusted income has been  included as it is deemed to provide  meaningful
information  regarding the Companys  current  period  performance  excluding the  additional  expense  associated  with the early debt
extinguishment,  which is a  non-recurring  transaction  the Company  consummated  upon the closing of the $43 million  offering of the
Companys  common stock in August 2003.  The following  should be read in  conjunction  with the  Companys  actual  financial  results
presented above, which have been prepared in accordance with Generally Accepted Accounting Principles (GAAP).

|Reconciliation of Adjusted Income                           | Twelve Months Ended 12/31/03
|----------------------------------------------------------- | ----------------------------
|Loss before income taxes, as reported                       | $(3,483)                    
|Warrant expense, debt issues costs and prepayment penalties
|expensed in connection with early payment of debt           | 7,674                       
|                                                            |                             
|Income before income taxes, as adjusted                     | 4,191                       
|Provision for income taxes                                  | 1,174                       
|                                                            |                             
|Income, as adjusted                                         | $ 3,017                     
|                                                            |                             

Year Ended December 31,
2002 Compared to Year Ended December 31, 2001.

Sales.Sales were $95.5 million for the year ended 2002, representing an increase
          of $52.9 million, or 124% over the year ended December 31, 2001. The primary
          reason for this significant increase were sales generated as a result of the
          February 2002 acquisition of Chattanooga Group, Inc. The Chattanooga Group
          Divisions sales for 2002 represented 48% of the Companys total
          annual sales for 2002. In the Surgical Division, overall sales for 2002 of $31.9
          million represent a 6% decrease when compared to sales levels of 2001. This was
          due to increases in price and changes in sales mix offset by decreases in
          volume. However, in this division, the overall sales decrease masks the
          improvements made by the Surgical Division in expanding its domestic sales,
          where the Company concentrated most of its division sales efforts throughout
          2002. The increase in domestic sales for the Surgical Division was 11% when
          compared to 2001 domestic sales levels. The increase was most notable in the
          spine implant area where domestic sales increased 90% over the level of spine
          product domestic sales for 2001. International sales in the Surgical Division
          totaled $4.2 million for 2002, which represents a decrease of 52% when compared
          to the sales levels for 2001. This decrease was primarily a result of a
          competitor acquiring Encores primary European distributor in the fall of
          2001. The Chattanooga Group Division reported sales of $46.1 million,
          representing a 4% increase over its sales levels of $44.2 million for the
          comparable period in 2001, which were generated prior to its acquisition by
          Encore. The Soft Goods Division contributed $17.5 million in sales for 2002,
          compared to $8.9 million for 2001, when only six months of sales were generated
          as a result of the July 2001 acquisition of the product lines that are sold in
          this division.

Gross margin.Gross margin
increased by $21.3 million in 2002 to $46 million as compared to $24.8 million for 2001.
This increase, like the increase in sales, was largely due to the acquisition of
Chattanooga Group, Inc. The addition of the Chattanooga Group accounted for $18.7 million
of the increase. The Soft Goods and Surgical Divisions increased by $2.5 million and
$157,000, respectively. While gross margin grew by absolute dollar amounts, overall gross
margin as a percent of sales decreased from 58% to 48% when compared to 2001. The Surgical
Divisions gross margins as a percent of sales improved for the year from 65% to 69%
due primarily to the change in sales mix in favor of domestic sales that yield higher
margins. Sales of Soft Goods Division products produced a gross margin of 31% in 2002,
compared to 33% in 2001 and sales of rehabilitation equipment in the Chattanooga Group
Division produced a gross margin of 40% of sales in 2002.

Research and Development.
Research and development expenses increased to $3.4 million for 2002 from $1.7 million in
2001. This is an increase of $1.7 million or 96% over 2001. The inclusion of research and
development expenses related to the Chattanooga Group Division primarily accounted for
this increase.

Selling, General and
Administrative. Selling, general, and administrative expenses totaled $35.6 million
for the year, representing an increase of $15.7 million, or 79%, over 2001 expenditures
that totaled $19.9 million. However, as a percentage of sales, selling, general, and
administrative expenses decreased to 37% for 2002 from 47% in 2001. These expenses
increased in part due to the acquisitions of the Chattanooga Group Division, which
incurred $10.6 million of selling, general, and administrative expenses in 2002, or 68% of
the total increase for the year, and the Soft Goods Division which increased $3.5 million
to $5.9 million due to the first full year of expenses related to this division. The
remaining increase is primarily attributable to two factors. First, marketing expenses
increased $700,000 due to increased activities associated with tradeshows and consulting
surgeons. Second, general and administrative expenses increased $800,000 due to expanded
investor relations activities, higher directors and officers liability insurance,
increased strategic planning activities, and higher attorney fees related to the Akthea
litigation.

Other charges.Unlike 2001
when $1.6 million relating to specific non-recurring items was reported, no non-recurring
charges were incurred during 2002. In 2001, these items included $917,000 related to a
senior management option exchange program, $535,000 incurred in connection with a legal
settlement of a lawsuit brought by a former stockholder in an attempt to stop the issuance
of the Series A Preferred stock and $171,000 charged for the cashless exercise of options
by a former employee.

Operating Income. The
combination of these factors resulted in a $5.5 million increase in operating income to
$7.1 million for the year ended December 31, 2002 compared to $1.5 million for the year
ended December 31, 2001.

Net Income.The large
improvements in operating income were offset by increased interest expense and a high
effective tax rate to produce net income of $6,000 for the year compared to net income of
$548,000 for 2001 before the impact of the beneficial conversion feature related to Series
A Preferred Stock of $3.7 million. Interest expense increased to $7.2 million in 2002 from
$1.3 million in 2001. This increase of $5.9 million was directly related to additional
interest incurred in connection with the acquisition of Chattanooga Group, Inc. The
effective tax rate rose to 98% for the year principally due to the permanent tax
differences related to the Chattanooga Group, Inc. acquisition compared to the level of
2002 pre-tax income.

# Critical Accounting
Policies and Estimates

Managements discussion and
analysis of financial condition and results of operations is based upon our financial
statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, management evaluates estimates, including those related
to inventory, accounts receivable, deferred taxes, goodwill, and intangible assets. We base our estimates on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. To the extent that
actual events differ from our estimates and assumptions, there could be a material impact
to our financial statements.

# Inventory Reserves

The nature of our business requires
us to maintain sufficient inventory on hand at all times to meet the requirements of our
customers. We record inventory at the lower of cost or market, with cost based upon
average actual cost. We maintain inventory reserves for such issues as slow moving or
excess inventory, product obsolescence and declines in valuation. Our inventory reserve
policy is primarily based on our products and market practices. In each division we use a
specific identification methodology (product rationalization), which can occur whenever
there is a change in strategy. In addition, we review sales performance on at least a
quarterly basis to determine the amounts that we should add to the existing reserve. We
monitor reserves on a quarterly basis and make changes as determined by the processes
referred to above. To determine the adequacy of our reserves at each reporting period we
analyze the following, among other factors:

- Current inventory quantities on hand;
- Product acceptance in the marketplace;
- Customer demand;
- Historical sales;
- Forecasted sales;
- Product obsolescence; and
- Technological innovations.

Any modifications to our estimates of
our reserves are reflected in cost of sales within the statement of operations during
the period in which such modifications are determined necessary by management.

Our Surgical Division products are
sold in the United States at the time the product is used in a surgical procedure. As
such, we must maintain sufficient quantities of our products at many locations throughout
the country. This requires a large amount of inventory to be on hand for each Surgical Division product we
sell. It also increases the sensitivity of this line of business to obsolescence reserve
estimates.

# Revenue Recognition

Our Surgical Division products are
sold through a network of independent sales representatives in the United States and by
distributors outside the United States. We record revenues from sales made by sales
representatives, who are paid commissions upon the ultimate sale of the products, at the
time the product is used in a surgical procedure (implanted in a patient) and a purchase
order is received from the hospital. We record revenues from sales to customers outside
the United States at the time the product is shipped to the distributor. Our distributors,
who sell the products to their customers, take title to the products, have no rights of
return and assume the risk for credit and obsolescence. Distributors are obligated to pay
us within specified terms regardless of when they sell the products. In addition, there is
no price protection available to distributors.

We sell our Soft Goods Division
products to distributors, retail outlets and various medical and sports establishments. We
record sales at the time the product is shipped to the customer. Customers take title to
the products, assume credit and product obsolescence risks, must pay within specified
periods regardless of when they sell or use the products and have no price protection
except for distributors who participate in our rebate program. We allow product returns
only with our prior approval and we maintain a reserve for estimated product returns based
on actual historical experience.  In addition, we grant rebates to distributors and we
maintain a reserve for future rebate claims based on actual historical experience.
The reserves for estimated product returns and rebate claims are a deduction from the sales
recorded for each reporting period.

We sell our Chattanooga Group
Division products to dealers who take title to the products, assume credit and product
obsolescence risks, must pay within specified periods regardless of when they sell the
products and have no price protection. We record the sales when the products are shipped
to the dealers. We allow product returns only with our prior approval and we maintain a
reserve for estimated product returns based on actual historical experience.

As a medical equipment manufacturer,
our revenue recognition issues are generally insignificant. Our customers take title to
the products, assume credit and product obsolescence risks, must pay within specified
periods regardless of when they sell the products and have limited rights of return. The
Surgical and Chattanooga Group Divisions offer no price protection; however, the Soft
Goods Division grants rebates to its distributors. We must make estimates of potential
future product returns and rebates related to current period product revenue. To do so,
management analyzes historical returns, current economic trends, and changes in customer
demand and acceptance of our products when evaluating the adequacy of the sales returns
and other allowances. Significant management judgment must be used and estimated made
in connection with establishing the sales returns, rebates and other allowances in any
accounting period. We maintain a reserve for future rebate claims based on actual
historical experience which is recorded as a deduction from the sales for each reporting
period. During 2003, average monthly rebates requested amounted to approximately $575,000.
Should actual future requests vary significantly from these historical averages, our
operating results for this division in particular and for the Company as a whole could be
affected.

# Deferred Tax Asset
Valuation Allowance

In assessing the potential
realization of deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon whether we attain future taxable
income during the periods in which those temporary differences become deductible. Based
upon managements projections of future taxable income and the periods and manner in
which our deferred tax assets will be available, management estimates that it is more
likely than not that all of our deferred tax assets will be available to offset future
taxable income. As such, no valuation allowance has been provided against the deferred tax
asset balance.

Our current deferred tax asset
balance is $2.5 million at December 31, 2003 and primarily relates to inventory and other
reserves, accrued compensation and a charitable contribution carryforward. Our current
projections indicate we will utilize these deferred tax items in the next few years.

# Goodwill and Intangible
Assets

We must make estimates related to the
initial recognition and measurement of intangible assets acquired in connection with a
business combination or asset acquisition, as well as the ongoing measurement of the
useful life and value of intangible assets and goodwill. With respect to valuations of
intangible assets acquired in connection with a business combination or asset acquisition,
we use both internal and external third-party evaluations in determining the respective
fair values and relative allocations of acquisition cost to the assets acquired and
liabilities assumed. Additionally, on an ongoing basis, we review our intangible assets
and goodwill to determine if there has been any change in the useful life of an intangible
asset or whether there has been impairment of these assets.

At December 31, 2003, we have $18.1
million in goodwill, of which $14.7 million relates to our Chattanooga Group Division and
$3.4 million relates to our Surgical Division. In addition, our intangible asset balance
of $14.1 million at December 31, 2003 can be allocated, based on revenues related to the
intangible assets, between our three divisions as follows:

|Surgical Division          | $0.1 
|-------------------------- | -----
|Chattanooga Group Division | 12.6 
|Soft Goods Division        | 1.4  
|                           |      
|Total                      | $14.1
|                           |      

Recent Accounting Pronouncements

In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB No. 104), which codifies, revises
and rescinds certain sections of SAB No. 101, Revenue Recognition, in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material effect on our results of operations, financial position or cash flows.

Significant Demands

Inventory.

The nature of our business
requires us to maintain sufficient inventory on hand at all times to meet the requirements
of our customers. Throughout our history, our largest demand for capital has come
from inventory. Our Surgical Division must maintain sufficient quantities of our product
in consigned locations throughout the country for surgeries to be performed on a daily and
timely basis. In addition, all of our divisions must have sufficient quantities on hand to
supply their dealers and distributors with product within a reasonable timeframe based on
market needs.

Capital Expenditures.

The following table
summarizes our capital expenditures during the indicated periods:

|                                     |  |         | 
|------------------------------------ |  | ------- | 
|(in thousands)                       |  | 2003    | 
|                                     |  |         | 
|Buildings and leasehold improvements |  | $   182 | 
|Equipment                            |  | 917     | 
|Furniture and fixtures               |  | 430     | 
|Surgical Instrumentation             |  | 1,323   | 
|                                     |  |         | 
|Total                                |  | $2,852  | 
|                                     |  |         | 

We have made significant investments
in the surgical implant instrumentation required to implant our surgical products. The
size of our investments in this instrumentation has increased due to the increasing size
of our sales force and the expansion of our product lines. Consistent with industry
practice, our sales agents often provide surgeons with the usage of necessary surgical
implant instrumentation free of charge. Following surgery, the instruments are returned to
our agents or us and the hospital pays us for any products used in the surgery. In the
United States, we capitalize and depreciate the surgical implant instrumentation we
utilize in support of our domestic sales force, whereas the instruments are sold or leased
to our international customers. We have invested in various machine tools in order to
increase our manufacturing capacity. We primarily acquire our machinery through capital
leases or acquisitions. We have devoted significant capital resources to expanding and
improving our information systems through the addition of computer hardware and software,
and various other related equipment required to support a growing organization.

Additionally, we acquired $1.3
million of equipment in connection with the acquisition of the orthopedic soft goods,
patient support, and pressure care product lines on July 2, 2001. We capitalized
$657,000 in 2001 and $256,000 in 2002 primarily in warehouse equipment, computer equipment
and software to set up information systems, network and warehousing capabilities related
to the sales of these products. We acquired $5.8 million in property and equipment
related to its acquisition of the Chattanooga Group. We capitalized $701,000 through
the end of 2002 related to the Chattanooga Group acquisition, which was primarily office
and plant equipment.  During 2003, we did not capitalize any items related to either
acquisition.

Research and Development.

Our industry is characterized by
continual technological improvement. Our customers demand innovation for a variety of
reasons including increased range of motion, faster recovery periods, ease of use, and
longer product life span, among other things. In response to this demand, we have
continued to invest in research and development efforts to benefit all of our divisions.
Our product enhancements and new product development processes typically require FDA and
international regulatory agency approval. As such, we must invest significant time and
resources in order to meet our customers expectations. We have committed 4.6% of
sales during 2003, 3.6% during 2002, and 4.1% of sales during the year ended December 31, 2001 to these efforts.
 We expect to increase this level of commitment as we continue to grow.

# Liquidity and Capital
Resources

On August 11, 2003, we sold a total
of 10,637,500 shares of our common stock at $4.00 per share in a public offering. This
offering generated total gross proceeds of approximately $42.6 million, and we used the
net proceeds of approximately $39.0 million to repay $25.9 million of indebtedness under
our senior subordinated notes payable to CapitalSource Finance LLC, $2.0 million of the
term loan debt under our senior credit facility with Bank of America, $10.6 million to
repay our outstanding indebtedness under our Bank of America revolving credit facility,
and the remainder for general corporate purposes.

On December 17, 2003, we sold
6,000,000 shares of our common stock for $6.25 per share in a public offering. This
offering generated total gross proceeds of approximately $37.5 million, and we will use
the net proceeds of approximately $34.5 million for working capital and general corporate
purposes, including potential acquisitions.

During 2003, our operating activities
provided cash and cash equivalents of $10.9 million, compared to $9.6 million in 2002. This increase is primarily related to the fact that cash flow from
operating activities improved due to the overall improvement in our sales and gross
margins and we controlled our operating expenses. However, there were several offsetting
fluctuations in our operating assets and liabilities. Our accounts receivable provided
$1.5 million in cash this year which is significant in light of our increased sales level.
Also, our outstanding balances of accounts payable and accrued liabilities increased $1.6
million mostly in accrued compensation and trade payables. This is actually an improvement
in the usage of cash of $3.7 million from the prior year when we used $2.1 million of cash
for payables and accrued liabilities. Increasing our inventory used $1.9 million of cash
during 2003 primarily for the establishment of new agent relationships in the Surgical
Division and the introduction of the new electrotherapy products in the Chattanooga Group
Division. This represents a decrease in the usage of cash of $5.3 million compared to the
prior year when inventory reductions provided cash of $3.4 million.

Our investing activities have
historically been limited to capital expenditures and, more recently, the purchase of
products and companies as we have implemented our acquisition growth campaign. We used
$2.9 million for capital expenditures during 2003 compared to only $1.5 million in 2002. A
significant portion of our capital expenditures typically relates to instrument sets
required by our Surgical Division. Part of the increase in 2003 resulted from an $800,000
increase over 2002 purchase levels as we are building the instrument base necessary to
support a growing domestic surgical sales force. In 2002, we completed our acquisition of
the Chattanooga Group, Inc. using $35.7 million in cash for this purchase. In 2003, we
invested $35.0 million in short term government securities using the cash generated from
our December public offering.

With the completion of our recent
acquisition campaign, our financing sources for both debt and equity securities have
expanded. Cash provided by financing activities in 2003 increased by $14.2 million to
$36.7 million in 2003 from $22.5 million in 2002. This increase is the result of cash
received from the

 resulting from two public offerings completed
in August and December 2003. This increase was offset by the $42.6 million in payments
made to reduce our long-term debt balance principally from funds generated from our August
public offering.

Since inception, we have financed our
operations through the sale of equity securities, borrowings and cash flow from
operations. Our Bank of America credit facility, as amended on September 26, 2003,
currently totals $25 million in principal availability under a revolving line of credit
facility. The availability of funds we can borrow at any given time under the revolving
line of credit depends upon the level of the borrowing base, which is based upon accounts
receivable and inventory. As of December 31, 2003, we had an available borrowing base of
approximately $22.8 million, and we had not borrowed any of this available amount. We
executed various security documents and we pledged all of our assets to the lenders to
secure the financing under our Bank of America credit agreement. The interest rate under
our credit facility is dependent on our total debt to EBITDA (earnings before interest,
taxes, depreciation and amortization), but based on that ratio as of December 31, 2003, is
equal to Bank of Americas base rate plus .25%, or the London Interbank Offered Rate
(LIBOR) plus 1.75%.

Additionally, in order to finance the
acquisition of Chattanooga Group, Inc., we and our subsidiaries entered into a note and
equity purchase agreement dated as of February 8, 2002 with CapitalSource Finance LLC
(CapitalSource), as agent and purchaser, pursuant to which we sold to
CapitalSource $24,000,000 in senior subordinated notes. We, and our subsidiaries, executed
various security documents whereby we pledged our assets to CapitalSource in order to
it to secure our obligations. CapitalSources rights to the collateral we have pledged to
them to secure the senior subordinated notes are junior and subordinate to the rights in
the collateral of the various lenders and the security interests created by the security
documents executed pursuant to the Bank of America credit agreement. We repaid all of the
outstanding principal and accrued payment in kind interest on these notes with the
proceeds of our August public offering.

Our agreements with CapitalSource
were amended and restated as of September 26, 2003, and now allow us to borrow up to $24
million, of which during October 2003 we borrowed $5 million. The interest rate for
amounts we borrow under the senior subordinated notes payable to CapitalSource will be 12%
per annum from and after our next borrowing draw request on the loan, but until then the
interest rate will be equal to the Citibank, N.A. prime rate plus 2%.

These debt arrangements contain
operating and financial agreements and restrictions which may restrict our business and
financing activities. These debt agreements restrict our ability to (i) incur additional
indebtedness; (ii) issue redeemable equity interests and preferred equity interests; (iii)
pay dividends or make distributions, repurchase equity interests or make other restricted
payments; (iv) make capital expenditures; (v) create liens; (vi) enter into transactions
with our affiliates; (vii) make investments; (viii) sell assets; or (ix) enter into
mergers or consolidations.

In connection with the original
CapitalSource note agreement, we granted to an affiliate of CapitalSource a warrant to
purchase through February 8, 2009 up to an aggregate of 2,198,614 shares of our common
stock at a purchase price of $0.01 per share. The expense related to this warrant is being
amortized to interest expense beginning February 8, 2002 using the original term of the
note agreement (five years). In connection with the repayment of this original debt, we
expensed the remaining balance of this warrant. As stated above, we amended and restated
both of our agreements with our lenders effective as of September 26, 2003, upon repayment of the existing debt. These
amendments improved our cost of borrowing and modified our financial covenants in a
manner which generally increases the likelihood of our compliance.  We were in compliance throughout 2003.

While we currently believe that we
will be able to meet all of our financial covenants during 2004 and will be able to keep
the need for outstanding debt under the maximum ceilings for amounts outstanding, there is
no assurance that we will in fact be able to do so or that we will be able to obtain a
waiver of default or amendments to our credit agreements in the future. In addition, we
believe that our existing cash, including the amounts we generated through our recent
public offerings and through operations and amounts available through our existing debt
agreements, will be sufficient to meet our needs through 2004.

In addition to the current
restrictions and requirements contained in our current loan and credit agreements, if we
were to borrow under our current facilities with Bank of America and CapitalSource the
maximum allowable, these debt levels may limit our flexibility in obtaining additional
financing and in pursuing other business opportunities. This potential high degree of
leverage could have negative consequences for us, including the following: (i) our ability
to obtain additional financing, if necessary, for working capital, capital expenditures,
acquisitions or other purposes may be impaired, or financing may not be available to us on
favorable terms; (ii) we would need a substantial portion of our cash flow to pay the
principal and interest on our indebtedness, including indebtedness that we may incur in
the future; (iii) payments on our indebtedness would reduce the funds that would otherwise
be available for operations and future business opportunities; (iv) a substantial decrease
in net operating cash flows could make it difficult for us to meet our debt service
requirements and force us to modify our operations; (v) our debt level could make us more
vulnerable than our competitors to a downturn in either our business or the economy
generally; and (vi) because some of our debt has a variable rate of interest, it would
expose us to the risk of increased interest rates.

# Contractual Obligations,
Commercial Commitments, and Leases

The following table summarizes our
contractual obligations associated with our long-term debt, lease obligations and purchase
obligations (in thousands) for periods after December 31, 2003:

|                            | Payment due by period |          |  |           | 
|--------------------------- | --------------------- | -------- |  | --------- | 
|
|
|
|Long-term debt obligations  |                       | $  6,168 |  | $     959 | 
|Capital lease obligations   |                       | 321      |  | 139       | 
|Operating lease obligations |                       | 2,232    |  | 719       | 
|Purchase obligations        |                       | 15,711   |  | 13,711    | 
|                            |                       |          |  |           | 
|Total                       |                       | $24,432  |  | $15,528   | 
|                            |                       |          |  |           | 

The purchase obligations shown above
include an annual commitment of $506,250 to our third party
supplier in Mexico who supplies the labor component necessary to assemble and finish our
soft goods products, as well as approximately $3.0 million committed to a manufacturer in
China to build PC Boards for our existing and new electrotherapy lines for our Chattanooga
Group Division. The contract we entered into with the manufacturer located in Acuna,
Mexico expires on June 30, 2004, and may be renewed for a term of one to three years by
mutual agreement.

# Related Party
Transactions

At our September 3, 2003 Board meeting
our directors approved, and effective November 18, 2003 we entered into, a Consulting
Agreement with Galen Advisors LLC (Galen Advisors) whereby Galen Advisors has
agreed to assist us in identifying, negotiating, and consummating strategic acquisitions.
Under the terms of this Consulting Agreement, we have agreed to pay Galen Advisors a
one-time fee in the amount of $1 million immediately following the closing, if any, of one
or more merger or acquisition transactions following the date of the Consulting Agreement
as a result of which we shall have consummated transactions with a purchase price
(including the value of any debt assumed) equal to or in excess of $25 million in the
aggregate. The Consulting Agreement will terminate upon the earlier of the payment by us
of the fee or November 18, 2005.

During 2002, Encore paid Galen
Associates, an affiliate of the Galen Partners III, L.P., Galen
Partners International III, L.P., and Galen Employee Fund III, L.P. (collectively,
the Galen Entities, $200,000 (paid with 63,492 shares of
common stock based on a fair market value of $3.15) under a Financial Advisory Agreement
for various consulting services provided to the Company in connection with the acquisition
of Chattanooga Group, Inc.

# 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 our expectations or beliefs concerning future events,
including, but not limited to, statements regarding growth in sales of our products,
profit margins and the sufficiency of our cash flow for 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, our dependence on the ability of our third-party manufacturers to
produce components on a basis that is cost-effective to us, market acceptance of our
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.

---

# ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to certain
market risks as part of its ongoing business operations, primarily risks from changing
interest rates and foreign currency exchange rates that could impact its financial
condition, results of operations, and cash flows. Primary exposure includes changing
interest rates. Currently, Encore is exposed to interest rate risk in connection with our
Bank of America credit facility and CapitalSource debt, which bear interest at floating
rates based on LIBOR or the prime rate
plus an applicable borrowing margin. Outstanding balances under these agreements are zero
and $5.0 million, respectively, at December 31, 2003.

Encore manages its interest rate risk
by balancing the amount of fixed and variable debt. For fixed rate debt, interest rate
changes affect the market value, but do not impact earnings or cash flow. Conversely, for
variable rate debt, interest rate changes generally do not affect the fair market value,
but do impact future earnings and cash flow, assuming other factors are held constant. All
of the Bank of America facility is variable rate debt. The CapitalSource debt is also
currently variable rate debt; but will convert to a fixed rate of 12% with the next draw.
Certain other debt of the Company is fixed rate debt. Encore may use derivative financial
instruments where appropriate to manage its interest rate risk. However, as a matter of
policy, it does not enter into derivative or other financial investments for trading or
speculative purposes. To date, we have not entered into derivate financial instruments.

Historically all of the
Companys sales have been denominated in U.S. dollars, and therefore the Company has
not been subject to foreign currency exchange risks. However, the Company has begun to
directly distribute its Chattanooga Group Division products in selected foreign markets,
and some of the sales of its products in European markets are denominated in Euros, which
would cause currency fluctuations to more directly impact our operating results. During
2003, average monthly euro sales approximated $100,000.

---

# ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA

|                                                                                           | Page
|------------------------------------------------------------------------------------------ | ----
|Report of KPMG LLP Independent Auditors                                                    | 36  
|at December 31, 2003 and 2002                                                              | 37  
|Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001 | 38  
|Consolidated Statements of Changes in Stockholders' Equity for the Years Ended            
|December 31, 2003, 2002 and 2001                                                           | 39  
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 | 40  
|Notes to Consolidated Financial Statements                                                 | 41  

---

# INDEPENDENT
AUDITORS REPORT

The Board of Directors and Stockholders
Encore Medical Corporation:

We have audited the accompanying
consolidated balance sheets of Encore Medical Corporation and subsidiaries as of December 31, 2003 and 2002
and the related consolidated statements of operations, changes in stockholders
equity and cash flows for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements
are the responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
financial position of Encore Medical Corporation and subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America

As discussed in note 7 to the consolidated financial
statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets on January 1, 2002.

/s/ KPMG LLP

Austin, Texas 
February 20, 2004

---

# ENCORE MEDICAL
CORPORATION AND SUBSIDIARIES

Consolidated Balance
Sheets (in thousands, except share data)

|                                                                 | December 31, | 
|---------------------------------------------------------------- | ------------ | 
|
|Assets                                                           |              | 
|Current assets:                                                  |              | 
|Cash and cash equivalents                                        |              | 
|Investments                                                      |              | 
|Accounts receivable, net of allowance for doubtful accounts of   |              | 
|$365 and $288, respectively                                      |              | 
|Inventories, net of allowance of $2,203 and $2,917, respectively |              | 
|Deferred tax assets                                              |              | 
|Prepaid expenses and other current assets                        |              | 
|                                                                 |              | 
|Total current assets                                             |              | 
|                                                                 |              | 
|Property and equipment, net                                      |              | 
|Goodwill                                                         |              | 
|Intangible assets, net                                           |              | 
|Other assets                                                     |              | 
|                                                                 |              | 
|Total assets                                                     |              | 
|                                                                 |              | 
|Liabilities and Stockholders' Equity                             |              | 
|Current liabilities:                                             |              | 
|Current portion of long-term debt                                |              | 
|Accounts payable                                                 |              | 
|Accrued expenses                                                 |              | 
|                                                                 |              | 
|Total current liabilities                                        |              | 
|                                                                 |              | 
|Long-term debt, net of current portion                           |              | 
|Deferred tax liability                                           |              | 
|Other non-current liabilities                                    |              | 
|                                                                 |              | 
|Total liabilities                                                |              | 
|                                                                 |              | 
|Stockholders' equity:                                            |              | 
|Series A Preferred Stock, $0.001 par value, 255,000 shares       |              | 
|authorized; 0 and 132,353 shares issued and outstanding          |              | 
|respectively; aggregate liquidation preference of $0 and $13,500 |              | 
|respectively                                                     |              | 
|Common stock, $0.001 par value, 100,000,000 and 50,000,000       |              | 
|shares authorized, respectively; 43,271,000 and 11,609,000       |              | 
|shares issued, respectively                                      |              | 
|Additional paid-in capital                                       |              | 
|Notes receivable for sale of common stock                        |              | 
|Deferred compensation                                            |              | 
|(Accumulated deficit)Retained earnings                           |              | 
|Less cost of repurchased stock, warrants and rights (512,000 and |              | 
|509,000 shares, respectively)                                    |              | 
|                                                                 |              | 
|Total stockholders' equity                                       |              | 
|                                                                 |              | 
|Total liabilities and stockholders' equity                       |              | 
|                                                                 |              | 

See accompanying notes to
consolidated financial statements.

---

# ENCORE MEDICAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (in thousands, except per share amounts)

|                                                                  | Year Ended December 31, |              |          
|----------------------------------------------------------------- | ----------------------- | ------------ | ---------
|                                                                  | 2003                    | 2002         | 2001     
|                                                                  |                         |              |          
|Sales                                                             | $ 108,059               | $ 95,491     | $ 42,616 
|Cost of sales                                                     | 54,287                  | 49,451       | 17,8521  
|                                                                  |                         |              |          
|Gross margin                                                      | 53,772                  | 46,040       | 24,764   
|Operating expenses:                                               |                         |              |          
|Selling, general and administrative                               | 39,535                  | 35,550       | 19,8652  
|Research and development                                          | 5,022                   | 3,397        | 1,7323   
|Other charges                                                     | --                      | --           | 1,623    
|                                                                  |                         |              |          
|Income from operations                                            | 9,215                   | 7,093        | 1,544    
|Other income (expense):                                           |                         |              |          
|Interest income                                                   | 142                     | 136          | 186      
|Interest expense                                                  | (5,305)                 | (7,212)      | (1,299)  
|Early extinguishment of debt                                      | (7,674)                 | --           | --       
|Other income                                                      | 139                     | 301          | 334      
|                                                                  |                         |              |          
|Income (loss) before income taxes                                 | (3,483)                 | 318          | 765      
|Provision (benefit) for income taxes                              | (966)                   | 312          | 217      
|                                                                  |                         |              |          
|Net income (loss)                                                 | (2,517)                 | 6            | 548      
|Beneficial conversion feature related to Series A Preferred Stock | --                      | --           | (3,706)  
|                                                                  |                         |              |          
|Net income (loss) attributable to common stock                    | $  (2,517)              | $          6 | $(3,158) 
|                                                                  |                         |              |          
|Net income (loss) per common and common equivalent share:         |                         |              |          
|Basic earnings (loss) per share-                                  |                         |              |          
|Basic earnings (loss) per share-                                  | $    (0.12)             | $     0.00   | $  (0.34)
|Shares used in computing basic earnings (loss) per share          | 20,848                  | 10,429       | 9,355    
|Diluted earnings (loss) per share-                                |                         |              |          
|Diluted earnings (loss) per share-                                | $    (0.12)             | $     0.00   | $  (0.34)
|Shares used in computing diluted earnings (loss) per share        | 20,848                  | 26,477       | 9,355    

See accompanying notes to
consolidated financial statements.

---

1Excludes $37,000 of stock
compensation expense included in other charges 2Excludes $694,000 of stock compensation
expense included in other charges3 Excludes $186,000 of stock compensation expense included
in other charges

---

# ENCORE MEDICAL CORPORATION AND SUBSIDIARIES 

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

|                                                                                                           | Preferred Stock | Common Stock | Additional | Notes Rec. - Sale of |                 | (Accumulated Deficit) | Repurchased Stock Warrants and Rights | Total Stockholders |        |          |         
|---------------------------------------------------------------------------------------------------------- | --------------- | ------------ | ---------- | -------------------- | --------------- | --------------------- | ------------------------------------- | ------------------ | ------ | -------- | --------
|                                                                                                           | Shares          | Amount       | Shares     | Amount               | Paid-In Capital | Common Stock          | Deferred Compensation                 | Retained Earnings  | Shares | Amount   | Equity  
|Balances at December 31, 2000                                                                              | -               | $-           | 9,348      | $9                   | $19,405         | $-                    | $(185)                                | $12                | (322)  | $(1,421) | $17,820 
|Issuance of common stock                                                                                   | -               | -            | 2,093      | 2                    | 2,195           | (1,187)               | -                                     | -                  | -      | -        | 1,010   
|Deferred compensation                                                                                      | -               | -            | -          | -                    | 9               | -                     | (9)                                   | -                  | -      | -        | --      
|Amortization of deferred compensation                                                                      | -               | -            | -          | -                    | -               | -                     | 138                                   | -                  | -      | -        | 138     
|Purchase of treasury stock                                                                                 | -               |              | -          | -                    | -               | -                     | -                                     | -                  | (313)  | (622)    | (622)   
|Issuance of preferred
stock, net of issuance costs                                                         | 132             | 12,840       | -          | -                    | -               | -                     | -                                     | -                  | -      | -        | 12,840  
|Legal settlement charge                                                                                    | -               | -            | -          | -                    | 410             | -                     | -                                     | -                  | -      | -        | 410     
|Tax benefit associated with
stock options                                                                  | -               | -            | -          | -                    | 33              | -                     | -                                     | -                  | -      | -        | 33      
|Net income                                                                                                 | -               | -            | -          | -                    | -               | -                     | -                                     | 548                | -      | -        | 548     
|                                                                                                          
|Balances at December 31, 2001                                                                              | 132             | 12,840       | 11,441     | 11                   | 22,052          | (1,187)               | (56)                                  | 560                | (635)  | (2,043)  | 32,177  
|Issuance of common stock                                                                                   | -               | -            | 168        | 1                    | 185             | -                     | -                                     | -                  | -      | -        | 186     
|Stock compensation                                                                                         | -               | -            | -          | -                    | 223             | -                     | -                                     | -                  | -      | -        | 223     
|Amortization of deferred
compensation                                                                      | -               | -            | -          | -                    | -               | -                     | 42                                    | -                  | -      | -        | 42      
|Purchase of treasury stock                                                                                 | -               | -            | -          | -                    | -               | 23                    | -                                     | -                  | (22)   | (23)     | -       
|Tax benefit associated with
stock options                                                                  | -               | -            | -          | -                    | 24              | -                     | -                                     | -                  | -      | -        | 24      
|Issuance of treasury stock
for services provided inconnection with the Chattanooga Group, Inc. acquisition | -               | -            | -          | -                    | 32              | -                     | -                                     | -                  | 148    | 435      | 467     
|Issuance of stock purchase
warrants                                                                        | -               | -            | -          | -                    | 7,904           | -                     | -                                     | -                  | -      | -        | 7,904   
|Net income                                                                                                 | -               | -            | -          | -                    | -               | -                     | -                                     | 6                  | -      | -        | 6       
|                                                                                                          
|Balances at December 31, 2002                                                                              | 132             | 12,840       | 11,609     | 12                   | 30,420          | (1,164)               | (14)                                  | 566                | (509)  | (1,631)  | 41,029  
|Issuance of common stock,
net of offering costs of $6.6 million                                            | -               | -            | 16,778     | 17                   | 74,205          | -                     | -                                     | -                  | -      | -        | 74,222  
|Stock compensation                                                                                         | -               | -            | -          | -                    | 141             | -                     | -                                     | -                  |        | -        | 141     
|Amortization of deferred
compensation                                                                      | -               | -            | -          | -                    | -               | -                     | 14                                    | -                  | -      | -        | 14      
|Conversion of preferred
stock to common stock                                                              | (132)           | (12,840)     | 13,235     | 13                   | 12,827          | -                     | -                                     | -                  | -      | -        | -       
|Exercise of common stock
warrants                                                                          | -               | -            | 1,649      | 1                    | 15              | -                     | -                                     | -                  | (3)    | (16)     | -       
|Tax benefit associated with
stock options                                                                  | -               | -            | -          | -                    | 156             | -                     | -                                     | -                  | -      | -        | 156     
|Note payments                                                                                              | -               | -            | -          | -                    | -               | 64                    | -                                     | -                  | -      | -        | 64      
|Net loss                                                                                                   | -               | -            | -          | -                    | -               | -                     | -                                     | (2,517             | -      | -        | (2,517) 
|                                                                                                          
|Balances at December 31, 2003                                                                              | -               | $-           | 43,271     | $43                  | $117,764        | $(1,100)              | $-                                    | $(1,951)           | (512)  | $(1,647) | $113,109
|                                                                                                           |                 |              |            |                      |                 |                       |                                       |                    |        |          |         

See accompanying notes to
consolidated financial statements.

ENCORE MEDICAL CORPORATION AND SUBSIDIARIESConsolidated Statements
of Cash Flows (in thousands)

|                                                                          | Year Ended December 31, |  |  
|------------------------------------------------------------------------- | ----------------------- |  | -
|                                                                          |                         |  |  
|                                                                          |                         |  |  
|Cash flows from operating activities:                                     |                         |  |  
|Net income (loss)                                                         |                         |  | $
|Adjustments to reconcile net income (loss) to net cash provided by        |                         | 
|operating activities:                                                     |                         | 
|Depreciation                                                              |                         |  |  
|Amortization of intangibles                                               |                         |  |  
|Amortization of debt issuance costs and early extinguishment of debt      |                         |  |  
|Non-cash interest expense                                                 |                         |  |  
|Stock-based compensation                                                  |                         |  |  
|Deferred taxes                                                            |                         |  |  
|Tax benefit associated with stock options                                 |                         |  |  
|Loss on disposal of assets                                                |                         |  |  
|Other charges                                                             |                         |  |  
|Changes in operating assets and liabilities:                              |                         | 
|Decrease (increase) in accounts receivable                                |                         |  |  
|(Increase) decrease in inventories                                        |                         |  |  
|(Increase) decrease in prepaid expenses and other assets                  |                         |  |  
|Increase (decrease) in accounts payable and accrued expenses              |                         |  |  
|                                                                          |                         |  |  
|Net cash provided by operating activities                                 |                         |  |  
|                                                                          |                         |  |  
|Cash flows from investing activities:                                     |                         | 
|Acquisition of OSG product lines                                          |                         |  |  
|Acquisition of Chattanooga Group, Inc.                                    |                         |  |  
|Purchases of property and equipment                                       |                         |  |  
|Proceeds from sale of assets                                              |                         |  |  
|Purchase of held-to-maturity investments                                  |                         |  |  
|                                                                          |                         |  |  
|Net cash used in investing activities                                     |                         |  |  
|                                                                          |                         |  |  
|Cash flows from financing activities:                                     |                         | 
|Proceeds from issuance of common stock, net                               |                         |  |  
|Payments to acquire treasury stock                                        |                         |  |  
|Proceeds from issuance of Series A Preferred Stock                        |                         |  |  
|Proceeds from notes receivable of common stock                            |                         |  |  
|Proceeds from long-term debt                                              |                         |  |  
|Payments on long-term debt                                                |                         |  |  
|Payment of debt issuance costs                                            |                         |  |  
|                                                                          |                         |  |  
|Net cash provided by financing activities                                 |                         |  |  
|                                                                          |                         |  |  
|Net increase (decrease) in cash and cash equivalents                      |                         |  |  
|Cash and cash equivalents at beginning of year                            |                         |  |  
|                                                                          |                         |  |  
|Cash and cash equivalents at end of year                                  |                         |  | $
|                                                                          |                         |  |  
|Supplemental disclosures of cash flow information:                        |                         | 
|Cash paid for:                                                            |                         | 
|Interest                                                                  |                         |  | $
|Income taxes                                                              |                         |  |  
|Supplemental schedule of non-cash investing and financing activities:     |                         | 
|Capital lease obligations related to equipment leases entered into        |                         | 
|during the year                                                           |                         |  | $
|                                                                          |                         |  |  
|Acquisition of treasury stock
 through cashless exercise of stock options |                         |  |  
|                                                                          |                         |  |  
|Notes received (redeemed) for sale (repurchase) of common stock           |                         |  |  
|                                                                          |                         |  |  
|Purchase of treasury stock by issuance of a note                          |                         |  |  
|                                                                          |                         |  |  
|Notes issued for acquisition of OSG product lines                         |                         |  |  
|                                                                          |                         |  |  
|Issuance of stock purchase warrants                                       |                         |  |  
|                                                                          |                         |  |  
|Issuance of treasury stock for services provided in connection with the   |                         | 
|Chattanooga Group, Inc. acquisition                                       |                         |  |  
|                                                                          |                         |  |  

See accompanying notes to consolidated financial statements.

---

ENCORE MEDICAL CORPORATION 
Notes to Consolidated
Financial Statements

# 1. Basis of Presentation
and Summary of Significant Accounting Policies

Description of Business

The accompanying audited consolidated
financial statements include the accounts of Encore Medical Corporation, a Delaware
corporation, and its wholly owned subsidiaries. We are a diversified orthopedic company that designs, manufactures, markets
and distributes a comprehensive range of high quality orthopedic devices, sports medicine
equipment and other related products for the orthopedic industry. Our products are used
primarily by orthopedic surgeons, physical and occupational therapists and other
orthopedic specialists who treat patients with musculoskeletal conditions resulting from
degenerative diseases, deformities, traumatic events and sports-related injuries. We
currently market and distribute our products through three operating divisions, our
Surgical Division, our Chattanooga Group Division and our Soft Goods Division. Our
Surgical Division offers reconstructive joint products, including hip, knee and shoulder
implants, trauma products and spinal implants. Our Chattanooga Group Division is a leader
in domestic sales of many of the orthopedic rehabilitation products in the market. Our
Soft Goods Division provides orthopedic soft goods that are used to assist the patient in
recovery from injury or a surgical procedure and to protect against further injury. Our
three divisions enable us to reach a diverse customer base through multiple distribution
channels.

Principles of
Consolidation

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

Use of Estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United
States of America 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. We consider all highly liquid investments with original maturities
of less than three months to be cash equivalents.  While the Companys cash and cash
equivalents are on deposit with high-quality institutions, such deposits exceed FDIC
insured limits.

Investments 
Investments consist of government
securities with readily determinable fair market values and original maturities in excess
of three months. We account for our investment instruments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities (SFAS No. 115). All of the
cash equivalents and short-term investments are treated as held to maturity under SFAS No.
115 and are carried at amortized cost, which approximates fair value, due to the short
period of time to maturity. See Note 3 for additional information.

Allowance for Doubtful Accounts
The Company must make estimates of the uncollectibility of accounts receivables.  In doing so,
management analyzes accounts receivable and historical bad debts, customer concentrations, customer
credit-worthiness, current economic trends and changes in customer payment patterns when evaluating the
adequacy of the allowance for doubtful accounts.

Inventories

Inventory value is stated at the
lower of cost or market, with cost being average actual cost. We establish reserves for
such issues as slow moving and excess inventory, product obsolescence and valuation
impairment. Our inventory reserve policy is primarily based on the products and market
practices. Each division determines the amount and timing of write-downs. For all
divisions, we utilize a specific identification methodology (product rationalization),
which can occur whenever there is a change in strategy. In addition, sales performance is
reviewed on at least a quarterly basis to determine the amounts that should be adjusted to
the existing reserve. The reserved inventory items are primarily being disposed of by
scrapping or donating to charitable organizations. See Note 5 for additional information.

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 that range from
three to thirty-nine years.  Leasehold
improvements and assets subject to capital leases 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. See Note 6 for additional information.

Impairment of Long-Lived
Assets

Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to undiscounted future net
cash flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair market value less costs to sell.

Goodwill and Intangible Assets

Intangible assets consist of agency
rights, transferable licenses, distribution networks, intellectual property and customer
lists and are carried at cost less accumulated amortization. Amortization of intangibles
is computed based on the straight-line method over periods ranging from two to forty
years. On an annual basis, and between annual tests in certain circumstances,
we review our goodwill and intangible assets to determine if there has been
any change in the useful life of a goodwill or intangible asset or whether there has been impairment
of these assets. See Note 7 for additional information.

Shipping and Handling
Costs

Shipping and handling costs, which
generally are not reimbursed by customers, are included in selling, general and
administrative expense. For the years ended December 31, 2003, 2002 and 2001, $1.8
million, $2.3 million, and $1 million of shipping and handling costs, respectively, were
included in selling, general and administrative expenses. All remaining shipping and
handling expenses, which are generally reimbursed by customers, are included as part of
sales and cost of sales.

Revenue Recognition

Our Surgical Divisions products
are sold through a network of independent sales representatives in the U.S. and by
distributors outside the U.S. Revenues from sales made by independent sales
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 (implanted into a
patient) and a purchase order is received from the hospital. Revenues from sales to
customers outside the U.S. are recorded when the product is shipped to the customer. The
distributors, who sell the products to other customers, take title to the products, have
no rights of return and assume the risk for credit and obsolescence. Distributors are
obligated to pay Encore within specified terms regardless of when they sell the products.
In addition there is no price protection.

Our Chattanooga Group Divisions
products are sold to independent dealers who take title to the products, assume credit and
product obsolescence risks, must pay within specified periods regardless of when they sell
the products, and have no price protection. The sales are recorded when the products are
shipped to these dealers. Product returns are allowed only with our prior approval and a
reserve for estimated product returns is maintained based on actual historical experience.

Our Soft Goods Divisions
products are sold to distributors, retail outlets, and various medical and sports
establishments. Sales are recorded at the time the product is shipped to the customer.
Customers take title to the products, assume credit and product obsolescence risks, must
pay within specified periods regardless of when they sell or use the products, and have no
price protection except for distributors who participate in our rebate program. Product
returns are allowed only with our prior approval and a reserve for estimated product
returns is maintained based on actual historical experience. In addition, rebates are
granted to distributors and a reserve is maintained for future rebate claims based on
actual historical experience. The reserves for estimated product returns and rebate claims
are a deduction from the sales recorded for each reporting period.

We must make estimates of potential
future product returns and rebates related to current period product revenue. To do so,
our management analyzes historical returns, current economic trends, and changes in
customer demand and acceptance of our products when evaluating the adequacy of the sales
returns and other allowances. Significant management judgment must be used and estimates
must be made in connection with establishing the sales returns, rebates and other
allowances in any accounting period.

Warranty Costs

We provide warranties on certain of our products,
principally within the Chattanooga Group Division. The warranty periods typically range
from one to two years, and provide for customer return rights relative to defective
product. At each reporting period, we estimate our warranty obligations based upon
historical experience and known product issues, if any. Activity in the warranty reserve
during the years ended December 31, 2003 and 2002 was as follows (in thousands):

|                          | Year ended December 31, |      
|------------------------- | ----------------------- | -----
|                          | 2003                    | 2002 
|Beginning Balance         | $ 402                   | $ 293
|Amount charged to expense | 697                     | 729  
|Deductions                | (680)                   | (620)
|                          |                         |      
|Ending Balance            | $ 419                   | $ 402
|                          |                         |      

As activity in the warranty reserve related to the Chattanooga Group
Division, which was acquired in February 2002, no 2001 information is available.

Advertising Costs

We expense advertising costs as they
are incurred. During 2003, 2002 and 2001, such costs approximated $1.3 million, $1.2
million, and $837,000, respectively.

Research and Development

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

Income Taxes

We account 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 that are more likely than not to be
realized.

Earnings (Loss) Per Share

In accordance with 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, warrants, restricted stock or the conversion of the Series A Preferred Stock.
Diluted earnings (loss) per share is computed using the weighted average number of common
stock and common stock equivalent shares outstanding during the period. Common stock
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.

Fair Value of Financial
Instruments

The carrying amounts of our financial
instruments, including cash and cash equivalents, investments, trade accounts receivable
and payable, approximate fair values due to their short-term nature. We estimate the fair
value of our long-term fixed rate debt based on our current borrowing rate for debt with
similar maturities, terms and characteristics. At December 31, 2003 and 2002, the carrying
value of our long-term debt approximated fair value.

Acquisitions

On February 8, 2002, we acquired all
of the issued and outstanding shares of capital stock of Chattanooga Group, Inc. We
acquired stock for a total purchase price of $36.8 million. See Note 14 for additional
information regarding the Chattanooga Group acquisition.

On July 2, 2001, we acquired
Kimberly-Clark Corporations line of orthopedic soft goods, patient safety devices
and pressure care products pursuant to an Asset Purchase Agreement. We acquired fixed
assets, inventory and intangible assets for a total purchase price of $8.8 million
consisting of $5.7 million in cash and a promissory note in the amount of $3.1 million
bearing interest at 8% per annum and payable over 24 months. For financial reporting
purposes, $2.1 million of the purchase price was allocated to acquired intangible assets
having a weighted-average useful life of approximately 9 years. The intangible assets that
make up that amount include customer lists of $300,000 (2-year weighted-average useful
life), transferable licenses of $1.6 million (17-year weighted-average useful life), and
intellectual property of $0.2 million (15-year weighted-average useful life).

Stock-based compensation
plans
We have adopted the disclosure-only
provisions of SFAS No. 148, Accounting for Stock-Based Compensation 
Transition and Disclosures (SFAS 148) as well as those outlined in SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS 123). As
permitted by SFAS 148 and SFAS 123, we continue to apply the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock issued to Employees and
related interpretations in accounting for our plans. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of our 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.

Had compensation cost for all stock
option grants been determined based on their fair market value at the grant dates
consistent with the method prescribed by SFAS 148 and SFAS 123, our net income (loss) and
earnings (loss) per share would have been adjusted to the pro forma amounts indicated
below:

|                                                                                                                                             | For the Year Ended December 31, |             |                |            
|-------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------- | ----------- | -------------- | -----------
|                                                                                                                                             |                                 | 2003        | 2002           | 2001       
|                                                                                                                                             |                                 |             |                |            
|Net income (loss) attributable to common stock                                                                                               | As reported                     | $   (2,517) | $            6 | $   (3,158)
|Add:  Total stock-based employee compensation expense
included in reported net income (loss) net of related tax effects                      |                                 | --          | --             | 657        
|Deduct:  Total stock-based employee compensation
expense determined under fair value-based method for all awards, net of related tax effects |                                 | (420)       | (280)          | (1,127)    
|                                                                                                                                             |                                 |             |                |            
|Net loss attributable to common stock                                                                                                        | Pro forma                       | (2,937)     | (274)          | (3,628)    
|                                                                                                                                             |                                 |             |                |            
|Earnings (loss) per share                                                                                                                    |                                 |             |                |            
|Basic:                                                                                                                                       | As reported                     | (0.12)      | 0.00           | (0.34)     
|                                                                                                                                             | Pro forma                       | (0.14)      | (0.03)         | (0.39)     
|Diluted:                                                                                                                                     | As reported                     | (0.12)      | 0.00           | (0.34)     
|                                                                                                                                             | Pro forma                       | (0.14)      | (0.03)         | (0.39)     

The fair market 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 2003, 2002 and 2001:

|                        | 2003       | 2002       | 2001      
|----------------------- | ---------- | ---------- | ----------
|                        |            |            |           
|Dividend yield          | 0.0%       | 0.0%       | 0.0%      
|Expected volatility     | 86.4%      | 86.0%      | 86.7%     
|Risk-free interest rate | 2.7%       | 4.1%       | 4.4%      
|Expected life           | 4.26 years | 3.71 years | 5.15 years

Comprehensive Income 
We include all changes in equity
during a period except those resulting from investments by and distributions to owners as
a component of other comprehensive income. For the years ended December 31, 2003, 2002 and
2001, there were no components of comprehensive income other than net income (loss).

2. Other charges
The components of other charges
included in the Consolidated Statements of Operations are as follows (in thousands):

|                                   | For the Year Ended December 31, |       |       
|---------------------------------- | ------------------------------- | ----- | ------
|                                   | 2003                            | 2002  | 2001  
|                                   |                                 |       |       
|Legal settlement charges           | $  --                           | $  -- | $535  
|Compensation expense associated   
|with stock option exchange program | --                              | --    | 917   
|Other                              | --                              | --    | 171   
|                                   |                                 |       |       
|Total                              | $  --                           | $  -- | $1,623
|                                   |                                 |       |       

In June 2001, in accordance with FIN
44, we recorded compensation expense of $917,000 related to the cancellation of certain
outstanding options to purchase common stock in exchange for our common shares. In June
2001, a former employee exercised options by selling some of the shares acquired by the
exercise of previously granted stock options back to us in sufficient quantity to cover
the exercise price and related tax liability. This cashless exercise of options generated
compensation expense of $171,000. In June 2001, we reached a settlement with a former
stockholder related to a complaint filed by it associated with our sale of Series A
Preferred Stock. We incurred two charges in connection with the settlement. The first
charge of $125,000 relates to court ordered reimbursement of the plaintiffs legal
expenses that resulted in the filing of a supplement to the original proxy statement. The
second charge of $410,000 represents a non-cash benefit provided to us by the primary
Series A Preferred Stock stockholders that arose as a result of their purchase of the
plaintiffs outstanding stock in us. Of the total charges of $1,623,000, approximately
$544,000 represented a cash outlay.

3.   Investments
We invest our excess cash in
U.S. treasury securities. These are items with readily determinable fair market values and
original maturities in excess of three months, but less than twelve months. All
investments have been classified as held-to-maturity and are carried at amortized cost,
which approximates fair value due to the short period of time to maturity. As of December
31, 2003 and 2002, we have investments with fair values and amortized costs of
approximately $35 million and $0, respectively.

4.    Accounts Receivable

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

|                                | For the Year Ended December 31, |      |      
|------------------------------- | ------------------------------- | ---- | -----
|                                | 2003                            | 2002 | 2001 
|                                |                                 |      |      
|Balance, beginning of year      | $ 288                           | $154 | $ 339
|Provision for bad debt expense  | 91                              | 134  | 136  
|Write-offs charged to allowance | (14)                            | --   | (321)
|                                |                                 |      |      
|Balance, end of year            | $ 365                           | $288 | $ 154
|                                |                                 |      |      

# 5. Inventories

Inventories consist of the following
(in thousands):

|                             | December 31, |          
|---------------------------- | ------------ | ---------
|                             | 2003         | 2002     
|                             |              |          
|Components and raw materials | $   8,433    | $   8,648
|Work in process              | 2,641        | 1,350    
|Finished goods               | 13,685       | 14,250   
|Consigned goods              | 7,023        | 6,370    
|                             |              |          
|                             | 31,782       | 30,618   
|Less - inventory reserves    | (2,203)      | (2,917)  
|                             |              |          
|                             | $ 29,579     | $ 27,701 
|                             |              |          

Certain of our inventory in the
Surgical Division, as noted above, is held with our sales agents on consignment.

A summary of the activity in our
inventory reserve for slow moving, excess, product obsolescence and valuation is presented
below (in thousands):

|                                   | For the Year Ended December 31, |         |        
|---------------------------------- | ------------------------------- | ------- | -------
|                                   | 2003                            | 2002    | 2001   
|                                   |                                 |         |        
|Balance, beginning of year         | $ 2,917                         | $ 4,477 | $ 4,675
|Provision charged to cost of sales | 2,561                           | 1,313   | 2,315  
|Write-offs charged to reserve      | (3,275)                         | (2,873) | (2,513)
|                                   |                                 |         |        
|Balance, end of year               | $ 2,203                         | $ 2,917 | $ 4,477
|                                   |                                 |         |        

The write-offs to the reserve were
principally related to the disposition of fully reserved inventory.

# 6. Property and Equipment

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

|                                                 | December 31, |          
|------------------------------------------------ | ------------ | ---------
|                                                 | 2003         | 2002     
|                                                 |              |          
|Land                                             | $   1,164    | $   1,164
|Buildings and improvements                       | 4,143        | 3,832    
|Equipment                                        | 7,567        | 6,991    
|Furniture and fixtures                           | 4,926        | 4,278    
|Surgical instrumentation                         | 10,253       | 9,153    
|                                                 |              |          
|                                                 | 28,053       | 25,418   
|Less - accumulated depreciation and amortization | (16,793)     | (14,239) 
|                                                 |              |          
|                                                 | $ 11,260     | $ 11,179 
|                                                 |              |          

Depreciation and amortization expense
relating to property and equipment for the years ended December 31, 2003, 2002 and 2001
was approximately $3,032,000, $3,329,000, and $2,135,000, respectively.

# 7. Goodwill and Intangible Assets

We adopted the non-amortization
provisions of SFAS No. 142, Goodwill and Other Intangible Assets, (SFAS
142) on January 1, 2002, which resulted in additional pre-tax earnings of $280,000
for each of the years ended December 31, 2003 and 2002. We have reviewed our
goodwill and other intangible assets and have determined that there has been no impairment
of these assets that would require an impairment charge to be recorded in our consolidated
financial statements. The following table provides comparative earnings and earnings per
share information had the non-amortization provisions of SFAS 142 been adopted for all
periods presented:

|                                   | Twelve Months Ended December 31, |       |         
|---------------------------------- | -------------------------------- | ----- | --------
|
|                                   | 2003                             | 2002  | 2001    
|                                   |                                  |       |         
|Reported net income (loss)         | $(2,517)                         | $6    | $(3,158)
|attributable to common stock      
|Goodwill amortization              | --                               | --    | 200     
|Adjusted net income (loss)         | $(2,517)                         | $6    | $(2,958)
|attributable to common stock      
|                                   |                                  |       |         
|BASIC EARNINGS (LOSS) PER SHARE:  
|As reported                        | $(0.12)                          | $0.00 | $(0.34) 
|Goodwill amortization              | --                               | --    | 0.02    
|Adjusted                           | $(0.12)                          | $0.00 | $(0.32) 
|                                   |                                  |       |         
|DILUTED EARNINGS (LOSS) PER SHARE: |                                  |       |         
|As reported                        | $(0.12)                          | $0.00 | $(0.34) 
|Goodwill amortization              | --                               | --    | 0.02    
|Adjusted                           | $(0.12)                          | $0.00 | $(0.32) 
|                                   |                                  |       |         

Intangibles consisted of the
following (in thousands) as of December 31, 2003:

|                                 | Gross Carrying Amount | Accumulated Amortization | Amortizable Intangibles, Net
|-------------------------------- | --------------------- | ------------------------ | ----------------------------
|                                 |                       |                          |                             
|Amortizable Intangible Assets:   |                       |                          |                             
|Technology-based                 | $ 2,977               | $(1,027)                 | $1,950                      
|Marketing-based                  | 900                   | (118)                    | 782                         
|Customer-based                   | 7,049                 | (2,106)                  | 4,943                       
|                                 |                       |                          |                             
|Amortizable Intangibles          | $10,926               | $(3,251)                 | $7,675                      
|                                 |                       |                          |                             
|Unamortizable Intangible Assets: |                       |                          |                             
|Trademarks                       |                       |                          | $6,420                      
|                                 |                       |                          |                             
|Total Intangible Assets          |                       |                          | $14,095                     
|                                 |                       |                          |                             

Intangibles consisted of the
following (in thousands) as of December 31, 2002:

|                                 | Gross Carrying Amount | Accumulated Amortization | Amortizable Intangibles, Net
|-------------------------------- | --------------------- | ------------------------ | ----------------------------
|                                 |                       |                          |                             
|Amortizable Intangible Assets:   |                       |                          |                             
|Technology-based                 | $ 2,977               | $  (746)                 | $  2,231                    
|Marketing-based                  | 952                   | (76)                     | 876                         
|Customer-based                   | 7,049                 | (1,472)                  | 5,577                       
|                                 |                       |                          |                             
|Amortizable Intangibles          | $10,978               | $(2,294)                 | $8,684                      
|                                 |                       |                          |                             
|Unamortizable Intangible Assets: |                       |                          |                             
|Trademarks                       |                       |                          | $6,420                      
|                                 |                       |                          |                             
|Total Intangible Assets          |                       |                          | $15,104                     
|                                 |                       |                          |                             

Our amortizable assets will continue to be amortized over their remaining useful lives ranging from 1 to 40 years.

During the year ended December 31, 2003, we disposed of $52,000 of gross intangible assets. Aggregate amortization expense
for the years ended December 31, 2003, 2002, and 2001 was $962,000, $1,113,000 and $764,000, respectively.

Estimated amortization expense for the next five years is as follows (in thousands):

|                                 |     
|-------------------------------- | ----
|For year ended December 31, 2004 | $700
|For year ended December 31, 2005 | 600 
|For year ended December 31, 2006 | 500 
|For year ended December 31, 2007 | 500 
|For year ended December 31, 2008 | 500 

# 8. Accrued Expenses

Accrued expenses consist of the
following (in thousands):

|                                   | December 31, |       
|---------------------------------- | ------------ | ------
|                                   | 2003         | 2002  
|                                   |              |       
|Accrued wages and related expenses | $2,488       | $1,461
|Accrued commissions                | 1,653        | 1,878 
|Accrued royalties                  | 394          | 252   
|Accrued warranties                 | 419          | 402   
|Accrued taxes                      | 703          | 498   
|Accrued professional fees          | 763          | 328   
|Other accrued liabilities          | 363          | 513   
|                                   |              |       
|                                   | $6,783       | $5,332
|                                   |              |       

# 9. Long-Term Debt and
Leases

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

|                                                                               | December 31, | 
|------------------------------------------------------------------------------ | ------------ | 
|
|$25,000 credit facility from a financial institution; interest at the          |              | 
|institutions base rate or LIBOR rate plus an applicable margin based on       |              | 
|the ratio of debt to EBITDA (as defined in the Credit Agreement); due          |              | 
|September 2006; collateralized by all assets of Encore; commitment fee of      |              | 
|0.375% of unused line balance; additional available borrowings at              |              | 
|December 31, 2003 of $22,777 based upon the current Borrowing Base as          |              | 
|defined in the Credit Agreement; interest rate of 4.25% and 4.28% at           |              | 
|December 31, 2003 and December 31, 2002, respectively.                         |              | 
|                                                                               |              | 
|$24,000 senior subordinated notes payable to a financial institution; interest |              | 
|at the Citibank, N.A. prime rate plus 2% up to $5,000; interest at 12%         |              | 
|when the outstanding balance exceeds $5,000; interest payable monthly;         |              | 
|due September 2008; collateralized by a second lien on all assets of           |              | 
|Encore; less unamortized deferred charges of $0 and $5,429, respectively;      |              | 
|interest rate of 6% and 13% at December 31, 2003 and December 31, 2002,        |              | 
|respectively.                                                                  |              | 
|                                                                               |              | 
|8% unsecured note payable to a corporation in connection with the orthopedic   |              | 
|soft goods product line acquisition, payable in monthly installments of        |              | 
|$130 through July 1, 2003.                                                     |              | 
|                                                                               |              | 
|6.5% unsecured note payable to a former employee in connection with a stock    |              | 
|purchase agreement payable in bi-weekly installments of $5 through             |              | 
|January 23, 2004.                                                              |              | 
|8.9% unsecured note payable to individuals in connection with the acquisition  |              | 
|of Biodynamic Technologies, Inc. in 1999, payable in varying quarterly         |              | 
|installments through March 31, 2005.                                           |              | 
|                                                                               |              | 
|Capital lease obligations, collateralized by related equipment                 |              | 
|                                                                               |              | 
|                                                                               |              | 
|                                                                               |              | 
|Less-current portion                                                           |              | 
|                                                                               |              | 
|                                                                               |              | 
|                                                                               |              | 

The debt agreements related to the
$25,000,000 credit facility and the $24,000,000 senior subordinated notes payable contain
warranties and covenants and require maintenance of certain financial ratios. Default on
any warranty or covenant could affect the ability to borrow under the agreements and, if
not waived or corrected, could accelerate the maturity of any borrowings outstanding under
the applicable agreement. As of the date of this report, we are in compliance with all
debt covenants and warranties.  In addition, these debt agreements restrict our ability to
(i) incur additional indebtedness; (ii) issue redeemable equity interests and preferred
equity interests; (iii) pay dividends or make distributions, repurchase equity interests
or make other restricted payments; (iv) make capital expenditures; (v) create liens;
(vi) enter into transactions with our affilates; (vii) make investments; (viii) sell assets;
or (ix) enter into mergers or consolidations.

We repaid in full all principal amounts
outstanding under the $25,000,000 credit facility and the $24,000,000 senior subordinated
notes payable during the quarter ended September 27, 2003 in conjunction with the public
offering we completed on August 11, 2003. See Note 10 for additional detail regarding the
public offering. In connection with the repayment,we recorded a one-time charge due to the early
repayment of our outstanding debt, totaling $7.7 million.  All but approximately $650,000
of this amount represented a non-cash expense for unamortized warrant and debt issue costs.
  These debt agreements were also amended and
restated effective September 26, 2003 to reflect, among other things, lower interest
rates, removal of the term notes from the senior credit facility, adjustment of the
required Borrowing Base, and adjustment of the warranties and covenants.

In connection with the original
$24,000,000 senior subordinated notes payable, we granted a warrant to purchase through
February 8, 2009 up to an aggregate of 2,198,614 shares of our common stock at a purchase
price of $0.01 per share. This warrant was originally valued at $6,596,000 and recorded as
a reduction of long-term debt. The expense related to this warrant
was amortized to interest expense beginning February 8, 2002 using the original term of
the note agreement (five years). In connection with the repayment of this original debt,
we expensed the remaining balance of this warrant during the quarter ended September 27,
2003. Our agreements with CapitalSource were amended and restated as of September 26,
2003, and now allow us to borrow up to $24 million, of which during October 2003 we
borrowed $5 million. The interest rate for amounts we borrow under the senior subordinated
notes payable to CapitalSource will be 12% per annum from and after our next borrowing
draw request on the loan, but until then the interest rate will be equal to the Citibank,
N.A. prime rate plus 2%.

Galen Partners III, L.P., Galen
Partners International III, L.P. and Galen Employee Fund III, L.P. (collectively, the
Galen Entities) and the lender entered into an agreement (the
Agreement) to evidence certain obligations included in the original
$24,000,000 senior subordinated notes payable. As an inducement for the Galen Entities to
enter into the Agreement, we granted to the Galen Entities an option (the
Option) dated as of February 8, 2002 to acquire a certain number of shares of
common stock of the Company. The Option expired unexercised on August 15, 2003. The Option
was originally valued at $1,308,000 and recorded as an other asset on the balance sheet.
It was amortized to interest expense over the life of the option (eighteen months) and was
fully amortized in August 2003.

At December 31, 2003, the aggregate
amount of annual principal maturities of long-term debt are as follows (in thousands):

|Year Ended December 31, |        
|----------------------- | -------
|2004                    | $   961
|2005                    | 207    
|2006                    | --     
|2007                    | --     
|2008                    | 5,000  
|                        |        
|                        | $6,168 
|                        |        

Leases
We lease building space,
manufacturing facilities and equipment under non-cancelable lease agreements that expire
at various dates. At December 31, 2003, future minimum lease payments are as follows (in
thousands):

|                                                      |           |        
|----------------------------------------------------- | --------- | -------
|                                                      | Operating | Capital
|                                                      | Leases    | Leases 
|                                                      |           |        
|Year Ending December 31,                             
|2004                                                  | $ 139     | $   719
|2005                                                  | 102       | 663    
|2006                                                  | 80        | 645    
|2007                                                  | --        | 178    
|2008 and thereafter                                   | --        | 27     
|                                                      |           |        
|Total minimum lease payments                          | $ 321     | $2,232 
|                                                      |           |        
|Less - amounts representing interest at rates ranging |          
|from 7% to 10%                                        | (18)     
|                                                      |          
|Net minimum lease payments                            | 303       |        
|Less - current portion of obligations under capital   | (127)     |        
|                                                      |          
|                                                      | $ 176     |        
|                                                      |          

Rental expense under operating leases totaled
approximately $876,000, $1,106,000, and $869,000, for the years ended December 31, 2003, 2002, and 2001, respectively.

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

|                                | December 31, |      
|------------------------------- | ------------ | -----
|                                | 2003         | 2002 
|                                |              |      
|Equipment                       | $ 269        | $ 875
|Furniture and fixtures          | 270          | 45   
|Less - accumulated amortization | (177)        | (604)
|                                |              |      
|                                | $ 362        | $ 316
|                                |              |      

# 10. Capital Stock

Preferred Stock 
Preferred stock may be issued at the
discretion of our Board of Directors (the Board) 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, 2003, we have 1,000,000
shares of authorized preferred stock, of which 255,000 shares have been designated Series
A Preferred Stock.

On June 12, 2001, we issued 132,353
shares of Series A Preferred Stock for net proceeds of approximately $12.8 million (the
Series A Offering). The 132,353 shares of Series A Preferred Stock were
immediately convertible into 13,235,300 shares of our common stock. In connection with the
issuance of Series A Preferred Stock in June 2001, because the stock was immediately
convertible into common stock of Encore at the holders option at a conversion price
of $1.02 per share, which was below the per share closing price of the Companys
common stock on the date of the issuance of the Series A Preferred Stock, Encore recorded
a charge to net income available to common stockholders of $3,706,000 representing the
fair value of the beneficial conversion feature of the Series A Preferred Stock. Because
the Company did not have retained earnings at the date the Series A Preferred Stock was
issued from which to record the beneficial conversion feature, no amounts were removed
from retained earnings to additional paid-in capital. On January 24, 2003, 750 shares of
Series A Preferred Stock were converted to 75,000 shares of common stock. On August 11,
2003, 131,603 shares of Series A Preferred Stock, representing all of the remaining
outstanding shares, were converted to 13,160,300 shares of common stock.

Common Stock 
On August 11, 2003 we sold a total of
10,637,500 shares of our common stock at $4.00 per share in a public offering. This
offering generated total gross proceeds of approximately $42.6 million, and we used the
net offering proceeds of approximately $39.0 million to repay $25.9 million indebtedness
under our senior subordinated notes payable to CapitalSource Finance LLC, $2.0 million of
the term loan debt under our senior credit facility with Bank of America, $10.6 million to
repay our outstanding indebtedness under our Bank of America revolving credit facility,
and the remainder for general corporate purposes. See Note 9 for additional information.

On December 17, 2003 we sold
6,000,000 shares of our common stock at $6.25 per share in a public offering. This
offering generated total gross proceeds of approximately $37.5 million ($34.5 million net
offering proceeds) which will be used for working capital and other general corporate
purposes, including possible acquisitions.

Stock Option Plans

We have seven stock option plans. All
options granted under the plans are exercisable for common stock in Encore as described
below. Non-employee stock compensation expense was approximately $155,000, $265,000, and
$138,000 for the years ended December 31, 2003, 2002 and 2001, respectively, which is
included in selling, general, and administrative expenses on the Consolidated Statements of
Operations.

The 1996 Incentive Stock 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 Encore and its subsidiaries. The 1997 Distributor
Advisory Panel Stock Option Plan provides for the grant of stock options to those persons
or entities that are our sales representatives and distributors of our products. The 1997
Surgeon Advisory Panel Stock Option Plan provides for the grant of stock options to those
surgeons who are serving as members of our, or our subsidiaries, surgeon advisory
panel. The 2000 Non-Employee Director Stock Option Plan provides for the grant of options
to non-employee directors of Encore.

In addition, we have three stock
option plans under which we are 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 us. The 1993 Distributor Stock Option Plan provided for the grant
of stock options to those who were sales representatives and distributors of our 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 our surgeon advisory panel.

The stock options granted under all
of these plans are generally 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, 2003, we had reserved a total of 6,046,488 shares of common
stock for the plans.

A summary of the activity in our
stock option plans is presented below:

|                                                                | Year ended December 31, |                                 |           |                                 |             |                                
|--------------------------------------------------------------- | ----------------------- | ------------------------------- | --------- | ------------------------------- | ----------- | -------------------------------
|                                                                |                         |                                 |           |                                 |             |                                
|
|                                                                | Shares                  | Weighted-Average Exercise Price | Shares    | Weighted-Average Exercise Price | Shares      | Weighted-Average Exercise Price
|                                                                |                         |                                 |           |                                 |             |                                
|Employee Options                                                |                         |                                 |           |                                 |             |                                
|Outstanding, beginning of year                                  | 1,077,942               | $2.45                           | 850,927   | $2.31                           | 3,343,934   | $2.10                          
|Granted-                                                        |                         |                                 |           |                                 |             |                                
|At market                                                       | 280,000                 | 3.13                            | 483,500   | 3.12                            | 88,105      | 1.75                           
|Exercised                                                       | (123,261)               | 2.49                            | (115,361) | 1.08                            | (577,934)   | 0.83                           
|Canceled                                                        | (63,990)                | 3.08                            | (141,124) | 3.82                            | (2,003,178) | 2.34                           
|                                                                |                         |                                 |           |                                 |             |                                
|Outstanding, end of year                                        | 1,170,691               | 2.88                            | 1,077,942 | 2.45                            | 850,927     | 2.31                           
|                                                                |                         |                                 |           |                                 |             |                                
|Options exercisable at year end                                 | 646,429                 |                                 | 572,992   |                                 | 751,927     |                                
|Weighted-average fair value of
options granted during the year- |                         |                                 |           |                                 |             |                                
|At market                                                       |                         | $2.68                           |           | $3.12                           |             | $1.73                          
|Other Than Employee Options                                     |                         |                                 |           |                                 |             |                                
|Outstanding, beginning of year                                  | 863,485                 | $3.75                           | 737,407   | $3.58                           | 613,790     | $3.85                          
|Granted-                                                        |                         |                                 |           |                                 |             |                                
|At market                                                       | 20,000                  | 3.00                            | 199,513   | 4.42                            | 75,000      | 1.20                           
|Above market                                                    | --                      | --                              | --        | --                              | 125,000     | 1.81                           
|Exercised                                                       | (16,436)                | 3.37                            | (53,302)  | 1.13                            | --          | --                             
|Canceled                                                        | (138,837)               | 3.15                            | (20,133)  | 4.33                            | (76,383)    | 3.95                           
|                                                                |                         |                                 |           |                                 |             |                                
|Outstanding, end of year                                        | 728,212                 | 3.58                            | 863,485   | 3.75                            | 737,407     | 3.58                           
|                                                                |                         |                                 |           |                                 |             |                                
|Options exercisable at year end                                 | 703,212                 |                                 | 758,485   |                                 | 581,782     |                                
|Weighted-average fair value of                                  |                         |                                 |           |                                 |             |                                
|options granted during the year-                               
|At market                                                       |                         | $2.56                           |           | $4.41                           |             | $1.19                          
|Above market                                                    | --                      |                                 |           | --                              |             | 2.22                           

The following table summarizes information about
 stock options outstanding at December 31, 2003:

|               | Options Outstanding | Options Exercisable |  |           | 
|-------------- | ------------------- | ------------------- |  | --------- | 
|
|
|
|$1.13 to $1.90 |                     |                     |  | 356,081   | 
|$2.00 to $3.95 |                     |                     |  | 1,131,843 | 
|$4.05 to $4.91 |                     |                     |  | 188,085   | 
|$5.00 or $6.48 |                     |                     |  | 222,894   | 
|               |                     |                     |  |           | 
|               |                     |                     |  | 1,898,903 | 
|               |                     |                     |  |           | 

Warrants

On February 8, 2002, in connection
with the financing for the acquisition of Chattanooga Group, Inc., we issued a
warrant to CapitalSource Holdings LLC, giving it the right to acquire for a period of five
years up to 2,198,614 shares of our common stock. On August 14, 2003, we exercised our
right to prepay $6 million of the principal amount of senior subordinated notes. Because
we exercised this right, CapitalSource conveyed warrants to purchase 549,653 shares of our
common stock to the Galen Entities. On October 20, 2003, CapitalSource exercised all of
its remaining warrants for 1,648,961 shares of common stock.  See Note 9 for additional information.

Healthcare Acquisition Corporation
(HCAC), our predecessor, issued 3,850,000 warrants (the $5
warrants) in connection with a public offering in March 1996. These warrants had an
exercise price of $5.00 per share and were convertible into one share of common stock for
each warrant. All of these $5 warrants expired on March 8, 2003.

Issuance of Common Stock
for Recourse Notes Payable
In June 2001, the Company sold
approximately 1.2 million shares of common stock at $1.02 per share to certain executives
of the Company. In exchange for the common stock, the Company accepted promissory notes
from the employees totaling $1,187,000, which bear interest at 8% per annum. The
promissory notes are collateralized by the 1.2 million shares of common stock and are full
recourse to the assets of the executives. The notes have been recorded as a component of
stockholders equity in the consolidated balance sheet. Due to the termination of
employment of certain of these executives during 2002, 22,222 shares of common stock were
repurchased by the Company at a price of $1.02 per share pursuant to the restricted stock
agreements and the related promissory notes were reduced accordingly. In 2003, we received
$64,000 in note payments from former employees.

11. Segment Information

We have three reportable segments as
defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS 131). Our reportable segments are business units that
offer different products that are managed separately because each business requires
different manufacturing and marketing strategies. The Surgical Division sells
reconstructive products including knee, hip, shoulder and spinal implants and
trauma-related products. The Soft Goods Division sells knee, shoulder, ankle and wrist
braces; neoprene supports; slings; cervical collars; immobilizers for various joints in
the body; pressure care products and patient safety devices. The Chattanooga Group
Division sells electrotherapy units, therapeutic ultrasound equipment, continuous passive
motion devices, therapy tables, along with heating and chilling units and other
rehabilitation products.

Information regarding business
segments is as follows (in thousands):

|                           | For the Year Ended December 31, |         |        
|-------------------------- | ------------------------------- | ------- | -------
|                           | 2003                            | 2002    | 2001   
|                           |                                 |         |        
|Sales:                     |                                 |         |        
|Surgical Division          | $  35,497                       | $31,889 | $33,759
|Chattanooga Group Division | 57,532                          | 46,145  | --     
|Soft Goods Division        | 15,030                          | 17,457  | 8,857  
|                           |                                 |         |        
|Consolidated net sales     | $108,059                        | $95,491 | $42,616
|                           |                                 |         |        
|Gross margin:              |                                 |         |        
|Surgical Division          | $  24,848                       | $21,998 | $21,841
|Chattanooga Group Division | 23,918                          | 18,650  | --     
|Soft Goods Division        | 5,006                           | 5,392   | 2,923  
|                           |                                 |         |        
|Consolidated gross margin  | $  53,772                       | $46,040 | $24,764
|                           |                                 |         |        

We allocate resources and evaluate
the performance of our segments based on gross margin and therefore have not disclosed
certain other items, such as interest, depreciation and income taxes as permitted by SFAS
131. The accounting policies of the reportable segments are the same as those described
in Note 1 to the consolidated financial statements. We do not allocate assets to
reportable segments because certain of our property and equipment are shared by all of
our segments.

During the three years ended December
31, 2003, our international sales were primarily to a few foreign distributors, of which
no one distributor accounted for at least 10% of total Company sales during such periods.
Following are our sales by geographic area (in thousands):

|                                | For the Year Ended December 31, |         |        
|------------------------------- | ------------------------------- | ------- | -------
|                                | 2003                            | 2002    | 2001   
|                                |                                 |         |        
|Net Sales:                      |                                 |         |        
|United States                   | $  93,971                       | $85,780 | $33,651
|Europe, Middle East, and Africa | 4,628                           | 3,139   | 3,984  
|Asia Pacific                    | 5,634                           | 4,522   | 4,690  
|Other                           | 3,826                           | 2,050   | 291    
|                                |                                 |         |        
|                                | $108,059                        | $95,491 | $42,616
|                                |                                 |         |        

12. Income Taxes

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

|                       | For the Year Ended December 31, |       |         
|---------------------- | ------------------------------- | ----- | --------
|                       | 2003                            | 2002  | 2001    
|                       |                                 |       |         
|Current income taxes:  |                                 |       |         
|U.S. Federal and State | $    476                        | $  77 | $ 1,001 
|Deferred income taxes: |                                 |       |         
|U.S. Federal and State | (1,442)                         | 235   | (784)   
|                       |                                 |       |         
|                       | $  (966)                        | $312  | $    217
|                       |                                 |       |         

The difference between the tax expense (benefit) derived by applying the Federal statutory income tax rate to net income
(loss) and the expense (benefit) recognized in the consolidated financial statements is as follows (in thousands):

|                                            | For the Year Ended December 31, |       |      
|------------------------------------------- | ------------------------------- | ----- | -----
|                                            |                                 |       |      
|                                            | 2003                            | 2002  | 2001 
|                                            |                                 |       |      
|Expense (benefit) derived by applying the  
|Federal statutory income tax rate to income
|(loss) before income taxes                  | $(1,184)                        | $ 108 | $ 260
|Add (deduct) the effect of -                |                                 |       |      
|State tax provision (benefit)               | (104)                           | (83)  | 27   
|Benefit from FSC utilization                | --                              | --    | (45) 
|State tax rate increase                     | 207                             | --    | --   
|Permanent differences and other, net        | 115                             | 287   | (25) 
|                                            |                                 |       |      
|                                            | $  (966)                        | $ 312 | $ 217
|                                            |                                 |       |      

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

|                                               | December 31, |         
|---------------------------------------------- | ------------ | --------
|                                               | 2003         | 2002    
|                                               |              |         
|Current deferred tax assets (liabilities):    
|Contribution carryforward                      | $    103     | $    307
|AMT and other credits                          | 30           | 12      
|Inventory and other reserves                   | 1,612        | 1,663   
|Accrued compensation and other                 | 767          | 189     
|                                               |              |         
|Gross current deferred tax assets              | 2,512        | 2,171   
|                                               |              |         
|Noncurrent deferred tax assets  (liabilities):
|Basis of property and equipment                | (616)        | (953)   
|Basis of intangible assets                     | (4,489)      | (4,487) 
|Accrued compensation                           | (307)        | 489     
|Contribution carryforward                      | 568          | 420     
|                                               |              |         
|Gross noncurrent deferred tax liabilities      | (4,844)      | (4,531) 
|                                               |              |         
|Net deferred tax assets (liabilities)          | $(2,332)     | $(2,360)
|                                               |              |         

In connection with the acquisition of Chattanooga Group,  Inc. (see note 14), we assumed net deferred tax liabilities of approximately $4.6 million, which consisted  principally of the differences for book and
tax purposes of the acquired intangible assets.

At December 31, 2003 we maintain a charitable  contribution carryforward of approximately $2.0 million. The carryforward is subject to certain  limitations and expires at various dates commencing in 2006.

In assessing the potential  realization of deferred tax assets, management considers whether it is more likely  than not that some portion or all of the deferred tax assets will be realized.  The ultimate
realization of deferred tax assets is dependent upon us attaining future taxable income during the periods in which those temporary differences become deductible. Based upon
managements projections of future taxable income and the periods and manner in which our deferred tax assets will be available, management estimates that it is more
likely than not that all of  our deferred tax assets will be available to offset future taxable income. As such, no valuation allowance has been provided against the deferred
tax asset balance at December 31, 2003 and 2002.

13. Earnings Per Share



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

|                                                         | For the Year Ended December 31, |             |         
|-------------------------------------------------------- | ------------------------------- | ----------- | --------
|                                                         | 2003                            | 2002        | 2001    
|                                                         |                                 |             |         
|Net income (loss)                                        | $(2,517)                        | $         6 | $    548
|Beneficial conversion feature related to Series A       
|Preferred Stock                                          | --                              | --          | (3,706) 
|                                                         |                                 |             |         
|Net income (loss) attributable to common stock           | $(2,517)                        | $         6 | $(3,158)
|                                                         |                                 |             |         
|Shares used in computing basic earnings (loss) per share | 20,848                          | 10,429      | 9,355   
|Common stock equivalents                                 | --                              | 2,813       | --      
|Preferred stock                                          | --                              | 13,235      | --      
|                                                         |                                 |             |         
|Shares used in computing diluted earnings (loss) per    
|share                                                    | 20,848                          | 26,477      | 9,355   
|                                                         |                                 |             |         
|Earnings (loss) per share                                |                                 |             |         
|Basic                                                    | $ (0.12)                        | $    0.00   | $(0.34) 
|                                                         |                                 |             |         
|Diluted                                                  | $ (0.12)                        | $    0.00   | $(0.34) 
|                                                         |                                 |             |         

Because we incurred a net loss for the years ended December 31, 2003 and 2001, 11,586,456 and 12,809,390 common stock
equivalents were not included in the computation of diluted earnings per share because the inclusion of such would be anti-dilutive. For the year ended December 31, 2002 the
effect of 5,908,906 common stock equivalents, were excluded as anti-dilutive.

# 14. Acquisition of
Chattanooga Group, Inc.

On February 8, 2002, we acquired all of the issued and outstanding shares of capital stock of Chattanooga Group, Inc. (Chattanooga)
pursuant to a Stock Purchase Agreement for a cash purchase price of $35.1 million. In order to finance this acquisition, we entered into the Credit Agreement with Bank of
America, N.A. for maximum borrowings up to $30 million, subject to limitations based upon our Borrowing Base, as defined therein, and the Note Agreement with CapitalSource Finance
LLC for $24 million.

The total purchase price paid for Chattanooga approximating $36.8 million, including cash payments of $35.1 million and
acquisition costs of $1.7 million, was allocated as follows based upon the fair value of the assets acquired and liabilities assumed (in thousands):

|                                      |         
|------------------------------------- | --------
|Current assets                        | $ 19,092
|Tangible and other non current assets | 5,871   
|Liabilities assumed                   | (16,431)
|Identifiable intangible assets        | 13,520  
|Goodwill                              | 14,724  
|                                      |         
|                                      | $ 36,776
|                                      |         

None of the acquired goodwill is expected to be tax deductible. The acquired intangible assets consist of the following,
and are being amortized over their estimated economic life, where applicable (in thousands):

|Asset class      | Fair value | Wtd. Avg. Useful life
|---------------- | ---------- | ---------------------
|Technology-based | $  1,830   | 12 years             
|Marketing-based  | 6,420      | Indefinite           
|Customer-based   | 5,270      | 20 years             
|Goodwill         | 14,724    
|                 |            |                      
|                 | $28,244   
|                 |            |                      

In connection with this acquisition and financing,  we repaid the outstanding  balances of certain Chattanooga debt
totaling  approximately  $5 million.  We also  repaid all  amounts  outstanding  under our then  current  revolving
credit facility,  which  approximated $6.6 million,  with proceeds from a similar revolving credit facility as part
of the Credit Agreement.

15.      Unaudited Quarterly Consolidated Financial Data          (in thousands, except for per share amounts)

|                                  |            | Three Months Ended |           |          
|--------------------------------- | ---------- | ------------------ | --------- | ---------
|                                  | Mar 29,    | Jun 28,            | Sep 27,   | Dec 31,  
|                                  | 2003       | 2003               | 2003      | 2003     
|                                  |            |                    |           |          
|Sales                             | $26,392    | $26,498            | $ 27,283  | $27,886  
|Gross margin                      | $12,944    | $13,019            | $ 13,658  | $14,151  
|Income from operations            | $  1,905   | $  2,302           | $   2,303 | $  2,705 
|Net income (loss)                 | $       42 | $     171          | $(4,717)  | $  1,987 
|Basic earnings (loss) per share   | $    0.00  | $    0.02          | $  (0.20) | $    0.05
|Weighted average shares - basic   | 10,668     | 10,792             | 23,098    | 37,198   
|Diluted earnings (loss) per share | $    0.00  | $    0.01          | $  (0.20) | $    0.05
|Weighted average shares - diluted | 26,663     | 26,696             | 23,098    | 40,539   



|                                  |            | Three Months Ended |           |            
|--------------------------------- | ---------- | ------------------ | --------- | -----------
|                                  | Mar 30,    | Jun 29,            | Sep 28,   | Dec 31,    
|                                  | 2002       | 2002               | 2002      | 2002       
|                                  |            |                    |           |            
|Sales                             | $19,308    | $ 25,519           | $24,474   | $26,190    
|Gross margin                      | $  9,690   | $ 11,648           | $11,571   | $13,131    
|Income from operations            | $     748  | $   2,025          | $  2,083  | $  2,237   
|Net income (loss)                 | $       35 | $    (154)         | $     120 | $         5
|Basic earnings (loss) per share   | $    0.00  | $  (0.02)          | $    0.01 | $    0.00  
|Weighted average shares - basic   | 10,018     | 10,244             | 10,377    | 10,476     
|Diluted earnings (loss) per share | $    0.00  | $  (0.02)          | $    0.00 | $    0.00  
|Weighted average shares - diluted | 25,755     | 10,244             | 26,654    | 26,622     

16. Related Party Transaction

At our September 3, 2003 Board meeting our directors approved, and effective November 18, 2003 we entered into, a
Consulting Agreement with Galen Advisors LLC (Galen Advisors) whereby Galen Advisors has agreed to assist us in identifying, negotiating, and consummating strategic
acquisitions. Under the terms of this Consulting Agreement, we have agreed to pay Galen Advisors a one-time fee in the amount of $1 million immediately following the closing, if
any, of one or more merger or acquisition transactions following the date of the Consulting Agreement as a result of which we shall have consummated transactions with a
purchase price (including the value of any debt assumed) equal to or in excess of $25 million in the aggregate. The Consulting Agreement shall terminate upon the earlier of
the payment by us of the fee or November 18, 2005.

During 2002, Encore paid  Galen Associates, $200,000 (paid with 63,492 shares of common stock based on a fair market
value of $3.15) under a Financial Advisory Agreement for various  consulting services provided to the Company in connection with the acquisition of  Chattanooga Group, Inc.

On February 1, 2001, we  purchased from an entity related to Nick Cindrich, our former Chairman of the Board, 180,000 shares
of common stock of Encore. These shares were purchased at a price approximately equal to the then current trading price of the stock on the Nasdaq National Market. The consideration for these
shares was given in the form of a  promissory note with an original principal amount of $409,000, bearing interest at 6.5%, payable bi-weekly over a three-year
period.Simultaneously with this  transaction, the former Chairman of the Board agreed to relinquish 109,767 vested options to purchase common stock in Encore that were in his
possession. The exercise prices of these options ranged from $1.69 to $5.16.

17. Legal Proceedings

Akthea S.A.R.L.

In the fall of 2001, we began a number of legal proceedings against Akthea S.A.R.L. (Akthea), our former
Surgical Division product distributor in France. The nature of the claims revolve around monies that were not paid to us by Akthea in connection with the distribution agreement
and lease agreement that were entered into by the parties. We filed a complaint in the United States District Court in Texas related to the lease agreement issues. We also
filed a request for arbitration with the International Chamber of Commerce Court of Arbitration in Paris related to the distribution agreement issues. On February 25,
2002, we were awarded a default judgment against Akthea in the United States District Court in the amount of $377,000.
 With respect to the distribution agreement issues,
our request for arbitration sought monies owed under the distribution agreement and an injunction prohibiting Akthea from initiating additional actions similar to those
described in the paragraph below. The arbitration panel issued a preliminary ruling granting
 us damages for Aktheas breach of the payment provisions of the
distribution agreement. On July 21, 2003, the arbitration panel issued its final ruling
granting our claim for other costs as well as injunctive relief.

While Akthea has interposed no counterclaims in the actions described in the preceding paragraph, in 2002, Akthea
initiated two civil proceedings in Nanterre, France against us and others.
The two civil cases have been stayed in favor of the arbitration already commenced between the parties,
and we have been awarded costs in obtaining these stays. Akthea has appealed the imposition of the stays of the two French civil cases, which appeal has been denied.
Additionally, Akthea requested that the responsible French regulatory authority institute criminal proceedings against us based on Aktheas claims that our implant products
are combined with other products and such combination does not comply with the French public health codes. The French authorities declined to act on Aktheas request to
pursue a criminal investigation.

Department of Commerce
Investigation of Chattanooga Group, Inc.

We are the subject of a Department of Commerce investigation of Chattanooga Group, Inc.s export practices with respect
to unlawfully trading with an embargoed country, and unlawfully preparing export documentation. The Department of Commerce investigation commenced prior to our February
2002 acquisition of Chattanooga Group, Inc. To the extent we incur monetary fines, costs and legal expenses related to the Department of Commerce investigation, the sellers from
whom we purchased the capital stock of Chattanooga Group, Inc. have agreed to indemnify us and to pay all reasonable costs, expenses, settlements and fines in excess of the
$167,000, which, as of December 31, 2003, was the remaining amount of what was accrued as a liability on Chattanooga Group Inc.s financial statements as of the date of the
acquisition up to a maximum of $5.0 million. With respect to the legal expenses, the sellers are only obligated to indemnify and reimburse us for the legal expenses of the
law firm currently handling the investigation or any other law firm of their choice. If upon final determination or settlement of the Department of Commerce investigation we
ultimately incur total expenses or fines in an amount less than the approximately $167,000 accrual, we shall owe the sellers the remainder of the accrual. When we acquired
Chattanooga Group, Inc., $2.5 million of the sellers sale proceeds were placed in escrow to satisfy the sellers indemnity obligations to us, and currently in
accordance with the terms of the purchase agreement $600,000 remains in escrow through February 8, 2005 for such purpose. In addition, we, as a successor in interest to
Chattanooga Group, Inc., and our officers and employees might be subject to any criminal charges which could be commenced as a result of this investigation. The
Department of Commerce also may revoke our export licenses or otherwise restrict our ability to export our products.

18. Commitments and Contingencies

As of December 31, 2003, we had entered into purchase commitments for inventory, capital acquisitions and other services
totaling approximately $15.2 million in the ordinary course of business. In addition to these items, we have promised to purchase from our third party supplier in Mexico who
supplies the labor component necessary to assemble and finish our soft goods products a minimum of $506,250 in labor per year.
The following table summarizes our contractual obligations associated with our purchase obligations for the
next five years (in thousands):

|                         |        
|------------------------ | -------
|Year Ending December 31, |        
|2004                     | $13,711
|2005                     | 2,000  
|2006                     | --     
|2007                     | --     
|2008 and thereafter      | --     
|                         |        
|Total                    | $15,711
|                         |        

The  manufacturing  and marketing of orthopedic  medical products entails risk of product  liability.  From time to
time we have been, and currently we are,  subject to product  liability claims and litigation.  In the future,  we
may again be subject to additional  product liability  claims,  which could have a negative impact on our business.
We currently carry product  liability  insurance in an amount of $20 million,  a level which we consider  adequate.
If a product  liability claim or series of claims is brought  against us for uninsured  liabilities or in excess of
our insurance  coverage,  our business could suffer  materially and cause our stock price to fall. In addition,  as
a result  of a  product  liability  claim,  we may have to  recall  some of our  products,  which  could  result in
significant costs to us and cause our stock price to fall.

19. Employee Benefit Plans

We have a qualified defined contribution plan, which allows for voluntary pre-tax contributions by employees. We pay
all general and administrative expenses of the plan and may make contributions to the plan. We made matching contributions of approximately $389,000, $354,000, and $264,000 to
the plan in 2003, 2002 and 2001, respectively, based on 50% of the first 6% of employee contributions in 2003 and 2002, and 100% of the first 6% of employee contributions in
2001. Encore provides certain medical expense coverage to certain former executives. At December 31, 2003, we have $449,000 recorded for estimated liabilities related to these
post retirement benefits.

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

None.

ITEM  9A.  CONTROLS AND PROCEDURES.

An evaluation was performed under the supervision and with the participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operations of our
disclosure controls and procedures as defined  by Securities Exchange Act of 1934 Rules 13a-15(e), as of the end
of the period covered by this annual report.  Based on that evaluation, our management, including our Chief
Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were
effective as of December 31, 2003.  No change in internal controls over financial reporting occurred during the
quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, such
internal control over financial reporting.

---

# PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information  with respect to this Item is incorporated by reference to our definitive  Proxy Statement for our 2004
Annual Meeting of  Stockholders.  Information  regarding  directors and officers is included within the sections of
our Proxy  Statement  entitled  Proposal  Item 1  Election of Directors and  Executive  Officers.  Information
related  to the Audit  Committee  is  included  within  the  section  of our  Proxy  Statement  entitled  Corporate
Governance and Related  Matters  Audit  Committee  Information.  Information  regarding  compliance  with Section
16(a) of the  Securities  Exchange  Act of 1934 is  included  within the  section of our Proxy  Statement  entitled
Stock Ownership  Section 16(a) Beneficial  Ownership  Reporting  Compliance.  Information  regarding our code of
conduct is included within the section of our Proxy Statement entitled Corporate Governance and Related Matters.

ITEM 11.     EXECUTIVE COMPENSATION

Information on compensation of our directors and certain named executive officers set forth under the
sub-captions Directors Continuing in Office and Executive Compensation other than the Report of the
Compensation Committee contained in our Proxy Statement is incorporated herein by reference.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information on the number of shares of our common stock beneficially owned by each director, each named executive
officer, all directors and all executive officers as a group, and owners of more than 5% of our common stock is
contained under the caption Stock Ownership in our Proxy Statement and is incorporated herein by reference.

The following table provides information as of December 31, 2003 regarding compensation plans (including
individual compensation arrangements) under which equity securities of Encore are authorized for issuance.

|Plan Category                                              | Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights | Weighted-average
exercise price
of outstanding
options,
warrants, and
rights | Number of securities remaining
available for future issuance
under equity compensation plans
(excluding securities reflected
in column (a))
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------
|                                                           |                                                                                             |                                                                              |                                                                                                                                            
|Equity compensation plans approved by security holders     | 1,198,691                                                                                   | $2.91                                                                        | 2,396,307                                                                                                                                  
|Equity compensation plans not
approved by security holders | 700,212                                                                                     | $3.73                                                                        | 608,500                                                                                                                                    
|                                                           |                                                                                             |                                                                              |                                                                                                                                            
|Total                                                      | 1,898,903                                                                                   | $3.14                                                                        | 3,004,807                                                                                                                                  
|                                                           |                                                                                             |                                                                              |                                                                                                                                            

For additional information regarding those plans that have not been approved by security holders, please
see the information included in Footnote 10 of the Companys consolidated financial statements.

The information set forth under the sub-caption Equity Compensation Plan Information contained in our
Proxy Statement is incorporated herein by reference.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information set forth under the sub-caption Certain Relationships
and Related Party Transactions contained in our Proxy Statement is incorporated herein by reference.

ITEM 14.     PRINCIPAL ACCOUNTING FEES AND SERVICES

Information relating to audit fees, audit-related fees, tax fees and all other fees billed in fiscal 2002 and
2003 by KPMG, LLP for services rendered to Encore is set forth under the caption Independent Accountants  Audit
Fees in our Proxy Statement and is incorporated herein by reference. In addition, information relating to the
pre-approval policies and procedures of the Audit Committee is set forth under the sub-caption Audit Committee
Pre-approval Policy in our Proxy Statement and is incorporated herein by reference.

---

# PART IV.

# ITEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

# (a) Financial Statements
and Financial Statement Schedules

The financial statements filed as
part of this report are listed under Item 8. Financial statement schedules listed under
applicable accounting rules and regulations of the Securities and Exchange Commission but
not included in this report are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or notes thereto
incorporated by reference.

# (b) Reports on Form 8-K

A.              On
October 7, 2003, we filed a Current Report on Form 8-K under Item 5,           Other
Events and Required FD Disclosure. We filed two news releases,           both dated
October 6, 2003, entitled Encore Medical Corporation           Establishes a New
Credit Facility and Encore Medical Receives FDA           Approval for a New
Spinal Implant Offering.

B.    
          On October 27, 2003, we filed a Current Report on Form 8-K, as amended by a
          Current Report filed on form 8-K/A on October 29, 2003, under Item 5,
          Other Events and Required FD Disclosure. We filed a news release,
          dated October 27, 2003, entitled Encore Medical Reports Record Third
          Quarter Revenue and Operating Income  Sales in All Divisions Increase Over
          Prior Year Results. In addition, we furnished under item 12 our financial
          results for the quarter ended September 27, 2003.

C.    
          On November 21, 2003, we filed a Current Report on Form 8-K under Item 5,
          Other Events and Required FD Disclosure. We filed a news release,
          dated November 20, 2003, entitled Encore Medical Corporation Announces
          Public Offering.

D.    
          On December 2, 2003, we filed a Current Report on Form 8-K under Item 5,
          Other Events and Required FD Disclosure. We filed a news release,
          dated December 1, 2003, entitled Encore Medical Receives FDA Approval For
          Ceramic-On-Ceramic Hip Implant Offering: Company Expands its Acetabular Product
          Offering and Expands Presence in the Marketplace.

E.    
          On December 8, 2003, we furnished a Current Report on Form 8-K under Item 9,
          Regulation FD Disclosure. We furnished a news release dated,
          December 4, 2003, entitled Encore Medical Corporation Shareholders Approve
          Increase to Authorized Shares.

F.    
          On December 12, 2003, we filed a Current Report on Form 8-K under Item 5,
          Other Events and Required FD Disclosure. We filed a news release,
          dated December 10, 2003, entitled Encore Medical Corporation Announces
          Pricing of Its Public Offering of 8,500,000 Shares of Common Stock. On
          December 17, 2003, we filed a Current Report on Form 8-K under Item 5,
          Other Events and Required FD Disclosure. In addition, we furnished
          under item 9 all financial documents related to the news release dated December
          17, 2003, entitled Encore Medical Corporation Announces Closing of Its
          Public Offering of 8,500,000 Shares of Common Stock.

G.    
          On December 19, 2003, we furnished a Current Report on Form 8-K under Item 9,
          Regulation FD Disclosure. We furnished a news release, dated
          December 19, 2003, entitled Encore Medical Corporation Announces Full
          Exercise of Underwriters Over-Allotment Option.

---

(c)    
          Exhibits:

|Exhibit No. | Description                                                                                                                                                                                                                      
|----------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 HCAC.(1)                                                                                                                                                                                         
|3.2         | Amendment to the Certificate of Incorporation of HCAC(3)                                                                                                                                                                         
|3.3         | Bylaws of HCAC(1)                                                                                                                                                                                                                
|3.4         | Certificate of Designations,
 Preferences and Limitations of Series A Preferred Stock of Encore Medical Corporation dated June 5, 2001(7)                                                                                        
|3.5         | Certificate of Amendment to the Certificate of Incorporation
 of Encore Medical Corporation(8)                                                                                                                                   
|3.6         | Amendment to Certificate
of Designations, Preferences and Limitations of Series A
Preferred Stock of Encore Medical Corporation dated February 8, 2002(8)                                                                        
|4.1         | Form of HCAC Common Stock Certificate(2)                                                                                                                                                                                         
|4.2         | Form of Encore Medical Corporation
 Common Stock Certificates(4)                                                                                                                                                                 
|4.3         | Investors' Rights Agreement
between Encore and CapitalSource Holdings LLC dated February 8, 2002(6)                                                                                                                              
|4.4         | Warrant issued by Encore
to CapitalSource Holdings LLC dated February 8, 2002(6)                                                                                                                                                 
|10.1        | Encore Medical Corporation 1996 Incentive Stock Plan(3)                                                                                                                                                                          
|10.2        | Employment Agreement between
Encore Medical Corporation and Jack Cahill dated June 12, 2001(8)                                                                                                                                   
|10.3        | Employment Agreement between
 Encore Medical Corporation and August Faske dated June 12, 2001(8)                                                                                                                                 
|10.4        | Employment Agreement
 between Encore Medical Corporation and Kenneth W. Davidson dated June 12, 2001 (8)                                                                                                                         
|10.5        | Employment Agreement
 between Encore Medical Corporation and Harry L. Zimmerman dated June 12, 2001 (8)                                                                                                                          
|10.6        | Restricted Stock Agreement
 between Encore Medical Corporation and Jack Cahill dated June 12, 2001 (8)                                                                                                                           
|10.7        | Restricted Stock Agreement
 between Encore Medical Corporation and August Faske dated June 12, 2001 (8)                                                                                                                          
|10.8        | Restricted Stock Agreement
 between Encore Medical Corporation and Kenneth W. Davidson dated June 12, 2001 (8)                                                                                                                   
|10.9        | Restricted Stock
 Agreement between Encore Medical Corporation and Harry L. Zimmerman dated June 12, 2001 (8)                                                                                                                    
|10.10       | Asset Purchase Agreement
 among Encore Medical Corporation, Tecnol, Inc., Kimberly-Clark Corporation, and
Kimberly-Clark Worldwide, Inc. (5)                                                                                     
|10.11       | Stock Purchase Agreement among
 Encore Medical Corporation and the Sellers of Chattanooga Group, Inc. dated November 23, 2001 (6)                                                                                                
|10.12       | Credit Agreement among Encore Medical Corporation and its Subsidiaries, Bank of America, National Association as
Agent and the Financial Institutions named therein as Lenders, dated February 8, 2002(6)                        
|10.13       | Revolving Loan Note and Term Notes A and B by Encore Medical Corporation
and its subsidiaries dated February 8, 2002(6)                                                                                                          
|10.14       | Note and Equity Purchase
 Agreement between Encore Medical Corporation and its subsidiaries and CapitalSource
Finance LLC dated February 8, 2002(6)                                                                              
|10.15       | Four Senior Subordinated Notes by Encore Medical Corporation and its subsidiaries
 dated February 8, 2002(6)                                                                                                                     
|10.16       | First Amendment and Waiver
 between Encore Medical Corporation and its Subsidiaries, Bank of America, National Association as Agent and the Financial
Institutions named therein as Lenders, dated May 7, 2002(9)                
|10.17       | Second Amendment between Encore
Medical Corporation and its Subsidiaries, Bank of America, National Association as
Agent and the Financial Institutions named therein as Lenders, dated May 30, 2002 (9)                         
|10.18       | First Amendment to Note and
Equity Purchase Agreement between Encore Medical Corporation and its subsidiaries and
CapitalSource Finance LLC dated May 7, 2002 (9)                                                                
|10.19       | Employment Agreement between Encore
 Medical Corporation and Paul Chapman dated February 8, 2002(9)                                                                                                                              
|10.20       | Employment Agreement, dated October 1,
 2003, by and between Encore Medical Corporation and Kenneth W. Davidson.(10)                                                                                                             
|10.21       | Consulting Agreement, dated November
18, 2003, by and between Encore Medical Corporation and Galen Advisors, LLC.(10)                                                                                                            
|10.22       | Encore Medical Corporation
 Amended and Restated 1997 Distributor Advisory Panel Stock Option Plan.(10)                                                                                                                          
|10.23       | Underwriting Agreement, dated
December 10, 2003, by and among Encore Medical Corporation, its subsidiary guarantors,
the underwriters named therein and the selling stockholders named therein.(10)                              
|21          | Schedule of Subsidiaries of Encore Medical Corporation                                                                                                                                                                           
|23.1        | Independent Auditors' Consent                                                                                                                                                                                                    
|31.1        | Certification (pursuant to Securities Exchange Act Rule 13a 14(a)) by Chief Executive Officer                                                                                                                                    
|31.2        | Certification (pursuant to Securities Exchange Act Rule 13a-14(a)) by Chief Financial Officer                                                                                                                                    
|32.1        | Section 1350 - Certification
 (pursuant to Section 906 of the Sarbanes Oxley Act of 2002) by Chief Executive Officer                                                                                                             
|32.2        | Section 1350 - Certification
(pursuant to Section 906 of the Sarbanes Oxley Act of 2002) by Chief Financial Officer                                                                                                              

________________________

|     |                                                                                                                                        
|---- | ---------------------------------------------------------------------------------------------------------------------------------------
|(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 Encore's Form 10-K filed with the SEC on March 30, 1998                                                         
|(5)  | Filed as an exhibit to Encore's Form 8-K filed with the SEC on July 17, 2001                                                           
|(6)  | Filed as an exhibit to Encore's Form 8-K filed with the SEC on February 25, 2002                                                       
|(7)  | Filed as an exhibit to Encore's Definitive 14A filed with the SEC on May 9, 2001                                                       
|(8)  | Filed as an exhibit to Encore's Form 10-K filed with the SEC on March 29, 2002                                                         
|(9)  | Filed as an exhibit to Encore's Form 10-K filed with the SEC on March 28, 2003                                                         
|(10) | Filed as an exhibit to Encore's
Form 8-K filed with the SEC on December 17, 2003                                                       

---

# 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

|                                                                                                                                                                                                             | By: /s/ Kenneth W. Davidson                                                   
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------
|Date:  March 29, 2004                                                                                                                                                                                        | Kenneth W. Davidson,
Chairman of the Board and         Chief Executive
Officer
|                                                                                                                                                                                                             |                                                                               
|                                                                                                                                                                                                             | By: /s/ August B. Faske                                                       
|Date:  March 29, 2004                                                                                                                                                                                        | August B. 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 |                                                                               
|                                                                                                                                                                                                             |                                                                               
|                                                                                                                                                                                                             |                                                                               
|                                                                                                                                                                                                             | By: /s/ Jay M. Haft                                                           
|Date:  March 29. 2004                                                                                                                                                                                        | Jay M. Haft, Director                                                         
|                                                                                                                                                                                                             |                                                                               
|                                                                                                                                                                                                             | By: /s/ Joel Kanter                                                           
|Date:  March 29, 2004                                                                                                                                                                                        | Joel Kanter, Director                                                         
|                                                                                                                                                                                                             |                                                                               
|                                                                                                                                                                                                             | By: /s/ John Abeles                                                           
|Date:  March 29, 2004                                                                                                                                                                                        | John Abeles, Director                                                         
|                                                                                                                                                                                                             |                                                                               
|                                                                                                                                                                                                             | By: /s/ Richard Martin                                                        
|Date:  March 29, 2004                                                                                                                                                                                        | Richard Martin, Director                                                      
|                                                                                                                                                                                                             |                                                                               
|                                                                                                                                                                                                             | By: /s/ Zubeen Shroff                                                         
|Date:  March 29, 2004                                                                                                                                                                                        | Zubeen Shroff, Director                                                       
|                                                                                                                                                                                                             |                                                                               
|                                                                                                                                                                                                             | By: /s/ Bruce F. Wesson                                                       
|Date:  March 29, 2004                                                                                                                                                                                        | Bruce F. Wesson, Director                                                     
|                                                                                                                                                                                                             |                                                                               
|                                                                                                                                                                                                             | By: /s/ Alastair Clemow                                                       
|Date:  March 29, 2004                                                                                                                                                                                        | Alastair Clemow, Director                                                     
|                                                                                                                                                                                                             |                                                                               
|                                                                                                                                                                                                             | By: /s/ Karen Osar                                                            
|Date:  March 29, 2004                                                                                                                                                                                        | Karen Osar, Director                                                          

---

# Exhibit 21

# Schedule of
Subsidiaries of Encore Medical Corporation

Encore Medical, L.P., a Delaware
limited partnership

Encore Medical GP, Inc.,
a Nevada corporation

Encore Medical Asset
Corporation, a Nevada corporation

Encore Medical Partners,
Inc, a Nevada corporation

Encore Orthopedics FSC
Limited, a Jamaican corporation

Chattanooga Europe,
B.V.B.A., a Belgium corporation

---

# Exhibit 23.1

# Independent Auditors' Consent

The Board of Directors and StockholdersEncore Medical Corporation

We consent to  incorporation  by reference in the  Registration  Statement  Nos.  333-109838,  333-106776,  333-106773,  333-92400  and
333-48240  on Form S-8, and  Registration  Statement  No.  333-109996  on Form S-3 of Encore  Medical  Corporation  of our report dated
February 20, 2004,  with respect to the  consolidated  balance sheets of Encore  Medical  Corporation as of December 31, 2003 and 2002,
and the related  consolidated  statements of operations,  changes in stockholders'  equity, and cash flows for each of the years in the
three-year  period ended December 31, 2003,  which report appears in the December 31, 2003 annual report on Form 10-K of Encore Medical
Corporation.

As  discussed  in note 7 to the  consolidated  financial  statements,  the Company  adopted the  provisions  of  Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets on January 1, 2002.

/s/ KPMG LLP

Austin, Texas March 29,
2004

---

# Exhibit 31.1

# CERTIFICATION

I, Kenneth W. Davidson, Chief
Executive Officer of Encore Medical Corporation, certify that:

(1)    
          I have reviewed this Annual Report on Form 10-K for the fiscal year ending
          December 31, 2003 as filed with the Securities and Exchange Commission on the
          date hereof of Encore Medical Corporation;

(2)    
          Based on my knowledge, this report does not contain any untrue statement of a
          material fact or omit to state a material fact necessary to make the statements
          made, in light of the circumstances under which such statements were made, not
          misleading with respect to the period covered by this report;

(3)    
          Based on my knowledge, the financial statements, and other financial information
          included in the report, fairly present in all material respects the financial
          condition, results of operations and cash flows of the registrant as of, and
          for, the periods presented in this report;

(4)    
          The registrants other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) and internal
          control over financial reporting (as defined in Securities Exchange Act of 1934
          Rules 13a-15(f) and 15d-15(f) for the registrant and have:

| | (a)              Designed
such disclosure controls and procedures, or caused such disclosure           controls and
procedures to be designed under our supervision, to ensure that           material
information relating to the registrant, including its consolidated
          subsidiaries, is made known to us by others within those entities, particularly
          during the period in which the periodic reports are being prepared;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)              Evaluated
the effectiveness of the registrants disclosure controls and           procedures
and presented in this report our conclusions about the effectiveness           of the
disclosure controls and procedures, as of the end of the period covered           by this
report based on such evaluation; and
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c)              Disclosed
in this report any change in the registrants internal control           over
financial reporting that occurred during the registrants most recent
          fiscal quarter that has materially affected, or is reasonably likely to
          materially affect, the registrants internal control over financial
          reporting; and
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(5)    
          The registrants other certifying officer and I have disclosed, based on
          our most recent evaluation of internal control over financial reporting, to the
          Registrants auditors and the audit committee of the registrants
          board of directors (or persons performing the equivalent functions):

| | (i)              All
significant deficiencies and material weaknesses in the design or operation           of
internal controls over financial reporting which are reasonably likely to
          adversely affect the registrants ability to record, process, summarize
and           report financial information; and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii)              Any
fraud, whether or not material, that involves management or other employees           who
have a significant role in the registrants internal controls over
          financial reporting.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 29, 2004

/s/ Kenneth W. Davidson

Kenneth W. Davidson
Chief Executive Officer

---

# Exhibit 31.2

# CERTIFICATION

I, August B. Faske, Chief Financial
Officer of Encore Medical Corporation, certify that:

(1)    
          I have reviewed this Annual Report on Form 10-K for the fiscal year ending
          December 31, 2003 as filed with the Securities and Exchange Commission on the
          date hereof of Encore Medical Corporation;

(2)    
          Based on my knowledge, this report does not contain any untrue statement of a
          material fact or omit to state a material fact necessary to make the statements
          made, in light of the circumstances under which such statements were made, not
          misleading with respect to the period covered by this report;

(3)    
          Based on my knowledge, the financial statements, and other financial information
          included in the report, fairly present in all material respects the financial
          condition, results of operations and cash flows of the registrant as of, and
          for, the periods presented in this report;

(4)    
          The registrants other certifying officer and I are responsible for
          establishing and maintaining disclosure controls and procedures (as defined in
          Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e))and internal control
over financial reporting (as defined in Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f) for the
          registrant and have:

| | (a)              Designed
such disclosure controls and procedures, or caused such disclosure           controls and
procedures to be designed under our supervision, to ensure that           material
information relating to the registrant, including its consolidated
          subsidiaries, is made known to us by others within those entities, particularly
          during the period in which the periodic reports are being prepared;
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b)              Evaluated
the effectiveness of the registrants disclosure controls and           procedures
and presented in this report our conclusions about the effectiveness           of the
disclosure controls and procedures, as of the end of the period covered           by this
report based on such evaluation; and
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c)              Disclosed
in this report any change in the registrants internal control           over
financial reporting that occurred during the registrants most recent
          fiscal quarter that has materially affected, or is reasonably likely to
          materially affect, the registrants internal control over financial
          reporting; and
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(5)    
          The registrants other certifying officer and I have disclosed, based on
          our most recent evaluation of internal control over financial reporting, to the
          Registrants auditors and the audit committee of the registrants
          board of directors (or persons performing the equivalent functions):

| | (i)              All
significant deficiencies and material weaknesses in the design or operation           of
internal controls over financial reporting which are reasonably likely to
          adversely affect the registrants ability to record, process, summarize
and           report financial information; and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii)              Any
fraud, whether or not material, that involves management or other employees           who
have a significant role in the registrants internal controls over
          financial reporting.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 29, 2004

/s/ August B. Faske

August B. Faske Chief Financial
Officer

---

# Exhibit 32.1

# Certification of
Periodic Financial Report

# Pursuant to 18 U.S.C.
Section 1350

For purposes of 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, Kenneth W. Davidson, the chief executive officer of Encore Medical
Corporation (the Company) hereby certifies that, to his knowledge:

| | (i)              this
Annual Report on Form 10-K for the fiscal year ending December 31, 2003, as
          filed with the Securities and Exchange Commission on the date hereof (the
          Report), fully complies with the requirements of section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (ii)              the
information contained in the Report fairly presents, in all material           respects,
the financial condition and results of operations of the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 29, 2004

/s/ Kenneth W. Davidson

Kenneth W. Davidson
Chief Executive Officer

A signed original of this written statement
required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Encore
Medical Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.  The foregoing certification is being furnished solely pursuant to 18 U.S.C Section 1350 and
is not being filed as part of this report or as a separate disclosure document.

---

# Exhibit 32.2

# Certification of
Periodic Financial Report

# Pursuant to 18 U.S.C.
Section 1350

For purposes of 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the
undersigned, August B. Faske, the chief financial officer of Encore Medical Corporation
(the Company) hereby certifies that, to his knowledge:

(i)    
          this Annual Report on Form 10-K for the fiscal year ending December 31, 2003, as
          filed with the Securities and Exchange Commission on the date hereof (the
          Report), fully complies with the requirements of section 13(a) or
          15(d) of the Securities Exchange Act of 1934; and

(ii)    
          the information contained in the Report fairly presents, in all material
          respects, the financial condition and results of operations of the Company.

Date: March 29, 2004

/s/ August B. Faske

August B. Faske Chief Financial
Officer

A signed original of this written
statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to
Encore Medical Corporation and furnished to the Securities and Exchange Commission or its
staff upon request. The foregoing certification is being furnished solely pursuant to 18 U.S.C Section 1350 and
is not being filed as part of this report or as a separate disclosure document