**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-Q**

 
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                             |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                               |
| ** ** | ** ** | **For the quarterly period ended  September 29, 2007**                                                                                                                                                                                                                                                                                   |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                               |
|       |       | **OR**                                                                                                                                                                                                                                                                                                                                   |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                               |
| **o**      | ** ** | **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: 333-142188**

 

**ReAbleTherapeutics Finance LLC**

(Exact name of Registrant as specified in its charter)

 

| **Delaware**                     | ** ** | **20-5653965**       |
|----------------------------------|------------|----------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer    |
| incorporation  or organization)  |       | Identification  No.) |

 

**9800 Metric Boulevard**

**Austin, Texas 78758**

(Address of principal executive offices) (Zip code)

 

**512-832-9500**

(Registrant’s telephone number including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes x No o

 

Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

 

Largeaccelerated filer o         Accelerated filer o           Non-accelerated filer x

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o No x

 

As of October 29, 2007, 100%of the issuer’s membership interests were owned by ReAble Therapeutics HoldingsLLC.

 

 

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**ReAble Therapeutics Finance LLC**

**Quarterly Report on Form 10-Q**

**For the period ended September 29, 2007**

 

**Index to Condensed Consolidated Financial Statements**

** **
|                                                                                                                                                                                                                    | **Page**   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **PART  I — Financial Information**                                                                                                                                                                           | ** ** |
| Item 1. Financial Statements                                                                                                                                                                                       |       |
| Unaudited  condensed consolidated balance sheets as of September 29, 2007 and December  31, 2006                                                                                                                   | 3          |
| Unaudited  condensed consolidated statements of operations for the Successor three and  nine month periods ended September 29, 2007 and for the Predecessor three and  nine month periods ended September 30, 2006 | 4          |
| Unaudited  condensed consolidated statements of cash flows for the Successor nine month  period ended September 29, 2007 and for the Predecessor nine month period  ended September 30, 2006                       | 5          |
| Notes  to unaudited condensed consolidated financial statements                                                                                                                                                    | 6          |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of  Operations                                                                                                               | 33         |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                | 49         |
| Item 4. Controls and Procedures                                                                                                                                                                                    | 49         |
| **PART  II — Other Information**                                                                                                                                                                              | ** ** |
| Item  1. Legal Proceedings                                                                                                                                                                                         | 50         |
| Item  1A. Risk Factors                                                                                                                                                                                             | 50         |
| Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                               | 51         |
| Item 3. Defaults Upon Senior Securities                                                                                                                                                                            | 51         |
| Item 4.  Submission of Matters to a Vote of Security Holders                                                                                                                                                       | 51         |
| Item  5. Other Information                                                                                                                                                                                         | 51         |
| Item 6.  Exhibits                                                                                                                                                                                                  | 52         |
| Signatures                                                                                                                                                                                                         | 53         |

** **

** **

2

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**Part I.FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**ReAble Therapeutics Finance LLC and Subsidiaries**

**Unaudited Condensed ConsolidatedBalance Sheets**

**(in thousands)**

** **
| ** **                                                    | ** ** | **September   29, 2007** | ** ** | **December 31,   2006** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| **Assets**                                                    |       |                               |       |                              |       |
| Current assets:                                               |       |                               |       |                              |       |
| Cash and cash equivalents                                     |       | $                                  | 31,805     |                              | $          | 30,903 |   |
| Accounts receivable, net                                      |       | 87,680                             |       | 74,155                            |       |
| Inventories, net                                              |       | 66,729                             |       | 67,673                            |       |
| Deferred tax assets                                           |       | 22,662                             |       | 25,734                            |       |
| Prepaid expenses and other current assets                     |       | 7,161                              |       | 5,966                             |       |
| Assets of discontinued operations                             |       | —                             |       | 380                               |       |
| Total current assets                                          |       | 216,037                            |       | 204,811                           |       |
| Property and equipment, net                                   |       | 44,453                             |       | 41,251                            |       |
| Goodwill                                                      |       | 517,070                            |       | 475,722                           |       |
| Intangible assets, net                                        |       | 331,392                            |       | 317,242                           |       |
| Other non-current assets                                      |       | 19,888                             |       | 21,610                            |       |
| Total assets                                                  |       | $                                  | 1,128,840  |                              | $          | 1,060,636 |   |
| **Liabilities, Minority Interests, and  Membership Equity**   |       |                               |       |                              |       |
| Current liabilities:                                          |       |                               |       |                              |       |
| Long-term debt and capital leases, current  portion           |       | $                                  | 7,965      |                              | $          | 6,505 |   |
| Accounts payable                                              |       | 25,134                             |       | 18,895                            |       |
| Accrued expenses                                              |       | 48,734                             |       | 37,979                            |       |
| Total current liabilities                                     |       | 81,833                             |       | 63,379                            |       |
| Long-term debt and capital leases, net of  current portion    |       | 621,187                            |       | 548,037                           |       |
| Deferred tax liabilities                                      |       | 102,555                            |       | 111,232                           |       |
| Other non-current liabilities                                 |       | 8,721                              |       | 1,871                             |       |
| Total liabilities                                             |       | 814,296                            |       | 724,519                           |       |
| Minority interests                                            |       | 1,021                              |       | 909                               |       |
| Commitments and contingencies Membership  equity:             |       |                               |       |                              |       |
| Membership equity                                             |       | 375,300                            |       | 373,469                           |       |
| Accumulated deficit                                           |       | (66,738                            | )          | (41,634                           | )          |
| Accumulated other comprehensive income:                       |       |                               |       |                              |       |
| Foreign currency translation adjustments                      |       | 6,584                              |       | 3,373                             |       |
| Change in hedging gains and losses, net of  tax               |       | (1,623                             | )          | —                            |       |
| Total membership equity                                       |       | 313,523                            |       | 335,208                           |       |
| Total liabilities, minority interests, and  membership equity |       | $                                  | 1,128,840  |                              | $          | 1,060,636 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

3

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**ReAble Therapeutics Finance LLC and Subsidiaries**

**Unaudited Condensed ConsolidatedStatements of Operations**

**(in thousands)**

** **
| ** **                                                                                                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                    | ** ** | **Successor**                    | ** ** | **Predecessor**                 | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                                                                                                    | ** ** | **September 29,  2007**     | ** ** | **September 30,  2006**    | ** ** | **September 29,  2007** | ** ** | **September 30,  2006** | ** ** |
| Net sales                                                                                                                     |       | $                                | 108,431    |                            | $          | 92,911 |   | $ | 321,391 |   | $ | 275,738 |   |
| Cost of sales                                                                                                                 |       | 42,159                           |       | 35,324                          |       | 131,031 |   | 108,295 |   |
| Gross margin                                                                                                                  |       | 66,272                           |       | 57,587                          |       | 190,360 |   | 167,443 |   |
| Operating expenses:                                                                                                           |       |                             |       |                            |       |   |   |   |   |
| Selling, general and administrative                                                                                           |       | 59,100                           |       | 44,125                          |       | 174,804 |   | 129,915 |   |
| Research and development                                                                                                      |       | 4,372                            |       | 2,905                           |       | 12,113 |   | 13,042 |   |
| Operating income                                                                                                              |       | 2,800                            |       | 10,557                          |       | 3,443 |   | 24,486 |   |
| Other income (expense):                                                                                                       |       |                             |       |                            |       |   |   |   |   |
| Interest income                                                                                                               |       | 244                              |       | 161                             |       | 671 |   | 400 |   |
| Interest expense                                                                                                              |       | (15,052                          | )          | (8,028                          | )          | (43,125 | ) | (23,508 | ) |
| Other income (expense), net                                                                                                   |       | 204                              |       | 27                              |       | 234 |   | (15 | ) |
| Income (loss) from continuing operations  before income taxes and minority interests                                          |       | (11,804                          | )          | 2,717                           |       | (38,777 | ) | 1,363 |   |
| Provision (benefit) for income taxes                                                                                          |       | (5,978                           | )          | 1,775                           |       | (13,923 | ) | 3,174 |   |
| Minority interests                                                                                                            |       | 113                              |       | 25                              |       | 278 |   | 137 |   |
| Income (loss) from continuing operations                                                                                      |       | (5,939                           | )          | 917                             |       | (25,132 | ) | (1,948 | ) |
| Discontinued operations:                                                                                                      |       |                             |       |                            |       |   |   |   |   |
| Income (loss) from discontinued operations  (net of income tax provision (benefit) of $0, $22, $20 and $(390),  respectively) |       | —                           |       | (163                            | )          | 28 |   | (607 | ) |
| Net income  (loss)                                                                                                            |       | $                                | (5,939     | )                               | $          | 754 |   | $ | (25,104 | ) | $ | (2,555 | ) |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

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**ReAble Therapeutics Finance LLC and Subsidiaries**

**Unaudited Condensed ConsolidatedStatements of Cash Flows**

**(in thousands)**

** **
| ** **                                                                                 | ** ** | **Nine Months Ended**    | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                 | ** ** | **Successor**                      | ** ** | **Predecessor** | ** ** |
| ** **                                                                                 | ** ** | **September 29,   2007** | ** ** | **September 30,   2006** | ** ** |
| **OPERATING ACTIVITIES:**                                                                  |       |                               |       |   |   |
| Net loss                                                                                   |       | $                                  | (25,104    | ) | $ | (2,555 | ) |
| Adjustments to reconcile net loss to net  cash (used in) provided by operating activities: |       |                               |       |   |   |
| Depreciation                                                                               |       | 9,586                              |       | 7,848 |   |
| Amortization of intangibles                                                                |       | 20,320                             |       | 5,295 |   |
| Amortization of debt issuance costs                                                        |       | 2,866                              |       | 1,594 |   |
| Non-cash interest expense                                                                  |       | —                             |       | 82 |   |
| Stock-based compensation                                                                   |       | 1,534                              |       | 3,006 |   |
| Loss on disposal of assets                                                                 |       | 418                                |       | 373 |   |
| Deferred income taxes                                                                      |       | (16,125                            | )          | (5,526 | ) |
| Provision for bad debt expense and sales  returns                                          |       | 6,016                              |       | 5,864 |   |
| Inventory reserves                                                                         |       | 825                                |       | 3,454 |   |
| Minority interests                                                                         |       | 278                                |       | 137 |   |
| Excess tax benefit associated with stock  option exercises                                 |       | (17                                | )          | (1,340 | ) |
| In-process research and development                                                        |       | —                             |       | 3,897 |   |
| Net effect of discontinued operations                                                      |       | 378                                |       | 985 |   |
| Changes in operating assets and  liabilities, net of acquired assets and liabilities:      |       |                               |       |   |   |
| Accounts receivable                                                                        |       | (14,269                            | )          | (723 | ) |
| Inventories                                                                                |       | 2,071                              |       | (8,644 | ) |
| Prepaid expenses, other assets and  liabilities                                            |       | (3,388                             | )          | 2,756 |   |
| Accounts payable and accrued expenses                                                      |       | 11,408                             |       | 2,787 |   |
| Net cash (used in) provided by operating  activities                                       |       | (3,203                             | )          | 19,290 |   |
| **INVESTING ACTIVITIES:**                                                                  |       |                               |       |   |   |
| Acquisition of businesses, net of cash  acquired                                           |       | (64,401                            | )          | (1,792 | ) |
| Acquisition of intangible assets                                                           |       | —                             |       | (244 | ) |
| Proceeds from sale of assets held for sale  and property and equipment                     |       | 4,565                              |       | 64 |   |
| Purchases of property and equipment                                                        |       | (9,683                             | )          | (11,023 | ) |
| Net cash used in investing activities                                                      |       | (69,519                            | )          | (12,995 | ) |
| **FINANCING ACTIVITIES:**                                                                  |       |                               |       |   |   |
| Proceeds from issuance of common stock                                                     |       | —                             |       | 4,922 |   |
| Proceeds from long-term obligations                                                        |       | 89,828                             |       | 25,300 |   |
| Payments on long-term obligations                                                          |       | (15,504                            | )          | (24,128 | ) |
| Payment of debt issuance costs                                                             |       | (1,129                             | )          | (10 | ) |
| Dividend paid to minority interests                                                        |       | (226                               | )          | — |   |
| Excess tax benefit associated with stock  option exercises                                 |       | 17                                 |       | 1,340 |   |
| Net cash provided by financing activities                                                  |       | 72,986                             |       | 7,424 |   |
| Effect of exchange rate on cash and cash  equivalents                                      |       | 638                                |       | 458 |   |
| **Net increase in cash and cash equivalents**                                              |       | 902                                |       | 14,177 |   |
| Cash and cash equivalents at beginning of  period                                          |       | 30,903                             |       | 17,200 |   |
| **Cash and cash equivalents at end of period**                                             |       | $                                  | 31,805     |   | $ | 31,377 |   |
| **Supplemental disclosures of cash flow information:**                                     |       |                               |       |   |   |
| Cash paid for interest                                                                     |       | $                                  | 34,238     |   | $ | 17,606 |   |
| Cash (received) paid for income taxes                                                      |       | (425                               | )          | 4,753 |   |
| **Non-cash investing and financing  activities:**                                          |       |                               |       |   |   |
| Capital lease obligations related to  equipment leases                                     |       | $                                  | 328        |   | $ | 384 |   |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

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**ReAble Therapeutics Finance LLC and Subsidiaries**

**Notes to Unaudited CondensedConsolidated Financial Statements**

 

**1. SUMMARYOF SIGNIFICANT ACCOUNTING PRINCIPLES**

 

**Basis ofPresentation and Principles of Consolidation.**

 

On November 3, 2006, anaffiliate of Blackstone Capital Partners V L.P. (“Blackstone”), acquired all ofthe outstanding shares of capital stock of ReAble Therapeutics, Inc. (“RTI”, “Parent”or “Predecessor”), in a merger transaction (the “Merger”). RTI is the parentcorporation of ReAble Therapeutics Holdings, LLC (“Holdings”), ReAbleTherapeutics Finance LLC (“RTFL” or “Successor”), and ReAble TherapeuticsFinance Corporation (“Finco”). RTFL directly or indirectly through itssubsidiaries, owns all of the operating assets owned by RTI prior to theMerger. (See further description of the Merger under Note 3).

 

The Merger was accounted foras a purchase under the guidance set forth in Statement of Financial AccountingStandards No. 141 “Business Combinations” (“SFAS 141”). In addition, the fairvalue basis of the acquired assets and assumed liabilities was “pushed down” tothe financial statements of RTI, and ultimately to these unaudited condensedconsolidated financial statements of RTFL. The unaudited condensed consolidatedstatements of operations and cash flows of RTI are presented for the three and ninemonth periods ended September 30, 2006 (the “Predecessor financial statements”),and the unaudited condensed consolidated statements of operations and cashflows of RTFL are presented for the three and nine month periods ended September29, 2007 (the “Successor financial statements”). Finco and Holdings did nothave any operations during the nine month period ended September 29, 2007 anddid not exist prior to the Merger.

 

The accompanying unauditedcondensed consolidated financial statements include the accounts of RTFL, andits wholly owned subsidiaries and those entities in which we hold a controllinginterest from the date of the Merger. Predecessor financial statements arepresented prior to the date of the Merger, with Successor financial statementspresented thereafter. The Predecessor results of RTI are not comparable to theSuccessor results of RTFL due to the difference in basis of presentation ofpurchase accounting as compared to historical cost. Minority interests reflectthe 50% separate ownership of Medireha GmbH, which we have consolidated due toour controlling interest in it. All significant intercompany balances andtransactions have been eliminated in consolidation.

 

Unless the context indicatesotherwise, all share information in this quarterly report on Form 10-Q reflectsthe 62.8 to 1 share recomputation that occurred in connection with the Mergerand the subsequent 25 for 1 stock split that was effected on November 8, 2006,following the closing of the Merger. We refer to these adjustments as the “shareadjustments” in this quarterly report on Form 10-Q.

 

The unaudited condensedconsolidated financial statements have been prepared in accordance withgenerally accepted accounting principles for interim financial information andwith the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.Accordingly, they do not include all of the information and notes required bygenerally accepted accounting principles for complete audited financialstatements. In the opinion of management, all adjustments consisting of normalrecurring accruals considered necessary for a fair presentation have beenincluded. Operating results for the three and nine month periods ended September29, 2007 are not necessarily indicative of the results that may be expected forthe year ending December 31, 2007. For further information, refer to theconsolidated financial statements and footnotes thereto included in our FormS-4 filed with the Securities and Exchange Commission on May 1, 2007 (File No.333-142188), as amended.

 

The terms “we”, “us”, andthe “Company” refer to the Predecessor for the period prior to the Merger andthe Successor for the period after the Merger.

 

**Use ofEstimates**

 

The preparation of unauditedcondensed consolidated financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosure of contingent assets and liabilitiesat the date of the unaudited condensed consolidated financial statements, andthe reported amounts of revenue and expenses during the reporting period.Actual results could differ from those estimates.

 

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**ForeignCurrency Translation**

 

Thefinancial statements of our international subsidiaries, where the localcurrency is the functional currency, are translated into U.S. dollars usingperiod-end exchange rates for assets and liabilities and average exchange ratesduring the period for revenues and expenses. Cumulative translation gains andlosses are excluded from results of operations and recorded as a separatecomponent of consolidated membership equity. Gains and losses resulting fromforeign currency transactions (transactions denominated in a currency otherthan the entity’s local currency) are included in the unaudited condensedconsolidated statements of operations as either a component of costs of goodssold or other income or expense, depending on the nature of the transaction.

 

**Reclassifications**

 

Certainreclassifications have been made to prior year consolidated financialstatements to conform to the current year presentation.

 

**2. RECENTACCOUNTING PRONOUNCEMENTS**

 

In June 2006, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 48*, “*Accounting for Uncertainty in IncomeTaxes – an Interpretation of FASB Statement No. 109 (“FIN 48”)”. FIN 48clarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with Statement of FinancialAccounting Standards No. 109, “Accounting for Income Taxes”. Thisinterpretation prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition of tax benefits, classification on the balance sheet, interestand penalties, accounting in interim periods, disclosure, and transition. Weadopted FIN 48 effective January 1, 2007. In accordance with FIN 48, we electedto continue to classify interest and penalties as a component of tax expense.As a result of the implementation of FIN 48, we recognized a $5.3 millionincrease in liabilities for unrecognized tax benefits, which was accounted foras an increase to the January 1, 2007 balance of goodwill. For the nine monthsended September 29, 2007, we recorded a decrease to the liability in the amountof $1.1 million related to expirations and adjustments in unrecognized taxbenefits.

 

We had unrecognized taxbenefits of approximately $7.0 million as of January 1, 2007, of which none, ifrecognized, would result in a reduction to our effective tax rate. Interest andpenalties were approximately $1.0 million at the date of adoption and areincluded in the unrecognized tax benefits. We recorded an increase of ourunrecognized tax benefits of approximately $7.1 million and $7.4 million duringthe three and nine month period ended September 29, 2007, respectively. Themajority of the increase of our unrecognized tax benefits is the result of theMerger (See Note 3).

 

We are subject to audit inGermany by Finanzamt Freiburg for the years 2000 through 2004. We are alsosubject to audit by the New York State Department of Taxation and Finance forthe years 2002 through 2004. As we have operations in most other U.S. states,other state tax authorities may assess deficiencies related to prior yearactivities; however, the years open to assessment vary with each state. We alsofile income tax returns for non-U.S. jurisdictions; the most significant ofwhich are Germany, Sweden and Switzerland.

 

In September 2006, the FASBissued Statement No. 157, “Fair Value Measurements” which defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles (“GAAP”) and expands disclosure about fair valuemeasurements. The statement is effective for fiscal years beginning afterNovember 15, 2007. The Company will adopt this statement as of the beginning offiscal year 2008 and is currently assessing the potential impact of adoption.

 

In February 2007, the FASBissued Statement No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities—Including an amendment to FASB Statement No. 115” whichpermits entities to choose to measure many financial instruments and certainother items at fair value that are not currently required to be measured atfair value. The statement is effective for fiscal years beginning afterNovember 15, 2007. The Company will adopt this statement as of the beginning offiscal year 2008 and is currently assessing the potential impact of adoption.

 

**3. MERGERTRANSACTION**

 

On November 3, 2006, anaffiliate of Blackstone acquired all of the outstanding shares of capital stockof RTI. Under the terms of the Agreement and Plan of Merger dated June 30, 2006(the “Merger Agreement”), upon the consummation of the Merger, the formerstockholders of RTI received an aggregate of $476.8 million in cash (or $16.46($6.55 before giving effect to the share adjustments) in cash for each share ofcommon stock of RTI they then held). The Merger was financed through acombination of equity contributed by an affiliate of Blackstone, cash on handof RTI, borrowings under a senior 

 

7

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secured credit facility (the“Senior Credit Facility”) and proceeds from our 11.75% senior subordinatednotes (see Note 8). Upon the closing of the Merger, shares of RTI’s commonstock ceased to be traded on the NASDAQ Global Market.

 

The total purchase price forthe Merger was approximately $529.2 million and consisted of $482.5 millioncash payments to former equity holders, $7.2 million related to the fair valueof rollover options that continued to remain as outstanding options to purchaseRTI common stock after the Merger, and $39.5 million in direct acquisitioncosts. The purchase price was allocated to the Company’s net tangible andidentifiable intangible assets based on their estimated fair values as ofNovember 3, 2006 as set forth below. The excess of purchase price over the nettangible and identifiable intangible assets was recorded as goodwill. Thepreliminary allocation of the purchase price was based in part upon third partyestimates of fair value for certain tangible and intangible assets and uponpreliminary data estimates and assumptions that are subject to change.

 

During the nine month periodended September 29, 2007, changes were made to the initial purchase priceallocation (see Note 7). The following valuations are preliminary and aresubject to change upon our further evaluation of the assets acquired andliabilities assumed (in thousands):

| ** **                            | ** ** | **Fair Value** | ** ** | **Useful Life** | ** ** |
|---------------------------------------|------------|---------------------|------------|----------------------|------------|
| Current assets                        |       | $                   | 209,011    |                 |       |   |
| Tangible and other non-current assets |       | 49,853              |       |                 |       |
| Liabilities assumed                   |       | (538,344            | )          |                 |       |
| In-process research and development   |       | 25,200              |       |                 |       |
| Identifiable intangible assets        |       |                |       |                 |       |
| Technology-based                      |       | 83,900              |       | 3 – 11 years    |       |
| Customer-based                        |       | 133,800             |       | 11 – 12 years   |       |
| Trademarks                            |       | 92,000              |       | Indefinite           |       |
| Non-compete                           |       | 1,600               |       | 1 year               |       |
| Goodwill                              |       | 472,232             |       | N/A                  |       |
| Purchase price                        |       | $                   | 529,252    |                 |       |   |

 

Goodwill represents theexcess of the purchase price over the fair value of tangible and identifiableintangible assets acquired and liabilities assumed, and is not tax deductible.

 

**4.ACQUISITIONS**

 

 Since 2001 and continuing in 2007, we embarkedon strategies to expand our distribution channels, increase our productofferings and establish a presence in certain international markets primarilyrelated to our Rehabilitation Division. In conjunction with these initiatives,we have completed ten acquisitions since 2001. We believe that the acquisition of thesebusinesses have allowed us to succeed in the highly competitive orthopedic andrehabilitation markets, and to serve our patients, and their professionalcaregivers more effectively. Inaddition, through the acquisition of these businesses, we have and anticipatewill continue to achieve certain synergies that will benefit primarily our manufacturingcost structure, selling and distribution costs, and research and development efforts.The results of operations attributable to each acquisition are includedin the condensed unaudited consolidated financial statements from the date ofacquisition.

 

***IOMED, Inc.***

 

On August 9, 2007, asubsidiary of RTFL acquired IOMED, Inc. (“IOMED”), a leader in developing,manufacturing and marketing active drug delivery systems used primarily totreat acute local inflammation in the physical and occupational therapy andsports medicine markets. Under the terms of the merger agreement dated May 17,2007, IOMED was merged with Spartan Acquisition Corp., a newly formedsubsidiary of RTFL (the “IOMED Merger”). The purchase price of $22.5 millionconsisted of $21.1 million in cash payments to former equity holders at $2.75per share, $0.8 million related to the fair value of vested stock options thatwere outstanding at the time of the IOMED Merger, and $0.6 million in directacquisition costs. The IOMED acquisition was primarily financed with $22.0million of borrowed funds under our revolving credit facility (see Note 8).

 

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***The Saunders Group, Inc.***

 

On July 2, 2007, asubsidiary of RTFL completed its purchase of substantially all of the assets ofThe Saunders Group, Inc. (“Saunders”) for total cash consideration of $40.5million, including $0.5 million of acquisition costs (the “Saunders Acquisition”).Saunders is a supplier of rehabilitation products to physical therapists,chiropractors, athletes, athletic trainers, physicians and patients, with aspecialty in patented traction devices, back supports, and exercise equipmentfor neck and back disorders. The Saunders Acquisition was financed with fundsborrowed under our Senior Credit Facility (see Note 8).

 

***Cefar AB***

 

On November 7, 2006, weacquired all of the issued and outstanding shares of Cefar AB (“Cefar”), aleading European provider of electrotherapy and rehabilitation devices for apurchase price of $23.2 million. Cefar markets electrotherapy devices indicatedfor chronic pain, for women’s health, for electroacupuncture, and for otherrehabilitation activities. We are integrating the operations of Cefar withthose of Compex SA, the European subsidiary of Compex (see Note 12). Ourstrategy for the merged company is to develop both the professional/medical andconsumer markets for electro stimulation across Europe and internationally,continuing to trade under both the Cefar and Compex brands. The purchase priceof $23.2 million was comprised of the payment of $12.4 million in cash,issuance of shares of RTI’s common stock valued at $9.5 million, and payment of$1.3 million of acquisition costs. The fair value of RTI common stock issuedwas determined as $16.46 per share ($6.55 before giving effect to the shareadjustments) based on the per share price used in the recently completedMerger. We funded the acquisition with RTI common stock with $10.0 million ofterm loan borrowings under the Senior Credit Facility and cash on hand.Pursuant to the terms of the acquisition agreement, $800,000 of the purchaseprice was placed in escrow subject to final calculations of net working capitaland net debt as defined in the acquisition agreement. During the third quarterof 2007, $250,000 was released from escrow related to final net debtcalculations which resulted in an adjustment to decrease the purchase price byapproximately $50,000. Moreover, additional amounts may be paid to certain ofthe former stockholders of Cefar if certain EBITDA targets for the combinedCefar-Compex SA entities are met by December 31, 2008. These payments, if any,would be recorded as an increase to the purchase price of Cefar. The results ofCefar have been included in our unaudited condensed consolidated statement ofoperations since the date of acquisition.

 

***Compex Technologies, Inc.***

 

On February 24, 2006,pursuant to the terms of a merger agreement dated November 11, 2005, weacquired all of the issued and outstanding shares of Compex Technologies, Inc.(“Compex”), a Minnesota corporation. Compex manufactured and sold a broad lineof transcutaneous electrical nerve stimulation (“TENS”) and neuromuscularelectrical nerve stimulation (“NMES”) products used for pain management,rehabilitation, fitness and sports performance enhancement in clinical, homehealthcare, sports and occupational medicine settings. Our integration effortsrelated to the integration of the Compex operations were initiated during thesecond quarter of 2006 and are substantially complete (see Note 12). The totalpurchase price of approximately $102.9 million was comprised of 7.3 millionshares of RTI common stock valued at $90.0 million, options to purchase 900,000shares of RTI common stock valued at $9.3 million, along with $3.6 million inacquisition costs. We funded the acquisition, which we refer to as the Compexacquisition, with RTI common stock and $25.3 million of borrowings under our$200.0 million senior credit facility to a syndicate of financial institutionsoriginally due on 2010 but which was repaid in full in conjunction with theMerger.

 

Included in the liabilitiesassumed in the Compex acquisition is a $1.1 million contingent liabilityrelating to litigation against Compex regarding a potential incorrect paymentof custom duties and VAT on imported goods prior to the date of theacquisition. On February 6, 2007, a judgment in the dispute with the customofficials was issued by the court which resulted in partial unfavorable rulingsfor each side. Both sides have appealed the ruling and a final judgment isexpected to be received in early 2008. Our current potential liability in thedispute if the custom officials were to prevail is approximately $1.1 million.Therefore, judgment settlement fees of approximately $1.1 million were recordedas an adjustment to the purchase price with a corresponding increase to goodwillduring the fourth quarter of 2006.

 

The following valuations forthe businesses we acquired during 2006 and 2007 are preliminary, with theexception of Compex, and are subject to change upon our further evaluation ofthe assets acquired and liabilities assumed. Fair value for certain of theassets acquired (inventory, fixed assets and intangible assets) was estimatedbased upon preliminary evaluations and third party appraisals. For the majorityof the remaining assets and liabilities, book value was deemed to approximatefair value due to the nature of the assets and liabilities. During the ninemonth period ended September 29, 2007, changes were made to the initialpurchase price allocations (see Note 7). 

 

9

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| ** **                            | ** ** | **IOMED**           | ** ** | **Saunders** | ** ** | **Cefar** | ** ** | **Compex** | ** ** | **Wtd. Avg. Useful** | ** ** |
|---------------------------------------|------------|---------------------|------------|--------------|------------|-----------|------------|------------|------------|--------------------------------|------------|
| **(in thousands):**              | ** ** | **Fair Value** | ** ** | **Life**     | ** ** |
| Current assets                        |       | $                   | 8,419      |         | $          | 5,787     |       | $          | 11,882     |                           | $          | 69,129 |   |   |   |
| Tangible and other non-current assets |       | 802                 |       | 273          |       | 1,036     |       | 8,340      |       |                           |       |
| Liabilities assumed (see Note 12)     |       | (4,644              | )          | (614         | )          | (10,630   | )          | (51,092    | )          |                           |       |
| In-process research and development   |       | —              |       | —       |       | —    |       | 3,897      |       |                           |       |
| Identifiable intangible assets:       |       |                |       |         |       |      |       |       |       |                           |       |
| Technology-based                      |       | 6,025               |       | 10,178       |       | 1,800     |       | 8,213      |       | 6 – 17 years              |       |
| Customer-based                        |       | 1,694               |       | 6,383        |       | 3,200     |       | 14,610     |       | 10 – 16 years             |       |
| Trademarks                            |       | 1,510               |       | 4,423        |       | 3,400     |       | 5,771      |       | Indefinite                     |       |
| Goodwill                              |       | 8,702               |       | 14,067       |       | 12,513    |       | 43,995     |       | N/A                            |       |
| Purchase price                        |       | $                   | 22,508     |         | $          | 40,497    |       | $          | 23,201     |                           | $          | 102,863 |   |   |   |

 

Goodwill represents the excessof the purchase price over the fair value of tangible and identifiableintangible assets acquired and liabilities assumed, and is not tax deductible.

 

***Other Acquisitions***

 

During 2007, we completedthe acquisition of various other businesses related to our OrthopedicRehabilitation Division’s products, including Endeavor Medical, Inc. (“Endeavor”)and Performance Modalities, Inc. (“PMI”). On April 13, 2007, we acquiredEndeavor for total consideration of $2.9 million. On February 16, 2007, weacquired certain assets of PMI for total consideration of $4.3 million. Thepreliminary allocation of the aggregate purchase price for both acquisitions,which is subject to change upon our further evaluation of the assets acquiredand liabilities assumed, resulted in the recognition of $2.9 million ofgoodwill.

 

*Pro FormaFinancial Information*

 

 The unaudited financial information in thetable below summarizes the combined results of operations of RTFL, IOMED, andSaunders on a pro forma basis, as though the companies acquired had beencombined as of the beginning of each of the periods presented. The pro formafinancial information is presented for informational purposes only and is notindicative of the results of operations that would have been achieved if the acquisitionshad taken place at the beginning of each of the periods presented. The proforma adjustments include the effect of purchase accounting adjustments,interest expense, and the related tax effects, among others.

 
| ** **                                                                           | ** ** | **Unaudited  Pro Forma  Three Months Ended** | ** ** | **Unaudited  Pro Forma  Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                                                           | ** ** | **Successor**                                               | ** ** | **Predecessor**                                            | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| **(in thousands):**                                                             | ** ** | **September 29,  2007**                                | ** ** | **September 30,  2006**                               | ** ** | **September 29,  2007** | ** ** | **September 30,  2006** | ** ** |
| Net sales                                                                            |       | $                                                           | 109,291    |                                                       | $          | 99,776 |   | $ | 335,128 |   | $ | 295,473 |   |
|                                                                                 |       |                                                        |       |                                                       |       |   |   |   |   |
| Income (loss) from continuing operations  before income taxes and minority interests |       | (13,371                                                     | )          | 1,676                                                      |       | (45,286 | ) | (2,451 | ) |
| Provision (benefit) for income taxes                                                 |       | (6,170                                                      | )          | 988                                                        |       | (16,124 | ) | 973 |   |
| Minority interests                                                                   |       | 113                                                         |       | 25                                                         |       | 278 |   | 137 |   |
| Income (loss) from continuing operations                                             |       | $                                                           | (7,314     | )                                                          | $          | 663 |   | $ | (29,440 | ) | $ | (3,561 | ) |

 

**5. ACCOUNTSRECEIVABLE**

 

A summary of activity in ouraccounts receivable reserves for doubtful accounts and sales returns ispresented below (in thousands):

 

10

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| ** **                               | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                               | ** ** | **Successor**                      | ** ** | **Predecessor**                    | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                               | ** ** | **September 29,   2007** | ** ** | **September 30,   2006** | ** ** | **September 29,   2007** | ** ** | **September 30,   2006** | ** ** |
| Balance, beginning of period             |       | $                                  | 3,802      |                               | $          | 3,699 |   | $ | 513 |   | $ | 4,016 |   |
| Provision for bad debt and sales returns |       | 1,872                              |       | 1,512                              |       | 6,016 |   | 5,864 |   |
| Write-off charges and recoveries         |       | (1,405                             | )          | (1,094                             | )          | (2,260 | ) | (5,763 | ) |
| Balance, end of period                   |       | $                                  | 4,269      |                               | $          | 4,117 |   | $ | 4,269 |   | $ | 4,117 |   |

 

**6.INVENTORIES**

 

Inventories consist of thefollowing (in thousands):

| ** **                     | ** ** | **September 29,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Components and raw materials   |       | $                            | 15,314     |                        | $          | 19,437 |   |
| Work in process                |       | 3,957                        |       | 3,848                       |       |
| Finished goods                 |       | 33,349                       |       | 27,974                      |       |
| Inventory held on consignment  |       | 15,373                       |       | 17,332                      |       |
|                           |       | 67,993                       |       | 68,591                      |       |
| Less – inventory reserves |       | (1,264                       | )          | (918                        | )          |
|                           |       | $                            | 66,729     |                        | $          | 67,673 |   |

 

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

 

| ** **                                 | ** ** | **Three Months Ended**             | ** ** | **Nine Months Ended**              | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                 | ** ** | **Successor**                      | ** ** | **Predecessor**                    | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                 | ** ** | **September 29,   2007** | ** ** | **September 30,   2006** | ** ** | **September 29,   2007** | ** ** | **September 30,   2006** | ** ** |
| Balance, beginning of period               |       | $                                  | 1,193      |                               | $          | 7,771 |   | $ | 918 |   | $ | 7,397 |   |
| Provision charged to cost of sales         |       | 175                                |       | 1,723                              |       | 825 |   | 3,454 |   |
| Recoveries (write-offs) charged to reserve |       | (104                               | )          | (1,241                             | )          | (479 | ) | (2,598 | ) |
| Balance, end of period                     |       | $                                  | 1,264      |                               | $          | 8,253 |   | $ | 1,264 |   | $ | 8,253 |   |

 

The write-offs to thereserve were principally related to the disposition of fully reservedinventory.

 

11

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**7. GOODWILLAND INTANGIBLE ASSETS**

 

A summary of the activity ingoodwill is presented below (in thousands): 

 

| ** **                                                                                   | ** ** | **Successor**                                         | ** ** | **Predecessor**                                                  | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **Nine months  ended  September 29,  2007** | ** ** | **November 4,  2006 through  December 31,  2006** | ** ** | **January 1,  2006 through  November 3,  2006** | ** ** |
| **Balance, beginning of period**                                                             |       | $                                                     | 475,722    |                                                             | $          | — |   | $ | 290,255 |   |
| Adjustment related to resolution of  contingencies                                           |       | —                                                |       | —                                                           |       | (173 | ) |
| Adjustment related to adoption of FIN 48                                                     |       | 4,178                                                 |       | —                                                           |       | — |   |
| Adjustment related to tax benefit  associated with stock option exercises                    |       | —                                                |       | —                                                           |       | (2,016 | ) |
| Goodwill associated with the acquisition of  Osteoimplant Technology, Inc. (“OTI”) |       | —                                                |       | —                                                           |       | 474 |   |
| Goodwill associated with the acquisition of  Compex                                          |       | —                                                |       | —                                                           |       | 43,995 |   |
| Goodwill associated with the Merger                                                          |       | 8,121                                                 |       | 459,933                                                          |       | — |   |
| Goodwill associated with the acquisition of  Cefar                                           |       | (660                                                  | )          | 13,173                                                           |       | — |   |
| Goodwill associated with the acquisition of  IOMED                                           |       | 8,702                                                 |       | —                                                           |       | — |   |
| Goodwill  associated with the acquisition of Saunders                                        |       | 14,067                                                |       | —                                                           |       | — |   |
| Goodwill  associated with the acquisition of other businesses                                |       | 2,883                                                 |       | —                                                           |       | — |   |
| Foreign currency translation                                                                 |       | 4,057                                                 |       | 2,616                                                            |       | 4,986 |   |
| **Balance, end of period**                                                                   |       | $                                                     | 517,070    |                                                             | $          | 475,722 |   | $ | 337,521 |   |

 

During the nine month periodended September 29, 2007, goodwill related to the Merger was adjusted toreflect additional adjustments related to the fair market value of the acquiredinventory, property plant and equipment, assets held for sale, deferred taxassets and assumed liabilities related to restructuring activities (see Note 12).Additionally, we recorded certain out of period adjustments not deemed materialto our projected fiscal year end 2007 results related to the value of theacquired inventory in conjunction with the Merger, which resulted in anincrease to cost of sales of approximately $1.5 million for the nine monthsended September 29, 2007 with an associated reduction to goodwill. Goodwillrelated to the Cefar acquisition was adjusted primarily to reflect additionaladjustments to the fair market value of the acquired inventory and intangibleassets.

 

We recorded approximately $8.7million and $14.1 million of goodwill during the third quarter of 2007associated with the acquisition of IOMED and Saunders, respectively. We have alsocompleted the acquisitions of various other businesses during the year that haveresulted in the recognition of approximately $2.9 million of goodwill inaggregate. The preliminary allocation of the aggregate purchase price for theseacquisitions is subject to change upon our further evaluation of the assetsacquired and liabilities assumed. All of the assets purchased during 2007 inconnection with these acquisitions relate to our Orthopedic RehabilitationDivision’s products.

 

During the fourth quarter of2006, we revalued our goodwill associated with the Merger (see Note 3).

 

Intangibles consisted of thefollowing as of September 29, 2007 (in thousands):

 

| ** **                          | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Intangibles,  Net** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| Amortizable intangible assets:      |       |                            |       |                          |       |                  |       |
| Technology-based                    |       | $                               | 101,903    |                          | $          | (11,932               | )          | $ | 89,971 |   |
| Customer-based                      |       | 148,701                         |       | (12,422                       | )          | 136,279               |       |
|                                |       | $                               | 250,604    |                          | $          | (24,354               | )          | 226,250 |   |
| Indefinite-lived intangible assets: |       |                            |       |                          |       |                  |       |
| Trademarks                          |       |                            |       |                          |       | 101,419               |       |
| Foreign currency translation        |       |                            |       |                          |       | 3,723                 |       |
| Total intangible assets             |       |                            |       |                          |       | $                     | 331,392    |   |

 

Intangibles consisted of thefollowing as of December 31, 2006 (in thousands):

 

12

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| ** **                           | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Intangibles,  Net** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| Amortizable intangible  assets:      |       |                            |       |                          |       |                  |       |
| Technology-based                     |       | $                               | 85,754     |                          | $          | (1,990                | )          | $ | 83,764 |   |
| Customer-based                       |       | 138,796                         |       | (2,045                        | )          | 136,751               |       |
|                                 |       | $                               | 224,550    |                          | $          | (4,035                | )          | 220,515 |   |
| Indefinite-lived  intangible assets: |       |                            |       |                          |       |                  |       |
| Trademarks                           |       |                            |       |                          |       | 95,396                |       |
| Foreign currency  translation        |       |                            |       |                          |       | 1,331                 |       |
| Total intangible assets              |       |                            |       |                          |       | $                     | 317,242    |   |

 

During the ninemonths ended September 29, 2007, we acquired approximately $32.1 million ofintangible assets in connection with the acquisition of businesses, of which $9.2million and $21.0 million relates to the acquisition of IOMED and Saunders,respectively.

 

Our amortizable intangible assetswill continue to be amortized over their useful lives ranging from 1 to 17years.

 

Aggregate amortization expensewas approximately $7.1 million and $20.3 million for the Successor three and ninemonth periods ended September 29, 2007, respectively, and $1.9 million and $5.3million for the Predecessor three and nine month periods ended September 30,2006, respectively.

 

Our estimated amortizationexpense for the three months ending December 31, 2007 and for the next fiveyears is as follows (in thousands):

| For three months ending December 31, 2007 |   | $      | 7,000  |   |
|-------------------------------------------|--------|--------|--------|--------|
| For year ended December 31, 2008          |   | 27,000 |   |
| For year ended December 31, 2009          |   | 27,000 |   |
| For year ended December 31, 2010          |   | 26,000 |   |
| For year ended December 31, 2011          |   | 24,000 |   |
| For year ended December 31, 2012          |   | 22,000 |   |

 

At September 29, 2007, wehave goodwill and intangible assets as follows (in thousands):

 

| ** **                         | ** ** | **Goodwill** | ** ** | **Intangibles,  net** | ** ** |
|------------------------------------|------------|--------------|------------|-----------------------|------------|
| Orthopedic Rehabilitation Division |       | $            | 469,664    |                  | $          | 301,329 |   |
| Surgical Implant Division          |       | 47,406       |       | 30,063                |       |
| Total                              |       | $            | 517,070    |                  | $          | 331,392 |   |

 

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**8.LONG-TERM DEBT AND CAPITAL LEASES**

 

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

 
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | ** ** | **September 29,   2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------|------------|
| $455.0 million Senior Credit Facility to a  syndicate of financial institutions; composed of a seven-year $405.0 million  term loan and a six-year $50.0 million revolving credit facility;  collateralized by all domestic assets of RTFL and pledge of 100% of the  membership interest of RTFL, 100% of the capital stock of each domestic subsidiary  of RTFL and 65% of the stock of first-tier foreign subsidiaries of RTFL;  interest at Bank of America’s prime rate plus 0.50% or Eurodollar rate  adjusted for maximum reserves; $28.0 million available under the revolving  credit facility as of September 29, 2007; term loan subject to quarterly  interest and principal payments of 0.25% of original principal balance with  the last payment due November 3, 2013; interest rate of 7.68% and 7.87% at  September 29, 2007 and December 31, 2006, respectively |       | $                                  | 423,363    |                        | $          | 349,125 |   |
| $200.0 million senior subordinated notes  payable to institutional investors; interest at 11.75%; interest payable  semi-annually on May 15 and November 15 of each year through November 15,  2014; effectively and contractually subordinated to the $400.0 million Senior  Credit Facility                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |       | 200,000                            |       | 200,000                     |       |
| $2.9 million revolving credit facilities at  various European Banks; collateralized by certain of Cefar’s assets, interest  rates ranging from 3.5% to 4.7% and 4.0% to 6.6% at September 29, 2007 and  December 31, 2006, respectively; interest added to outstanding balance  quarterly; $0.1 million available under the credit facilities as of September  29, 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |       | 2,781                              |       | 2,265                       |       |
| $2.7 million term loans from various  European banks; collateralized by certain of Cefar’s assets, interest rates  based on various floating market rates; principal and interest payments due  quarterly through February 2013; interest rates ranging from 3.5% to 4.9% and  3.5% to 4.9% at September 29, 2007 and December 31, 2006, respectively                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | 1,890                              |       | 2,037                       |       |
| Note payable to a corporation, which is  principally owned by an employee of the Company, in connection with the  acquisition of Rehab Med+Equip by Empi in 2002; balance due July 2008;  interest at higher of 5% or prime on the first business day of each calendar  quarter; interest rate of 8.25% at September 29, 2007 and December 31, 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |       | 469                                |       | 469                         |       |
| Capital lease obligations, collateralized  by related equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |       | 649                                |       | 646                         |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |       | 629,152                            |       | 554,542                     |       |
| Less – current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |       | (7,965                             | )          | (6,505                      | )          |
| Long-term debt and capital leases, net of  current portion                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |       | $                                  | 621,187    |                        | $          | 548,037 |   |

 

*SeniorSecured Credit Facility*

 

In connection with theMerger, RTFL and Holdings (“co-issuers”) entered into the Senior CreditFacility with Banc of America Securities LLC and Credit Suisse Securities (USA)LLC. The Senior Credit Facility provides senior secured financing of $400.0million, consisting of a $50.0 million revolving credit facility and a $350.0million term loan facility. In addition, we are permitted, subject to receiptof additional commitments from participating lenders and certain otherconditions, to incur up to an additional $150.0 million of borrowings under theSenior Credit Facility, of which $55.0 million was drawn on July 2, 2007 tofund the Saunders Acquisition and converted to a term loan as discussed below. Duringthe third quarter of 2007, we also drew $22.0 million from our revolving creditfacility to fund the IOMED acquisition.

 

During the third quarter of2007, RTFL entered into two amendments to the Senior Credit Facility. The firstamendment is a technical amendment intended to clarify certain portions of theSenior Credit Facility related to financial statement reporting requirementsand to covenant compliance reporting requirements. The second amendment is anincremental term loan amendment to borrow an additional $55.0 million term loanunder the Senior Credit Facility. RTFL borrowed the funds on July 2, 2007 inconnection with the Saunders Acquisition. Of the total proceeds received,approximately $40.5 million

 

14

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was used to fund the Saunders Acquisition and related expenses, $12.5million was used to pay off the outstanding balance on our revolving creditfacility as of June 30, 2007, and the remaining proceeds will be used forgeneral corporate purposes.

 

*InterestRate and Fees.*Borrowingsunder the Senior Credit Facility bear interest at a rate equal to an applicablemargin plus, at our option, either (a) a base rate determined by reference tothe higher of (1) the prime rate of Bank of America and (2) the federal fundsrate plus 0.50% or (b) the Eurodollar rate determined by reference to the costsof funds for deposits in U.S. Dollars for the interest period relevant to eachborrowing adjusted for maximum reserves. The applicable margin for borrowingsunder the term loan facility and the revolving credit facility may be reducedsubject to our attaining certain leverage ratios. In addition to payinginterest on outstanding principal under the Senior Credit Facility, we arerequired to pay a commitment fee to the lenders under the revolving creditfacility in respect of the unutilized commitments thereunder. The initialcommitment fee rate was 0.50% per annum. The commitment fee rate may be reducedsubject to our attaining certain leverage ratios.

 

*Prepayments.*The Senior CreditFacility requires us to prepay outstanding term loans, subject to certainexceptions, with (1) 50% (which percentage will be reduced to 25% and 0% uponour attaining certain leverage ratios) of our annual excess cash flow, (2)100%of the net cash proceeds above an annual amount to be agreed from non-ordinarycourse asset sales by Holdings and its subsidiaries, subject to exceptions tobe agreed upon, including a 100% reinvestment right if reinvested or committedto reinvest within 15 months of such sale or disposition so long asreinvestment is completed within 180 days thereafter, and (3)100% of the netcash proceeds from issuances of debt by Holdings and its subsidiaries, otherthan proceeds from debt permitted to be incurred under the Senior CreditFacility. The foregoing mandatory prepayments will be applied to the term loanfacilities in direct order of maturity. We may voluntarily repay outstandingloans under the Senior Credit Facility at any time without premium or penalty,provided that voluntary prepayments of Eurodollar loans made on a date otherthan the last day of an interest period applicable thereto shall be subject tocustomary breakage costs.

 

*Amortization.*We are required topay annual amortization (payable in equal quarterly installments) on the loansunder the term loan facility in an amount equal to 1.00% of our funded totalprincipal amount during the first six years and nine months following theclosing of the Senior Credit Facility, with the remaining amount payable atmaturity which is seven years from the date of the closing of the Senior CreditFacility. Principal amounts outstanding under the revolving credit facility aredue and payable in full at maturity, which is six years from the date of theclosing of the Senior Credit Facility.

 

*Guaranteeand Security.*Allobligations under the Senior Credit Facility are unconditionally guaranteed byHoldings and each existing and future direct and indirect wholly-owned domesticsubsidiary of RTFL, other than immaterial subsidiaries and subsidiaries thatare precluded by law or regulation from guaranteeing the obligations (see Note18).

 

*Covenants.*The Senior CreditFacility contains a number of covenants that, among other things, restrict,subject to certain exceptions, our ability to incur additional indebtedness orissue preferred stock, create liens on assets, enter into sale and leasebacktransactions, engage in mergers or consolidations, sell assets, pay dividendsand other restricted payments, make investments, loans or advances, makecapital expenditures, repay subordinated indebtedness, make certainacquisitions, engage in certain transactions with affiliates, amend materialagreements governing our subordinated indebtedness, enter into certainburdensome agreements, change our lines of business and change the status ofHoldings as a passive holding company. In addition, the Senior Credit Facilityrequires us to maintain a consolidated total debt to Adjusted EBITDA ratio (ortotal leverage ratio) starting at a maximum of 8.00:1 and stepping down overtime to 4.75:1 by the end of 2013 and an Adjusted EBITDA to consolidatedinterest expense ratio (or interest coverage ratio) starting at a minimum of1.25:1 and stepping up over time to 1.80:1 by the end of 2013. As of the twelvemonth period ending September 29, 2007, our total leverage and interestcoverage ratios were 7.48:1 and 1.53:1, respectively. As of September 29, 2007,we were in compliance with all of these covenants.

 

*11.75%Senior Subordinated Notes*

 

During the fourth quarter of2006, RTFL and Finco, as co-issuers, issued and sold $200.0 million aggregateprincipal amount of 11.75% senior subordinated notes due 2014 (the “11.75% Notes”).We filed a registration statement on Form S-4 with the Securities and ExchangeCommission relating to an exchange offer to exchange these privately issued11.75% Notes for registered 11.75% Notes. The registration statement wasdeclared effective on May 2, 2007 and we launched the exchange offer on May 2,2007. The exchange offer was completed on June 5, 2007.

 

15

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Themarket value of the 11.75% Notes is approximately $190.0 million as ofSeptember 29, 2007. This was determined using factors that included recenttrade prices on fixed rate notes, prevailing interest rates and the variablerate feature of our Senior Credit Facility.

 

*OptionalRedemption*. Under theindenture (the “Indenture”) governing the 11.75% Notes, prior to November 15,2010, RTFL has the option to redeem some or all of the 11.75% Notes for cash ata redemption price equal to 100% of the then outstanding principal balance plusan applicable make-whole premium plus accrued and unpaid interest. Beginning onNovember 15, 2010, RTFL may redeem some or all of the 11.75% Notes at aredemption price of 105.875% of the then outstanding principal balance plusaccrued and unpaid interest. The redemption price decreases to 102.938% and100.000% of the then outstanding principal balance at November 2011 andNovember 2012, respectively. Additionally, from time to time, before November15, 2009, RTFL may redeem up to 35% of the 11.75% Notes at a redemption priceequal to 111.75% of the principal amount then outstanding, in each case, withproceeds raised, or a direct or indirect parent company raises, in certainequity offerings, as long as at least 65% of the aggregate principal amount ofthe notes issued remains outstanding.

 

*Change ofControl*. Upon theoccurrence of a change of control, unless RTFL has previously sent orconcurrently sends a notice exercising its optional redemption rights withrespect to all of the then-outstanding 11.75% Notes, RTFL will be required tomake an offer to repurchase all of the then-outstanding 11.75% Notes at 101% oftheir principal amount, plus accrued and unpaid interest.

 

*Guarantees*. Under the terms of the Indenture, RTFL’ssubsidiaries that guarantee the Senior Credit Facility, jointly and severally,and unconditionally guarantee the 11.75% Notes on an unsecured seniorsubordinated basis (see Note 18).

 

*Covenants.*The Indenturecontains a number of covenants that restrict our ability, and the ability ofour restricted subsidiaries, to incur additional debt or issue certainpreferred and convertible shares, pay dividends on, redeem, repurchase or makedistributions in respect of our capital stock or make other restrictedpayments, make certain investments, sell certain assets, create liens oncertain assets to secure debt, consolidate, merge, sell or otherwise dispose ofall or substantially all of our assets, enter into certain transactions withour affiliates and designate our subsidiaries as unrestricted subsidiaries. Asof September 29, 2007, we were in compliance with all applicable covenants.Based upon our adjusted EBITDA (as defined in the Indenture) to fixed chargesratio at September 29, 2007, our ability to incur additional debt and makerestricted payments is restricted, except that we may incur certain debt andmake certain restricted payments and certain permitted investments withoutregard to the ratio, such as our ability to (i) incur up to an aggregateprincipal amount of $400.0 million under credit facilities, plus the lesser of(a) $50.0 million and (b) an amount equal to the aggregate amount of our EBITDAfor the four fiscal quarters for which internal financial statements areimmediately preceding such date times five, with appropriate pro formaadjustments to EBITDA on the date on which such indebtedness is to be incurredless the amount of our secured indebtedness outstanding on the date of suchincurrence, (ii) acquire persons engaged in a similar business that becomerestricted subsidiaries and (iii) make other investments having an aggregatefair market value not to exceed 3.5% of Total Assets (as defined in theIndenture) provided that the adjusted EBITDA to fixed charges ratio is lessthan 6.00:1 on a pro forma basis after giving effect to such investment. Fixedcharges is defined in the Indenture as consolidated interest expense plus allcash dividends or other distributions paid on any series of preferred stock ofany restricted subsidiary and all dividends or other distributions accrued onany series of disqualified stock.

 

Our ability to continue tomeet the covenants specified above in future periods will depend on eventsbeyond our control, and we cannot assure you that we will continue to meetthose ratios. A breach of any of these covenants in the future could result ina default under the Senior Credit Facility and the Indenture, at which time thelenders could elect to declare all amounts outstanding under the Senior CreditFacility to be immediately due and payable. Any such acceleration would alsoresult in a default under the Indenture.

 

**9. STOCKOPTION PLANS AND STOCK-BASED COMPENSATION**

 

Effective January 1, 2006,we adopted the FASB Statement of Financial Accounting Standards No. 123(R) “Share-BasedPayment” (“SFAS 123(R)”) using the modified prospective method, in whichcompensation cost was recognized beginning with the effective date (a) based onthe requirements of SFAS 123(R) for all share-based payments granted after theeffective date and (b) based on the requirements of SFAS 123(R) for all awardsgranted to employees prior to the effective date of SFAS 123(R) that remainunvested on the effective date.

 

With the adoption of SFAS123(R), we elected to amortize stock-based compensation for awards granted onor after the adoption of SFAS 123(R) on January 1, 2006 on a straight-line basisover the requisite service (vesting) period for the entire award.

 

16

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*Summary ofPlan – Post-Merger*

 

After the Merger, thecompensation committee of the board of directors of RTI adopted a new 2006Stock Incentive Plan (the “2006 Plan”). The 2006 Plan provides for the grant ofstock options and other stock-based awards to key employees, directors andconsultants, including executive officers. The total number of shares that maybe issued under the 2006 Plan is 2,500,000 subject to adjustment in certainevents. The exercise price of stock options granted under the 2006 Plan willnot be less than 100% of the fair market value of the underlying shares on thedate of grant, as determined under the 2006 Plan. The pool of shares availableunder the 2006 Plan may be increased in the event of acquisitions. In addition,RTI also adopted a form of non-statutory stock option agreement (the “FormOption Agreement”) for awards under the 2006 Plan. Under the Form Option Agreement,certain stock options will vest over a specified period of time (typically fiveyears) contingent solely upon the awardees’ continued employment with theCompany (“service” tranche). Other stock options will vest over a specifiedperformance period from the grant date upon the achievement of pre-determinedperformance targets over time (“performance” tranche), while others vest basedupon achieving a pre-determined performance target calculated using Blackstone’sinternal rate of return on it’s investment in RTI (“market condition” tranche),as defined in the Form Option Agreement. The Form Option Agreement includescertain forfeiture provisions upon an awardees’ separation from service withthe Company. RTFL recorded non-cash compensation expense of approximately $0.5million and $1.5 million in the condensed consolidated statement of operationsfor the three and nine month periods ended September 29, 2007 associated withthe service and market condition stock option tranches under the 2006 Plan. Noamounts have been recorded for the performance condition stock option tranchesas achievement of the performance criteria is not deemed probable.

 

*Summary ofPlans – Pre-Merger*

 

Prior to the Merger, RTI hada number of stock option plans. All options granted under these plans wereexercisable for shares of common stock in RTI. The stock options granted underthese plans were granted at fair value on the date of grant, vested ratablyover a predefined period and expired no more than ten years from the date ofgrant. With the exception of certain options held by executive officers,outstanding options to purchase common stock of RTI which were vested or whichby its terms would have become vested at the effective time of the Merger, werecancelled in exchange for the right to receive, for each share of common stockof RTI issuable upon exercise of such option, cash in the amount equal to theexcess, if any, of $16.46 ($6.55 before giving effect to the share adjustments)over the exercise price per share of any such options, multiplied by the numberof shares of common stock for which such option was exercisable immediatelyprior to the effective time of the Merger. RTI recorded non-cash compensationexpense of approximately $1.0 million and $3.0 million in the Predecessorfinancial statements for the three and nine month periods ended September 30,2006.

 

*Summary ofAssumptions and Activity*

 

The calculated fair value ofeach option award is estimated on the date of grant using theBlack-Scholes-Merton option pricing model for service and performance basedawards, and a binomial model for market based awards. In estimating fair value,expected volatilities used by RTI in 2006 prior to the Merger were based on thehistorical volatility of the underlying common stock, and other factors such asimplied volatility of traded options. Expected volatility used by RTFLsubsequent to the Merger is based on the historical volatility of RTI’s commonstock, and other factors such as implied volatility of traded options of a comparablepeer group. In periods prior to January 1, 2006, volatility was estimated basedupon historical volatility of RTI common stock. The change in determining theexpected volatility assumption in periods subsequent to January 1, 2006 wasbased in part upon the guidance provided by the Securities and ExchangeCommission in Staff Accounting Bulletin No. 107. The expected life assumptionsfor all periods were derived from a review of annual historical employeeexercise behavior of option grants with similar vesting periods. Expected lifeis calculated in two tranches based on the employment level defined asmanagement or non-management. The risk-free rate used to calculate the fairvalue of the market condition stock option tranche is based on the contractuallife of the option, whereas the risk- free rate used in calculating the fairvalue of the rollover stock options, service and performance stock optiontranches is based on the expected term of the option. In all cases, therisk-free rate is based on the U.S. Treasury yield bond curve in effect at thetime of grant.

 

The assumptions used tocalculate the fair value of options granted are evaluated and revised, asnecessary, to reflect market conditions and experience. The key assumptionsused in determining fair value of share based payment awards for the Successornine month period ended September 29, 2007 and for the Predecessor nine monthperiod ended September 30, 2006 were as follows:

 

17

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| ** **                      | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------|------------|---------------------------------|------------|
| ** **                      | ** ** | **Successor**                   | ** ** | **Predecessor** | ** ** |
| ** **                      | ** ** | **September 29,  2007**    | ** ** | **September 30,  2006** | ** ** |
| Expected dividend yield         |       | 0.0                             | %          | 0.0 | % |
| Expected stock price volatility |       | 56.0 – 60.0                | %          | 61.0 | % |
| Risk-free interest rate         |       | 4.6 - 4.7                       | %          | 4.8 | % |
| Expected option life            |       | 5.2 – 7.1 years            |       | 4.5 – 5.6 years |   |

 

A summary of stock optionactivity during the Successor nine month period ended September 29, 2007, ispresented below:

 
| ** **                        | ** ** | **Number of  Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term  (Years)** | ** ** | **Aggregate Intrinsic  Value** | ** ** |
|-----------------------------------|------------|----------------------------|------------|---------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                        | ** ** | ** **                 | ** ** | ** **                                  | ** ** | ** **                                                           | ** ** | ** **                          | ** ** |
| Balance at January 1, 2007        |       | 3,044,650                  |       | $                                           | 15.34      | ** **                                                           | ** ** | ** **                          | ** ** | ** ** |
| Granted                           |       | 242,500                    |       | 16.46                                       | ** ** | ** **                                                           | ** ** | ** **                          | ** ** |
| Exercised                         |       | —                     |       | —                                      | ** ** | ** **                                                           | ** ** | ** **                          | ** ** |
| Cancelled                         |       | (210,238                   | )          | 16.17                                       | ** ** | ** **                                                           | ** ** | ** **                          | ** ** |
| Balance at September 29, 2007     |       | 3,076,912                  |       | $                                           | 15.37      |                                                                 | 8.8        |                                | $          | 3,440,534 |   |
| Exercisable at September 29, 2007 |       | 778,600                    |       | $                                           | 12.15      |                                                                 | 7.8        |                                | $          | 3,440,534 |   |

 

The weighted average grantdate calculated fair value of stock options granted during the Successor threeand nine month periods ended September 29, 2007 was $9.12 and $9.17,respectively. The weighted average grant date calculated fair value of stockoptions granted during the Predecessor nine month period ended September 30,2006 was $9.25. There were no options granted during the three monthsended September 30, 2006. Thetotal intrinsic value of options exercised during the Predecessor three andnine month periods ended September 30, 2006 was approximately $2.4 million and $5.1 million, respectively. Upon the exercise ofoptions, we issue new common stock from our authorized shares. There were nostock option exercises during the Successor three and nine month periods endedSeptember 29, 2007.

 

Total unrecognizedstock-based compensation expense related to nonvested stock options, net ofexpected forfeitures, was approximately $16.0 million as of September 29, 2007.We anticipate this expense to be recognized over a weighted average period ofapproximately 4.2 years. However, compensation expense associated withperformance based options will be recognized only to the extent achievement ofcertain performance targets are deemed probable.

 

The following tablesummarizes the effect of adopting SFAS 123(R) for the three and nine monthperiods presented (in thousands):

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **Successor**                    | ** ** | **Predecessor**                 | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                    | ** ** | **September 29,  2007**     | ** ** | **September 30,  2006**    | ** ** | **September 29,  2007** | ** ** | **September 30,  2006** | ** ** |
| Stock-based compensation expense  recognized: |       |                             |       |                            |       |   |   |   |   |
| Cost of sales                                 |       | $                                | 12         |                            | $          | 18 |   | $ | 36 |   | $ | 56 |   |
| Selling, general and administrative           |       | 513                              |       | 982                             |       | 1,482 |   | 2,897 |   |
| Research and development                      |       | 5                                |       | 18                              |       | 16 |   | 53 |   |
| Total                                         |       | 530                              |       | 1,018                           |       | 1,534 |   | 3,006 |   |
| Related deferred income tax benefit           |       | (207                             | )          | (95                             | )          | (599 | ) | (323 | ) |
| Increase (decrease) in net income (loss)      |       | $                                | 323        |                            | $          | 923 |   | $ | 935 |   | $ | 2,683 |   |

 

*RestrictedStock*

 

On March 13, 2007, wegranted 15,189 shares of restricted stock awards to an executive officerpursuant to the terms of a restricted stock agreement. The shares are subjectto a vesting schedule over a period of three years with the final vesting onNovember 3, 2009. The calculated fair value of the stock awards, whichapproximated $250,000, was determined using the fair value of RTI’s commonstock on the date of grant of $16.46 per share. Compensation expense isrecognized on a straight-line basis over the respective vesting period. As ofSeptember 29, 2007, there was approximately $180,000 of total

 

18

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unrecognized compensation cost related to unvested restricted stock.This cost is expected to be recognized over a weighted average period ofapproximately 2.1 years.

 

**10. SEGMENTAND GEOGRAPHIC INFORMATION**

 

We have two reportablesegments as defined by SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information” (“SFAS 131”). Our reportable segments are businessunits that offer different products that are managed separately because eachbusiness requires different manufacturing and marketing strategies. TheOrthopedic Rehabilitation Division offers non-invasive medical products thatare used before and after surgery to assist in the repair and rehabilitation ofsoft tissue and bone, and toprotect against further injury; electrotherapy devices and accessoriesused to treat pain and restore muscle function; iontophoretic devices andaccessories used to deliver medication; clinical therapy tables and tractionequipment; and orthotics devices used to treat joint and spine conditions. TheSurgical Implant Division sells reconstructive products including knee, hip andshoulder implants.

 

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

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                         | ** ** | **Successor**                    | ** ** | **Predecessor**                 | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                         | ** ** | **September 29,  2007**     | ** ** | **September 30,  2006**    | ** ** | **September 29,  2007** | ** ** | **September 30,  2006** | ** ** |
| **Net sales:**                     |       |                             |       |                            |       |   |   |   |   |
| Orthopedic Rehabilitation Division |       | $                                | 92,774     |                            | $          | 77,681 |   | $ | 272,288 |   | $ | 229,799 |   |
| Surgical Implant Division          |       | 15,657                           |       | 15,230                          |       | 49,103 |   | 45,939 |   |
| Total                              |       | $                                | 108,431    |                            | $          | 92,911 |   | $ | 321,391 |   | $ | 275,738 |   |
|                               |       |                             |       |                            |       |   |   |   |   |
| **Gross margin:**                  |       |                             |       |                            |       |   |   |   |   |
| Orthopedic Rehabilitation Division |       | $                                | 54,332     |                            | $          | 46,494 |   | $ | 156,037 |   | $ | 132,650 |   |
| Surgical Implant Division          |       | 11,940                           |       | 11,093                          |       | 34,323 |   | 34,793 |   |
| Total                              |       | $                                | 66,272     |                            | $          | 57,587 |   | $ | 190,360 |   | $ | 167,443 |   |

 

We allocate resources andevaluate the performance of our segments based on gross margin and thereforehave not disclosed certain other items, such as depreciation, operating income,interest and income taxes as permitted by SFAS 131.

 

**GeographicArea**

 

Following are our net salesby geographic area (in thousands): 

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **Successor**                    | ** ** | **Predecessor**                 | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                            | ** ** | **September 29,  2007**     | ** ** | **September 30,  2006**    | ** ** | **September 29,  2007** | ** ** | **September 30,  2006** | ** ** |
| **Net sales*:**                       |       |                             |       |                            |       |   |   |   |   |
| United States                         |       | $                                | 81,315     |                            | $          | 74,087 |   | $ | 234,593 |   | $ | 217,567 |   |
| Germany                               |       | 9,398                            |       | 7,740                           |       | 28,766 |   | 24,080 |   |
| Other Europe, Middle East, and Africa |       | 13,866                           |       | 7,416                           |       | 46,225 |   | 24,686 |   |
| Asia Pacific                          |       | 1,927                            |       | 2,297                           |       | 5,250 |   | 6,456 |   |
| Other                                 |       | 1,925                            |       | 1,371                           |       | 6,557 |   | 2,949 |   |
| Total                                 |       | $                                | 108,431    |                            | $          | 92,911 |   | $ | 321,391 |   | $ | 275,738 |   |

 

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* Net sales are attributedto countries based on location of customer.

 

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Following are our long-livedassets by geographic area as of September 29, 2007 and December 31, 2006 (inthousands):

 

| ** **       | ** ** | **September 29,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------|------------|------------------------------|------------|-----------------------------|------------|
| United States    |       | $                            | 807,537    |                        | $          | 751,914 |   |
| Europe and other |       | 105,266                      |       | 103,911                     |       |
|             |       | $                            | 912,803    |                        | $          | 855,825 |   |

 

**11. INCOMETAXES**

 

Income taxes for the interimperiods presented have been included in the accompanying unaudited condensedconsolidated financial statements on the basis of an estimated annual effectivetax rate, adjusted for discrete items. We recorded approximately $6.0 millionand $13.9 million of income tax benefit on a pre-tax loss of approximately$11.8 million and $38.8 million for the Successor three and nine month periodsended September 29, 2007, respectively. The tax benefit for these periodsdiffered from the amount which would have been recorded using the U.S.statutory tax rate due primarily to the recording of foreign taxes and deferredtaxes on the assumed repatriation of foreign earnings. During the three monthsended September 29, 2007, we recorded an approximate $1.3 million income taxbenefit relating to a change in the enacted tax rate in Germany associated witha corresponding reduction in the net deferred tax liabilities recorded inGermany.

 

During the Predecessor threeand nine month periods ended September 30, 2006, we recorded approximately $1.8million and $3.2 million of income tax expense, respectively, on a pre-taxincome of approximately $2.7 million and $1.4 million, respectively, due to therecording, in connection with the Compex acquisition, of approximately $4.0million of in-process research and development (“IPR&D”) costs, which arenot deductible for tax purposes, and to non-deductible stock based compensationexpense.

 

**12.RESTRUCTURING AND RELATED CHARGES**

 

Starting in the secondquarter of 2006 and continuing through September 29, 2007, we have implementedcertain restructuring and reorganization programs, including workforcereductions and the exit and consolidation of facilities, related to theintegration of businesses we have acquired. To date, our restructuring effortshave primarily related to the integration of Compex, which was acquired onFebruary 24, 2006, and the integration of our Cefar-Compex S.A. operationsfollowing the acquisition of Cefar on November 7, 2006. During 2006, ourrestructuring activities included the divestiture of the Compex U.S. consumerproduct line, the closing of the Compex billing operations located in Tampa,Florida, and the integration of those operations into our existing operationsin Minnesota, and the closure and sale of the Compex corporate headquarterslocated in New Brighton, Minnesota. During 2007, we initiated restructuringinitiatives to centralize certain research and development activities andreorganize certain sales and administrative functions in our Cefar-Compex S.A.European operations. Included in our restructuring reserve as of September 29,2007 is approximately $0.4 million related to estimated severance and facilityexit costs. In connection with the IOMED and Saunders Acquisitions, certainemployees will be terminated and as a result, we will incur involuntarytermination costs in the amount of approximately $1.2 million and $0.3 million,respectively, of which approximately $0.3 million and $0.2 million,respectively, has been accrued in our unaudited condensed consolidated balancesheet as of September 29, 2007. In certain cases, estimated severance andfacility exit costs have been accrued as a liability with a correspondingincrease to goodwill in accordance with the guidance specified in EmergingIssues Task Force Issue Number 95-3, “Recognition of Liabilities in Connectionwith a Purchase Business Combination” (“EITF 95-3”). As not all of ourrestructuring costs meet the accrual requirements of EITF 95-3, we expensecertain severance and other costs as incurred. Our restructuring activities areongoing and are expected to be completed over the course of 2007.

 

A summary of the activityrelating to the restructuring for the Successor three and nine month periodsended September 29, 2007 is as follows (in thousands):

 

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| ** **                    | ** ** | **Lease  Termination  Costs** | ** ** | **Severance** | ** ** | **Total** | ** ** |
|-------------------------------|------------|-------------------------------|------------|---------------|------------|-----------|------------|
| Balance at January 1, 2007    |       | $                             | 346        |          | $          | 1,389     |       | $ | 1,735 |   |
| Expensed during period        |       | —                        |       | 155           |       | 155       |       |
| Payments made during period   |       | (346                          | )          | (1,025        | )          | (1,371    | )          |
| Balance at March 31, 2007     |       | —                        |       | 519           |       | 519       |       |
| Expensed during period        |       | —                        |       | —        |       | —    |       |
| Adjustments to goodwill       |       | 394                           |       | 267           |       | 661       |       |
| Payments made during period   |       | —                        |       | (175          | )          | (175      | )          |
| Balance at June 30, 2007      |       | 394                           |       | 611           |       | 1,005     |       |
| Expensed during period        |       | —                        |       | 278           |       | 278       |       |
| Adjustments to goodwill       |       | —                        |       | 202           |       | 202       |       |
| Payments made during period   |       | —                        |       | (324          | )          | (324      | )          |
| Foreign currency translation  |       | 21                            |       | (7            | )          | 14        |       |
| Balance at September 29, 2007 |       | $                             | 415        |          | $          | 760       |       | 1,175 |   |
|                               |            |                               |            |               |            |           |            |  |  |  |

 

**13.DISCONTINUED OPERATIONS**

 

We account for ourdiscontinued operations under the provisions of SFAS No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets.” Accordingly, we classifiedresults of operations and the related charges for discontinued operations as “Incomefrom discontinued operations, net of tax” in the accompanying unauditedcondensed consolidated statements of operations. We reclassified assets andliabilities of the discontinued operations and reflected them on theaccompanying unaudited condensed consolidated balance sheets as “Assets of discontinuedoperations”

 

On June 30, 2006, wecompleted the sale of our Slendertone® U.S. consumer product line (“U.S.Consumer product line”) for a purchase price of $2.4 million, plus the cost ofinventory acquired. The assets sold were previously included in our OrthopedicRehabilitation Division and comprised our entire Slendertone consumer productinventory and all of our rights to distribute Slendertone products in theUnited States. In addition, pursuant to the transition services agreement datedJune 8, 2006 that we entered into with the buyer, we provided transitionservices for the Slendertone business in the U.S. through December 31, 2006. Weused the net proceeds from this sale to invest in our core OrthopedicRehabilitation and Surgical Implant businesses.

 

For accounting purposes, theoperating results of the U.S. Consumer product line have been classified asdiscontinued operations in the unaudited condensed consolidated statements ofoperations for all periods presented.

 

Discontinued operations areas follows (in thousands): 

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                      | ** ** | **Successor**                    | ** ** | **Predecessor**                 | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                                      | ** ** | **September 29,  2007**     | ** ** | **September 30,  2006**    | ** ** | **September 29,  2007** | ** ** | **September 30,  2006** | ** ** |
| Net sales                                                       |       | $                                | —     |                            | $          | 31 |   | $ | — |   | $ | 4,009 |   |
| Income (loss) from operations                                   |       | —                           |       | (141                            | )          | 48 |   | (997 | ) |
|                                                            |       |                             |       |                            |       |   |   |   |   |
| Income (loss) before income taxes from  discontinued operations |       | —                           |       | (141                            | )          | 48 |   | (997 | ) |
| Income tax provision (benefit)                                  |       | —                           |       | 22                              |       | 20 |   | (390 | ) |
| Income (loss) from discontinued operations                      |       | $                                | —     |                            | $          | (163 | ) | $ | 28 |   | $ | (607 | ) |

 

**14.COMMITMENTS AND CONTINGENCIES**

 

Approximately $1.1 millionhas been recorded as a contingent liability and an adjustment to goodwillrelating to litigation against Compex regarding a dispute over custom dutiesand VAT on imported goods prior to the date of acquisition. On February 6,2007, a judgment in the dispute with the custom officials was issued by thecourt which resulted in partial unfavorable rulings for each side. Both sideshave appealed the ruling and a final judgment is expected to be received earlyin 2008.

 

21

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On July 7, 2006, a purportedclass action complaint, *Louis Dudas et al.v.**Encore Medical Corporation etal.,*was filed against RTI and its directors in the District Courtof Travis County, Texas, 345th Judicial District (“the Texas Action”).Recently, Blackstone was added as a defendant. On July 18, 2006, a secondpurported class action complaint, *Robert**Kemp et al. v. Alastair J. Clemow et al.*(the“Delaware Action”) was filed by a putative stockholder of RTI in the Court ofChancery of the State of Delaware, New Castle County, against RTI and itsdirectors. Blackstone and Grand Slam Holdings, LLC were also named asdefendants in the Delaware Action. The Delaware Action was dismissed inFebruary 2007 with no liability accruing to RTI or the other defendants.

 

The Texas Action is still inpreliminary stages and we cannot presently predict the outcome of the lawsuit,although we believe it is without merit. The Texas Action complaint allegesthat RTI’s directors breached their fiduciary duties by, *inter alias*, agreeing to an allegedlyinadequate acquisition price in connection with the Merger. The complaintseeks, among other things, to rescind any actions that have already been takento consummate the Merger, rescissory damages and the plaintiffs’ reasonablecosts and attorneys’ fees and expert fees.

 

Due to the nature of ourbusiness, we are subject to a variety of audits by government agencies andother private interests. In connection with audits of our compliance withfederal requirements for our facilities and related quality and manufacturingprocesses, the U.S. Food and Drug Administration (the “FDA”) has informed usthat they believe that certain discrete processes related to our SurgicalImplant Division did not conform with Current Good Manufacturing Practices (“CGMP”).We have been working with the FDA to resolve all outstanding issues they haveidentified in the past as a result of their audits regarding Quality SystemRegulations (“QSR”) and CGMP compliance. These issues have not caused anymaterial adverse effect on us to date and we do not believe the resolution ofthese issues will have a material adverse effect on us in the future. However,if the FDA does not agree with us with respect to the resolution of theseissues, our financial position and results of operations could be materiallyimpacted.

 

The manufacturing andmarketing of orthopedic medical products entails risk of product liability. Fromtime to time, we have been, and currently we are, subject to product liabilityclaims and litigation. In the future, we may again be subject to additionalproduct liability claims, which could have a negative impact on our business.We currently carry product liability insurance up to a limit of $20.0 million,subject to an aggregate self-insurance deductible of $750,000. Our insurancepolicy is subject to annual renewal. We believe our current product liabilityinsurance coverage is adequate. If a product liability claim or series ofclaims is brought against us for uninsured liabilities or in excess of ourinsurance coverage, our business could suffer materially and cause our stockprice to fall. In addition, as a result of a product liability claim, we mayhave to recall some of our products, which could result in significant costs tous. As of September 29, 2007 and December 31, 2006, we have accruedapproximately $1.7 million and $2.3 million, respectively, for productliability claims expense based upon previous claim experience in part due tothe fact that we have exceeded the coverage limits on certain claims.

 

On February 22, 2005,we acquired substantially all of the assets of OTI, which included a line ofspinal implant products and several total knee and hip implant designs forapproximately $15.7 million.  The acquisition consideration issubject to adjustmentbasedupon the final balance sheet as of the closing date, which remains the subjectof a dispute between the former OTI shareholders and us. We do not anticipatethe resolution of the dispute will have a material impact on our financialposition or results of operations. In 2006 the parties concluded an arbitrationthat resulted in an award of approximately $326,000 to ReAble to reflect a lowerinventory value at the date of closing than was originally determined by OTI.We were involved in the defense of a patent infringement claim against us andOTI, which was settled with a payment of $400,000 to the counterparty in 2006.We are also in a related dispute with OTI and its chief executive officer overcertain representations and warranties that were made under the Asset PurchaseAgreement that governs the OTI acquisition (the “OTI APA”). This dispute iscurrently the subject of litigation in which each party has asserted certainclaims, including our claim for indemnification from the approximately $1.4 millionescrow fund that was established pursuant to the OTI APA specifically for thepurpose of funding indemnification claims. We have reflected the costs that wehave incurred to date related to litigation for which we believe we areentitled to indemnification as an account receivable. At September 29, 2007, thereceivable approximated $1.6 million.

 

**15. RELATEDPARTY TRANSACTIONS**

 

In connection with theMerger, Blackstone Management Partners V L.L.C. (“BMP”) has agreed to providecertain monitoring, advisory and consulting services to us for an annualmonitoring fee equal to $3.0 million payable in the first quarter of each year.At any time in connection with or in anticipation of a change of control ofRTI, a sale of all or substantially all of RTI’s assets or an initial publicoffering of common stock of RTI or its successor, BMP may elect to receive, inlieu of remaining annual monitoring fee payments, a single lump sum cashpayment equal to the then-present value of all then-current and future annualmonitoring fees payable under the transaction and monitoring fee agreement,

 

22

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assuming a hypothetical termination date of the agreement to be thetwelfth anniversary of such election. The monitoring fee agreement willcontinue until the earlier of the twelfth anniversary of the date of theagreement or such date as RTI and BMP may mutually determine. RTI will agree toindemnify BMP and its affiliates, directors, officers, employees, agents andrepresentatives from and against all liabilities relating to the servicescontemplated by the transaction and monitoring fee agreement and the engagementof BMP pursuant to, and the performance of BMP and its affiliates of theservices contemplated by, the transaction and monitoring fee agreement. Duringthe nine month period ended September 29, 2007, we recorded approximately $2.3million related to the monitoring fee, which has been recorded as a componentof selling, general and administrative expense.

 

**16.DERIVATIVE INSTRUMENTS**

 

We make use of debtfinancing as a source of funds and are therefore exposed to interest ratefluctuations in the normal course of our business. We operate internationallyand are therefore exposed to foreign currency exchange rate fluctuations in thenormal course of our business. As part of our risk management strategy, we usederivative instruments to hedge portions of our exposure. Before acquiring aderivative instrument to hedge a specific risk, potential natural hedges areevaluated. Derivative instruments are only utilized to manage underlyingexposures that arise from our business operations and are not used for speculativepurposes. Factors considered in the decision to hedge an underlying marketexposure include the materiality of the risk, the volatility of the market, theduration of the hedge, and the availability, effectiveness and cost ofderivative instruments.

 

The Senior Credit Facilityis subject to a floating interest rate. We manage the risk of unfavorablemovements in interest rates by hedging a portion of the outstanding loanbalance. In February 2007, we swapped variable rates for fixed rates on $175.0million of the borrowings under the Senior Credit Facility, thereby locking ina fixed rate on this portion of the principal. This reduces the effect ofrising interest rates, thereby making interest expense more predictable. As ofSeptember 29, 2007, we had two agreements in place for a notional amount of$100.0 million and $75.0 million, expiring in 2010 and 2012, respectively.Under these agreements, RTI paid a fixed rate of 5.17% and received a variablerate equal to the current three month LIBOR rate.

 

The fair value of ourinterest rate swap agreements recorded on the balance sheet as of September 29,2007 was approximately $2.7 million and is recorded in other non-currentliabilities. We believe our interest rate swaps are highly effective.Derivative gains and losses on cash flow hedges that qualify as accountinghedges are reported as accumulated other comprehensive income net of tax, untilsuch time as they are reported in income along with the hedged item. Werecognized derivative net gains of approximately $80,000 and$210,000 in interest expense along with thehedged item during the three and nine month periods ended September 29, 2007.

 

**17. DJOMERGER**

** **

OnJuly 15, 2007, RTFL and Reaction Acquisition Merger Sub (“Reaction MergerSub”), a wholly-owned subsidiary of RTFL, entered into an Agreement and Plan ofMerger (the “DJO Merger Agreement”) with DJO, Inc. (“DJO”) pursuant to whichReaction Merger Sub will be merged with and into DJO, with DJO continuing asthe surviving corporation and becoming a wholly owned subsidiary of RTFL. RTFLis controlled by affiliates of Blackstone. As a result of the DJO merger:

 

•              eachissued and outstanding share of common stock of DJO, including shares to beissued immediately prior to the Merger under DJO’s Stock Purchase Plan, willgenerally be cancelled and converted into the right to receive $50.25 in cash(the “per share merger consideration”), without interest and less anyapplicable withholding taxes; and

 

•              eachoutstanding option to purchase common stock under DJO’s stock option plans,whether vested or unvested, except for options held by certain membersof DJO management which will be rolled over in the transactions, will becancelled and entitle the holder to receive a cash payment equal to the excess,if any, of the per share merger consideration over the per share exercise priceof the applicable stock option, multiplied by the number of shares subject tothe stock option, less any applicable taxes required to be withheld.

 

 

23

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Inconnection with the DJO merger, investment funds affiliated with Blackstonewill provide equity financing in the aggregate amount of up to $423.7 million.Credit Suisse, Credit Suisse Securities (USA) LLC, Bank of America, N.A., Bancof America Bridge LLC, and Banc of America Securities LLC have committed toprovide the debt financing needed to complete the transaction.

 

Inconnection with the DJO merger, we intend to:

 

•              enterinto new senior secured credit facilities, consisting of a $1,055.0 million sixand a half-year term loan facility and a $100.0 million six-year revolvingcredit facility;

 

•              issue$575.0 million aggregate principal amount of senior notes;

 

•              repayall amounts outstanding under our existing Senior Credit Facility;

 

•              repaycertain outstanding indebtedness of DJO at the time of closing of the DJOmerger;

 

•              payfees and expenses associated with the DJO merger and concurrent debt offeringsestimated to be approximately $80 million.

 

Closingof the transaction is subject to conditions customary in a transaction of thistype. Each DJO and RTFL has agreed to pay a termination fee if the DJO MergerAgreement is terminated under certain circumstances as set forth in the DJOMerger Agreement.  We currently expect toclose the transaction in the fourth quarter of 2007.  

 

**18.SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS**

 

On November 3, 2006, inconnection with the Merger, RTFL and its direct wholly-owned subsidiary, Finco,issued $200.0 million aggregate principal amount of the 11.75% Notes. Finco wasformed solely to act as a co-issuer of the 11.75% Notes, has only nominalassets and does not conduct any operations. The Indenture generally prohibitsFinco from holding any assets, becoming liable for any obligations, or engagingin any business activity. The 11.75% Notes are jointly and severally, fully andunconditionally guaranteed, on an unsecured senior subordinated basis by all ofRTFL’s domestic subsidiaries (other than the co-issuer) that are 100% owned,directly or indirectly, by RTFL (the “Guarantors”). Our foreignsubsidiaries (the “Non-Guarantors”) do notguarantee the notes. The Guarantors also unconditionally guarantee the SeniorCredit Facility.

 

The following tables presentthe financial position, results of operations and cash flows of RTFL, theGuarantors, the Non-Guarantors and Eliminations as of September 29, 2007 andDecember 31, 2006 and for the three and nine month periods ended September 29,2007. In addition, the following tables present the results of operations andcash flows of RTI, the Guarantors, the Non-Guarantors, and Eliminations for thethree and nine month periods ended September 30, 2006. The Guarantors in thetables relating to the Predecessor period include Encore Medical IHC, Inc. (“EMIHC”),a previously wholly owned direct subsidiary of RTFL which was liquidated onDecember 31, 2006. EMIHC was the borrower under our old senior secured creditfacility which was fully repaid in connection with the Merger and the issuer ofthe 9.75% Notes, which were repurchased pursuant to a tender offer inconnection with the Merger.

 

24

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**ReAble Therapeutics Finance LLC and Subsidiaries**

 

**Unaudited Condensed Consolidating Balance Sheets**

**As of September 29, 2007**

**(in thousands)**

 
| ** **                                                   | ** ** | **RTFL** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                   |       |     |       |           |       |                 |       |             |       |             |       |
| Current assets:                                              |       |     |       |           |       |                 |       |             |       |             |       |
| Cash and cash equivalents                                    |       | $        | 28         |           | $          | 21,892               |       | $                | 9,885      |             | $          | — |   | $ | 31,805 |   |
| Accounts receivable, net                                     |       | —   |       | 68,146         |       | 19,534               |       | —           |       | 87,680           |       |
| Inventories, net                                             |       | —   |       | 56,928         |       | 10,201               |       | (400             | )          | 66,729           |       |
| Deferred tax assets                                          |       | —   |       | 19,593         |       | 3,215                |       | (146             | )          | 22,662           |       |
| Prepaid expenses and other current assets                    |       | 309      |       | 5,470          |       | 1,382                |       | —           |       | 7,161            |       |
| Assets of discontinued operations                            |       | —   |       | —         |       | —               |       | —           |       | —           |       |
| Total current assets                                         |       | 337      |       | 172,029        |       | 44,217               |       | (546             | )          | 216,037          |       |
| Property and equipment, net                                  |       | —   |       | 38,286         |       | 8,039                |       | (1,872           | )          | 44,453           |       |
| Goodwill                                                     |       | —   |       | 454,615        |       | 62,455               |       | —           |       | 517,070          |       |
| Intangible assets, net                                       |       | —   |       | 295,691        |       | 35,701               |       | —           |       | 331,392          |       |
| Investment in subsidiaries                                   |       | 590,621  |       | 23,352         |       | 51,479               |       | (665,452         | )          | —           |       |
| Intercompany receivable                                      |       | 344,126  |       | —         |       | —               |       | (344,126         | )          | —           |       |
| Other non-current assets                                     |       | 18,427   |       | 518            |       | 943                  |       | —           |       | 19,888           |       |
| Total assets                                                 |       | $        | 953,511    |           | $          | 984,491              |       | $                | 202,834    |             | $          | (1,011,996 | ) | $ | 1,128,840 |   |
| **Liabilities, Minority Interests and  Membership Equity**   |       |     |       |           |       |                 |       |             |       |             |       |
| Current liabilities:                                         |       |     |       |           |       |                 |       |             |       |             |       |
| Long-term debt and capital leases, current  portion          |       | $        | 4,050      |           | $          | 751                  |       | $                | 3,164      |             | $          | — |   | $ | 7,965 |   |
| Accounts payable                                             |       | 234      |       | 19,221         |       | 5,679                |       | —           |       | 25,134           |       |
| Accrued expenses                                             |       | 13,727   |       | 21,822         |       | 13,185               |       | —           |       | 48,734           |       |
| Total current liabilities                                    |       | 18,011   |       | 41,794         |       | 22,028               |       | —           |       | 81,833           |       |
| Long-term debt and capital leases, net of  current portion   |       | 619,313  |       | 350            |       | 1,524                |       | —           |       | 621,187          |       |
| Deferred tax liabilities                                     |       | —   |       | 95,381         |       | 7,174                |       | —           |       | 102,555          |       |
| Intercompany payable                                         |       | —   |       | 251,470        |       | 92,656               |       | (344,126         | )          | —           |       |
| Other non-current liabilities                                |       | 2,664    |       | 6,057          |       | —               |       | —           |       | 8,721            |       |
| Total liabilities                                            |       | 639,988  |       | 395,052        |       | 123,382              |       | (344,126         | )          | 814,296          |       |
| Minority interests                                           |       | —   |       | —         |       | 1,021                |       | —           |       | 1,021            |       |
| Membership equity                                            |       | 313,523  |       | 589,439        |       | 78,431               |       | (667,870         | )          | 313,523          |       |
| Total liabilities, minority interests and  membership equity |       | $        | 953,511    |           | $          | 984,491              |       | $                | 202,834    |             | $          | (1,011,996 | ) | $ | 1,128,840 |   |

 

25

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**ReAble Therapeutics Finance LLC and Subsidiaries**

 

**Unaudited Condensed Consolidating Balance Sheets**

**As of December 31, 2006**

**(in thousands)**

 
| ** **                                                    | ** ** | **RTFL** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| **Assets**                                                    |       |     |       |           |       |                 |       |             |       |             |       |
| Current assets:                                               |       |     |       |           |       |                 |       |             |       |             |       |
| Cash and cash equivalents                                     |       | $        | 12         |           | $          | 22,650               |       | $                | 8,241      |             | $          | — |   | $ | 30,903 |   |
| Accounts receivable, net                                      |       | —   |       | 55,854         |       | 18,301               |       | —           |       | 74,155           |       |
| Inventories, net                                              |       | —   |       | 58,707         |       | 9,188                |       | (222             | )          | 67,673           |       |
| Deferred tax assets                                           |       | —   |       | 21,598         |       | 4,282                |       | (146             | )          | 25,734           |       |
| Prepaid expenses and other current assets                     |       | 21       |       | 5,462          |       | 483                  |       | —           |       | 5,966            |       |
| Assets of discontinued operations                             |       | —   |       | 380            |       | —               |       | —           |       | 380              |       |
| Total current assets                                          |       | 33       |       | 164,651        |       | 40,495               |       | (368             | )          | 204,811          |       |
| Property and equipment, net                                   |       | —   |       | 35,141         |       | 8,157                |       | (2,047           | )          | 41,251           |       |
| Goodwill                                                      |       | —   |       | 414,079        |       | 61,643               |       | —           |       | 475,722          |       |
| Intangible assets, net                                        |       | —   |       | 281,992        |       | 35,250               |       | —           |       | 317,242          |       |
| Investment in subsidiaries                                    |       | 387,419  |       | (41,601        | )          | 47,731               |       | (393,549         | )          | —           |       |
| Intercompany receivable                                       |       | 287,144  |       | —         |       | —               |       | (287,144         | )          | —           |       |
| Other non-current assets                                      |       | 19,940   |       | 762            |       | 908                  |       | —           |       | 21,610           |       |
| Total assets                                                  |       | $        | 694,536    |           | $          | 855,024              |       | $                | 194,184    |             | $          | (683,108 | ) | $ | 1,060,636 |   |
| **Liabilities, Minority Interests and  Membership Equity**    |       |     |       |           |       |                 |       |             |       |             |       |
| Current liabilities:                                          |       |     |       |           |       |                 |       |             |       |             |       |
| Long-term debt and capital leases, current  portion           |       | $        | 3,500      |           | $          | 332                  |       | $                | 2,673      |             | $          | — |   | $ | 6,505 |   |
| Accounts payable                                              |       | —   |       | 13,455         |       | 5,440                |       | —           |       | 18,895           |       |
| Accrued expenses                                              |       | 7,909    |       | 17,607         |       | 12,463               |       | —           |       | 37,979           |       |
| Total current liabilities                                     |       | 11,409   |       | 31,394         |       | 20,576               |       | —           |       | 63,379           |       |
| Long-term debt and capital leases, net of  current portion    |       | 545,625  |       | 783            |       | 1,629                |       | —           |       | 548,037          |       |
| Deferred tax liabilities                                      |       | —   |       | 99,152         |       | 12,080               |       | —           |       | 111,232          |       |
| Intercompany payable                                          |       | —   |       | 192,819        |       | 94,325               |       | (287,144         | )          | —           |       |
| Other non-current liabilities                                 |       | —   |       | 1,871          |       | —               |       | —           |       | 1,871            |       |
| Total liabilities                                             |       | 557,034  |       | 326,019        |       | 128,610              |       | (287,144         | )          | 724,519          |       |
| Minority interests                                            |       | —   |       | —         |       | 909                  |       | —           |       | 909              |       |
| Membership equity                                             |       | 137,502  |       | 529,005        |       | 64,665               |       | (395,964         | )          | 335,208          |       |
| Total liabilities, minority interests, and  membership equity |       | $        | 694,536    |           | $          | 855,024              |       | $                | 194,184    |             | $          | (683,108 | ) | $ | 1,060,636 |   |

 

26

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**ReAble Therapeutics Finance LLC and Subsidiaries**

 

**Unaudited Condensed Consolidating Statements of Operations**

**For the Successor Three Month Period Ended September 29, 2007**

**(in thousands)**

 
| ** **                                                                  | ** ** | **RTFL** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| Net sales                                                                   |       | $        | —     |           | $          | 87,331               |       | $                | 22,473     |             | $          | (1,373 | ) | $ | 108,431 |   |
| Cost of sales                                                               |       | —   |       | 32,741         |       | 10,750               |       | (1,332           | )          | 42,159           |       |
| Gross margin                                                                |       | —   |       | 54,590         |       | 11,723               |       | (41              | )          | 66,272           |       |
| Operating expenses:                                                         |       |     |       |           |       |                 |       |             |       |             |       |
| Selling, general and administrative                                         |       | —   |       | 48,686         |       | 10,414               |       | —           |       | 59,100           |       |
| Research and development                                                    |       | —   |       | 3,279          |       | 1,093                |       | —           |       | 4,372            |       |
| Operating income                                                            |       | —   |       | 2,625          |       | 216                  |       | (41              | )          | 2,800            |       |
| Other income (expense):                                                     |       |     |       |           |       |                 |       |             |       |             |       |
| Interest income                                                             |       | 3,936    |       | 1,149          |       | 58                   |       | (4,899           | )          | 244              |       |
| Interest expense                                                            |       | (15,038  | )          | (4,023         | )          | (890                 | )          | 4,899            |       | (15,052          | )          |
| Other income (expense), net                                                 |       | 5,163    |       | 72             |       | 132                  |       | (5,163           | )          | 204              |       |
| Loss from continuing operations before  income taxes and minority interests |       | (5,939   | )          | (177           | )          | (484                 | )          | (5,204           | )          | (11,804          | )          |
| Provision (benefit) for income taxes                                        |       | —   |       | (6,467         | )          | 489                  |       | —           |       | (5,978           | )          |
| Minority interests                                                          |       | —   |       | —         |       | 113                  |       | —           |       | 113              |       |
| Net income (loss)                                                           |       | $        | (5,939     | )              | $          | 6,290                |       | $                | (1,086     | )                | $          | (5,204 | ) | $ | (5,939 | ) |

** **

27

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** **

**ReAble Therapeutics Finance LLC and Subsidiaries**

 

**Unaudited Condensed Consolidating Statements of Operations**

**For the Successor Nine Month Period Ended September 29, 2007**

**(in thousands)**

** **
| ** **                                                                  | ** ** | **RTFL** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| Net sales                                                                   |       | $        | —     |           | $          | 255,007              |       | $                | 70,083     |             | $          | (3,699 | ) | $ | 321,391 |   |
| Cost of sales                                                               |       | —   |       | 101,324        |       | 33,403               |       | (3,696           | )          | 131,031          |       |
| Gross margin                                                                |       | —   |       | 153,683        |       | 36,680               |       | (3               | )          | 190,360          |       |
| Operating expenses:                                                         |       |     |       |           |       |                 |       |             |       |             |       |
| Selling, general and administrative                                         |       | —   |       | 142,502        |       | 32,302               |       | —           |       | 174,804          |       |
| Research and development                                                    |       | —   |       | 9,037          |       | 3,076                |       | —           |       | 12,113           |       |
| Operating income                                                            |       | —   |       | 2,144          |       | 1,302                |       | (3               | )          | 3,443            |       |
| Other income (expense):                                                     |       |     |       |           |       |                 |       |             |       |             |       |
| Interest income                                                             |       | 11,810   |       | 3,893          |       | 192                  |       | (15,224          | )          | 671              |       |
| Interest expense                                                            |       | (42,968  | )          | (12,375        | )          | (3,006               | )          | 15,224           |       | (43,125          | )          |
| Other income (expense), net                                                 |       | 6,054    |       | 43             |       | 191                  |       | (6,054           | )          | 234              |       |
| Loss from continuing operations before  income taxes and minority interests |       | (25,104  | )          | (6,295         | )          | (1,321               | )          | (6,057           | )          | (38,777          | )          |
| Provision (benefit) for income taxes                                        |       | —   |       | (14,941        | )          | 1,018                |       | —           |       | (13,923          | )          |
| Minority interests                                                          |       | —   |       | —         |       | 278                  |       | —           |       | 278              |       |
| Income (loss) from continuing operations                                    |       | (25,104  | )          | 8,646          |       | (2,617               | )          | (6,057           | )          | (25,132          | )          |
| Discontinued operations:                                                    |       |     |       |           |       |                 |       |             |       |             |       |
| Income from discontinued operations, net of  tax                            |       | —   |       | 28             |       | —               |       | —           |       | 28               |       |
| Net income (loss)                                                           |       | $        | (25,104    | )              | $          | 8,674                |       | $                | (2,617     | )                | $          | (6,057 | ) | $ | (25,104 | ) |

 

28

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** **

**ReAble Therapeutics Finance LLC and Subsidiaries**

 

**Unaudited Condensed Consolidating Statements of Operations**

**For the Predecessor Three Month Period Ended September 30, 2006**

**(in thousands)**

** **
| ** **                                                                    | ** ** | **RTI** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|---------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| Net sales                                                                     |       | $       | —     |           | $          | 80,077               |       | $                | 13,803     |             | $          | (969 | ) | $ | 92,911 |   |
| Cost of sales                                                                 |       | —  |       | 30,122         |       | 6,352                |       | (1,150           | )          | 35,324           |       |
| Gross margin                                                                  |       | —  |       | 49,955         |       | 7,451                |       | 181              |       | 57,587           |       |
| Operating expenses:                                                           |       |    |       |           |       |                 |       |             |       |             |       |
| Selling, general and administrative                                           |       | (4      | )          | 37,472         |       | 6,657                |       | —           |       | 44,125           |       |
| Research and development                                                      |       | —  |       | 2,513          |       | 392                  |       | —           |       | 2,905            |       |
| Operating income                                                              |       | 4       |       | 9,970          |       | 402                  |       | 181              |       | 10,557           |       |
| Other income (expense):                                                       |       |    |       |           |       |                 |       |             |       |             |       |
| Interest income                                                               |       | —  |       | 3,918          |       | 19                   |       | (3,776           | )          | 161              |       |
| Interest expense                                                              |       | —  |       | (11,764        | )          | (40                  | )          | 3,776            |       | (8,028           | )          |
| Other income (expense), net                                                   |       | 2,417   |       | 6,913          |       | (272                 | )          | (9,031           | )          | 27               |       |
| Income from continuing operations before income  taxes and minority interests |       | 2,421   |       | 9,037          |       | 109                  |       | (8,850           | )          | 2,717            |       |
| Provision for income taxes                                                    |       | —  |       | 1,626          |       | 74                   |       | 75               |       | 1,775            |       |
| Minority interests                                                            |       | —  |       | —         |       | 25                   |       | —           |       | 25               |       |
| Income from continuing operations                                             |       | 2,421   |       | 7,411          |       | 10                   |       | (8,925           | )          | 917              |       |
| Discontinued operations:                                                      |       |    |       |           |       |                 |       |             |       |             |       |
| Loss from discontinued operations, net of  tax                                |       | —  |       | (163           | )          | —               |       | —           |       | (163             | )          |
| Net income                                                                    |       | $       | 2,421      |           | $          | 7,248                |       | $                | 10         |             | $          | (8,925 | ) | $ | 754 |   |

 

29

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**ReAble Therapeutics Finance LLC and Subsidiaries**

 

**Unaudited Condensed Consolidating Statements of Operations**

**For the Predecessor Nine Month Period Ended September 30, 2006**

**(in thousands)**

** **
| ** **                                                                           | ** ** | **RTI** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| Net sales                                                                            |       | $       | —     |           | $          | 235,281              |       | $                | 43,829     |             | $          | (3,372 | ) | $ | 275,738 |   |
| Cost of sales                                                                        |       | —  |       | 92,438         |       | 19,394               |       | (3,537           | )          | 108,295          |       |
| Gross margin                                                                         |       | —  |       | 142,843        |       | 24,435               |       | 165              |       | 167,443          |       |
| Operating expenses:                                                                  |       |    |       |           |       |                 |       |             |       |             |       |
| Selling, general and administrative                                                  |       | 32      |       | 109,251        |       | 20,632               |       | —           |       | 129,915          |       |
| Research and development                                                             |       | —  |       | 10,005         |       | 3,037                |       | —           |       | 13,042           |       |
| Operating income (loss)                                                              |       | (32     | )          | 23,587         |       | 766                  |       | 165              |       | 24,486           |       |
| Other income (expense):                                                              |       |    |       |           |       |                 |       |             |       |             |       |
| Interest income                                                                      |       | —  |       | 11,678         |       | 50                   |       | (11,328          | )          | 400              |       |
| Interest expense                                                                     |       | —  |       | (34,746        | )          | (90                  | )          | 11,328           |       | (23,508          | )          |
| Other income (expense), net                                                          |       | (2,549  | )          | 10,447         |       | (923                 | )          | (6,990           | )          | (15              | )          |
| Income (loss) from continuing operations  before income taxes and minority interests |       | (2,581  | )          | 10,966         |       | (197                 | )          | (6,825           | )          | 1,363            |       |
| Provision for income taxes                                                           |       | —  |       | 2,279          |       | 836                  |       | 59               |       | 3,174            |       |
| Minority interests                                                                   |       | —  |       | —         |       | 137                  |       | —           |       | 137              |       |
| Income (loss) from continuing operations                                             |       | (2,581  | )          | 8,687          |       | (1,170               | )          | (6,884           | )          | (1,948           | )          |
| Discontinued operations:                                                             |       |    |       |           |       |                 |       |             |       |             |       |
| Loss from discontinued operations, net of  tax                                       |       | —  |       | (607           | )          | —               |       | —           |       | (607             | )          |
| Net income (loss)                                                                    |       | $       | (2,581     | )              | $          | 8,080                |       | $                | (1,170     | )                | $          | (6,884 | ) | $ | (2,555 | ) |

 

30

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**ReAble Therapeutics Finance LLC and Subsidiaries**

 

**Unaudited Condensed Consolidating Statements of Cash Flows**

**For the Successor Nine Month Period Ended September 29, 2007**

**(in thousands)**

** **
| ** **                                                                                          | ** ** | **RTFL** | ** ** | **Guarantors** | ** ** | **Non-  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------------|------------|----------------------|------------|------------------|------------|------------------|------------|
| **OPERATING ACTIVITIES:**                                                                           |       |     |       |           |       |                 |       |             |       |             |       |
| Net income (loss)                                                                                   |       | $        | (25,104    | )              | $          | 8,674                |       | $                | (2,617     | )                | $          | (6,057 | ) | $ | (25,104 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |       |     |       |           |       |                 |       |             |       |             |       |
| Depreciation                                                                                        |       | —   |       | 7,442          |       | 2,677                |       | (533             | )          | 9,586            |       |
| Amortization of intangibles                                                                         |       | —   |       | 18,234         |       | 2,086                |       | —           |       | 20,320           |       |
| Amortization of debt issuance costs                                                                 |       | 2,866    |       | —         |       | —               |       | —           |       | 2,866            |       |
| Stock-based compensation                                                                            |       | —   |       | 1,534          |       | —               |       | —           |       | 1,534            |       |
| Loss on disposal of assets                                                                          |       | —   |       | 121            |       | 410                  |       | (113             | )          | 418              |       |
| Deferred income taxes                                                                               |       | —   |       | (15,070        | )          | (1,055               | )          | —           |       | (16,125          | )          |
| Non-cash income from subsidiaries                                                                   |       | (6,053   | )          | —         |       | —               |       | 6,053            |       | —           |       |
| Provision for bad debt expense and sales  returns                                                   |       | —   |       | 5,713          |       | 303                  |       | —           |       | 6,016            |       |
| Inventory reserves                                                                                  |       | —   |       | 756            |       | 69                   |       | —           |       | 825              |       |
| Minority interests                                                                                  |       | —   |       | —         |       | 278                  |       | —           |       | 278              |       |
| Excess tax benefit associated with stock  option exercises                                          |       | —   |       | (17            | )          | —               |       | —           |       | (17              | )          |
| Net effect of discontinued operations                                                               |       | —   |       | 378            |       | —               |       | —           |       | 378              |       |
| Changes in operating assets and  liabilities, net of acquired assets and liabilities:               |       |     |       |           |       |                 |       |             |       |             |       |
| Accounts receivable                                                                                 |       | —   |       | (14,067        | )          | (202                 | )          | —           |       | (14,269          | )          |
| Inventories                                                                                         |       | —   |       | 522            |       | 1,369                |       | 180              |       | 2,071            |       |
| Prepaid expenses, other assets and  liabilities                                                     |       | (208     | )          | (2,352         | )          | (828                 | )          | —           |       | (3,388           | )          |
| Accounts payable and accrued expenses                                                               |       | 6,049    |       | 6,392          |       | (1,033               | )          | —           |       | 11,408           |       |
| Net cash provided by (used in) operating  activities                                                |       | (22,450  | )          | 18,260         |       | 1,457                |       | (470             | )          | (3,203           | )          |
| **INVESTING ACTIVITIES:**                                                                           |       |     |       |           |       |                 |       |             |       |             |       |
| Acquisition of businesses, net of cash  acquired                                                    |       | —   |       | (64,010        | )          | (391                 | )          | —           |       | (64,401          | )          |
| Proceeds from sale of assets held for sale                                                          |       | —   |       | 4,500          |       | 65                   |       | —           |       | 4,565            |       |
| Purchases of property and equipment                                                                 |       | —   |       | (7,752         | )          | (2,401               | )          | 470              |       | (9,683           | )          |
| Net cash used in investing activities                                                               |       | —   |       | (67,262        | )          | (2,727               | )          | 470              |       | (69,519          | )          |
| **FINANCING ACTIVITIES:**                                                                           |       |     |       |           |       |                 |       |             |       |             |       |
| Intercompany                                                                                        |       | (50,642  | )          | 48,240         |       | 2,402                |       | —           |       | —           |       |
| Payments on long-term obligations                                                                   |       | (15,263  | )          | (307           | )          | 66                   |       | —           |       | (15,504          | )          |
| Proceeds from long-term obligations                                                                 |       | 89,500   |       | 294            |       | 34                   |       | —           |       | 89,828           |       |
| Payment of debt issuance costs                                                                      |       | (1,129   | )          | —         |       | —               |       | —           |       | (1,129           | )          |
| Excess tax benefit associated with stock  option exercises                                          |       | —   |       | 17             |       | —               |       | —           |       | 17               |       |
| Dividend paid to minority interests                                                                 |       | —   |       | —         |       | (226                 | )          | —           |       | (226             | )          |
| Net cash provided by financing activities                                                           |       | 22,466   |       | 48,244         |       | 2,276                |       | —           |       | 72,986           |       |
| Effect of exchange rate on cash and cash  equivalents                                               |       | —   |       | —         |       | 638                  |       | —           |       | 638              |       |
| **Net increase (decrease) in cash and cash  equivalents**                                           |       | 16       |       | (758           | )          | 1,644                |       | —           |       | 902              |       |
| Cash and cash equivalents at beginning of  period                                                   |       | 12       |       | 22,650         |       | 8,241                |       | —           |       | 30,903           |       |
| Cash and cash equivalents at end of period                                                          |       | $        | 28         |           | $          | 21,892               |       | $                | 9,885      |             | $          | — |   | $ | 31,805 |   |

 

31

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**ReAble Therapeutics Finance LLC and Subsidiaries**

 

**Unaudited Condensed Consolidating Statements of Cash Flows**

**For the Predecessor Nine Month Period Ended September 30, 2006**

**(in thousands)**

** **
| ** **                                                                                | ** ** | **RTI** | ** ** | **Guarantors** | ** ** | **Non -  Guarantors** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------|------------|----------------|------------|----------------------------|------------|------------------|------------|------------------|------------|
| **OPERATING ACTIVITIES:**                                                                 |       |    |       |           |       |                       |       |             |       |             |       |
| Net income (loss)                                                                         |       | $       | (2,581     | )              | $          | 8,080                      |       | $                | (1,170     | )                | $          | (6,884 | ) | $ | (2,555 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |    |       |           |       |                       |       |             |       |             |       |
| Depreciation                                                                              |       | —  |       | 5,767          |       | 2,471                      |       | (390             | )          | 7,848            |       |
| Amortization of intangibles                                                               |       | —  |       | 3,652          |       | 1,643                      |       | —           |       | 5,295            |       |
| Amortization of debt issuance costs                                                       |       | —  |       | 1,594          |       | —                     |       | —           |       | 1,594            |       |
| Non-cash interest expense                                                                 |       | —  |       | 82             |       | —                     |       | —           |       | 82               |       |
| Stock-based compensation                                                                  |       | —  |       | 3,006          |       | —                     |       | —           |       | 3,006            |       |
| Loss on disposal of assets                                                                |       | —  |       | 315            |       | 302                        |       | (244             | )          | 373              |       |
| Deferred income taxes                                                                     |       | 8       |       | (4,932         | )          | (661                       | )          | 59               |       | (5,526           | )          |
| Non-cash income from subsidiaries                                                         |       | 2,549   |       | (9,353         | )          | —                     |       | 6,804            |       | —           |       |
| Provision for bad debt expense and sales  returns                                         |       | —  |       | 5,720          |       | 144                        |       | —           |       | 5,864            |       |
| Inventory reserves                                                                        |       | —  |       | 3,309          |       | 145                        |       | —           |       | 3,454            |       |
| Minority interests                                                                        |       | —  |       | —         |       | 137                        |       | —           |       | 137              |       |
| Excess tax benefit associated with stock  option exercises                                |       | —  |       | (1,340         | )          | —                     |       | —           |       | (1,340           | )          |
| In-process research and development                                                       |       | —  |       | 2,213          |       | 1,684                      |       | —           |       | 3,897            |       |
| Net effect of discontinued operations                                                     |       | —  |       | 985            |       | —                     |       | —           |       | 985              |       |
| Changes in operating assets and  liabilities, net of acquired assets and liabilities:     |       |    |       |           |       |                       |       |             |       |             |       |
| Accounts receivable                                                                       |       | —  |       | (3,479         | )          | 2,756                      |       | —           |       | (723             | )          |
| Inventories                                                                               |       | —  |       | (8,976         | )          | 136                        |       | 196              |       | (8,644           | )          |
| Prepaid expenses, other assets and  liabilities                                           |       | 3,424   |       | (342           | )          | (326                       | )          | —           |       | 2,756            |       |
| Accounts payable and accrued expenses                                                     |       | 950     |       | 5,008          |       | (3,171                     | )          | —           |       | 2,787            |       |
| Net cash provided by operating activities                                                 |       | 4,350   |       | 11,309         |       | 4,090                      |       | (459             | )          | 19,290           |       |
| **INVESTING ACTIVITIES:**                                                                 |       |    |       |           |       |                       |       |             |       |             |       |
| Acquisition of businesses, net of cash  acquired                                          |       | —  |       | (1,792         | )          | —                     |       | —           |       | (1,792           | )          |
| Acquisition of intangible assets                                                          |       | —  |       | (110           | )          | (134                       | )          | —           |       | (244             | )          |
| Proceeds from sale of assets                                                              |       | —  |       | 64             |       | —                     |       | —           |       | 64               |       |
| Purchases of property and equipment                                                       |       | —  |       | (9,371         | )          | (2,111                     | )          | 459              |       | (11,023          | )          |
| Net cash used in investing activities                                                     |       | —  |       | (11,209        | )          | (2,245                     | )          | 459              |       | (12,995          | )          |
| **FINANCING ACTIVITIES:**                                                                 |       |    |       |           |       |                       |       |             |       |             |       |
| Proceeds from issuance of common stock                                                    |       | 4,920   |       | 2              |       | —                     |       | —           |       | 4,922            |       |
| Intercompany                                                                              |       | (9,303  | )          | 4,521          |       | 4,782                      |       | —           |       | —           |       |
| Proceeds from long-term obligations                                                       |       | —  |       | 25,300         |       | —                     |       | —           |       | 25,300           |       |
| Payments on long-term obligations                                                         |       | —  |       | (20,762        | )          | (3,366                     | )          | —           |       | (24,128          | )          |
| Payment of debt issuance costs                                                            |       | —  |       | (10            | )          | —                     |       | —           |       | (10              | )          |
| Excess tax benefit associated with stock  option exercises                                |       | —  |       | 1,340          |       | —                     |       | —           |       | 1,340            |       |
| Net cash provided by (used in) financing  activities                                      |       | (4,383  | )          | 10,391         |       | 1,416                      |       | —           |       | 7,424            |       |
| Effect of exchange rate on cash and cash  equivalents                                     |       | —  |       | —         |       | 458                        |       | —           |       | 458              |       |
| **Net increase (decrease) in cash and cash  equivalents**                                 |       | (33     | )          | 10,491         |       | 3,719                      |       | —           |       | 14,177           |       |
| Cash and cash equivalents at beginning of  period                                         |       | 308     |       | 13,588         |       | 3,304                      |       | —           |       | 17,200           |       |
| Cash and cash equivalents at end of period                                                |       | $       | 275        |           | $          | 24,079                     |       | $                | 7,023      |             | $          | — |   | $ | 31,377 |   |

 

32

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**ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Introduction**

 

This management’s discussionand analysis of financial condition and results of operations is intended toprovide an understanding of our results of operations, financial condition andwhere appropriate, factors that may affect future performance.

 

The following discussionshould be read in conjunction with the condensed consolidated financialstatements and related notes to those financial statements included elsewherein this quarterly report on Form 10-Q and in conjunction with our Form S-4which was declared effective on May 1, 2007 with the Securities and Exchange Commission.

 

For purposes of thissection, the terms “we”, “us”, or the “Company” refer to RTI (as defined below)and its subsidiaries for the period prior to the consummation of the Merger andRTFL (as defined below) and its subsidiaries for the period after theconsummation of the Merger.

 

**Overview ofBusiness**

 

We are a diversifiedrehabilitation and orthopedic device company that develops, manufactures anddistributes a comprehensive range of high-quality medical devices used byphysicians, therapists, athletic trainers, orthopedic surgeons, and otherhealthcare professionals to treat patients with musculoskeletal conditionsresulting from degenerative diseases, deformities, traumatic events, andsports-related injuries. Through our Orthopedic Rehabilitation Division, we area leading distributor of electrical stimulation and other orthopedic productsused for pain management, orthopedic rehabilitation, physical therapy, fitnessand sports performance enhancement. Our Surgical Implant Division offers acomprehensive suite of reconstructive joint products.

 

•             *Orthopedic RehabilitationDivision*. We market ourorthopedic rehabilitation products through two brands in the United States:Chattanooga Group and Empi; and three brands in Europe: Compex, Cefar and Ormed.These products are non-invasive medical devices that are used before and aftersurgery to assist in the repair and rehabilitation of soft tissue and bone andto protect against injury, such as at-home and clinical electrotherapy,continuous passive motion devices (“CPM”) used to treat pain and restore musclefunction, physical therapy tables, home and clinical traction products,iontophoretic devices and chiropractic treatment tables used to treat joint andspine conditions. Our Orthopedic Rehabilitation Division accounted forapproximately 85.6% and 84.7% of our net sales, as well as 82.0% and 82.0% ofour gross profit, for the three and nine month periods ended September 29,2007, respectively.

 

•             *Surgical Implant Division*. Our Surgical Implant Division develops,manufactures and markets a wide variety of products that serve the orthopedicreconstructive joint implant market. These products include knee, hip andshoulder reconstructive products, along with the instruments used by surgeonsto perform orthopedic reconstructive surgery. Our Surgical Implant Divisionaccounted for approximately 14.4% and 15.3% of our net sales, as well as 18.0%and 18.0% of our gross profit, for the three and nine month periods endedSeptember 29, 2007, respectively.

 

Our two divisions enable usto reach a diverse customer base through multiple distribution channels andgive us the opportunity to provide a wide range of orthopedic devices andrelated products to orthopedic specialists operating in a variety of patienttreatment settings. These two divisions constitute our two reportable segments.See Note 10 to our unaudited condensed consolidated financial statements forfurther information regarding our reportable business segments.

 

We are subject to regulationby the FDA with respect to sales of our products in the United States, and wemust, in many cases, obtain FDA authorization to market our products beforethey can be sold in the United States. Additionally, we are subject to similarregulations in many of the foreign countries in which we sell our products.

 

The nature of our businessrequires significant allocation of resources to investment in accountsreceivable, inventory, new product development and debt servicing. We have adiverse group of customers to whom we sell our products. In order to collectour revenues, we employ a variety of processes tailored to meet the needs ofour customers. In addition, our customers expect us to maintain sufficientinventory on hand at all times to meet their needs. Many of our domesticcustomers require consignment product to be placed at or near their respectivelocations. Our remaining customers across all 

 

33

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product lines demand shortdelivery schedules for their orders. Finally, we place an emphasis on ourresearch and development efforts for the development of new products.

 

**The Merger**

 

On November 3, 2006 anaffiliate of Blackstone Capital Partners V L.P. (“Blackstone”) acquired all ofthe outstanding shares of capital stock of ReAble Therapeutics, Inc. (“RTI”) ina merger transaction (the “Merger”). See Note 3 to our unaudited condensedconsolidated financial statements for further information regarding the Merger.RTI is the parent company of ReAble Therapeutics Holdings, LLC (“Holdings”),ReAble Therapeutics Finance LLC (“RTFL”) and ReAble Therapeutics FinanceCorporation (“Finco”). RTFL, directly or indirectly through its subsidiaries,owns all of the operating assets owned by RTI prior to the Merger. The totalpurchase price for the Merger was approximately $529.2 million and consisted of$482.5 million paid to former holders of shares of common stock and options topurchase shares of common stock of RTI, $7.2 million related to the fair valueof the management rollover options that continued to remain as outstandingshares to purchase RTI common stock after the Merger, and $39.5 million indirect acquisition costs. The Merger was financed through a combination ofequity contributed by Blackstone, cash on hand of RTI, borrowings under theSenior Credit Facility, and proceeds from the newly issued 11.75% Notes. Uponthe closing of the Merger, shares of RTI’s common stock ceased to be traded onthe NASDAQ Global Market.

 

The Merger was accounted foras a purchase under the guidance set forth in Statement of Financial AccountingStandards No. 141 “Business Combinations”. In addition, the fair value basis ofthe acquired assets and assumed liabilities was “pushed down” to the financialstatements of RTI, and ultimately to the condensed consolidated financialstatements of RTFL. The condensed consolidated statements of operations andcash flows of RTI are presented for the three and nine month periods endedSeptember 30, 2006 (the “Predecessor financial statements”), and the condensedconsolidated financial statements of RTFL are presented for the three and ninemonth periods ended September 29, 2007 (the “Successor financial statements”).The Predecessor and Successor periods have been prepared using a differentbasis of presentation due to the application of purchase accounting. Finco andHoldings did not have any operations during the nine month period endedSeptember 29, 2007 and did not exist prior to the Merger.

 

In addition, in connectionwith the Merger, we recomputed the shares of RTI’s common stock to reflect the62.8 to 1 share recomputation such that every 62.8 shares of RTI’s common stockoutstanding prior to the Merger was recomputed as 1 share of RTI’s commonstock. Subsequently, on November 8, 2006, following the closing of the Merger,we effected a 25 for 1 stock split, which resulted in every 1 share of RTI’scommon stock becoming 25 shares of RTI’s common stock. All share information inthis quarterly report on Form 10-Q for all periods presented retroactivelyreflect these adjustments.

 

**RecentAcquisitions**

 

On August 9, 2007, asubsidiary of RTFL acquired IOMED, Inc. (“IOMED”), a leader in developing,manufacturing and marketing active drug delivery systems used primarily totreat acute local inflammation in the physical and occupational therapy andsports medicine markets. Under the terms of the merger agreement dated May 17,2007, IOMED was merged with Spartan Acquisition Corp., a newly formedsubsidiary of RTFL (the “IOMED Merger”). The purchase price of $22.5 millionconsisted of $21.1 million in cash payments to former equity holders at $2.75per share, $0.8 million related to the fair value of vested stock options thatwere outstanding at the time of the IOMED Merger, and $0.6 million in directacquisition costs. The acquisition was primarily financed with $22.0 million ofborrowed funds under our revolving credit facility.

 

On July 2, 2007, asubsidiary of RTFL completed its purchase of substantially all of the assets ofThe Saunders Group, Inc. (“Saunders”) for total cash consideration of $40.5million, including $0.5 million of acquisition costs (the “Saunders Acquisition”).Saunders is a supplier of rehabilitation products to physical therapists,chiropractors, athletes, athletic trainers, physicians and patients, with aspecialty in patented traction devices, back supports, and exercise equipmentfor neck and back disorders. The Saunders Acquisition was financed with fundsborrowed under our Senior Credit Facility.

 

On November 7, 2006, weacquired all of the issued and outstanding shares of Cefar, a leading Europeanprovider of electrotherapy and rehabilitation devices. Cefar marketselectrotherapy devices used for chronic pain, for women’s health (labor pain,incontinence, dysmenorrhea), for electroacupuncture, and for otherrehabilitation activities. We are integrating the operations of Cefar withthose of Compex SA, the European subsidiary of Compex. Our strategy for themerged company is to develop both the professional/medical and consumer marketsfor electrical stimulation across Europe and internationally while continuingto sell products under both the Cefar and Compex brands. The purchase price forCefar of $23.2 million was 

 

34

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comprised of $12.4 millionin cash, issuance of shares of RTI’s common stock valued at $9.5 million, andpayment of approximately $1.3 million in acquisition costs. The cash portion ofthe acquisition was funded with $10.0 million of term loan borrowings under theSenior Credit Facility and cash on hand.

 

On February 24, 2006, wecompleted the acquisition of Compex. Compex manufactured and sold a broad lineof transcutaneous electrical nerve stimulation (“TENS”) and neuromuscularelectrical nerve stimulation (“NMES”) products used for pain management,rehabilitation, fitness and sports performance enhancement in clinical, homehealthcare, sports and occupational medicine settings. The purchase price ofapproximately $102.9 million included shares of RTI’s common stock valued atapproximately $90.0 million in exchange for all of the outstanding common stockof Compex, options to purchase shares of RTI’s common stock valued at $9.3million in exchange for all of the outstanding options to purchase common stockof Compex, and $3.6 million in acquisition costs. We also borrowedapproximately $25.3 million under our $200.0 million Senior Credit Facility toa syndicate of financial institutions originally due on 2010 but which wasrepaid in full in conjunction with the Merger and used $17.3 million forrepayment of Compex’s existing debt with the balance used for working capital.

 

**Results ofOperations**

 

The following table setsforth our statements of operations as a percentage of sales for the periodsindicated:

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **Successor**                    | ** ** | **Predecessor**                 | ** ** | **Successor** | ** ** | **Predecessor** | ** ** |
| ** **                                                                         | ** ** | **September 29,  2007**     | ** ** | **September 30,  2006**    | ** ** | **September 29,  2007** | ** ** | **September 30,  2006** | ** ** |
| Net sales                                                                          |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Cost of sales                                                                      |       | 38.9                             |       | 38.0                            |       | 40.8 |   | 39.3 |   |
| Gross margin                                                                       |       | 61.1                             |       | 62.0                            |       | 59.2 |   | 60.7 |   |
| Operating expenses:                                                                |       |                             |       |                            |       |   |   |   |   |
| Selling, general and  administrative                                               |       | 54.5                             |       | 47.5                            |       | 54.4 |   | 47.1 |   |
| Research and  development                                                          |       | 4.0                              |       | 3.1                             |       | 3.7 |   | 4.7 |   |
| Operating income                                                                   |       | 2.6                              |       | 11.4                            |       | 1.1 |   | 8.9 |   |
| Other income (expense):                                                            |       |                             |       |                            |       |   |   |   |   |
| Interest income                                                                    |       | 0.2                              |       | 0.2                             |       | 0.2 |   | 0.1 |   |
| Interest expense                                                                   |       | (13.9                            | )          | (8.6                            | )          | (13.4 | ) | (8.5 | ) |
| Other income (expense),  net                                                       |       | 0.2                              |       | 0.0                             |       | 0.0 |   | 0.0 |   |
| Income (loss) from  continuing operations before income tax and minority interests |       | (10.9                            | )          | 3.0                             |       | (12.1 | ) | 0.5 |   |
| Provision (benefit) for  income taxes                                              |       | (5.5                             | )          | 1.9                             |       | (4.3 | ) | 1.2 |   |
| Minority interests                                                                 |       | 0.1                              |       | 0.0                             |       | 0.0 |   | 0.0 |   |
| Income (loss) from  continuing operations                                          |       | (5.5                             | )          | 1.1                             |       | (7.8 | ) | (0.7 | ) |
| Discontinued  operations:                                                          |       |                             |       |                            |       |   |   |   |   |
| Income (loss) from  discontinued operations, net of tax                            |       | 0.0                              |       | (0.2                            | )          | 0.0 |   | (0.2 | ) |
| Net income  (loss)                                                                 |       | (5.5                             | )%         | 0.9                             | %          | (7.8 | )% | (0.9 | )% |

 

***Three Months Ended September 29, 2007, compared to Three Months EndedSeptember 30, 2006***

 

*Net Sales.*Our net sales for thethree month period ended September 29, 2007 were $108.4 million, representingan increase of 16.7% over net sales of $92.9 million for the three month periodended September 30, 2006, driven by continued growth in both our OrthopedicRehabilitation and Surgical Implant Divisions. Sales in our OrthopedicRehabilitation Division and our overall net sales benefited from sales ofproducts we acquired in connection with the acquisitions of Cefar, Saunders andIOMED. During the three month period ended September 29, 2007, our net salesbenefited from three months of revenue contribution from our Cefar and Saundersacquisitions and two months of revenue from the acquisition of IOMED (see Note4).

 

The following table setsforth the geographic mix of our net sales for the three month period endedSeptember 29, 2007 compared to the three month period ended September 30, 2006:

 

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| ** **                                  | ** ** | **Domestic**  | ** ** | **International** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|---------------|------------|-------------------|------------|------------|------------|
| ** **                                  | ** ** | **Successor** | ** ** | **Predecessor**   | ** ** | **%**      | ** ** | **Successor** | ** ** | **Predecessor** | ** ** | **%** | ** ** | **Successor** | ** ** | **Predecessor** | ** ** | **%** | ** ** |
| **(In thousands, except %)** | ** ** | **2007**      | ** ** | **2006**          | ** ** | **Growth** | ** ** | **2007** | ** ** | **2006** | ** ** | **Growth** | ** ** | **2007** | ** ** | **2006** | ** ** | **Growth** | ** ** |
| Orthopedic  Rehabilitation Division         |       | $             | 67,682     |              | $          | 61,433     |       | 10.2 | % | $ | 25,092 |   | $ | 16,248 |   | 54.4 | % | $ | 92,774 |   | $ | 77,681 |   | 19.4 | % |
| Surgical Implant  Division                  |       | 13,633        |       | 12,654            |       | 7.7        | %          | 2,024 |   | 2,576 |   | (21.4 | )% | 15,657 |   | 15,230 |   | 2.8 | % |
| Total                                       |       | $             | 81,315     |              | $          | 74,087     |       | 9.8 | % | $ | 27,116 |   | $ | 18,824 |   | 44.1 | % | $ | 108,431 |   | $ | 92,911 |   | 16.7 | % |

 

Net sales in our OrthopedicRehabilitation Division of $92.8 million during the three month period endedSeptember 29, 2007 increased 19.4% over net sales of $77.7 million during thethree month period ended September 30, 2006, led by continued growth across ourrehabilitation product lines and the impact of revenue contribution from ourrecent acquisitions as discussed above.

 

Net sales in our SurgicalImplant Division increased to $15.7 million from $15.2 million during the threemonth period ended September 29, 2007, representing a 2.8% increase over theprior year quarter. Domestic Surgical Implant Division net sales for the threemonths ended September 29, 2007 of $13.6 million increased 7.7% over net salesof $12.7 million for the three months ended September 30, 2006, drivenprimarily by growth in our shoulder and hip products, and was negativelyimpacted on a comparative basis by reduced sales from our Cyclone spinalproduct line, which was sold during the first quarter of 2007. Internationalnet sales of $2.0 million for the three months ended September 29, 2007decreased 21.4% over net sales of $2.6 million during the three month periodended September 30, 2006 due to the impact of stocking orders in the thirdquarter of 2006 related to the expansion of our international business.

 

For the three months endedSeptember 29, 2007, sales of new products, which are products that have been onthe market less than one year, were $12.6 million compared to new product salesof $5.4 million during the three months ended September 30, 2006. The increasein comparative sales of new products was primarily driven by sales of recentlyintroduced Orthopedic Rehabilitation products.

 

*GrossMargin.*Ourconsolidated gross margin as a percentage of net sales decreased to 61.1%during the three month period ended September 29, 2007 from 62.0% during thethree month period ended September 30, 2006. Our Orthopedic RehabilitationDivision gross margin of 58.6% for the three months ended September 29, 2007,compared to a gross margin of 59.9% in the prior year quarter was negativelyimpacted by a shift in product mix which resulted in an increase in sales ofproducts with lower margins primarily related to growth in our cataloguebusiness. Our Surgical Implant Division gross margin increased to 76.3% duringthe three months ended September 29, 2007 compared to a gross margin of 72.8%for the three months ended September 30, 2006.

 

*Selling, Generaland Administrative.*Ourselling, general and administrative expenses increased to $59.1 million duringthe three month period ended September 29, 2007 from $44.1 million during thethree month period ended September 30, 2006. As a percentage of net sales,selling, general and administrative expense increased to 54.5% from 47.5% inthe prior year quarter primarily due to additional expenses associated with theaddition of Cefar, Saunders, and IOMED operations, higher commissions due to acombination of increased sales and changes to compensation plans related toongoing integration, higher intangible amortization expense incurred inconnection with the Merger, and higher expenses related to acquisitionintegration activities.

 

*Researchand Development.*Ourresearch and development expense increased to $4.4 million during the threemonth period ended September 29, 2007 from $2.9 million for the three monthperiod ended September 30, 2006. As a percentage of net sales, research anddevelopment expense increased to 4.0% during the three month period endedSeptember 29, 2007 as compared to 3.1% for the three months ended September 30,2006 due to increased spending for new product development.

 

*InterestExpense.*Our interestexpense increased to $15.1 million during the three month period endedSeptember 29, 2007 compared to interest expense of $8.0 million during thethree month period ended September 30, 2006. This increase in interest expenseis principally driven by increased borrowings to finance the Merger and recentacquisitions and higher interest rates on our outstanding indebtedness.

 

*Provision(Benefit) for Income Taxes.*During the three month period ended September 29, 2007, we recordedapproximately $6.0 million of income tax benefit on pre-tax loss ofapproximately $11.8 million. The tax benefit for these periods differed fromthe amount which would have been recorded using the U.S. statutory tax rate duein part to the recording of foreign taxes and deferred taxes on the assumedrepatriation of foreign earnings. In addition, during the three 

 

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months ended September 29,2007, we recorded an approximate $1.3 million income tax benefit relating to achange in the enacted tax rate in Germany associated with a reduction in thenet deferred tax liabilities recorded in Germany.

 

*DiscontinuedOperations.*We didnot record any income (loss) from discontinued operations during the threemonth period ended September 29, 2007. During the three month period endedSeptember 30, 2006, we reported a loss from discontinued operations ofapproximately $0.2 million which was attributable to our Slendertone® U.S.Consumer product line (“U.S. Consumer Product Line”) that was sold on June 30,2006.

 

*Net Income(Loss).*Due to thefactors discussed above, we recorded a net loss of $6.0 million during thethree month period ended September 29, 2007 compared to net income of $0.8million during the three month period ended September 30, 2006.

 

***Nine Months Ended September 29, 2007, compared to Nine Months EndedSeptember 30, 2006***

 

*Net Sales.*Our net sales for thenine month period ended September 29, 2007 were $321.4 million, representing anincrease of 16.6% over net sales of $275.7 million for the nine month periodended September 30, 2006, driven by continued growth in both our OrthopedicRehabilitation and Surgical Implant Divisions. Our net sales also benefitedfrom sales of products we acquired in connection with the acquisitions ofCompex, Cefar, Saunders and IOMED (see Note 4). For the nine month period endedSeptember 30, 2006, both our consolidated net sales and our OrthopedicRehabilitation Division net sales were impacted by a charge of $5.6 millionrelated to accounts receivable acquired in the Compex acquisition.

 

The following table setsforth the geographic mix of our net sales for the nine month period endedSeptember 29, 2007 compared to the nine month period ended September 30, 2006:

 
| ** **                                  | ** ** | **Domestic**  | ** ** | **International** | ** ** | **Total**  | ** ** |
|---------------------------------------------|------------|---------------|------------|-------------------|------------|------------|------------|
| ** **                                  | ** ** | **Successor** | ** ** | **Predecessor**   | ** ** | **%**      | ** ** | **Successor** | ** ** | **Predecessor** | ** ** | **%** | ** ** | **Successor** | ** ** | **Predecessor** | ** ** | **%** | ** ** |
| **(In thousands, except %)** | ** ** | **2007**      | ** ** | **2006**          | ** ** | **Growth** | ** ** | **2007** | ** ** | **2006** | ** ** | **Growth** | ** ** | **2007** | ** ** | **2006** | ** ** | **Growth** | ** ** |
| Orthopedic  Rehabilitation Division         |       | $             | 192,316    |              | $          | 178,098    |       | 8.0 | % | $ | 79,972 |   | $ | 51,701 |   | 54.7 | % | $ | 272,288 |   | $ | 229,799 |   | 18.5 | % |
| Surgical Implant  Division                  |       | 42,277        |       | 39,469            |       | 7.1        | %          | 6,826 |   | 6,470 |   | 5.5 | % | 49,103 |   | 45,939 |   | 6.9 | % |
| Total                                       |       | $             | 234,593    |              | $          | 217,567    |       | 7.8 | % | $ | 86,798 |   | $ | 58,171 |   | 49.2 | % | $ | 321,391 |   | $ | 275,738 |   | 16.6 | % |

 

Net sales in our OrthopedicRehabilitation Division of $272.3 million during the nine month period endedSeptember 29, 2007 increased 18.5% over net sales of $229.8 million during thenine month period ended September 30, 2006, led by continued growth across ourrehabilitation product lines and the impact of revenue contribution from ourrecent acquisitions as discussed above.

 

Net sales in our SurgicalImplant Division increased to $49.1 million during the nine month period endedSeptember 29, 2007 from $45.9 million during the nine month period endedSeptember 30, 2006, representing a 6.9% increase over the prior year period,driven primarily by growth in our domestic business. Domestic Surgical ImplantDivision net sales for the nine months ended September 29, 2007 increased 7.1%to $42.3 million compared to $39.5 million for the nine months ended September30, 2006 and was negatively impacted on a comparative basis by reduced salesfrom our Cyclone spinal product line, which was sold during the first quarterof 2007. International sales of $6.8 million for the nine months endedSeptember 29, 2007 increased 5.5% compared to the same period in the prior yearwhen sales were $6.5 million primarily due to increasing penetration ofexisting and new international markets.

 

For the nine months endedSeptember 29, 2007, sales of new products, which are products that have been onthe market less than one year, were $23.2 million compared to new product salesof $20.1 million during the nine months ended September 30, 2006.

 

*GrossMargin.*Ourconsolidated gross margin as a percentage of net sales decreased to 59.2%during the nine month period ended September 29, 2007 compared to 60.7% duringthe nine month period ended September 30, 2006 and was negatively impacted by$4.8 million, $2.1 million and $0.5 million of expense related to the write upto fair market value of inventory in connection with the Merger, the Cefaracquisition, and in connection with the previously discussed 2007 acquisitions,respectively. Our Orthopedic Rehabilitation Division gross margin of 57.3% duringthe nine month period ended September 29, 2007 compared to gross margin of57.7% for the nine months ended September 30, 2006 was negatively impacted by$1.5 million, $2.1 million, and $0.5 million of expense related to the write upto fair market value of inventory in connection with the Merger, the Cefaracquisition, and in connection with the previously discussed 2007 acquisitions,

 

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respectively. Both ourconsolidated gross margin and our Orthopedic Rehabilitation Division grossmargin for the nine month period ended September 30, 2006 were impacted by acharge of $5.6 million related to accounts receivable acquired in the Compexacquisition and by $0.8 million of expense related to the write up to fairmarket value of inventory acquired in the Compex acquisition. Our SurgicalImplant Division gross margin decreased to 69.9% during the nine months endedSeptember 29, 2007 compared to a gross margin of 75.7% for the nine monthsended September 30, 2006, due primarily to $3.3 million of expense related tothe write up to fair market value of inventory in connection with the Merger.

 

*Selling,General and Administrative.*Our selling, general and administrative expenses increased to $174.8million during the nine month period ended September 29, 2007 from $129.9million during the nine month period ended September 30, 2006. As a percentageof net sales, selling, general and administrative expense increased to 54.4%from 47.1% in the prior year primarily due to additional expenses associatedwith the addition of Compex, Cefar, Saunders, and IOMED operations, highercommissions due to a combination of increased sales and changes to compensationplans related to ongoing integration, higher intangible amortization expenseincurred in connection with the Merger, and higher expenses related toacquisition integration activities.

 

*Researchand Development.*Excluding the impact of $4.0 million of in-processresearch and development (“IPR&D”) costs incurred in the prior year periodassociated with the Compex acquisition, our research and development expense increased $3.1 million to $12.1million during the nine month period ended September 29, 2007 as compared tothe nine month period ended September 30, 2006. As a percentage of net sales,research and development expense increased to 3.8% during the nine month periodended September 29, 2007 as compared to 3.3% (excluding the impact ofIPR&D) for the nine months ended September 30, 2006. The increase is due tothe addition of Compex and Cefar research and development expense along withincreased spending for new product development.

 

*InterestExpense.*Our interestexpense increased to $43.1 million during the nine month period ended September29, 2007 compared to interest expense of $23.5 million during the nine monthperiod ended September 30, 2006. This increase in interest expense wasprincipally driven by increased borrowings to finance the Merger and recentacquisitions and higher interest rates on our outstanding indebtedness.

 

*Provision(Benefit) for Income Taxes.*During the nine month period ended September 29, 2007, we recordedapproximately $13.9 million of income tax benefit on pre-tax loss ofapproximately $38.8 million. The tax benefit for these periods differed fromthe amount which would have been recorded using the U.S. statutory tax rate duein part to the recording of foreign taxes and deferred taxes on the assumedrepatriation of foreign earnings. In addition, during the nine months endedSeptember 29, 2007, we recorded an approximate $1.3 million income tax benefitrelating to a change in the enacted tax rate in Germany associated with areduction in the net deferred tax liabilities recorded in Germany.

 

*DiscontinuedOperations.*Duringthe nine month period ended September 29, 2007, we reported income fromdiscontinued operations of approximately $28,000 which was attributable to ourU.S. Consumer Product Line that was sold on June 30, 2006. During the ninemonth period ended September 30, 2006, we reported a loss from discontinuedoperations of approximately $0.6 million.

 

*Net Loss.*Due to the factors discussed above, werecorded a net loss of $25.1 million during the nine month period endedSeptember 29, 2007 compared to a net loss of $2.6 million during the nine monthperiod ended September 30, 2006.

 

**CriticalAccounting Policies and Estimates**

 

Our management’s discussionand analysis of financial condition and results of operations is based upon ourfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. On an on-going basis, weevaluate our estimates, including those related to revenue recognition,goodwill and intangible assets, deferred tax assets and liabilities, andinventory. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources. Tothe extent that actual events differ from our estimates and assumptions, therecould be a material impact to our financial statements.

 

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***Revenue Recognition***

 

We recognize revenue when(1) persuasive evidence of an arrangement exists, (2) the price is fixed ordeterminable, (3) delivery has occurred and (4) collectibility is reasonablyassured.

 

We sell our OrthopedicRehabilitation Division products through a variety of distribution channels. Wesell our clinical rehabilitation products to dealers. We record sales at thetime the product is shipped to the dealer. Dealers take title to the products,assume credit and product obsolescence risks, must pay within specified periodsregardless of when they sell or use the products and have no price protection.We sell our home therapy products to wholesale customers and directly topatients. We recognize wholesale revenue when we ship our products to ourwholesale customers. We recognize home therapy retail revenue, both rental andpurchase, when our product has been dispensed to the patient and the patient’sinsurance has been verified. We recognize revenue for product shipped directlyto the patient at the time of shipment. For retail products that are sold fromour inventories consigned at clinic locations, we recognize revenue when wereceive notice that the device has been prescribed and dispensed to thepatient, and the insurance has been verified or preauthorization from theinsurance company has been obtained, when required.

 

We sell our Surgical ImplantDivision products through a network of independent sales representatives in theUnited States and through distributors outside the United States. We recordrevenues from sales made by sales representatives, who are paid commissionsupon the ultimate sale of the products, at the time the product is used in asurgical procedure (implanted in a patient). We record revenues from sales tocustomers outside the United States at the time the product is shipped to thedistributor. Our international distributors, who sell the products to theircustomers, take title to the products, have no rights of return and assume therisk for credit and obsolescence. Our international distributors are obligatedto pay us within specified terms, regardless of when they sell the products. Inaddition, there is no price protection available to distributors.

 

*Reservesfor Sales Allowances, Product Returns and Rental Credits*. We have established reserves to account forsales allowances, product returns and reserves for rental credits. Significantmanagement judgment must be used and estimates must be made in connection withestablishing the reserves for sales allowances, product returns, rental creditsand other allowances in any accounting period.

 

Our reserves for salesallowances account for sales of our products below the invoice price. Thesesales generally result from agreements that we enter into with certaincustomers that permit them to pay us for our products in amounts that are belowthe invoice price of the product. We estimate the amount of the reduction basedon historical experience and invoices generated in the period, and we considerthe impact of new contract terms or modifications of existing arrangements withour customers. We provide for these reserves by reducing our gross revenue.

 

Our reserve for productreturns accounts for customer returns of our products after purchase. Thesereturns are mainly attributable to a third-party payor’s refusal to provide apatient release or reimbursement for the product or the inability of theproduct to adequately address the patient’s condition. We provide for thisreserve by reducing gross revenue by an amount based on our historical rate ofreturns.

 

Our reserve for rentalcredit recognizes a timing difference between billing of a purchase andprocessing of a rental credit associated with some of our rehabilitationdevices. Many insurance providers require patients to rent our rehabilitationdevices for a period of one to three months prior to purchase. If the patienthas a long-term need for the device, these insurance companies may authorizepurchase of the device after such time period. When the device is purchased,most providers require that rental payments previously made on the device becredited toward the purchase price. These credits are processed at the time thepayment is received for the purchase of the device, which creates a time lagbetween billing of the purchase and processing of the rental credit. Our rentalcredit reserve accounts for unprocessed rental credits based on the number ofdevices converted to purchase. The reserve is calculated by first assessing thenumber of our products being rented during the relevant period and our historicalconversion rate of rentals to sales, and then reducing our revenue by theapplicable amount. We provide for these reserves by reducing our gross revenue.The cost to refurbish rented products is expensed as incurred as part of costof sales.

 

*Reservefor Uncollectible Accounts Receivable.*In addition to the reserves for salesallowances, returns and rental credits, we have also established a reserve forthe portion of accounts receivable that we estimate will not be collectedbecause of our customers’ and patients’ nonpayment. The reserve is based onhistorical trends and current relationships with our customers and providers.Changes in our collection rates can result from a number of factors, includingturnover in personnel, changes in the payment policies or practices of payorsor changes in industry rates or pace of reimbursement. Additions to thisreserve are reflected in selling, general and administrative expense.

 

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***Goodwill and Intangible Assets***

 

We must make estimatesrelated to the initial recognition and measurement of intangible assetsacquired in connection with a business combination or asset acquisition, aswell as the ongoing measurement of the useful life and value of intangibleassets and goodwill. With respect to valuations of intangible assets acquiredin connection with a business combination or asset acquisition, we use externalthird-party evaluations in determining the respective fair values and relativeallocations of acquisition cost to the assets acquired and liabilities assumed.We periodically evaluate whether events and circumstances have occurred whichmay affect the estimated useful life, or the recoverability of the remainingbalances of our goodwill and other intangible assets. If such events orcircumstances were to indicate that the carrying amount of those assets wouldnot be recoverable, we would estimate the future cash flows expected to resultfrom the use of the assets and their eventual disposition. In the fourth quarterof each year we will perform an annual test of our goodwill and intangibleassets for potential impairment. The process of evaluating the potentialimpairment is subjective and requires us to exercise judgment in makingassumptions related to future cash flows and discount rates. If the sum of theexpected future cash flows (undiscounted and without interest charges) are lessthan the carrying amount of goodwill and other long-lived assets, we wouldrecognize an impairment loss.

 

Any impairment of an intangibleasset or goodwill would require a reduction in the value of the asset on ourconsolidated balance sheet and a charge to operating income on our consolidatedstatement of operations. The nature of the charge to operating income would bedetermined based upon the nature of the intangible asset or goodwill requiringthe adjustment.

 

***Deferred Tax Asset Valuation Allowance***

 

We recognize deferred taxassets and liabilities based on the differences between the financial statementcarrying amount and the tax bases of assets, liabilities and net operating losscarry forwards. We establish valuation allowances when the recovery of adeferred tax asset is not likely based on historical income, projected futureincome, the expected timing of the reversals of temporary differences and theimplementation of tax-planning strategies.

 

***Inventory Reserves***

 

The nature of our businessrequires us to maintain sufficient inventory on hand at all times to meet therequirements of our customers. We record inventory at the lower of cost ormarket, with cost based upon average actual cost. We maintain inventoryreserves for slow moving or excess inventory, product obsolescence and declinesin value. In each division, we use a specific identification methodology,adjustments to which can occur whenever there is a change in strategy. Inaddition, we review sales performance on at least a quarterly basis todetermine the amounts that we should add to the existing reserve. We monitorreserves on a quarterly basis and make changes when necessary. To determine theadequacy 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.

 

If there is a materialchange due to the factors listed above, the current level of the reserve forinventory may not be adequate and would result in our increasing the reservelevel. Any modifications to our estimates of our reserves are reflected in costof sales within the statement of operations during the period in which suchmodifications are determined necessary by management.

 

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Our OrthopedicRehabilitation Division consigns a portion of its inventory to clinics andother healthcare provider locations to allow its products to be immediatelydispensed to patients. Our Surgical Implant Division products are sold in theUnited States at the time the product is used in a surgical procedure. As such,this division also consigns product at many locations throughout the country.This requires a large amount of inventory to be on hand for the products wesell on consignment. It also increases the sensitivity of these products toobsolescence reserve estimates. As this inventory is not in our possession, wealso reserve for these products based on the results of periodic inventorycounts and historical trends.

 

**RecentAccounting Pronouncements**

 

In June 2006, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 48*, “*Accounting for Uncertainty in IncomeTaxes – an Interpretation of FASB Statement No. 109 (“FIN 48”)”. Thisinterpretation clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with FAS 109, “Accountingfor Income Taxes.” This interpretation prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. Thisinterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. The interpretation is effective for fiscal years beginning afterDecember 15, 2006. The Company has adopted this interpretation as of thebeginning of fiscal 2007 (see Note 2).

 

In September 2006, the FASBissued Statement No. 157, “Fair Value Measurements” which defines fair value,establishes a framework for measuring fair value in GAAP and expands disclosureabout fair value measurements. The statement is effective for fiscal yearsbeginning after November 15, 2007. The Company will adopt this statement as ofthe beginning of fiscal 2008 and is currently assessing the potential impact ofadoption.

 

In February 2007, the FASBissued Statement No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities—Including an amendment to FASB Statement No. 115” whichpermits entities to choose to measure many financial instruments and certainother items at fair value that are not currently required to be measured atfair value. The statement is effective for fiscal years beginning afterNovember 15, 2007. The Company will adopt this statement as of the beginning offiscal 2008 and is currently assessing the potential impact of adoption.

 

**Liquidityand Capital Resources**

 

Cash flows for the ninemonths ended September 29, 2007 and September 30, 2006 are as follows (inthousands):

 
| ** **                                            | ** ** | **Nine Months Ended**    | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **Successor**                      | ** ** | **Predecessor** | ** ** |
| ** **                                            | ** ** | **September 29,   2007** | ** ** | **September 30,   2006** | ** ** |
| Cash (used in) provided by operating  activities      |       | $                                  | (3,203     | ) | $ | 19,290 |   |
| Cash used in investing activities                     |       | (69,519                            | )          | (12,995 | ) |
| Cash provided by financing activities                 |       | 72,986                             |       | 7,424 |   |
| Effect of exchange rate on cash and cash  equivalents |       | 638                                |       | 458 |   |
| Net increase in cash and cash equivalents             |       | $                                  | 902        |   | $ | 14,177 |   |

 

***Cash Flows***

 

During the nine month periodended September 29, 2007, our operating activities used $3.2 million of cash ascompared to the nine months ended September 30, 2006, when our operatingactivities provided cash of $19.3 million, resulting in a decrease in cashprovided by operations of $22.5 million. The increase in cash used by operationsduring the first nine months of 2007 as compared to the same period in theprior year is primarily due to interest payments on newly issued debt andincreased expenses related to acquisition integration. Our net loss, adjustedfor non-cash items, provided $0.6 million of cash during 2007, which representsa decrease of $21.5 million compared to our net loss for the first nine monthsended September 30, 2006, adjusted for non-cash items, which provided $22.1million of operating cash flow. Discontinued operations provided $0.4 millionof cash during the nine month period ended September 29, 2007 as compared to$1.0 million of cash during the nine month period ended September 30, 2006,resulting in a net decrease in cash flow from discontinued operations of $0.6million in 2007 as compared to 2006. Our gross accounts receivable used $14.3million of cash during the nine months ended September 29, 2007 while in thesame period in the prior year our gross accounts receivable used $0.7 millionof cash, resulting in a net decrease in cash flow of $13.6 million dueprimarily to higher sales. Our gross inventory provided $2.1 million of cashduring the nine month period ended September 29, 2007 compared to a use of $8.6million of cash during the nine month

 

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period ended September 30,2006, resulting in a net increase in cash flow of $10.7 million. In addition,our prepaid expenses, other assets and liabilities used $3.4 million of cashduring the nine month period ended September 29, 2007 compared to the ninemonth period ended September 30, 2006 when prepaid expenses, other assets andliabilities provided $2.8 million of cash, resulting in a decrease in cash flowof $6.2 million. Finally, our outstanding balances of accounts payable andaccrued liabilities provided cash of $11.4 million during the nine month periodended September 29, 2007, compared to our outstanding balances of accountspayable and accrued liabilities which provided $2.8 million of cash during thenine month period ended September 30, 2006, resulting in an increase in cashflow of $8.6 million.

 

Investing activities used$69.5 million of cash during the nine months ended September 29, 2007, comparedto $13.0 million during the nine months ended September 30, 2006, representinga $56.5 million increase in cash used for investing activities. During the ninemonths ended September 29, 2007 we used $64.4 million of cash for acquisitionactivities compared to $1.8 million during the nine months ended September 30,2006 (see Note 4). We also received $4.6 million of cash as proceeds primarilyfrom the sale of assets held for sale during the nine months ended September29, 2007 compared to $0.1 million during the nine months ended September 30,2006. In addition, we used $9.7 million to purchase property and equipmentduring the nine months ended September 29, 2007 while during the nine monthsended September 30, 2006 we used $11.0 million, representing a decrease of $1.3million.

 

Cash provided by financingactivities during the nine month period ended September 29, 2007 of $73.0million increased by $65.6 million compared to the nine month period endedSeptember 30, 2006, when cash provided by financing activities was $7.4million. Our net proceeds or the difference between proceeds from borrowingsand related debt payments, provided $74.3 million of cash during the nine monthperiod ended September 29, 2007, resulting in a net increase in cash of $73.1million compared to net proceeds of $1.2 million for the nine months endedSeptember 30, 2006. During the nine month period ended September 29, 2007, wedrew $34.5 million on our revolving credit agreement, of which $12.5 millionwas repaid during the third quarter with funds received from the incremental$55.0 million term loan (see Note 8), and also repaid $3.0 million of long-termdebt and paid $1.1 million of debt issuance costs related to the new term loan.During the nine month period ended September 30, 2006, we borrowed $25.3million under our revolving credit facility in connection with the Compexacquisition, and we paid $24.1 million on long-term borrowings, $17.3 millionof which represented a retirement of bank debt acquired from Compex. Inaddition, during the nine month period ended September 30, 2006, we receivedapproximately $4.9 million in proceeds from stock option exercises principallyby former Compex executives. We also received $1.3 million of excess taxbenefit associated with the exercise of these stock options. Finally, our partiallyowned subsidiary, Medereha GmbH paid a dividend of $0.2 million to minorityinterests during the nine months ended September 29, 2007.

 

***Indebtedness***

 

As of September 29, 2007, wehad outstanding total indebtedness of approximately $629.2 million, and we hadan additional $28.0 million of available borrowings under our Senior CreditFacility. During the third quarter of 2007, we drew $22.0 million from ourrevolving credit facility to fund the IOMED acquisition. On July 2, 2007, inconjunction with the acquisition of The Saunders Group, Inc., we incurredadditional term borrowings under our Senior Credit Facility in the amount of$55.0 million (see Note 8). Of the total net proceeds received, $40.5 millionwas used to fund the acquisition and related expenses, $12.5 million was usedto pay off the outstanding balance on our revolving credit facility as of June30, 2007 and the remaining proceeds will be used for general corporatepurposes.

 

We believe that our existingcash, plus the cash we expect to generate from operations and borrowingsavailable under our Senior Credit Facility, will be sufficient to meet ouroperating needs for the next twelve months, including working capitalrequirements, capital expenditures, debt repayment obligations and potentialnew product or business acquisitions. While we currently are in compliance withall of our financial covenants imposed by our Senior Credit Facility, there isno assurance that we will continue to remain in compliance in the future. If wedo not remain in compliance, there is no assurance that we will be able toobtain from our lenders, waivers of default or amendments to the Senior CreditFacility in the future.

 

We have continued to expandour business through selected acquisitions of businesses or products in theorthopedic industry. We have completed ten acquisitions since 2001 that haveallowed us to expand our business in the orthopedic devices market to includerehabilitation equipment, to expand our business in the European orthopedicrehabilitation market and to expand our surgical implant product offerings. Wehave a history of raising capital through a combination of debt and equityofferings to finance these acquisitions. As additional financing needs arise,we may consider sources of financing to 

 

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include a combination ofdebt or equity. We may issue debt or equity in anticipation of future financingneeds, to position our capital structure towards a certain debt-to-equity rangeor to replace existing borrowing agreements.

 

We and our subsidiaries, affiliates or significantshareholders (including Blackstone and its affiliates) may from time to time,in our or their sole discretion, purchase, repay, redeem or retire any of ouroutstanding debt or equity securities (including any publicly issued debt orequity securities), in privately negotiated or open market transactions, bytender offer or otherwise.

 

*SeniorCredit Facility*

 

*Overview.*Our Senior Credit Facility consists of a$405.0 million term loan facility and a $50.0 million revolving creditfacility. The revolving credit facility includes borrowing capacity availablefor letters of credit and for borrowings on same-day notice, referred to as theswing line loans. In addition, we are permitted, subject to receipt ofadditional commitments from participating lenders and certain other conditions,to incur up to an additional $150.0 million of borrowings under our SeniorCredit Facility, of which $55.0 million was drawn on July 2, 2007 to fund theSaunders Acquisition and converted to a term loan. During the third quarter of2007, we also drew $22.0 million from our revolving credit facility to fund theIOMED acquisition.

 

*InterestRate and Fees.*Borrowingsunder the Senior Credit Facility bear interest at a rate equal to an applicablemargin plus, at our option, either (a) a base rate determined by reference tothe higher of (1) the prime rate of Bank of America, N.A. and (2) the federalfunds rate plus 0.50% or (b) the Eurodollar rate determined by reference to thecosts of funds for deposits in U.S. Dollars for the interest period relevant tosuch borrowing adjusted for maximum reserves. The initial applicable margin forborrowings under the term loan facility and the revolving credit facility are1.50% with respect to base rate borrowings and 2.50% with respect to Eurodollarborrowings. The applicable margin for borrowings under each facility may bereduced subject to our attaining certain leverage ratios.

 

In addition to payinginterest on outstanding principal under the Senior Credit Facility, we arerequired to pay a commitment fee to the lenders under the revolving creditfacility in respect of the unutilized commitments thereunder. The initialcommitment fee rate is 0.50% per annum. The commitment fee rate may be reducedsubject to our attaining certain leverage ratios. We must also pay customaryletter of credit fees.

 

*Amortization.*We are required topay annual amortization (payable in equal quarterly installments) on the loansunder the term loan facility in an amount equal to 1.00% of our funded totalprincipal amount during the first six years and nine months following theclosing of the Senior Credit Facility, with the remaining amount payable atmaturity which is November 3, 2013.

 

Principal amountsoutstanding under the revolving credit facility are due and payable in full atmaturity, which is November 3, 2012.

 

*CertainCovenants and Events of Default.*The Senior Credit Facility contains a number of covenants that, amongother things, restrict, subject to certain exceptions, our (and most or all ofour subsidiaries’) ability to:

 

•    incur additional indebtedness or issue preferred stock;

 

•    create liens on assets;

 

•    enter into sale and leaseback transactions;

 

•    engage in mergers or consolidations;

 

•    sell assets;

 

•    pay dividends and other restricted payments;

 

•    make investments, loans or advances;

 

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•    make capital expenditures;

 

•    repay subordinated indebtedness (including the 11.75% Notes);

 

•    make certain acquisitions;

 

•    engage in certain transactions with affiliates;

 

•    amend material agreements governing our subordinated indebtedness(including the 11.75% Notes);

 

•    enter into certain burdensome agreements;

 

•    change our lines of business; and

 

•    change the status of Holdings as a passive holding company.

 

In addition, pursuant to theterms of the credit agreement relating to the Senior Credit Facility, we arerequired to maintain a consolidated total debt to Adjusted EBITDA ratio (ortotal leverage ratio) starting at a maximum of 8.00:1 and stepping down overtime to 4.75:1 by the end of 2013 and an Adjusted EBITDA to consolidatedinterest expense ratio (or interest coverage ratio) starting at a minimum of1.25:1 and stepping up over time to 1.80:1 by the end of 2013. We are subjectto these financial covenants beginning as of the twelve month period endingJune 30, 2007.

 

The Senior Credit Facilityalso contains certain customary affirmative covenants and events of default.

 

*11.75%Senior Subordinated Notes*

 

The Indenture limits our(and most or all of our subsidiaries’) ability to:

 

•    incur additional debt or issue certain preferred shares;

 

•    pay dividends on or make other distributions in respect of our capitalstock or make other restricted payments;

 

•    make certain investments;

 

•    sell certain assets;

 

•    create liens on certain assets to secure debt;

 

•    consolidate, merge, sell or otherwise dispose of all or substantiallyall of our assets;

 

•    enter into certain transactions with our affiliates; and

 

•    designate our subsidiaries as unrestricted subsidiaries.

 

Subject to certainexceptions, the Indenture permits us and our restricted subsidiaries to incuradditional indebtedness, including secured indebtedness.

 

*CovenantCompliance*

 

As described above, theSenior Credit Facility and the Indenture contain various covenants that limitour ability to engage in specified types of transactions. In addition, underthe Senior Credit Facility, we are required to satisfy and maintain specifiedfinancial ratios, and under the Indenture, our ability to engage in activitiessuch as incurring additional indebtedness, making investments and payingdividends is tied to ratios based on Adjusted EBITDA. As of September 29, 2007,we were in compliance with all applicable covenants, but our ability to borrowadditional amounts is restricted due to our existing fixed charges ratiopursuant to the provisions of the Indenture.

 

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Adjusted EBITDA is definedas EBITDA further adjusted to exclude non-cash items, non-recurring items andother adjustment items permitted in calculating covenant compliance under theSenior Credit Facility and the Indenture. We believe that the inclusion ofsupplementary adjustments to EBITDA applied in presenting Adjusted EBITDA isappropriate to provide additional information to investors to demonstratecompliance with our financing covenants.

 

Adjusted EBITDA does notrepresent net loss or cash flow from operations as those terms are defined byGAAP and does not necessarily indicate whether cash flows will be sufficient tofund cash needs. In particular, the definition of Adjusted EBITDA in theIndenture and the Senior Credit Facility allows us to add back certainnon-cash, extraordinary, unusual or non-recurring charges that are deducted incalculating net loss. However, these are expenses that may recur, vary greatlyand are difficult to predict. While Adjusted EBITDA and similar measures arefrequently used as measures of operations and the ability to meet debt servicerequirements, Adjusted EBITDA is not necessarily comparable to other similarlytitled captions of other companies due to the potential inconsistencies in themethod of calculation.

 

Our ability to continue to meetthe covenants specified above in future periods will depend on events beyondour control, and we cannot assure you that we will continue to meet thoseratios. A breach of any of these covenants in the future could result in adefault under the Senior Credit Facility and the Indenture, at which time thelenders could elect to declare all amounts outstanding under the Senior CreditFacility to be immediately due and payable. Any such acceleration would alsoresult in a default under the Indenture.

 

The following table providesa reconciliation from our net loss to EBITDA and Adjusted EBITDA for the threeand twelve months ended September 29, 2007. The terms and related calculationsare defined in the credit agreement relating to the Senior Credit Facility andthe Indenture.

 
| ** **                    | ** ** | **(unaudited)**                             | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| **(in thousands)**       | ** ** | **Three Months  Ended September 29,  2007** | ** ** | **Twelve Months  Ended September 29,  2007** | ** ** |
| Net loss                      |       | $                                           | (5,939     | ) | $ | (110,960 | ) |
| Interest expense, net         |       | 14,808                                      |       | 53,154 |   |
| Income tax benefit            |       | (5,978                                      | )          | (37,333 | ) |
| Depreciation and amortization |       | 10,551                                      |       | 37,974 |   |
| EBITDA                        |       | 13,442                                      |       | (57,165 | ) |
| Non-cash items (a)            |       | 906                                         |       | 56,272 |   |
| Non-recurring items (b)       |       | 2,846                                       |       | 17,594 |   |
| Other adjustment items (c)    |       | 12,832                                      |       | 63,043 |   |
| Adjusted EBITDA               |       | $                                           | 30,026     |   | $ | 79,744 |   |

 

(a) Non-cash items arecomprised of the following:

 
| ** **                           | ** ** | **(unaudited)**                                            | ** ** |
|--------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                           | ** ** | **Three Months  Ended September 29,  2007** | ** ** | **Twelve Months  Ended September 29,  2007** | ** ** |
| Stock compensation expense           |       | $                                                          | 530        |   | $ | 9,256 |   |
| Loss on disposition of assets        |       | —                                                     |       | 416 |   |
| Loss on early extinguishment of debt |       | —                                                     |       | 9,154 |   |
| Purchase accounting adjustments (1)  |       | 376                                                        |       | 36,380 |   |
| Loss on asset impairment (2)         |       | —                                                     |       | 1,066 |   |
| Total non-cash items                 |       | $                                                          | 906        |   | $ | 56,272 |   |

 

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(1)   Expenses for the three months ended September 29, 2007 represents $0.4million of expense related to the write-up to fair market value of acquiredinventory in connection with IOMED and Saunders acquisitions. Expenses for thetwelve months ended September 30, 2007 represents $25.2 million of expenserelated to the write-off of IPR&D and $11.2 million of expense related tothe write-up to fair market value of inventory acquired in connection with theCompex, Cefar, IOMED, and Saunders acquisitions and the Merger.

 

(2)   Represents $1.1 million of expense related to the impairment of certainapplication software that will not be placed in service.

 

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(b)  Non-recurring items are comprised of the following:

 
| ** **                      | ** ** | **(unaudited)**                                            | ** ** |
|---------------------------------|------------|------------------------------------------------------------|------------|
| ** **                      | ** ** | **Three Months  Ended September 29,  2007** | ** ** | **Twelve Months  Ended September 29,  2007** | ** ** |
| Employee severance (1)          |       | $                                                          | 615        |   | $ | 1,562 |   |
| Restructuring expense (2)       |       | 2,435                                                      |       | 13,039 |   |
| Other (3)                       |       | (204                                                       | )          | 2,993 |   |
| Total non-recurring adjustments |       | $                                                          | 2,846      |   | $ | 17,594 |   |

 

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(1)   Expenses for the three months ended September 29, 2007 representsemployee severance expense incurred in connection with the IOMED and Saundersacquisitions. Expenses for the twelve months ended September 29, 2007represents employee severance expense incurred in connection with the Compexacquisition, the Saunders acquisition, the IOMED acquisition and the Merger.

 

(2)   Restructuring expense for the three months ended September 29, 2007includes $0.3 million, $1.2 million and $0.2 million of integration costsincurred in connection with the Compex acquisition, the Cefar acquisition, andthe Saunders acquisition, respectively, and $0.7 million of integration costsin connection with the PMI acquisition, the Endeavor acquisition, the IOMEDacquisition, other acquisitions, and the Merger. Restructuring expense for thetwelve months ended September 29, 2007 represents (i) $5.3 million of expenserelated to field selling, information technology, operations and product lineconsolidation incurred in connection with the integration of Compex, (ii) $1.5million of inventory reserves related to the discontinuation of certainproducts acquired from Osteoimplant Technology, Inc. (“OTI”) in February 2005,(iii) $2.9 million of integration expenses related to the Cefar acquisition,(iv) $2.3 million for restructuring advisory fees related to the Merger, and(v) $1.0 million of integration expenses related to the PMI, Saunders, andother acquisitions.

 

(3)   Other expenses for the twelve months ended September 29, 2007 includes$3.0 million of other non-recurring expenses, including provisions made forlitigation settlements and additional product liability claims.

 

(c)  Other adjustment items are comprised of the following:

 
| ** **                         | ** ** | **(unaudited)**                                            | ** ** |
|------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                         | ** ** | **Three Months  Ended September 29,  2007** | ** ** | **Twelve Months  Ended September 29,  2007** | ** ** |
| Transaction expenses (1)           |       | $                                                          | 882        |   | $ | 25,418 |   |
| Compex acquisition adjustments (2) |       | —                                                     |       | 20,986 |   |
| Minority interest                  |       | 113                                                        |       | 338 |   |
| Pre-acquisition EBITDA (3)         |       | 40                                                         |       | 4,488 |   |
| Discontinued operations            |       | —                                                     |       | 16 |   |
| Subtotal other items               |       | 1,035                                                      |       | 51,246 |   |
| Cost savings (4)                   |       | 11,797                                                     |       | 11,797 |   |
| Total other items                  |       | $                                                          | 12,832     |   | $ | 63,043 |   |

 

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(1)   Expenses for the three months ended September 29, 2007 include $0.8million for monitoring fees paid to Blackstone and $0.1 million for escrowexpenses related to the Endeavor acquisition. Expenses for the twelve monthsended September 29, 2007 include $14.3 million of legal, advisory, consulting,and related expenses incurred in connection with the closing of the Merger,$5.3 million for monitoring fees paid to Blackstone, $5.5 million of managementretention bonuses paid at the closing of the Merger, and $0.3 million of mergerand acquisition related expenses.

 

(2)   Represents adjustments and additional reserves related to the Compexacquisition and operations. The amounts principally include $19.8 million ofadditional accounts receivable reserves. During December 2006, the decision wasmade to outsource the Compex accounts receivable collection effort to a thirdparty. Based on collection estimates provided by the third party collectioncompany, in the fourth quarter of 2006, we recorded an additional adjustment tothe carrying value of accounts receivable in the amount of $19.8 million.

 

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(3)   Represents pre-acquisition EBITDA of (i) $0.1 million from September30, 2006 to February 16, 2007 related to the Performance Modalities, Inc. (“PMI”)acquisition, (ii) $0.2 million from September 30, 2006 to April 13, 2007 forthe Endeavor Medical Inc. (“Endeavor”) acquisition, (iii) $0.2 million ofEBITDA from September 30, 2006 to November 7, 2006 primarily related to theCefar acquisition, (iv) $3.5 million of EBITDA from September 30, 2006 to July2, 2007 for the Saunders acquisition, and (v) $0.5 million of EBITDA fromSeptember 30, 2006 to August 9, 2007 for the IOMED acquisition, which areincluded in the calculation of Adjusted EBITDA for the twelve months endedSeptember 29, 2007 pursuant to the definition of Adjusted EBITDA contained inthe credit agreement relating to the Senior Credit Facility and the Indenture.

 

(4)   Includes projected cost savings of (i) $4.4 million related to actionsinitiated in connection with the Cefar acquisition, principally related tofacility and general and administrative consolidation, (ii) $7.0 millionrelated to headcount reductions and production efficiencies in relation to theIomed and Saunders acquisitions and (iii) $0.4 million principally from actionsinitiated in connection with the Endeavor acquisition and procurement savingsrelated to purchases of certain product components.

 

Our covenant requirementsand ratios for the four-quarter period and as of September 29, 2007 under ourSenior Credit Facility are as follows:

 
| ** **                                        | ** ** | **Covenant   Requirements** | ** ** | **Actual Ratios** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|------------------------|------------|
| **Covenant (1)**                                  |       |                             |       |                   |       |
| Consolidated total debt to Adjusted EBITDA        |       | 8.00:1                           |       | 7.48:1                 |       |
| Adjusted EBITDA to consolidated interest  expense |       | 1.25:1                           |       | 1.53:1                 |       |

 

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(1)         Beginning with the twelve month period endingJune 30, 2007, the Senior Credit Facility requires us to maintain aconsolidated total debt to Adjusted EBITDA ratio starting at a maximum of 8.00:1and stepping down over time to 4.75:1 by the end of 2013 and an Adjusted EBITDAto consolidated interest expense ratio starting at a minimum of 1.25:1 andstepping up over time to 1.80:1 by the end of 2013. Consolidated total debt isdefined as aggregate consolidated indebtedness of Holdings, RTFL and therestricted subsidiaries less the aggregate amount of all cash and cashequivalents, free and clear of all liens subject to certain exceptions, andconsolidated interest expense is defined as consolidated cash interest expenseless cash interest income and further adjusted for certain noncash ornonrecurring interest expense, under the Senior Credit Facility.

Under the Indenturegoverning our 11.75% notes, our ability to incur additional debt, subject tospecified exceptions, is tied to improving our Adjusted EBITDA to fixed chargesratio or having a ratio of at least 2.00:1, on a pro forma basis after givingeffect to such incurrence.  Additionally,our ability to make certain restricted payments is also tied to having anAdjusted EBITDA to fixed charge ratio of at least 2.00:1 on a pro formabasis.  Our ratio of Adjusted EBITDA tofixed charges for the four-quarter period ended September 29, 2007, measured onthat date, would have been 1.47:1. Notwithstanding these limitations, we may incur certain debt and makecertain restricted payments and certain permitted investments without regard tothe ratio, such as our ability to (i) incur up to an aggregate principal amountof $400.0 million under credit facilities, plus the lesser of (a) $50.0 millionand (b) an amount equal to the aggregate amount of our EBITDA for the fourfiscal quarters for which internal financial statements are availableimmediately preceding such date times five, with appropriate pro formaadjustments to EBITDA on the date on which such indebtedness is to be incurredless the amount of our secured indebtedness outstanding on the date of suchincurrence, (ii) acquire persons engaged in a similar business that becomesrestricted subsidiaries and (iii) make other investments having an aggregatefair market value not to exceed 3.5% of total assets provided that the ratio oftotal debt to Adjusted EBITDA is less than 6.00:1 on a pro forma basis aftergiving effect to such investment. Fixed charges is defined in the Indenture asconsolidated interest expense plus all cash dividends or other distributionspaid on any series of preferred stock of any restricted subsidiary and alldividends or other distributions accrued on any series of disqualified stock.

**ForwardLooking Statements**

 

The foregoing management’sdiscussion and analysis contains “forward looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934 that represent our expectations or beliefsconcerning future events, including, but not limited to, statements regardinggrowth in sales of our products, profit margins and the sufficiency of our cashflow for future liquidity and capital resource needs. These forward-lookingstatements are further qualified by important factors that could cause actualresults to differ materially from those in the forward-looking statements.These factors include, without limitation, the effect of competitive pricing,our dependence 

 

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on the ability of ourthird-party manufacturers to produce components on a basis that iscost-effective to us, market acceptance of our products, the ability to attractand retain competent employees, technological obsolescence of one or moreproducts, changes in product strategies, the ability to locate acceptableacquisition candidates and then finance and integrate those acquisitions andeffects of government regulation. Results actually achieved may differmaterially from expected results included in these statements as a result ofthese or other factors.

 

**Recent Developments**

 

On July 15,2007, RTFL and Reaction Acquisition Merger Sub (“Reaction Merger Sub”), awholly-owned subsidiary of RTFL, entered into an Agreement and Plan of Merger (the“DJO Merger Agreement”) with DJO, Inc. (“DJO”) pursuant to which ReactionMerger Sub will be merged with and into DJO, with DJO continuing as thesurviving corporation and becoming a wholly owned subsidiary of RTFL. RTFL iscontrolled by affiliates of Blackstone. As a result of the DJO merger:

•                                          each issued and outstanding share ofcommon stock of DJO, including shares to be issued immediately prior to theMerger under DJO’s Stock Purchase Plan, will generally be cancelled andconverted into the right to receive $50.25 in cash (the “per share mergerconsideration”), without interest and less any applicable withholding taxes;and

•                                          each outstanding option to purchasecommon stock under DJO’s stock option plans, whether vested or unvested, exceptfor options held by certain members of DJO management which will be rolled overin the transactions, will be cancelled and entitle the holder to receive a cashpayment equal to the excess, if any, of the per share merger consideration overthe per share exercise price of the applicable stock option, multiplied by thenumber of shares subject to the stock option, less any applicable taxesrequired to be withheld.

In connectionwith the DJO merger, investment funds affiliated with Blackstone will provideequity financing in the aggregate amount of up to $423.7 million. Credit Suisse, Credit Suisse Securities (USA) LLC,Bank of America, N.A., Banc of America Bridge LLC, and Banc of AmericaSecurities LLC have committed to provide the debt financing needed to completethe transaction.

In connection with the DJO merger, we intend to:

•                                          enter into new senior secured creditfacilities, consisting of a $1,055.0 million six and a half-year term loanfacility and a $100.0 million six-year revolving credit facility;

•                                          issue $575.0 million aggregateprincipal amount of senior notes;

•                                          repay all amounts outstanding underour existing Senior Credit Facility;

•                                          repay certain outstandingindebtedness of DJO at the time of closing of the DJO merger;

•                                          pay fees and expenses associated withthe DJO merger and concurrent debt offerings estimated to be approximately $80million.

Closingof the transaction is subject to conditions customary in a transaction of thistype. Each DJO and RTFLhas agreed to pay a termination fee if the DJO Merger Agreement is terminatedunder certain circumstances as set forth in the DJO Merger Agreement.  We currently expect to close the transactionin the fourth quarter of 2007.  

 

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**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to certainmarket risks as part of our ongoing business operations, primarily risks fromchanging interest rates and foreign currency exchange rates that could impactour financial condition, results of operations, and cash flows.

 

***Interest Rate Risk***

 

Our primary exposure is tochanging interest rates. We are exposed to interest rate risk in connectionwith our Senior Credit Facility, which bears interest at floating rates basedon Bank of America’s prime rate plus 0.5% or Eurodollar rate adjusted formaximum reserves. Our outstanding balance under the Senior Credit Facility was$423.4 million as of September 29, 2007. We have historically managed ourinterest rate risk by balancing the amount of fixed and variable debt. Forfixed rate debt, interest rate changes affect the market value, but do notimpact earnings or cash flow. Conversely, for variable rate debt, interest ratechanges generally do not affect the fair market value, but do impact futureearnings and cash flow, assuming other factors are held constant. In February2007, we swapped variable rates for fixed rates on $175.0 million of theborrowings under the Senior Credit Facility, thereby locking in a fixed rate onthis portion of the principal. A hypothetical 1% increase in variable interestrates for the Senior Credit Facility would have impacted our earnings and cashflow, for the quarter ending September 29, 2007, by approximately $620,000. Wemay use additional derivative financial instruments where appropriate to manageour interest rate risk. However, as a matter of policy, we do not enter intoderivative or other financial investments for trading or speculative purposes.

 

***Foreign Currency Risk***

 

Due to the global reach ofour business, we are exposed to market risk from changes in foreign currencyexchange rates, particularly with respect to the U.S. dollar compared to theEuro. Our wholly owned foreign subsidiaries are consolidated into our financialresults and are subject to risks typical of an international businessincluding, but not limited to, differing economic conditions, changes inpolitical climate, differing tax structures, other regulations and restrictionsand foreign exchange rate volatility. To date, we have not used internationalcurrency derivatives to hedge against our investment in our Europeansubsidiaries or their operating results, which are converted into U.S. Dollarsat period-end and average rates, respectively. However, as we continue toexpand our business through acquisitions and organic growth, the sales of ourproducts in European markets that are denominated in foreign currencies hasincreased. As a result, the impact of currency fluctuations on our operatingresults has increased. Accordingly, our future results could be materiallyimpacted by changes in these or other factors. During the first nine months of2007, our average monthly sales denominated in foreign currencies wasapproximately $8.5 million of which $7.7 million was derived from Eurodenominated sales. In addition, our exposure to fluctuations in foreigncurrencies arises because certain of our subsidiaries enter into purchase orsale transactions using a currency other than its functional currency. While ourGerman subsidiary periodically utilizes international currency derivatives tolimit its risk to currency fluctuations, it is our general policy to not usederivative financial instruments to manage foreign currency exchange rate risk.As of September 29, 2007, we did not have any foreign currency derivativesoutstanding.

 

**ITEM 4.CONTROLS AND PROCEDURES**

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified in the SEC’s rules and forms,and that such information is accumulated and communicated to management,including our Chief Executive Officer and our Chief Financial Officer, as appropriate,to allow timely decisions regarding required disclosure.

 

As indicated in thecertifications in Exhibit 32 of this report, our Chief Executive Officer andour Chief Financial Officer, with the assistance of other members of ourmanagement, have evaluated our disclosure controls and procedures (as definedin the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)). Basedupon the evaluation of our disclosure controls and procedures required bySecurities Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief ExecutiveOfficer and Chief Financial Officer have concluded that as of the end of theperiod covered by this report, our disclosure controls and procedures wereeffective.

 

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Our internal control system was designed to providereasonable assurance to the Company’s management and board of directorsregarding the preparation and fair presentation of published financialstatements.

 

All internal controlsystems, no matter how well designed, have inherent limitations. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and presentation.

 

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**Changes inInternal Control Over Financial Reporting**

 

We are involved in ongoingevaluations of internal controls. In anticipation of the filing of thisquarterly report, our Chief Executive Officer and Chief Financial Officer, withthe assistance of other members of our management, reviewed our internalcontrols and have determined, based on such review, that there have been nochanges in internal control over financial reporting during the quarter endedSeptember 29, 2007 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

**Part II.OTHER INFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

From time to time, we areplaintiffs or defendants in various litigation matters in the ordinary courseof our business, some of which involve claims for damages that are substantialin amount. We believe that the disposition of claims currently pending will nothave a material adverse effect on our financial position or results ofoperations.

 

The manufacture and sale oforthopedic devices and related products exposes us to significant risks ofproduct liability claims, lawsuits and product recalls. From time to time, wehave been, and we are currently, the subject of a number of product liabilityclaims and lawsuits relating to our products. We face an inherent business riskof exposure to product liability claims in the event that the use of ourproducts is alleged to have resulted in adverse effects, including injuries ordeath. If there is a significant increase in the number or amount of productliability claims, our business could be adversely affected. Even if we aresuccessful in defending against any product liability claims, such claims couldnevertheless distract our management, result in substantial costs, harm ourreputation, adversely affect the sales of all our products and otherwise harmour business.

 

We currently carry productliability insurance up to a limit of $20.0 million, subject to an aggregate self-insurancedeductible of $750,000. Our insurance policy is subject to annual renewal. Webelieve our current product liability insurance coverage is adequate. As ofSeptember 29, 2007, we exceeded the coverage limits for certain type of productliability claims. However, our estimate of the excess loss has been accrued forin our consolidated balance sheet as of September 29, 2007. Other productliability claims that could be made against us could significantly exceed thecoverage limit of such policy or such insurance coverage may not continue to beavailable on commercially reasonable terms or at all. Additionally, we are alsosubject to the risk that our insurers will exclude from coverage claims madeagainst us or the risk that insurers may become insolvent. If we do not orcannot maintain adequate product liability insurance, our business and resultsof operations may be adversely affected.

 

On July 7, 2006, a purportedclass action complaint, *Louis Dudas et al.v.**Encore Medical Corporation etal.,*was filed against RTI and its directors in the District Courtof Travis County, Texas, 345th Judicial District (the “Texas Action”). On July18, 2006, a second purported class action complaint, *Robert**Kemp et al. v.Alastair J. Clemow et al.*(the “Delaware Action”) was filed by aputative stockholder of RTI in the Court of Chancery of the State of Delaware,New Castle County, against RTI and its directors. Blackstone Capital Partners VL.P. and Grand Slam Holdings, LLC were also named as defendants in the DelawareAction and the Texas Action. The Delaware Action was dismissed by theplaintiffs in February 2007 with no liability accrued to RTI or the otherdefendants.

 

The Texas Action is still inpreliminary stages and we cannot presently predict the outcome of the lawsuit,although we believe it is without merit. The Texas Action complaint allegesthat RTI’s directors breached their fiduciary duties by, *inter alia*, agreeing to an allegedlyinadequate acquisition price in connection with the Merger transaction. Thecomplaint seeks, among other things, to rescind any actions that have alreadybeen taken to consummate the Merger, rescissory damages, and the plaintiffs’reasonable costs and attorneys’ fees and expert fees.

 

**ITEM 1A.RISK FACTORS**

 

Therisk factors described below reflect any material changes from the risk factorspreviously disclosed in our Registration Statement on Form S-4 as filed withthe Securities and Exchange Commission on May 1, 2007 (file No. 333-142188), asamended.

 

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**Our financial condition and growth depends upon thesuccessful integration of our acquired businesses. We may not be able toefficiently and effectively integrate recently and future acquired operations,and thus may not fully realize the anticipated benefits from such acquisitions.**

 

Weentered into the DJO Merger Agreement with the expectation that our acquisitionof DJO will result in benefits to each company. Achieving the anticipatedbenefits of the DJO Merger will depend in part upon whether we can integrateour businesses in an efficient and effective manner. In addition, theintegration of previously acquired businesses and any future businesses that wemay acquire involves a number of risks, including, but not limited to:

 

•  the disruption of ongoing business and thediversion of management’s attention from the management of daily operations tothe integration of operations;

 

•  loss of key personnel of the recentlyacquired operations;

 

•  higher integration costs than anticipated;

 

•  failure to fully achieve expected synergiesand costs savings;

 

•  difficulties in the assimilation andretention of highly qualified, experienced employees;

 

•  resistance to the assimilation of differentcultures and practices, and complexity in the assimilation of personnel andoperations which are broadly geographically dispersed; and

 

•  unanticipated impediments in the integrationof departments, systems, including accounting systems, technologies, books andrecords and procedures, as well as in maintaining uniform standards, controls,including internal control over financial reporting required by theSarbanes-Oxley Act of 2002, procedures and policies.

 

Ifwe cannot efficiently and effectively integrate acquired businesses oroperations, we would be likely to experience material negative consequences toour business, financial condition or results of operations. Successfulintegration of these acquired businesses or operations will depend on ourability to manage these operations, realize opportunities for revenue growthpresented by strengthened product offerings and expanded market coverage and,to some degree, to eliminate redundant and excess costs to fully realize theexpected synergies. We cannot be certain that we will realize our anticipatedbenefits from our recent acquisitions, or that we will be able to efficientlyand effectively integrate the recently acquired operations as planned. If wefail to integrate the recently acquired operations efficiently or fail torealize the benefits we anticipate, it could have a material adverse effect onour business, financial condition, and results of operations.

 

**ITEM 2.****UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF****PROCEEDS**

 

(a)  Not applicable.

 

(b)  Not applicable.

 

(c)  Not applicable.

 

**ITEM 3.****DEFAULTSUPON SENIOR SECURITIES**

 

None.

 

**ITEM 4.****SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

**ITEM 5.****OTHERINFORMATION**

 

(a)  None.

 

(b)  None.

 

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**ITEM 6.****EXHIBITS**

 

(a)  Exhibits.

 
| 3.1  | Certificate of Formation of ReAble Therapeutics Finance LLC  (incorporated by reference to Exhibit 3.1 of RTFL’s Registration Statement on  Form S-4, filed on April 18, 2007 (File No. 333-142188)).            |
|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  | Limited Liability Company Agreement of ReAble Therapeutics Finance  LLC (incorporated by reference to Exhibit 3.2 of RTFL’s Registration  Statement on Form S-4, filed on April 18, 2007 (File No. 333-142188)). |
| 10.1 | Amendment No. 1 to Credit  Agreement (incorporated by reference herein to Exhibit 10.1 to RTFL’s Current  Report on Form 8-K filed on July 5, 2007).                                                             |
| 10.2 | Incremental Amendment No.  1 to Credit Agreement (incorporated by reference herein to Exhibit 10.2  to RTFL’s Current Report on Form 8-K filed on July 5, 2007).                                            |
| 10.3 | Agreement and Plan of  Merger with DJO Incorporated Reaction Acquisition Merger Sub, Inc.  (incorporated by reference herein to Exhibit 10.3 to RTFL’s Current Report on  Form 8-K filed on July 15, 2007).      |
| 31.1 | Certification (pursuant to  Securities Exchange Act Rule 13a-14a) by Chief Executive Officer.                                                                                                                         |
| 31.2 | Certification (pursuant to  Securities Exchange Act Rule 13a-14a) 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.                                                                                           |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
|                  |   |                                                                                                                   | ReAble Therapeutics  Finance LLC |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------|----------------------------------|
|             |   |                                                                                                                   |                             |
| October 29, 2007 |   | By:                                                                                                                    | /s/ Kenneth W. Davidson          |
| Date             |   | Kenneth W. Davidson,                                                                                                   |
|             |   | Chief Executive Officer                                                                                                |
|             |   | (Principal Executive  Officer)                                                                                         |
|             |   |                                                                                                                   |
| October 29, 2007 |   | By:                                                                                                                    | /s/ William W. Burke             |
| Date             |   | William W. Burke,                                                                                                      |
|             |   | Executive Vice  President and Chief Financial Officer  (Principal Financial Officer and Principal Accounting  Officer) |

 

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