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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-K

|           |  |                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                         
|           |  |                                                                                         
|x          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934    
|           |  |                                                                                         
|           |  | For the fiscal year ended December 31, 2002                                             
|           |  |                                                                                         
|           |  | 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 001-16757

DJ ORTHOPEDICS, INC.

(Exact name of Registrant as specified in its charter)


|                                                                             |  |                                                   
|---------------------------------------------------------------------------- |  | --------------------------------------------------
|Delaware
(State or other jurisdiction of
Incorporation or organization)      |  | 33-0978270
(I.R.S. Employer
Identification Number)
|                                                                             |  |                                                   
|2985 Scott Street
Vista, California
(Address of principal executive offices) |  | 92083
(Zip Code)                                  

Securities registered pursuant to Section 12(b) of the Act:

|                              |  |                         
|----------------------------- |  | ------------------------
|                              |  | Name of Each Exchange on
|Title of Each Class           |  | Which Registered        
|                              |  |                         
|Common Stock, $0.01 Par Value |  | New York Stock Exchange 

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

|      |  |     
|----- |  | ----
|Yes x |  | No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]

Indicated by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).

|      |  |     
|----- |  | ----
|Yes x |  | No o

The aggregate market value of all outstanding common equity held by
non-affiliates of the Registrant based on the closing price of common stock as
reported on the New York Stock Exchange on June 28, 2002, was $75,490,585.

The number of shares of the Registrants common stock outstanding at February
28, 2003 was 17,901,796 shares.

Documents Incorporated by Reference

Portions of the Proxy Statement for the Registrants 2003 Annual Meeting of
Stockholders to be filed with the Commission on or before April 30, 2003 are
incorporated by reference in Part III of this Annual Report on Form 10-K. With
the exception of those portions that are specifically incorporated by reference
in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed
filed as part of this Report or incorporated by reference herein.



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TABLE OF CONTENTS



|                                                                                                                                              |                                                                                               |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I                                                                                                                                       
|                                                                                                                                              | Item 1. Business                                                                             
|                                                                                                                                              | Item 2. Properties                                                                           
|                                                                                                                                              | Item 3. Legal Proceedings                                                                    
|                                                                                                                                              | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                                                                                                              | Item 4A. Executive Officers                                                                  
|PART II                                                                                                                                      
|                                                                                                                                              | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters            
|                                                                                                                                              | Item 6. Selected Financial Data                                                              
|                                                                                                                                              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                                                                                                              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                                                                                                                              | Item 8. Financial Statements and Supplementary Data                                          
|                                                                                                                                              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III                                                                                                                                     
|                                                                                                                                              | Item 10. Directors and Executive Officers of the Registrant                                  
|                                                                                                                                              | Item 11. Executive Compensation                                                              
|                                                                                                                                              | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                                                                                                                                              | Item 13. Certain Relationships and Related Transactions                                      
|                                                                                                                                              | Item 14. Controls and Procedures                                                             
|PART IV                                                                                                                                      
|                                                                                                                                              | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES                                                                                                                                   
|CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO QUARTERLY REPORTS
|INDEX TO EXHIBITS                                                                                                                            
|EXHIBIT 10.66                                                                                                                                
|EXHIBIT 10.67                                                                                                                                
|EXHIBIT 12.1                                                                                                                                 
|EXHIBIT 21.1                                                                                                                                 
|Exhibit 23.1                                                                                                                                 



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##### Table of Contents



DJ ORTHOPEDICS, INC.

FORM 10-K
TABLE OF CONTENTS

|               |  |                                                                                       |  |         
|-------------- |  | ------------------------------------------------------------------------------------- |  | --------
|               |  |                                                                                       |  | Page No.
|               |  |                                                                                       |  |         
|               |  | PART I                                                                                |  |         
|Item 1.        |  | Business                                                                              |  | 3       
|Item 2.        |  | Properties                                                                            |  | 27      
|Item 3.        |  | Legal Proceedings                                                                     |  | 27      
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                   |  | 28      
|Item 4A        |  | Executive Officers                                                                    |  | 28      
|               |  | PART II                                                                               |  |         
|Item 5.        |  | Market for the Registrants Common Equity and Related Stockholder Matters             |  | 29      
|Item 6.        |  | Selected Financial Data                                                               |  | 29      
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 33      
|Item 7A        |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 43      
|Item 8.        |  | Financial Statements and Supplementary Data                                           |  | 45      
|Item 9.        |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 73      
|               |  | PART III                                                                              |  |         
|Item 10.       |  | Directors and Executive Officers of the Registrant                                    |  | 74      
|Item 11.       |  | Executive Compensation                                                                |  | 74      
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 74      
|Item 13.       |  | Certain Relationships and Related Transactions                                        |  | 74      
|Item 14.       |  | Controls and Procedures                                                               |  | 74      
|               |  | PART IV                                                                               |  |         
|Item 15.       |  | Exhibits, Financial Statement Schedules and Reports On Form 8-K                       |  | 74      
|SIGNATURES     |  | 81                                                                                   
|CERTIFICATIONS |  | 82                                                                                   

Explanatory Note

This annual report on a Form 10-K is filed for dj Orthopedics, Inc. (dj
Orthopedics), a Delaware corporation. It is also filed for dj Orthopedics, LLC
(dj Ortho), a Delaware limited liability company and DJ Orthopedics Capital
Corporation (DJ Capital), a Delaware corporation, with respect to the 12 5/8% Senior
Subordinated Notes (the Notes) due in 2009 in an original aggregate principal
amount at maturity of $100 million that were co-issued by dj Ortho and dj
Capital. dj Orthopedics
owns 100% of the equity interest of dj Ortho and does not otherwise own any
material assets or business operations. The financial position and operating
results of dj Orthopedics and dj Ortho are, therefore, substantially the same
and are reflected in the consolidated financial information contained in this
report. dj Capital was formed solely to act as co-issuer of the Notes and does
not hold any assets or conduct any business operations of its own. Financial
information for dj Capital would not be meaningful and is not included in this
annual report.

Note on Forward-Looking Information

This annual report on Form 10-K includes forward-looking statements
intended to be within the safe-harbor for such statements provided by Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. These statements reflect our current estimates, expectations and
projections about our future results, performance, prospects and opportunities.
Forward-looking statements include, among other things, the information
concerning our possible future results of operations, business and growth
strategies, financing plans, cost reduction programs, our competitive position
and the effects of competition and the projected growth of the markets in which
we operate. Forward-looking statements include all statements that are not
historical facts. In some cases, you can identify these statements by
forward-looking words such as anticipate, believe, could, estimate, expect,
intend, may, should, will, plan, intend, would and similar expressions. These
forward-looking statements are based on information currently available to us
and are subject to a number of risks, uncertainties and other factors that
could cause our actual results, performance, prospects or opportunities to
differ materially from those expressed in, or implied by, the forward-looking
statements we make in this annual report. Important factors that could cause
our actual results to differ materially from the results referred to in the
forward-looking statements we make in this annual report are discussed under
Risk Factors and elsewhere in this annual report, and you are cautioned to
consider these risk factors in connection with such forward-looking statements.

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Part I




Item 1. Business

Overview

We are a global orthopedic sports medicine company specializing in the
design, manufacture and marketing of products that rehabilitate soft tissue and
bone injuries, help protect against injury, and treat osteoarthritis of the
knee. Osteoarthritis is a form of damage to or degeneration of the articular
surface of a joint. Our broad range of over 600 existing products, many of
which are based on proprietary technologies, include rigid knee braces, soft
goods and specialty and other complementary orthopedic products which provide
solutions for patients and orthopedic sports medicine professionals throughout
the patients continuum of care. Our products can be grouped into three broad
categories as follows:



| |  |  | Rigid Knee Braces.Our DonJoy® line of rigid knee braces
includes ligament braces, which provide support for knee
ligament instabilities, post-operative braces, which provide
both knee immobilization and a protected range of motion, and
osteoarthritic braces, which provide relief of knee pain due to
osteoarthritis. These technologically advanced products are
generally prescribed by orthopedic sports medicine surgeons.
Our rigid knee braces are either customized braces, utilizing
basic frames which are then custom-manufactured to fit a
patients particular measurements, or are standard braces which
are available off-the-shelf in various sizes and can be easily
adjusted to fit the patient in the orthopedic professionals
office.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Soft Goods.Our soft goods products, most of which are
constructed from fabric or neoprene materials, provide support
and/or heat retention and compression of the knee, ankle, back
and upper extremities, including the shoulder, elbow, neck and
wrist.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | Specialty and Other Complementary Orthopedic Products.Our
portfolio of specialty and other complementary orthopedic
products includes two post-surgery systems: a continuous cold
therapy system to assist in the reduction of pain and swelling;
and a pain management delivery system that employs ambulatory
infusion pumps for the delivery of local anesthetic to the
surgical site. Also included within this product category are
lower extremity fracture boots, which are an alternative to
lower extremity casting, and upper extremity shoulder and arm
braces and slings.                                                                                                                                                                            

In this annual report, the terms we, our, and us refer to dj Orthopedics,
Inc., a Delaware corporation, and its subsidiaries. The principal operating
subsidiary of dj Orthopedics, Inc. is dj Orthopedics, LLC, a limited liability
company organized in Delaware. We are the successor to DonJoy, L.L.C., and
that company was, prior to June 30, 1999, a wholly owned subsidiary of Smith &
Nephew, Inc. Our executive offices are located at 2985 Scott Street, Vista,
California 92083, and our telephone number is (800) 336-5690. Our website is
www.djortho.com.

We file annual reports, such as this Form 10-K, as well as quarterly
reports on Form 10-Q and current reports on Form 8-K, with the U.S. Securities
and Exchange Commission (SEC). We make these reports available free of charge
on our website under the investor relations page. The reports can be accessed
the same day as they are filed with the SEC. All such reports were made
available in this fashion during 2002.

Performance Improvement Program

In August 2002, we commenced a company-wide performance improvement
program with the objective of increasing revenues and reducing both costs of
goods sold and operating expenses as a percentage of net revenues beginning in
2003. We retained the services of AlixPartners, LLC, a consulting firm
specializing in corporate performance enhancement, to assist with the
performance improvement program.

With the goal of reducing costs by streamlining our organization
structure, we began our performance improvement program with the elimination of
several senior management positions. In September 2002, we also commenced the
move of the manufacturing of all our remaining soft goods and certain
non-custom rigid braces manufactured in the United States to our manufacturing
facilities in Mexico. The move of these manufacturing operations was completed
by the end of 2002 and resulted in the elimination of approximately 200 U.S.
positions. A comparable number of positions were added in Mexico. The
manufacturing move is expected to result in reduced manufacturing costs. Other
focuses of the performance improvement program include reducing operating
expenses; improving the profitability of revenue from our OfficeCare® channel;
reducing working capital and improving our business processes and information
systems. Although the performance improvement program was substantially
completed by the end of 2002, no assurance can be given that it will be
successful in achieving the desired goals.

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Business Segments

In connection with the performance improvement program, we refocused our
resources on our core business within the rehabilitation segment of the
orthopedic sports medicine market. We have discontinued our surgical line of
products sold under the Alaron®brand and will not enter the total joint
replacement market at this time. We have organized our business around our
distribution channels and are presenting our financial information in this
annual report according to business segments corresponding to these channels.
The channels are:



| |  |  | DonJoy®sales, in which our products are sold through
independent sales agents and their direct and indirect sales
representatives to orthopedic surgeons, orthotic and prosthetic
centers, hospitals and other sports medicine outlets;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | ProCare®, in which products are sold primarily to
national third party distributors, regional medical supply dealers
and medical product buying groups;                                                                                
|
| |  |  | OfficeCare®, in which we maintain an inventory of product on
hand at orthopedic practices for immediate disbursement to the
patient and we arrange billing to the patient or third party payer;
and                                    
|
| |  |  | International, in which our products are sold in foreign
countries through wholly owned subsidiaries or independent
distributors.                                                                                                      

Strategy

Our strategic objectives are to strengthen our leadership position in the
orthopedic sports medicine market and to increase our revenues and achieve
profitability. The key elements of our business strategy include:

Focus on our Core Business.An important part of our performance
improvement program is a commitment to focus on our core rehabilitation
business. While we may in the future move into the repair and regeneration
segments of the orthopedic sports medicine market, our emphasis at this time is
in rehabilitation and will include increased attention to and resources in
developing and marketing new and innovative rehabilitation products, as well as
increasing market share for our existing products. To this end, we have
ceased active commercialization of our Alaron® surgical product line and have
discontinued marketing our knee replacement product. In 2001, we entered into
an agreement with I.M.D., b.v. (IMD) to distribute a bone growth stimulator,
OrthoPulse, which was planned to be our first product in the regeneration
market. We intend to follow closely the efforts of IMD to obtain approval of
the U.S. Food and Drug Administration for its OrthoPulse product (see Products
 Specialty and Other Complementary Orthopedic Products 
Bone Growth Stimulator).

Applying our Engineering and Manufacturing Expertise to Introduce New
Products and Product Enhancements.We intend to remain an innovator of
orthopedic sports medicine products through our commitment to research and
development and our close working relationships with orthopedic professionals
by designing, developing and introducing products in the orthopedic sports
medicine market. Using our materials, process and design expertise in bracing
and supports, we will continue to enhance our current range of products to
address changing customer needs, emphasizing high quality product designs that
will reduce labor and material costs. In addition, we intend to add
complementary products through our own research and development efforts and
arrangements with third parties. For example, we have introduced two pain
management systems, the IceMan® device, a cold therapy system, which we
developed, and the PainBuster® Pain Management System, a range of ambulatory
infusion pumps. In early 2003, we released the Fource Point  knee brace, our
latest advancement in rigid knee braces for ligament protection and
rehabilitation, and a new fracture boot product for patients with
diabetes-related foot problems.

Enhance Effectiveness and Profitability of our OfficeCare®Channel.We
plan to increase the profitability and decrease the required amount of working
capital in our OfficeCare channel through the successful implementation of our
contract to outsource the revenue cycle aspects of the business to a third
party. Our outsource partner will be responsible for order entry, billing and
collections, permitting us to concentrate on manufacturing, building
relationships with orthopedic practices, inventory controls, and customer
service. We believe that this distribution channel serves a growing need among
orthopedic practices and represents an opportunity for significant growth for
our entire line of products.

Securing Additional National Accounts.We plan to capitalize on the
growing practice in healthcare in which hospitals and other large healthcare
providers seek to reduce costs by outsourcing their purchasing activities to
national buying groups. (See Distribution Channels  ProCare®.) Contracts with
these national accounts represent a significant opportunity for sales in large
volumes. We believe that our broad range of products is well-suited for the
goals of these buying groups and intend to pursue these contracts aggressively.

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Growing International Revenues and Profits through Direct Representation
in Key Countries.We intend to increase our international revenues and profits
in key countries where we believe the opportunity for growth is significant due
to high per capita healthcare spending. We believe that direct control of the
distribution networks in selected countries through wholly-owned subsidiaries
will allow us to accelerate the launch of new products and product
enhancements, to benefit from the sale of our higher margin, value added
products and to capture the distributors margin. We have established
subsidiaries in Germany and the United Kingdom effective January 1, 2002 and in
Canada effective May 7, 2002. We market products in over 40 countries,
primarily countries in Europe, as well as in Australia, Canada and Japan.
International sales accounted for approximately 13% and 11% of our net
revenues, excluding freight revenue, in 2002 and 2001, respectively.

Increasing Margins by Capitalizing on Operating Efficiencies Achieved in
our Performance Improvement Program.We plan to capitalize on the improved
operating efficiencies generated in our performance improvement programs to
enhance gross margins and reduce operating expenses. We have moved the bulk of
our labor-intensive operations to our facilities in Mexico to generate labor
cost savings. We have converted our manufacturing scheduling to produce
finished goods on customer demand and are in the process of converting our
procurement process to enable us to replenish our supply of raw materials upon
usage. Both processes will allow us to decrease the level of inventory
necessary to operate the business as well as reduce the risk of excess and
obsolete inventory. We also plan to achieve cost savings by further reducing
the number of stock keeping units (SKUs) without impacting service or breadth
of our product range. Additionally, we have streamlined our organization and
improved our cost structure by consolidating certain executive positions and
corporate functions.

Pursuing Strategic Growth Opportunities by Acquiring or Licensing
Complementary Products and Technologies.We may continue to acquire or license
complementary products and technologies applicable to the orthopedic sports
medicine market that will allow us to broaden our product lines and leverage
our existing infrastructure, distribution networks, brand name recognition and
expertise in research and development.

Products

Rigid Knee Bracing

We design, manufacture and market a broad range of rigid knee bracing
products, including ligament braces, post-operative braces and osteoarthritic
braces. These technologically advanced products are generally prescribed to a
patient by an orthopedic sports medicine surgeon. Our rigid knee braces are
either customized to fit a patients particular measurements or are standard
braces which are available off-the-shelf in various sizes and can be easily
adjusted to fit the patient in the orthopedic professionals office.

Ligament Braces.Ligament braces provide durable support for moderate to
severe knee ligament instabilities to help patients regain range of motion
capability so they can successfully complete rehabilitation and resume the
activities of daily living after knee surgery or injury. Ligament braces are
generally prescribed six to eight weeks after knee surgery, often after use of
a more restrictive post-operative brace. Our ligament braces can also be used
to support the normal functioning of the knee. Our ligament bracing product
line includes premium customized braces generally designed for strenuous
athletic activity and off-the-shelf braces generally designed for use in less
rigorous activity. All of our ligament braces are designed using our patented
Four Points of Leverage system. This system exerts a force on the upper
portion of the tibia, which, in turn, reduces strain on the damaged,
reconstructed or torn ligament. Our U.S. patent covering the Four Points of
Leverage system expires in January 2005.

Post-operative Braces.Post-operative braces limit a patients range of
motion after knee surgery and protect the repaired ligaments/joints from stress
and strain which would slow or prevent a healthy healing process. The products
within this line provide both immobilization and a protected range of motion,
depending on the rehabilitation protocol prescribed by the orthopedic sports
medicine surgeon. Our post-operative bracing product line includes a range of
premium to lower priced off-the-shelf braces and accessory products. We also
offer the patented DonJoy Vista Rehabilitation System that facilitates patient
rehabilitation in a home or clinical setting by motivating and improving
compliance of patients through continuous feedback and recorded home exercise
sessions.

Osteoarthritic Braces.Osteoarthritic braces are used to treat patients
suffering from osteoarthritis. Our line of customized and off-the-shelf
osteoarthritic braces is designed to shift the load going through the knee,
providing additional stability and reducing pain, and in some cases may serve
as a cost-efficient alternative to total knee replacement.

In 2001, we introduced the Knee Guarantee program, in relation to our
Defiance® knee brace. The Knee Guarantee program will, in specified instances,
cover a patients insurance deductible up to $1,000, or give uninsured patients
$1,000, towards surgery should an ACL re-injury occur while wearing the brace.
As of December 31, 2002, claims under this program were minimal.

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The following table sets forth information on our primary products within
the three rigid knee bracing product lines, all of which are sold under the
DonJoy®brand name.

|                                                    |  |                                             |  |        |  |                                                                                                                                                            
|--------------------------------------------------- |  | ------------------------------------------- |  | ------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                    |  |                                             |  | Year   |  |                                                                                                                                                            
|                                                    |  |                                             |  | Intro- |  |                                                                                                                                                            
|Product                                             |  | Category                                    |  | duced  |  | Function/Description                                                                                                                                       
|                                                   
|Defiance®                                           |  | Ligament                                    |  | 1992   |  | Our flagship knee brace, custom fitted to patient                                                                                                          
|                                                    |  | Instability                                 |  |        |  | measurements. Available in a broad range of colors and                                                                                                     
|                                                    |  | Osteoarthritis                              |  |        |  | patterns. Designed for strenuous athletic and work                                                                                                         
|                                                    |  |                                             |  |        |  | activity.                                                                                                                                                  
|Legend                                             |  | Ligament                                    |  | 1995   |  | Sturdy, patient ready brace available in seven sizes with                                                                                                  
|                                                    |  | Instability                                 |  |        |  | a rugged rubberized coating. Designed for both athletic                                                                                                    
|                                                    |  |                                             |  |        |  | and work activity.                                                                                                                                         
|4TITUDE®                                            |  | Ligament                                    |  | 1999   |  | Our premium patient ready knee brace available in seven                                                                                                    
|                                                    |  | Instability                                 |  |        |  | sizes and two length options to suit a wider variety of                                                                                                    
|                                                    |  |                                             |  |        |  | patient requirements. Features include a low profile,                                                                                                      
|                                                    |  |                                             |  |        |  | light weight, and high durability.                                                                                                                         
|Enhanced Playmaker                                 |  | Ligament                                    |  | 2000   |  | Multi-purpose non-rigid brace widely used to address mild                                                                                                  
|                                                    |  | Instability                                 |  |        |  | to moderate instabilities.                                                                                                                                 
|SE 4-point                                         |  | Ligament                                    |  | 2001   |  | Lower cost, patient ready brace addressing targeted market                                                                                                 
|                                                    |  | Instability                                 |  |        |  | needs while still delivering DonJoy performance and                                                                                                        
|                                                    |  |                                             |  |        |  | support.                                                                                                                                                   
|DonJoy CE                                          |  | Ligament                                    |  | 2001   |  | Low cost custom knee brace product targeted for specialty                                                                                                  
|                                                    |  | Instability                                 |  |        |  | markets and managed care.                                                                                                                                  
|Armor by DonJoy                                     |  | Ligament                                    |  | 2001   |  | Our brace designed for extreme users. These braces                                                                                                         
|                                                    |  | Instability                                 |  |        |  | feature a medial thigh cut-away, swiveling strap tabs,                                                                                                     
|                                                    |  | Prophylaxis                                 |  |        |  | extra strong 1/8 inch thick frame and sport specific                                                                                                       
|                                                    |  |                                             |  |        |  | accessories.                                                                                                                                               
|Defiance® DropLock                                  |  | Ligament                                    |  | 2002   |  | Custom-made rigid brace designed to aid in the treatment                                                                                                   
|                                                    |  | Instability,                                |  |        |  | of quadricep muscle disorders, such as Post-Polio                                                                                                          
|                                                    |  | Muscle                                      |  |        |  | Syndrome, and for use in ACL rehabilitation protocols.                                                                                                     
|                                                    |  | Disorders                                   |  |        |  | Features a patent-pending drop lock hinge design.                                                                                                          
|Fource Point                                       |  | Ligament                                    |  | 2003   |  | Advanced
patent-pending design that dampens knee joint extension, which                                                                                    
|                                                    |  | Instability                                 |  |        |  | improves mechanical performance of the brace and reduces                                                                                                   
|                                                    |  |                                             |  |        |  | shear forces at the knee.                                                                                                                                  
|                                                   
|IROM Brace                                         |  | Post-operative                              |  | 1992   |  | Used for post-operative management of various knee                                                                                                         
|(Improved Range Of Motion)                          |  | Motion Control                              |  |        |  | procedures. Allows for immobilization and/or protected                                                                                                     
|                                                    |  | and Stability                               |  |        |  | range of motion.                                                                                                                                           
|DonJoy ELS                                         |  | Post-operative                              |  | 1996   |  | Designed to accommodate aggressive rehabilitation, the ELS                                                                                                 
|(Extension Lock Splint)                             |  | knee support with selective                 |  |        |  | features a simple
slide lock mechanism that can be easily manipulated by the patient.                                                                      
|                                                    |  | immobilization                              |  |        |  |                                                                                                                                                            
|TROM Brace                                         |  | Post-operative                              |  | 1998   |  | Allows for both immobilization and for protected range of                                                                                                  
|(Total Range Of Motion)                             |  | Motion Control                              |  |        |  | motion after surgery. Features a patented hinge adjustment                                                                                                 
|                                                    |  | and Stability                               |  |        |  | system for ease of use and patient convenience.                                                                                                            
|IROM, ELS, and
TROM Braces with Telescoping Bars |  | Post-operative Motion Control and Stability |  | 2001   |  | Adjustable length
post-op braces in all hinge designs introduced to reduce customer
inventory requirements and offer improved fit and performance features.
|                                                   
|OPAL                                               |  | Osteoarthritis                              |  | 1998   |  | Comfortable, lightweight, low profile slip-on brace using                                                                                                  
|                                                    |  |                                             |  |        |  | DonJoy Drytex material, yet delivering substantial                                                                                                         
|                                                    |  |                                             |  |        |  | support. Designed for patients with mild to moderate                                                                                                       
|                                                    |  |                                             |  |        |  | osteoarthritis.                                                                                                                                            
|Oadjuster®                                          |  | Osteoarthritis                              |  | 2000   |  | The unique Oadjuster® brace is designed to be patient                                                                                                      
|                                                    |  |                                             |  |        |  | ready, easy to fit and comfortable to wear. Oadjuster®                                                                                                     
|                                                    |  |                                             |  |        |  | features a bi-axial hinge that provides ability to shift                                                                                                   
|                                                    |  |                                             |  |        |  | pressures and load in the knee.                                                                                                                            
|Montana®                                            |  | Osteoarthritis                              |  | 2000   |  | Custom cast molded brace provides pain relief for                                                                                                          
|                                                    |  |                                             |  |        |  | osteoarthritis patients with large cuffs for hard-to-fit                                                                                                   
|                                                    |  |                                             |  |        |  | patients, a multi-vector hinge and diagonal loading straps                                                                                                 
|                                                    |  |                                             |  |        |  | for patient adjustment to address pain.                                                                                                                    

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|                      |  |                   |  |        |  |                                                          
|--------------------- |  | ----------------- |  | ------ |  | ---------------------------------------------------------
|                      |  |                   |  | Year   |  |                                                          
|                      |  |                   |  | Intro- |  |                                                          
|Product               |  | Category          |  | duced  |  | Function/Description                                     
|                     
|Adjustable            |  | Osteoarthritis    |  | 2002   |  | Custom double upright osteoarthritis brace positioned for
|OA Defiance          |  |                   |  |        |  | active aging baby boomer. A custom correction is built 
|                      |  |                   |  |        |  | into the frame with an adjustable telescoping condyle pad
|                      |  |                   |  |        |  | that allows the patient to fine-tune the load to the   
|                      |  |                   |  |        |  | demand of the activity. The brace features multiple color
|                      |  |                   |  |        |  | schemes and varying lengths.                             
|                     
|DonJoy Vista         |  | Rehabilitation    |  | 2001   |  | Features a TROM post-op brace, a hand-held patient data  
|Rehabilitation System |  | System for        |  |        |  | device similar in look and feel to a personal digital    
|                      |  | patient           |  |        |  | device, and custom clinician computer software used to   
|                      |  | education, brace, |  |        |  | design rehabilitation protocols. Using the system for    
|                      |  | coaching, and     |  |        |  | ligament reconstruction procedures, total joint          
|                      |  | real time         |  |        |  | replacements, and other knee procedures can help the     
|                      |  | biofeedback       |  |        |  | patient, therapist and physician better monitor and      
|                      |  |                   |  |        |  | measure rehabilitation progress.                         
|                     

Soft Goods

Our soft goods products, most of which are fabric or neoprene-based,
provide support and/or heat retention and compression for afflictions of the
knee, ankle, back and upper extremities, including the shoulder, elbow, neck
and wrist. We currently offer products ranging from simple neoprene knee
sleeves to complex products that incorporate advanced materials and features
such as air-inflated cushions and metal alloy hinge components.

The following table sets forth information on our primary soft goods products:

|                      |  |                                             |  |            |  |                                                                                                                                                                                          
|--------------------- |  | ------------------------------------------- |  | ---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                      |  |                                             |  | Year       |  |                                                                                                                                                                                          
|Product               |  | Category                                    |  | Introduced |  | Function/Description                                                                                                                                                                     
|                     
|Playmaker®            |  | Ligament                                    |  | 1992       |  | Low profile neoprene brace with extended hinge bars is an                                                                                                                                
|                      |  | instabilities                               |  |            |  | intermediate-level product that can be used for mild to moderate                                                                                                                         
|                      |  |                                             |  |            |  | knee ligament instabilities.                                                                                                                                                             
|                     
|RocketSoc®            |  | Chronic ankle                               |  | 1992       |  | Lightweight, low profile device designed to control abnormal                                                                                                                             
|                      |  | instabilities                               |  |            |  | plantar flexion and inversion without restricting range of                                                                                                                               
|                      |  |                                             |  |            |  | motion. Peroneal forefoot and calcaneal heel lock straps                                                                                                                                 
|                      |  |                                             |  |            |  | provide unsurpassed support to the anterior talofibular,                                                                                                                                 
|                      |  |                                             |  |            |  | calcaneofibular and posterior talofibular ligaments.                                                                                                                                     
|                     
|Air DonJoy®           |  | Medial/lateral                              |  | 1995       |  | Low cost knee sleeve with air inflatable cushions designed to                                                                                                                            
|                      |  | instabilities                               |  |            |  | treat and ease the pain of patellofemoral malalignment,                                                                                                                                  
|                      |  |                                             |  |            |  | including lateral subluxation and dislocations. Adjustable                                                                                                                               
|                      |  |                                             |  |            |  | straps allow for correction of patellar tilt, glide and rotation.                                                                                                                        
|                     
|Stabilizing Ankle     |  | Chronic ankle                               |  | 1997       |  | Low profile, lace-up design with figure eight strapping locks in                                                                                                                         
|Support               |  | instabilities                               |  |            |  | heel and provides compressive support to help prevent injury                                                                                                                             
|                      |  |                                             |  |            |  | during athletic or daily activities.                                                                                                                                                     
|                     
|COMFORTFORM Wrist    |  | Ligament and cumulative trauma applications |  | 1997       |  | Provides comfortable
support for the wrist to help reduce pain and inflammation from
conditions such as sprains, strains, arthritis and cumulative trauma injuries such as carpal tunnel.
|                     
|Surround® w/Air Ankle |  | Post-trauma and                             |  | 2001       |  | Rigid ankle stirrup design with pre-inflated air bladder lined                                                                                                                           
|                      |  | chronic ankle                               |  |            |  | with compressive foam to provide support and compression to                                                                                                                              
|                      |  | instabilities                               |  |            |  | swollen tissue. While walking, air bladder compresses the joint                                                                                                                          
|                      |  |                                             |  |            |  | to reduce swelling.                                                                                                                                                                      
|                     
|Tru-Pull             |  | Patellofemoral                              |  | 2003       |  | Hybrid Drytex and breathable mesh fabric sleeve features an                                                                                                                              
|Advanced System       |  | Dysfunction                                 |  |            |  | elastomeric pull device that provides a dynamic effect during                                                                                                                            
|                      |  |                                             |  |            |  | knee extension. Patented independent anchors prevent rotation of                                                                                                                         
|                      |  |                                             |  |            |  | the brace and provide a True and consistent pull on the                                                                                                                                
|                      |  |                                             |  |            |  | patella to avoid lateral subluxation.                                                                                                                                                    
|                     

Specialty and Other Complementary Orthopedic Products

We have a portfolio of specialty and other complementary orthopedic
products designed to facilitate orthopedic rehabilitation, including cold
therapy systems, pain management systems, lower extremity fracture boots, upper
extremity braces, and other related products and accessories.

Cold Therapy Systems.We manufacture, market and sell the IceMan®device,
a cold therapy product, which was introduced in 1996, as well as other cold
therapy products such as ice packs and wraps. The IceMan product is a

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portable device used after surgery or injury to reduce swelling, minimize the
need for post-operative pain medications and accelerate the rehabilitation
process. The product consists of a durable quiet pump and control system used
to circulate cold water from a reservoir to a pad and designed to fit the
injured area, such as the ankle, knee or shoulder. The IceMan® product uses a
patented circulation system to provide constant fluid flow rates, thereby
minimizing temperature fluctuations which can reduce device effectiveness and
create the potential for tissue or nerve damage.

Pain Management Systems.We are a non-exclusive North American orthopedic
distributor of the PainBuster®Pain Management Systems, which are used after
surgical procedures. These pain management and relief systems provide a
continuous infusion of local anesthetic dispensed by the physician directly
into the surgical site following surgical procedures. The portable PainBuster
Pain Management Systems consist of a range of introducer needles, catheters for
easy insertion and connection during surgery and pumps for continuous infusion
for up to 72 hours. The PainBuster Pain Management Systems are intended to
provide direct pain relief, reduce hospital stays and allow earlier and greater
ambulation. Our distribution rights for these products terminate at the end of
2003, unless extended by mutual consent.

Lower Extremity Fracture Boots.These products are boots which fit on a
patients foot and provide comfort and stability for ankle and foot injuries
ranging from ankle sprains and soft tissue and stress fractures in the lower
leg to stable fractures of the ankle. Fracture boots are used as an
alternative to traditional casts.

In
January 2003, Medicare introduced a new reimbursement code relating
to tibial ankle-foot fracture boot products. We believe that the new code, which provides for a
lower payment value on the applicable devices, may apply to some or all of our
lower extremity fracture boot products. We are currently in the process of
disputing this change. If we determine that the new code is applicable to all
of our lower extremity fracture boots, our revenue from the sale of these
products through the OfficeCare® channel could be reduced in the future by up
to approximately $5 million annually; however, we expect such reduction will be
less than $5 million. Sales of fracture boots represented approximately 51%
and 49% of the net revenues, excluding freight revenue, of our OfficeCare®
channel for the years ended December 31, 2002 and 2001, respectively.

Diabetic Lower Extremity Fracture Boots.We recently introduced a line of
fracture boots designed for patients suffering from pre-ulcerative and
ulcerative foot conditions, primarily related to complications from diabetes.
The new fracture boots are a more convenient and hygienic replacement for total
contact casting as a treatment for pre-ulcerative and ulcerative conditions of
the plantar surface of the foot, most often related to complications from
diabetes.

Upper Extremity Braces.We offer a line of shoulder and arm braces and
slings, including the Quadrant® and S.C.O.I. shoulder braces and the
UltraSling®. The shoulder braces are technologically advanced and designed for
immobilization after shoulder surgery and allow for controlled motion. The
UltraSling is a durable oversized sling, which offers lower-priced
immobilization and support for mild shoulder sprains and strains.

Bone Growth Stimulator.In 2001, we entered into an agreement with IMD to
distribute a bone growth stimulator (OrthoPulse) which was planned to be our
first product in the regeneration market. We also made an equity investment in
IMD. OrthoPulse is currently undergoing the FDA regulatory approval process.
On July 1, 2002, notification was received from the FDA that the premarket
approval application (PMA) for OrthoPulse was placed on an integrity hold due
to concerns that the clinical data that had been submitted in support of the
PMA were not reliable. As required by the FDA, an independent review of the
clinical data commenced on August 5, 2002. The auditors report was submitted
on September 30, 2002 and IMD is engaged in an ongoing communications with the
FDA to address this matter. Without approval by the FDA, marketing of this
product in the United States cannot proceed. In 2001 we purchased a beginning
inventory of this product from IMD We cannot distribute such inventory in the
United States until FDA approval is obtained, and although we can distribute
such inventory in certain other countries which do not require FDA approval,
the markets in these countries are smaller than in the U.S. At this point, we
do not have an estimate of when or whether final FDA approval will occur, and
we have, as a result of this continuing uncertainty, recorded charges to fully
reserve our inventories of this product and we have written off our investment
in IMD.

Distribution Channels

We market products in the United States through distinct sales and
distribution channels that we categorize as DonJoy®, ProCare®, and OfficeCare®.
Sales in the United States accounted for approximately 87%, 89% and 87% of our
net revenues, excluding freight revenue, for the years ended December 31, 2002,
2001 and 2000, respectively. Our international channel consists of sales by
our foreign subsidiaries and sales through foreign independent distributors.

DonJoy®.The DonJoy sales channel, which consists primarily of sales of
our DonJoy brand rigid knee braces, accounted for approximately 49%, 49% and
52% of our net revenues, excluding freight revenue, for the years ended
December 31, 2002, 2001 and 2000, respectively. Products are marketed and sold
in this channel by 38 commissioned sales

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agents which employ or contract with over 200 sales representatives who are
primarily dedicated to the sale of our products to the orthopedic sports
medicine market. These sales representatives market to orthopedic sports
medicine surgeons, orthotic and prosthetic centers, hospitals, surgery centers,
physical therapists and athletic trainers. Because the DonJoy product lines
generally require customer education on the application and use of the product,
the sales representatives are technical specialists who receive extensive
training both from us and the agent and use their technical expertise to help
fit the patient with our product and assist the orthopedic professional in
choosing the appropriate product to meet the patients needs. After a sales
representative receives a product order, we generally ship and bill the product
directly to the orthopedic professional and we pay a sales commission to the
agent.

We enjoy long-standing relationships with most of our agents and sales
representatives. Under the arrangements with the agents, each agent is granted
an exclusive geographic territory for sales of our products and is not
permitted to market products, or represent competitors who sell or distribute
products, that compete with our existing products. The agents receive a
commission which varies based on the type of product being sold. If an agent
fails to achieve specified sales quotas, we may terminate the agent, as we have
done in the past.

Our sales agents and representatives also sell rigid knee braces that are
custom fit for patients of U.S. orthopedic sports medicine surgeons. We refer
to this business program as our Insurance program because we sell the brace
directly to the patient and take responsibility for insurance billing. We
obtain pre-approval from the patients insurance company and then seek
reimbursement directly from the patients insurance company or other third
party payor or from the patient when self-pay is applicable. The Insurance
program is intended to facilitate the use of our higher cost custom products by
orthopedic sports medicine surgeons.

ProCare®.The ProCare sales channel accounted for approximately 25%, 27%
and 25% of our net revenues, excluding freight revenue, for the years ended
December 31, 2002, 2001 and 2000, respectively. Products in this channel
consist of most of our soft goods line and certain of our specialty and other
complementary orthopedic products, which are generally sold in non-exclusive
territories under private label brand names to third party distributors. These
distributors include large, national third party distributors such as Owens &
Minor Inc., McKesson/HBOC, Allegiance Healthcare and PSS World Medical Inc.;
regional medical surgical dealers; and medical products buying groups which
consist of a number of dealers who make purchases through the buying group.
These distributors generally resell the products to large hospital chains,
hospital buying groups, primary care networks and orthopedic physicians for use
by the patient. Unlike our rigid brace products, these soft goods products
generally do not require significant customer education for their use.

In response to the emergence of managed care and the formation of buying
groups, national purchasing contracts and various bidding procedures imposed by
hospitals and buying groups, we have entered into national contracts primarily
for our soft goods products, but often also covering rigid knee braces, with
large healthcare providers and buying groups, such as AmeriNet Inc., US
Government/Military hospitals, National Purchasing Alliance, Magnet, Managed
Healthcare Association, and Hanger Orthopedic Group. Under
these contracts, we provide favorable pricing to the buying group and are
generally designated as one of several preferred purchasing sources for the
members of the buying group for specified products, although the members are
not obligated to purchase our products. We are also the premier supplier for
HealthTrust Purchasing Group, Magnet, Managed Healthcare Association and
Novation. We expect that in the future we will enter into additional national
contracts with other healthcare providers and buying groups. Revenues from
group buying organizations accounted for approximately 20%, 20% and
21% of our net revenues,
excluding freight revenue, for each of the years ended
December 31, 2002,
2001 and 2000.

OfficeCare®.The OfficeCare sales channel accounted for approximately 13%,
13% and 10% of our net revenues, excluding freight revenue, for the years ended
December 31, 2002, 2001 and 2000, respectively. In 1996, in response to the
needs of certain customers, we launched the OfficeCare program, an inventory
management and insurance billing program for certain U.S. orthopedic sports
medicine surgeons. Under the OfficeCare program, we provide the orthopedic
sports medicine surgeon with an inventory of our orthopedic products for
immediate disbursement to the patient. We then seek reimbursement directly
from the patients insurance company or other third party payor or from the
patient when self-pay is applicable. The OfficeCare program is intended to
facilitate the introduction of our products to orthopedic sports medicine
surgeons who had not previously been our customers. We have outsourced the
revenue cycle portion of this program, from order entry to billing and
collecting, to an independent third party contractor, allowing us to
concentrate on the aspects of this channel that are core to our business. As of
December 31, 2002, the OfficeCare program was located at over 500 physician
offices throughout the United States.

As a result of the growth of this program, our working capital needs have
significantly increased due to higher levels of accounts receivable and
inventories necessary to operate the program. In addition, this program has
increased our involvement in the third party reimbursement process, or in
certain cases, our direct billings to the patient. The collection period for
these receivables as compared to other portions of our business is
significantly longer and has also resulted in a need to increase our accounts
receivable provision for contractual allowances and doubtful accounts. As noted
in our

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critical accounting policies and estimates, we increased our related reserves
by an aggregate of $6.7 million for the year ended December 31, 2002.

International.We market our products in over 40 countries, primarily
countries in Europe as well as in Australia, Canada and Japan. Excluding
freight revenue, the International sales channel accounted for approximately
13%, 11% and 13% of our net revenues for the years ended December 31, 2002,
2001 and 2000, respectively.

International sales are currently made through two distinct channels:
independent third party distributors, including Smith & Nephew sales
organizations in certain countries, and through wholly owned foreign
subsidiaries in Germany and the United Kingdom (in each case since January 1,
2002) and in Canada (since May 2002). We had formed a majority owned
distribution subsidiary in Australia in 2001, and that company was focusing on
surgical products including a knee replacement product. In late 2002 we
decided to discontinue commercial activities on that product, as well as most
of our other surgical products, and in light of that decision, the
establishment of a subsidiary in Australia was no longer attractive. At the
end of 2002, we sold our inventory of the knee replacement product back to the
manufacturer and sold our interest in the Australian subsidiary to the minority
shareholder. The former Australian subsidiary will continue to sell our
products as an independent distributor.

Research and Development

Our internal research and development program is aimed at developing and
enhancing products, processes and technologies in order to remain an innovator
in the orthopedic sports medicine market. Our research and development
expenditures were $2.9 million, $2.3 million and $2.9 million in 2002, 2001 and
2000, respectively.

Our research and development activities are conducted in our Vista
facility by a group of product engineers and designers who have substantial
experience in developing and designing products using advanced technologies,
processes and materials. The research and development team uses computational
tools and computer aided design (CAD) systems during the development process
which allow a design to be directly produced on computer-based fabrication
equipment, reducing both production time and costs. Our current research and
development activities are focused on using new materials, innovative designs
and state of the art manufacturing processes to develop new products and to
enhance our existing products. We are also pursuing strategic initiatives to
identify areas for technological innovation and to develop products that
improve patient rehabilitation by utilizing advanced technologies.

We have developed and maintain close relationships with a number of widely
recognized orthopedic sports medicine surgeons and sports medicine specialists
who assist in product research, development and marketing. These professionals
often become product champions, speaking about our products at medical
seminars, assisting in the training of other professionals in the use and
fitting of the products and providing us with feedback on the industrys
acceptance of the new products. Some of these surgeons and specialists who
participate in the design of products or provide consulting services have
contractual relationships with us under which they receive royalty payments or
consultant fees in connection with the development of particular products with
which they have been involved. Our medical advisory board, consisting of four
orthopedic sports medicine surgeons and one certified orthotist, also assists
in our product development by advising us on technological advances in sports medicine, along
with competitive and reimbursement updates within the orthopedic sports
medicine industry.

We maintain a clinical education research laboratory in our Vista
facility, which is used by orthopedic sports medicine surgeons to evaluate our
soft tissue repair products in a simulated surgical setting and practice
surgical technique. These surgeons often provide us with feedback, which
assists us in the development and enhancement of products. In addition, we
utilize our biomechanical laboratory in the Vista facility to test the
effectiveness of our products. U.S. based and international surgeons and
researchers collaborate with our research staff to perform biomechanical
testing. The tests are designed to demonstrate the functionality of new
products and the effectiveness of new surgical procedures. State of the art
mechanical models are used to simulate behavior of normal, injured and
osteoarthritic knees and observe the performance of new product designs as well
as competitive products. We host numerous orthopedic sports medicine surgeons
at our biomechanical laboratory and our surgical technique laboratory, which
allows professionals to practice procedures and then to measure the
effectiveness of those procedures.

In addition to our internal research and development efforts, we have
entered into a number of technology licensing arrangements with third parties
that provide us innovative technologies and processes for the manufacture and
development of our products. Finally, we also act as the distributor of a
number of products that are manufactured by others.

Manufacturing

With the substantial completion of our performance improvement program at
the end of 2002, most of our products are manufactured in Tijuana, Mexico. The
products that are still manufactured in Vista, California consist of our custom
rigid

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bracing products and our cold therapy products. We operate a vertically
integrated manufacturing and cleanroom packaging operation and are capable of
producing a majority of our subassemblies and components in-house. These
include metal stamped parts, injection molding components and fabric-strapping
materials. We also have extensive in-house tool and die fabrication
capabilities, which provide savings in the development of typically expensive
tools and molds as well as flexibility to respond to and capitalize on market
opportunities as they are identified. Utilizing a variety of computational
tools and CAD systems during the development process, we can produce a design
directly on computer-based fabrication equipment, reducing both tool production
time and costs.

Our Vista, California facility has achieved ISO 9001 certification,
EN46001 certification and certification to the European Medical Device
Directive and our Mexico facility has achieved ISO 9001 certification. In 2002, our list of certifications for both the Vista and
Mexico facilities was expanded to add the new Canadian Medical Device
Regulation (ISO 13485). These
certifications are internationally recognized quality standards for
manufacturing and assist us in marketing our products in certain foreign
markets.

Our manufacturing operations use new and innovative technologies and
materials including thermoplastics, various composites and polypropylene glass,
as well as a variety of lightweight metals and alloys. We also use Velcro® and
neoprene, as well as Drytex®, a wrap-knit nylon and polyester composite, in the
manufacture of our products. Most of the raw materials that we use in the
manufacture of our products are available from more than one source and are
generally readily available on the open market. We source some of our finished
products from manufacturers in China as well as other third party
manufacturers. In addition, we provide a variety of competitor products
through our OfficeCare® program as requested by the surgeon.

Competition

The orthopedic sports medicine market is highly competitive and
fragmented. Our competitors include a few large, diversified orthopedic
companies and numerous smaller niche companies. Some of our competitors are
part of corporate groups that have significantly greater financial, marketing
and other resources than we do. Our primary competitors in the rigid knee
brace market include smaller niche companies such as Bledsoe Brace Systems (a
division of Medical Technology, Inc.), Breg, Inc., Generation II USA, Inc.,
Innovation Sports Incorporated and Townsend Industries Inc. In the soft goods
products market, our competitors include DeRoyal Industries, Tecnol Orthopedic
Products (a division of Encore Medical Corporation) and Zimmer Holdings, Inc.
We compete with a variety of manufacturers of specialty and other complementary
orthopedic products, depending on the type of product. In addition, in certain
foreign countries, we compete with one or more local or regional competitors
such as Bauerfeind in Germany and FGP in Italy.

Competition in the rigid knee brace market is primarily based on product
technology, quality and reputation, relationships with customers, service and
price. Competition in the soft goods market is less dependent on innovation
and technology and is primarily based on product range, service and price.
Several competitors have initiated stock and bill programs similar to our
OfficeCare program to provide value to their customers. Competition in
specialty and other complementary orthopedic products is based on a variety of
factors, depending on the type of product. International competition is
primarily from foreign manufacturers whose costs are lower due to their ability
to manufacture the products within their respective countries.

We believe that our extensive product lines, advanced product design,
strong distribution networks, reputation with leading orthopedic sports
medicine surgeons and their allied healthcare professionals and customer
service performance provide us with an advantage over our competitors. In
particular, we believe that our broad product lines provide us with a
competitive advantage over the smaller niche companies which generally have
innovative technology in a focused product category, while our established
distribution networks and relationship-based selling efforts provide us with a
competitive advantage over larger manufacturers.

Intellectual Property

Our most significant intellectual property rights are our patents and
trademarks, including our brand names, and proprietary know-how.

We own or have licensing rights to over 56 U.S. and foreign patents and
over 13 pending patent applications. We anticipate that we will apply for
additional patents in the future as we develop new products and product
enhancements. Our most significant patent, which is registered only in the
United States, involves the bracing technology and design called the Four
Points of Leverage system. A majority of our ligament bracing products have
been designed using the Four Points of Leverage system which exerts a force
on the upper portion of the tibia, which, in turn, reduces strain on the
damaged, reconstructed or torn ligament. Our patent covering the Four Points
of Leverage system expires in January 2005. Excluding freight revenue,
revenues generated from products using our Four Points of Leverage system
accounted for approximately 22%, 26% and 27% of our net revenues for the years
ended December 31, 2002, 2001 and 2000, respectively. Our other significant
patents include the Custom Contour Measuring Instrument, which serves as an
integral part of the

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measurement process for patients ordering our customized ligament and
osteoarthritic braces. In addition, we own patents covering a series of hinges
for our post-operative braces, as well as pneumatic pad design and production
technologies (which utilize air inflatable cushions that allow the patient to
vary the location and degree of support) used in braces such as the Defiance®.
We also have patents relating to our osteoarthritic braces and specific
mechanisms in a number of our products. In addition to these patents, we rely
on non-patented know-how, trade secrets, process and other proprietary
information, which we protect through a variety of methods, including
confidentiality agreements and proprietary information agreements with vendors,
employees, consultants and others who have access to our proprietary
information.

We believe that our patents, trademarks and other proprietary rights are
important to the development and conduct of our business and the marketing of
our products. As a result, we intend to aggressively protect our intellectual
property rights.

Employees

As of December 31, 2002, we had approximately 1,200 employees. Our
workforce is not unionized. We have not experienced any strikes or work
stoppages, and management considers its relationships with our employees to be
good.

Government Regulation

Medical Device Regulation

United States.Our products and operations are subject to regulation by
the U.S. Food and Drug Administration (FDA). The FDA regulates the research,
testing, manufacturing, safety, labeling, storage, recordkeeping, promotion,
distribution, and production of medical devices in the United States to ensure
that medical products distributed domestically are safe and effective for their
intended uses. In addition, the FDA regulates the export of medical devices
manufactured in the United States to international markets.

Under the Federal Food, Drug, and Cosmetic Act (FFDCA), medical devices
are classified into one of three classesClass I, Class II or Class
IIIdepending on the degree of risk associated with each medical device and the
extent of control needed to ensure safety and effectiveness. Our currently
marketed products are all Class I or Class II medical devices.

Class I devices are those for which safety and effectiveness can be
assured by adherence to a set of guidelines, which include compliance with the
applicable portions of the FDAs Quality System Regulation (QSR), facility
registration and product listing, reporting of adverse medical events, and
appropriate, truthful and non-misleading labeling, advertising, and promotional
materials (the General Controls).

Class II devices also are subject to the General Controls and most require
premarket demonstration of adherence to certain performance standards or other
special controls and clearance by the FDA. Premarket review and clearance by
the FDA for these devices may be accomplished through the 510(k) premarket
notification procedure. By regulation, the FDA is required to clear a 510(k)
premarket notification within 90 days of submission of the application. As a
practical matter, clearance often takes longer; however, our products have
generally been cleared within the 90-day time period. If the FDA determines
that the device, or its intended use, is not substantially equivalent to a
previously-cleared device or use, the FDA will place the device, or the
particular use of the device, into Class III, and the device sponsor must then
fulfill more rigorous premarketing requirements.

A Class III device is a product which has a new intended use or uses
advanced technology that is not substantially equivalent to a use or technology
with respect to a legally marketed device. The safety and efficacy of Class
III devices cannot be assured solely by the General Controls and the other
requirements described above. FDA approval of a premarket approval application
(PMA) is required before marketing of a Class III product in the United States
can proceed. The PMA process is much more demanding than the 510(k) premarket
notification process, and normally requires formal clinical studies to
demonstrate safety and efficacy.

In addition, our manufacturing processes are required to comply with the
applicable portions of the QSR, which covers the methods and documentation of
the design, testing, production, processes, controls, quality assurance,
labeling, packaging, and shipping of our products. The QSR also, among other
things, requires maintenance of a device master record, device history record,
and complaint files. Our domestic facility, records, and manufacturing
processes are subject to periodic unscheduled inspections by the FDA. Our
Mexican facilities, which export products to the United States, may also be
inspected by the FDA. Based on internal audits of our domestic and Mexican
facilities, we believe that our facilities are in substantial compliance with
the applicable QSR regulations.

The FDA has broad regulatory and enforcement powers, including the ability
to levy fines and civil penalties, to suspend or delay issuance of approvals,
to seize or to recall products, and to withdraw approvals.

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There are only limited restrictions under law on the export from the
United States of any medical device that is legally distributed in the United
States. However, there are restrictions under U.S. law on the export from the
United States of medical devices that cannot be legally distributed in the
United States. If a Class I or Class II device does not have 510(k) clearance,
and the manufacturer reasonably believes that the device could obtain 510(k)
clearance in the U.S., then the device can be exported to a foreign country for
commercial marketing without the submission of any type of export request or
prior FDA approval, if it satisfies certain limited criteria relating primarily
to specifications of the foreign purchaser and compliance with the laws of the
country to which it is being exported. All of our products which are exported
to foreign countries currently comply with these restrictions.

International.In many of the foreign countries in which we market our
products, we are subject to regulations affecting, among other things, product
standards, packaging requirements, labeling requirements, import restrictions,
tariff regulations, duties and tax requirements. Many of the regulations
applicable to our devices and products in such countries are similar to those
of the FDA, including those in Germany, our largest foreign market. In many
countries, the national health or social security organizations require our
products to be qualified before they can be marketed with the benefit of
reimbursement eligibility. To date, we have not experienced difficulty in
complying with these regulations. Due to the movement towards harmonization of
standards in the European Union, we expect a changing regulatory environment in
Europe characterized by a shift from a country-by-country regulatory system to
a European Union-wide single regulatory system. The timing of this
harmonization and its effect on us cannot currently be predicted.

Federal Privacy And Transaction Law and Regulations

Other federal legislation requires major changes in the transmission and
retention of health information by us. The Health Insurance Portability and
Accountability Act of 1996 (HIPAA) mandates, among other things, the adoption
of standards for the electronic exchange of health information that may require
significant and costly changes to current practices. The U.S. Department of
Health and Human Services (HHS) has released three rules to date mandating the
use of new standards with respect to certain healthcare transactions and health
information. The first rule requires the use of uniform standards for common
healthcare transactions, including healthcare claims information, plan
eligibility, referral certification and authorization, claims status, plan
enrollment and disenrollment, payment and remittance advice, plan premium
payments, and coordination of benefits The second rule released by HHS imposes
new standards relating to the privacy of individually identifiable health
information. These standards not only require our compliance with rules
governing the use and disclosure of protected health information, but they also
require us to obtain satisfactory assurances that any business associate of
ours to whom such information is disclosed will safeguard the information. The
third rule released by HHS establishes minimum standards for the security of
electronic health information. We will be required to comply with the
transaction standards by October 16, 2003, the privacy standards by April 14,
2003, and the security standards by April 21, 2005.

Third Party Reimbursement

In recent years, efforts to control Medicare costs have included the
heightened scrutiny of reimbursement codes and payment methodologies. Under
Medicare, devices are classified by reimbursement codes, which in turn
determine each devices payment levels. Reimbursement codes describing some of
our products have from time to time been redefined, which can reduce payment
levels or the breadth of products for which reimbursement can be sought under
recognized codes. In January 2003, Medicare introduced a new
reimbursement code relating to tibial ankle-foot fracture boot
products. We believe that the new code, which provides for a lower
payment value on the applicable devices, may apply to some or all of
our lower extremity fracture boot products (See Products  Specialty and Other
Complementary Orthopedic Products above). We are in the process of disputing
this change. We also expect that reduction in the total dollar amount
available for Medicare payments will occur in the future as the reform process
continues for devices. In addition, if federal initiatives such as competitive
bidding are enacted or payment adjustments under the Medicare programs
inherent reasonableness authority are implemented, these measures could result
in reductions in Medicare payments for our products. Beyond changes in
reimbursement codes and payment methodologies, the movement, both domestically
and in foreign countries, toward healthcare reform and managed care may
continue to result in downward pressure on product pricing. Excluding freight
revenue, net revenues from third party reimbursement accounted for
approximately 17%, 17% and 13% of our net revenues for the years ended December
31, 2002, 2001 and 2000, respectively. Medicare reimbursement consists of
approximately 13% of our net revenues from third party reimbursement, excluding
freight revenues, or 2% of our total net revenues, excluding freight
revenue, for the year ended December 31, 2002.

Fraud and Abuse

We are subject to various federal and state laws pertaining to healthcare
fraud and abuse, including anti-kickback laws and physician self-referral laws.
Violations of these laws are punishable by criminal and civil sanctions,
including, in some instances, exclusion from participation in federal and state
healthcare programs, including Medicare, Medicaid, Veterans Administration
health programs and TRICARE. We have never been challenged by a governmental
authority

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under any of these laws and believe that our operations are in material
compliance with such laws. However, because of the far-reaching nature of
these laws, there can be no assurance that we would not be required to alter
one or more of our practices to be in compliance with these laws. In addition,
there can be no assurance that the occurrence of one or more violations of
these laws or regulations would not result in a material adverse effect on our
financial condition and results of operations.

Anti-kickback and Fraud Laws.Our operations are subject to federal and
state anti-kickback laws. Certain provisions of the Social Security Act, which
are commonly known collectively as the Medicare Fraud and Abuse Statute,
prohibit persons from knowingly and willfully soliciting, receiving, offering
or providing remuneration directly or indirectly to induce either the referral
of an individual, or the furnishing, recommending, or arranging for a good or
service, for which payment may be made under a federal healthcare program such
as Medicare and Medicaid. The definition of remuneration has been broadly
interpreted to include anything of value, including such items as gifts,
discounts, waiver of payments, and providing anything at less than its fair
market value. Many states have adopted prohibitions similar to the Medicare
Fraud and Abuse Statute, some of which apply to the referral of patients for
healthcare services reimbursed by any source, not only by the Medicare and
Medicaid programs.

Our OfficeCare® program is a stock and bill arrangement through which we
make our products and services available in the offices of physicians or other
providers. In conjunction with the OfficeCare program, we may pay
participating physicians a fee for rental space and support services provided
by such physicians to us. In a Special Fraud Alert issued by the Office of
Inspector General of the U.S. Department of Health and Human Services (OIG) in
February 2000, the OIG indicated that it may scrutinize stock and bill programs
involving excessive rental payments or rental space for possible violation of
the Medicare Fraud and Abuse Statute, but notes that legitimate arrangements,
including fair market value rental arrangements, will not be considered
violations of the statute. We believe we have structured the OfficeCare
program to comply with the Medicare Fraud and Abuse Statute.

HIPAA created two new federal crimes: healthcare fraud and false
statements relating to healthcare matters. The healthcare fraud statute
prohibits knowingly and willfully executing or attempting to execute a scheme
or artifice to defraud any healthcare benefit program, including private
payers. The false statements statute prohibits knowingly and willfully
falsifying, concealing or covering up a material fact or making any materially
false, fictitious or fraudulent statement or representation in connection with
the delivery of or payment for healthcare benefits, items or services. This
statute applies to any health benefit plan, not just Medicare and Medicaid.
Additionally, HIPAA granted expanded enforcement authority to HHS and the U.S.
Department of Justice (DOJ) and provided enhanced resources to support the
activities and responsibilities of the OIG and DOJ by authorizing large
increases in funding for investigating fraud and abuse violations relating to
healthcare delivery and payment. In addition, HIPAA mandates the adoption of
standards for the electronic exchange of health information. See
BusinessGovernment RegulationFederal Privacy and Transaction Law and
Regulations.

Physician Self-Referral Laws.We are also subject to federal and state
physician self-referral laws. Federal physician self-referral legislation
(commonly known as the Stark Law) prohibits, subject to certain exceptions,
physician referrals of Medicare and Medicaid patients to an entity providing
certain designated health services if the physician or an immediate family
member has any financial relationship with the entity. The Stark Law also
prohibits the entity receiving the referral from billing any good or service
furnished pursuant to an unlawful referral, and any person collecting any
amounts in connection with an unlawful referral is obligated to refund such
amounts. Various states have corollary laws to the Stark Law, including laws
that require physicians to disclose any financial interest they may have with a
healthcare provider to their patients when referring patients to that provider.
Both the scope and exceptions for such laws vary from state to state.

False Claims Laws.Under separate statutes, submission of claims for
payment that are not provided as claimed may lead to civil money penalties,
criminal fines and imprisonment, and/or exclusion from participation in
Medicare, Medicaid and other federally funded state health programs. These
false claims statutes include the federal False Claims Act, which prohibits the
knowing filing of a false claim or the knowing use of false statements to
obtain payment from the federal government. When an entity is determined to
have violated the False Claims Act, it must pay three times the actual damages
sustained by the government, plus mandatory civil penalties of between $5,500
and $11,000 for each separate false claim. Suits filed under the False Claims
Act, known as qui tam actions, can be brought by any individual on behalf of
the government and such individuals (known as relators or, more commonly, as
whistleblowers) may share in any amounts paid by the entity to the government
in fines or settlement. In addition, certain states have enacted laws modeled
after the federal False Claims Act. Qui tam actions have increased
significantly in recent years causing greater numbers of healthcare companies
to have to defend a false claim action, pay fines or be excluded from the
Medicare, Medicaid or other federal or state healthcare programs as a result of
an investigation arising out of such action.

Governmental Audits

Our operations are subject to periodic survey by governmental entities or
contractors to assure compliance

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with Medicare and Medicaid standards and requirements. From time to time in
the ordinary course of business, we, like other healthcare companies, are
audited by or receive claims documentation requests from governmental entities,
which may cite certain deficiencies based on our alleged failure to comply with
applicable supplier standards or other requirements. We review and assess such
audits or reports and attempt to take appropriate corrective action. The
failure to effect such action or to obtain, renew or maintain any of the
required regulatory approvals, certifications or licenses could adversely
affect our business, results of operations or financial condition and could
prevent the programs involved from offering products and services to patients.

Risk Factors

Our ability to achieve our operating and financial goals is subject to
risks relating to our business operations, to government regulation, to our
debt level and other special risks to our Senior Subordinated Note holders, some of which are noted
below.

Risks Related to Our Business

We have just implemented our performance improvement program and may be unable
to achieve the future operating efficiencies and results that we desire.

In the third quarter of 2002, we engaged AlixPartners, LLC, a company
specializing in corporate performance improvements, to expedite the development
of a financial and operating performance improvement program. An objective of
the performance improvement program was to reduce both costs of goods sold and
operating expenses as a percentage of our net revenues beginning in 2003. An
important component of the program is the outsourcing to a third party
contractor of the revenue cycle functions in our OfficeCare® business, and we
are relying on improved billing and collection practices as a key element in
building a profitable and growing OfficeCare business. While we have
implemented this and the other principal factors of the program, there can be
no assurance the performance improvement program will be successful or achieve
the desired goals.

As a part of the performance improvement program we moved the majority of
our manufacturing operations to our facilities in Mexico. As a part of this
move, we increased the employee base in Mexico to approximately 700 employees
and added a third facility in Tijuana, Mexico. We have limited experience in
managing a Mexican operation of this magnitude, and our ability to manufacture
high-quality products in time to meet customerdriven delivery schedules in the
new Mexican facilities will be critical to our ability to achieve our operating
goals.

We reported a net loss of $15.2 million in 2002, after charges for
impairment of long-lived assets and costs of restructuring and other
performance improvement actions, and no assurance can be given that we can
reach our profit goals in 2003 and beyond.

If we cannot successfully implement our business strategy, our business,
results of operations and potential for growth will be adversely effected.

Our ability to achieve our business objectives is subject to a variety of
factors, many of which are beyond our control. For example, our business
strategy contemplates that existing customers for some of our current products
will buy new products from us in the future and that we can sell our products
to more orthopedic sports medicine professionals than we do now. Similarly, we
believe our revenues will increase with the aging of the general population and
as individuals engage in increasingly active lifestyles. Our business strategy
further contemplates a growth in international sales through the development of
direct distribution capabilities in a number of foreign jurisdictions. If our
assumptions regarding these trends prove to be incorrect, we may not be
successful in implementing our strategy. In addition, the implementation of
our strategy may not improve our operating results. We may decide to alter or
discontinue aspects of our business strategy and may adopt alternative or
additional strategies due to business or competitive factors or factors not
currently foreseen, such as the introduction of new products by our competitors
and new medical technologies that would make our products obsolete. Any failure
to successfully implement our business strategy may adversely affect our
business, results of operations and potential for growth.

If we are not able to develop or license and market new products or product
enhancements we will not remain competitive.

Our future success and the ability to grow our revenues and earnings
require the continued development or licensing of new products and the
enhancement of our existing products. We may not be able to:



| |  |  | continue to develop successful new products and enhance existing products;
| | - |  | --------------------------------------------------------------------------
|
| |  |  | obtain required regulatory clearances and approvals for such products;    

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| |  |  | market such products in a commercially viable manner; or
| | - |  | --------------------------------------------------------
|
| |  |  | gain market acceptance for such products.               

Our failure to develop or license and market new products and product
enhancements could have a material adverse effect on our business, financial
condition and results of operations. In addition, if any of our new or
enhanced products contain undetected errors or design defects, especially when
first introduced, our ability to market these products could be substantially
delayed, resulting in lost revenue, potential damage to our reputation and/or
delays in obtaining acceptance of the product by orthopedic sports medicine
surgeons and other professionals.

Our competitors may develop new medical procedures, technologies or
products that are more effective than ours or that would render our technology
or products obsolete or uncompetitive, which could have a material adverse
effect on us.

Our transition to direct distribution of our products in selected foreign
countries could adversely affect our revenues and income in these countries.

Our strategy to selectively replace our third party international
distributors with wholly owned distributorships might adversely affect our
revenue and net income in those countries. Prior to January 2002, we sold
products in Germany/Austria, our largest foreign market, and the United
Kingdom, which together aggregated $7.2 million of revenue in 2001, or 40% of
our 2001 international sales and 4% of total sales, excluding freight revenue,
through an independent third party distributor. Commencing January 1, 2002, we
began to distribute our products in these countries through wholly owned
subsidiaries. Our 2002 net revenues in Germany/Austria and the United Kingdom
were $9.1 million, or 41% of 2002 international sales and 5% of total sales,
excluding freight revenue. In addition, in May 2002, we began direct
distribution in Canada through a wholly owned subsidiary. Although we have no
current plan to do so, if we decide to replace our independent distributors in
other countries, we may experience temporary disruptions, as we did in Europe,
to our business in those countries. Moreover, we have little experience in
managing a large international operation, and the creation of direct
distribution capabilities in Germany/Austria, the United Kingdom, and Canada
has required changes in our organization and the implementation of additional
financial and operational controls. We cannot assure you that we will be able
to successfully implement these organizational changes and controls.

We rely heavily on our relationships with orthopedic professionals, agents and
distributors for marketing our products and our failure to maintain these
relationships would adversely effect our business and operating results.

The sales of our products depend significantly on the prescription or
recommendation of such products by orthopedic sports medicine surgeons and
other sports medicine professionals. We have developed and maintain close
relationships with a number of widely recognized orthopedic sports medicine
surgeons and sports medicine specialists who assist in product research,
development and marketing. These professionals often become product champions,
speaking about our products at medical seminars, assisting in the training of
other professionals in the use and fitting of our products and providing us
with feedback on the industrys acceptance of our new products. Failure of our
products to retain the support of those surgeons and specialists, or the
failure of our products to secure and retain similar support from leading
surgeons and specialists, could have a material adverse effect on our business,
financial condition and results of operations.

Our marketing success also depends largely upon marketing arrangements
with independent agents and distributors. Our success depends upon our agents
and distributors sales and service expertise and their relationships with the
customers in the marketplace. Our failure to maintain relationships with
agents and distributors could have a material adverse effect on our business,
financial condition and results of operations.

Our international sales may be adversely affected by foreign currency exchange
fluctuations and other risks.

Commencing January 2002, we began selling products through our
subsidiaries in Germany and the United Kingdom in Euros and Pounds Sterling,
respectively, and, commencing May 2002, we began selling products through our
subsidiary in Canada in Canadian Dollars. International sales in 2002 were
favorably impacted by foreign currency exchange fluctuations with the weakening
of the U.S. dollar against the Euro. In 2001, the volume and product mix of
international sales was indirectly adversely impacted by foreign currency
exchange fluctuations as the strengthening of the U.S. dollar against the Euro
effectively increased the cost of our products to our European third party
distributors. As we begin to further directly distribute our products in other
selected foreign countries, we expect that future sales of our products in
these markets will be denominated in the applicable foreign currencies, which
would cause currency fluctuations to more directly impact, our operating
results.

We are also subject to other risks inherent in international operations
including political and economic conditions,

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foreign regulatory requirements, exposure to different legal requirements
and standards, potential difficulties in protecting intellectual property,
import and export restrictions, increased costs of transportation or shipping,
difficulties in staffing and managing international operations, labor disputes,
difficulties in collecting accounts receivable and longer collection periods
and potentially adverse tax consequences. As we continue to expand our
international business, our success will be dependent, in part, on our ability
to anticipate and effectively manage these and other risks. If we are unable to
do so, these and other factors may have a material adverse effect on our
international operations or on our business, financial condition and results of
operations.

We operate in a very competitive business environment.

The orthopedic sports medicine market is highly competitive and
fragmented. Our competitors include a few large, diversified general
orthopedic products companies and numerous smaller niche companies. Some of
our competitors are part of corporate groups that have significantly greater
financial, marketing and other resources than we do. Accordingly, we may be at
a competitive disadvantage with respect to these competitors. Our primary
competitors in the rigid knee bracing product line include Bledsoe Brace
Systems (a division of Medical Technology, Inc.), Breg, Inc., Generation II
USA, Inc., Innovation Sports Incorporated and Townsend Industries Inc. Our
competitors in the soft goods products segment include DeRoyal Industries,
Tecnol Orthopedics (a division of Encore Medical Corporation) and Zimmer
Holdings, Inc. We compete with a variety of manufacturers of specialty and
other complementary orthopedic products, depending on the type of product. In
addition, in certain foreign countries, we compete with one or more local
competitors such as Bauerfeind in Germany and FGP in Italy. As competition in
any of these markets becomes stronger, we may not realize profit margins at the
same rate as today.

We rely on suppliers in China and other parts of Asia for a portion of our
finished soft goods products, which makes us susceptible to supply shortages of
these products.

Some of our important suppliers are in China and other parts of Asia. We
obtain approximately 8% of our total purchased materials from suppliers in
China and other parts of Asia providing us predominately finished soft goods
products. Political and economic instability and changes in government
regulations in these areas could affect our ability to continue to receive
materials from our suppliers there. The loss of our suppliers in China and
other parts of Asia or any other interruption or delay in the supply of our
required materials or our inability to obtain these materials at acceptable
prices and within a reasonable amount of time could impair our ability to meet
scheduled product deliveries to our customers and could hurt our reputation and
cause customers to cancel orders. For example, in October 2002, a strike among
dock workers along the west coast of the United States caused a significant
interruption in supply of products from China and other parts of Asia and led
to increased backlog of orders and additional costs.

Our lack of local manufacturing operations outside North America may cause our
products to be less competitive in international markets.

We currently have no manufacturing operations in any foreign country other
than Mexico. For our international sales to third party distributors, the cost
of transporting our products to foreign countries is currently borne by our
third party distributors who are also often required to pay foreign import
duties on our products. As a result, the cost of our products to our third
party distributors is often greater than products manufactured in that country.
In addition, foreign manufacturers of competitive products often receive
various local tax concessions which lower their overall manufacturing costs.
In order to compete successfully in international markets, we may be required
to open or acquire manufacturing operations abroad, which would be costly to
implement and would increase our exposure to the risks of doing business in
foreign countries. We may not be able to successfully operate offshore
manufacturing operations, which could have a material adverse effect on our
international operations or on our business, financial condition and results of
operations.

We rely on intellectual property to develop and manufacture our products and
our business could be adversely affected if we lose our intellectual property
rights.

We hold U.S. and foreign patents relating to a number of our components
and products and have patent applications pending with respect to other
components and products. We also expect to apply for additional patents as we
deem appropriate. We believe that several of our existing patents are, and
will continue to be, extremely important to our success. These include the
patents relating to our:



| |  |  | Four Points of Leverage system, the critical element in the design of all of our ligament braces;                                                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Custom Contour Measuring System, which serves as an integral part of the measurement process for
patients ordering our customized ligament and osteoarthritic braces;
|
| |  |  | series of hinges for our post-operative braces;                                                                                                                      

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| |  |  | pneumatic pad design and production technologies which utilize air inflatable cushions that allow the
patient to vary the location and degree of support provided by braces such as the Defiance® brace;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | osteoarthritis bracing concepts;                                                                                                                                                                        
|
| |  |  | ankle bracing, both rigid and soft; and                                                                                                                                                                 
|
| |  |  | rigid shoulder bracing.                                                                                                                                                                                 

However, we cannot assure you that:



| |  |  | our existing or future patents, if any, will afford us adequate protection;
| | - |  | ---------------------------------------------------------------------------
|
| |  |  | our patent applications will result in issued patents; or                  
|
| |  |  | our patents will not be circumvented or invalidated.                       

The patent for our Four Points of Leverage system is registered only in
the United States and expires in January 2005. Products using the Four Points
of Leverage system represented approximately 22%, 26% and 27% of our net
revenues, excluding freight revenue, in 2002, 2001 and 2000, respectively. The
expiration of this patent could have a material adverse effect on our business,
financial condition and results of operations.

Our osteoarthritis bracing concept patents represented approximately 5% of
our net revenues, excluding freight revenue, in each of 2002, 2001 and 2000. These
patents are currently involved in a patent infringement lawsuit. See risk
factor below titled Our operating results and financial condition could be
adversely affected if we become involved in litigation regarding our patents or
other intellectual property rights. The loss of such patents could have a
material adverse effect on our business, financial condition and results of
operations.

Our success also depends on non-patented proprietary know-how, trade
secrets, processes and other proprietary information. We employ various
methods to protect our proprietary information, including confidentiality
agreements and proprietary information agreements with vendors, employees,
consultants and others who have access to our proprietary information.
However, these methods may not provide us with adequate protection. Our
proprietary information may become known to, or be independently developed by,
competitors, or our proprietary rights in intellectual property may be
challenged, any of which could have a material adverse effect on our business,
financial condition and results of operations.

Our operating results and financial condition could be adversely affected if we
become involved in litigation regarding our patents or other intellectual
property rights.

The orthopedic products industry has experienced extensive litigation
regarding patents and other intellectual property rights. We or our products
may become subject to patent infringement claims or litigation or interference
proceedings declared by the United States Patent and Trademark Office (USPTO)
or the foreign equivalents thereto to determine the priority of inventions.
The defense and prosecution of intellectual property suits, USPTO interference
proceedings or the foreign equivalents thereto and related legal and
administrative proceedings are both costly and time-consuming. An adverse
determination in litigation or interference proceedings to which we may become
a party could:



| |  |  | subject us to significant liabilities to third parties;                                            
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | require disputed rights to be licensed from a third party for royalties that may be substantial; or
|
| |  |  | require us to cease using such technology.                                                         

Any one of these outcomes could have a material adverse effect on us.
Furthermore, we may not be able to obtain necessary licenses on satisfactory
terms, if at all. Accordingly, adverse determinations in a judicial or
administrative proceeding or our failure to obtain necessary licenses could
prevent us from manufacturing and selling our products, which would have a
material adverse effect on our business, financial condition and results of
operations. Moreover, even if we are successful in such litigation, the
expense of defending such claims could have a material adverse effect on our
business, financial condition and results of operations.

On June 7, 2002, a patent infringement action was filed against us and our
former parent, Smith & Nephew, by Generation II Orthotics Inc. and Generation
II USA Inc. The suit alleges that we and Smith & Nephew willfully infringed,

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and are infringing, certain osteoarthritis bracing concept patents by
manufacturing, using and selling certain orthopedic knee braces for the
treatment of unicompartmental osteoarthritis. The lawsuit seeks unspecified
monetary damages and an injunction to prevent us from infringing the patents
and from selling the relevant knee braces. We believe the claims are without
merit and intend to defend the action vigorously. We have filed an answer and
counterclaims seeking to invalidate the patents. Pursuant to a prior
contractual obligation, we have agreed to indemnify and defend Smith & Nephew
in this matter. The parties conducted a mediation session on this
matter on March 25, 2003, and settlement discussions are occurring. No assurance
can be given that the action will settle or that we will be able to achieve a favorable
outcome in this litigation. See risk factor above titled We rely on intellectual property to
develop and manufacture our products and our business could be adversely
affected if we lose our intellectual property rights.

In addition, we have from time to time needed to, and may in the future
need to, litigate to enforce our patents, to protect our trade secrets or
know-how or to determine the enforceability, scope and validity of the
proprietary rights of others. Such prosecution of our intellectual property
rights could involve counterclaims against us. Any future litigation or
interference proceedings will result in substantial expense to us and
significant diversion of effort by our technical and management personnel.

We have a single stockholder who can substantially influence the outcome of all
matters voted upon by its stockholders and the interests of that stockholder
may not be aligned with yours.

J.P. Morgan DJ Partners, LLC (JPMDJ Partners) beneficially owns
approximately 45.6% of our outstanding common stock. As a result, JPMDJ
Partners is able to substantially influence all matters requiring the approval
of our stockholders, including the election of directors and the approval of
significant corporate transactions, such as acquisitions, and to block an
unsolicited tender offer and any other matter requiring a supermajority vote of
its stockholders. This concentration of ownership could delay, defer or
prevent a change in control of dj Orthopedics, Inc. or impede a merger,
consolidation, takeover or other business combination which a stockholder may
otherwise view favorably.

Because we have various mechanisms in place to discourage
takeover attempts, a change in control of our company that a stockholder may consider favorable
could be prevented.

Provisions of our certificate of
incorporation and bylaws may discourage, delay or prevent a change in control of our company that a
stockholder may consider favorable. These provisions could also discourage proxy contests and make it
more difficult for stockholders to elect directors and take other corporate actions. These
provisions include:



| |  |  | authorizing the issuance of
blank check preferred stock that could be issued by our board of
directors to increase the number of outstanding shares and thwart a takeover attempt;                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a classified board of directors with staggered,
three-year terms, which may lengthen the time required to gain control of the board of directors;                                                        
|
| |  |  | prohibiting cumulative voting in the election of directors, which would
otherwise allow less than a majority of stockholders to elect director candidates;                                               
|
| |  |  | requiring supermajority voting to effect particular amendments to our certificate
of incorporation and bylaws;                                                                                           
|
| |  |  | limitations on who may call special meetings of stockholders;                                                                                                                                            
|
| |  |  | prohibiting stockholder action by written consent, thereby requiring
all actions to be taken at a meeting of the stockholders; and                                                                       
|
| |  |  | establishing advance notice requirements for the nomination of candidates
for election to the board of directors or for proposing matters that can be acted upon by stockholders
at stockholder meetings.
|

In addition, Section 203 of the
Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in
a business combination with an interested stockholder, generally a person which together with its
affiliates owns or within the last three years has owned 15% of our voting stock, for a period of
three years after the date of the transaction in which the person became an interested stockholder,
unless the business combination is approved in a prescribed manner.
Accordingly, Section 203 may discourage, delay or prevent a change in
control of our company.

As a result, these provisions could
limit the price that investors are willing to pay in the future for shares of our common stock.

Risks Related to Government Regulation

Our failure to receive regulatory clearance or approval for our products or
operations in the United States or abroad would adversely affect our revenues
and potential for future growth.

Our products and operations are subject to extensive regulation in the
United States by the Food and Drug Administration. (See Governmental
Regulation  Medical Device Regulation above.) The submission for a bone
growth stimulation product under development is currently under review by the
FDA and has been subject to substantial delay. At this point, we do not have
an estimate of when or whether final FDA approval will occur and there can be
no assurance that this delay in the approval process will not have a material
adverse effect on our ability to sell the product in the United States in the
future. Failure to obtain FDA clearance or approvals of the product or other
new products we develop in the future, any limitations imposed by the FDA on
new product development or use, or the costs of obtaining FDA clearance or
approvals could have a material adverse effect on our business, financial
condition and results of operations.

In many of the foreign countries, in which we market our products, we are
subject to extensive regulations similar to those of the FDA, including those
in Germany, our largest foreign market. (See Governmental Regulation  Medical
Device Regulation  International above.) Failure to receive, or delays in the
receipt of, relevant foreign qualifications could also have a material adverse
effect on our business, financial condition, and results of operations. Due to
the movement towards harmonization of standards in the European Union, we
expect a changing regulatory environment in Europe characterized by a shift
from a country-by-country regulatory system to a European Union wide single
regulatory system. The timing of this harmonization and its effect on us
cannot currently be predicted. Any such developments could have a material
adverse effect on our business, financial condition and results of operations.

Changes in reimbursement policies for our products by third party payers or
reductions in reimbursement rates for our products could adversely affect our
business and results of operations.

The ability of orthopedic sports medicine surgeons and their allied
healthcare professionals (or persons to whom they sell our products) to receive
reimbursement for the cost of our products from private third party payers and,
to a lesser extent, Medicare, Medicaid and other governmental programs, is
important to our business. Limitations or reductions in permitted reimbursement
for our products can have a material adverse effect on our sales and
profitability.

Congress and certain state legislatures are considering reforms in the
healthcare industry that may modify reimbursement practices, including controls
on healthcare spending through limitations on the growth of Medicare and
Medicaid spending. It is not clear at this time what proposals, if any, will be
adopted or, if adopted, what effect these proposals would have on our business.
In addition to extensive existing government healthcare regulation, there are
legislative proposals at the federal level such as competitive bidding, which
pursuant to the Balanced Budget Act of 1997, was evaluated in

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demonstration projects in Texas and Florida. Under competitive bidding,
Medicare would change its approach to reimbursing certain items and services
covered by Part B from the current fee schedule amount to an amount that would
be established through a bidding process between the government and suppliers.
If Congress decides to apply competitive bidding nationally, this may reduce
the number of suppliers providing certain items and services to Medicare
beneficiaries and the amounts paid for such items and services. Such
reductions could have a material adverse effect on our business, financial
condition and results of operations.

Further, on February 11, 2003, the Centers for Medicare and Medicaid
Services (CMS) made effective an interim final rule implementing the inherent
reasonableness authority, which allows adjustments to payment amounts by up to 15 percent
per year for certain items and services
covered by Part B when the existing payment amount is determined to be grossly
excessive or grossly deficient. The regulation lists factors that may be used
to determine whether an existing reimbursement rate is
grossly excessive or grossly deficient and to determine what is a realistic and
equitable payment amount. Also, under the regulation, a payment amount will not be considered
grossly excessive or grossly deficient if an overall payment adjustment of
less than fifteen percent would be necessary to produce a realistic and equitable
payment amount. Using this authority, CMS may reduce
reimbursement levels for certain items and services covered by Part B, which
could have a material adverse effect on our business, financial condition and
results of operations.

Many private health insurance plans tailor their coverage and
reimbursement policies after Medicare policies. If enacted, Congressional or
regulatory measures that reduce Medicare reimbursement rates could cause
private health insurance plans to reduce their reimbursement rates for our
products, which could have an adverse effect on our ability to sell our
products or cause our orthopedic professional customers to use less expensive
products introduced by us and our competitors.

Failure by users of our products to obtain sufficient reimbursement from
third party payers for our products or adverse changes in governmental and
private payers policies toward reimbursement for our products could have a
material adverse effect on our business, financial condition and results of
operations. We cannot assure you that third party reimbursement for our
products will continue to be available or at what rate such products will be
reimbursed.

Similar to our domestic business, our success in international markets
also depends upon the eligibility of our products for reimbursement through
government sponsored healthcare payment systems and third party payers.
Reimbursement practices vary significantly by country, with certain countries,
most notably France, requiring products to undergo a lengthy regulatory review
in order to be eligible for third party reimbursement. In addition, healthcare
cost containment efforts similar to those we face in the United States are
prevalent in many of the foreign countries in which our products are sold and
these efforts are expected to continue in the future, possibly resulting in the
adoption of more stringent standards. For example, in Germany, our largest
foreign market, reimbursement by government sponsored healthcare payment
systems for some categories of our products was decreased in 1997. Under the
current formula, the German government reimburses 80% of the cost of the
affected products and patients bear the remaining 20% of the cost. In Italy,
our rigid knee bracing products and cold therapy systems, among others, are no
longer eligible for reimbursement. In the United Kingdom, while reimbursement
for our products through the National Health Service (NHS), is currently
available, the cost of our products is not reimbursed by private health
insurance plans and orthopedic professionals are being pressured by the NHS to
reduce or eliminate the number of rigid knee braces prescribed for orthopedic
patients. Any developments in our foreign markets that eliminate or reduce
reimbursement rates for our products could have an adverse effect on our
ability to sell our products or cause our orthopedic professional customers to
use less expensive products, which could have a material adverse effect on our
results of operations.

Healthcare reform, managed care and buying groups have put downward pressure on
the prices of our products.

Within the United States, healthcare reform and managed care are changing
the dynamics of the healthcare industry in response to the need to control
rising healthcare costs. As a result of healthcare reform, the U.S. healthcare
industry has seen a rapid expansion of managed care organizations. The
development of managed care programs in which the providers contract to provide
comprehensive healthcare to a patient population at a fixed cost per person
(referred to as capitation) has put pressure on, and is expected to continue to
lead, healthcare providers to lower costs. The advent of managed care has also
resulted in greater attention to the tradeoff between patient need and product
cost, so-called demand matching, where patients are evaluated as to age, need
for mobility and other parameters and are then matched with an orthopedic
product that is cost effective in light of such evaluation. One result of
demand matching has been, and is expected to continue to be, a shift toward
lower priced products, and any such shift in our product mix to lower margin,
off-the-shelf products could have an adverse impact on our operating results.
For example, in our rigid knee-bracing segment, we and many of our competitors
are offering lower priced, off-the-shelf products in response to managed care
customers.

A further result of managed care and the related pressure on costs has
been the advent of buying groups in the United States. Such buying groups enter
into preferred supplier arrangements with one or more manufacturers of
orthopedic

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or other medical products in return for price discounts. The extent to which
such buying groups are able to obtain compliance by their members with such
preferred supplier agreements varies considerably depending on the particular
buying groups. In response to the organization of new buying groups, we have
entered into national contracts with selected groups and believe that the high
levels of product sales to such groups and the opportunity for increased market
share have the potential to offset the financial impact of discounting. We
believe that our ability to maintain our existing arrangements will be
important to our future success and the growth of our revenues. In addition,
we may not be able to obtain new preferred supplier commitments for major
buying groups, in which case we could lose significant potential sales, to the
extent these groups are able to command a high level of compliance by their
members. On the other hand, if we receive preferred supplier commitments from
particular groups which do not deliver high levels of compliance, we may not be
able to offset the negative impact of lower per unit prices or lower margins
with any increases in unit sales or in market share, which could have a
material adverse effect on our business, financial condition and results of
operations.

In international markets, where the movement toward healthcare reform and
the development of managed care are generally not as advanced as in the United
States, we have experienced downward pressure on product pricing and other
effects of healthcare reform similar to that which we have experienced in the
United States. We expect healthcare reform and managed care to continue to
develop in our primary international markets, which we expect will result in
further downward pressure in product pricing. The timing and the effects on us
of healthcare reform and the development of managed care in international
markets cannot currently be predicted.

Proposed laws that would limit the types of orthopedic professionals who can
fit, sell or seek reimbursement for our products could, if adopted, adversely
affect our business and results of operations.

Congress and state legislatures have from time to time, in response to
pressure from certain orthopedic practitioners, considered proposals which
limit the types of orthopedic professionals who can fit and/or sell our
products or who can seek reimbursement for our products. Several states have
adopted legislation which imposes certification or licensing requirements on
the measuring, fitting and adjusting of certain orthotic devices. Some of
these laws, have exemptions, which exempt manufacturers representatives.
Others apply to the activities of these representatives. Other states may be
considering such legislation. Such laws could limit our potential customers in
those jurisdictions in which such legislation or regulations are enacted by
limiting the measuring and fitting of these devices to certain licensed
individuals. We may not be successful in opposing their adoption, and,
therefore, such laws could have a material adverse effect on our business,
financial condition and results of operations.

We may need to change our business practices to comply with healthcare fraud
and abuse regulations.

We are subject to various federal and state laws pertaining to healthcare
fraud and abuse, including anti-kickback laws and physician self-referral laws.
Violations of these laws are punishable by criminal and/or civil sanctions,
including, in some instances, imprisonment and exclusion from participation in
federal and state healthcare programs, including Medicare, Medicaid, Veterans
Administration health programs and TRICARE. We have not been challenged by a
governmental authority under any of these laws and believe that our operations
are in material compliance with such laws. However, because of the
far-reaching nature of these laws, we may be required to alter one or more of
our practices to be in compliance with these laws. Healthcare fraud and abuse
regulations are complex and even minor, inadvertent irregularities in
submissions can potentially give rise to claims that a fraud and abuse law or
regulation has been violated. Any violations of these laws or regulations
could result in a material adverse effect on our business, financial condition
and results of operations. If there is a change in law, regulation or
administrative or judicial interpretations, we may have to change our business
practices or our existing business practices could be challenged as unlawful,
which could have a material adverse effect on our business, financial condition
and results of operations.

Denied claims from government agencies could reduce our revenue or profits.

Medicare contractors and Medicaid agencies periodically conduct pre- and
post-payment review and other audits of claims, and are under increasing
pressure to scrutinize more closely healthcare claims. We cannot assure you
that such reviews and/or similar audits of our claims will not result in
material recoupments or denials, which could have a material adverse effect on
our business, results of operations or financial condition.

Risks Related to our Debt Level

Our substantial indebtedness could limit our ability to operate our business,
obtain additional financing and pursue other business opportunities.

We are highly leveraged, which means we have a large amount of
indebtedness in relation to our stockholders

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equity. We may incur additional indebtedness from time to time to finance
acquisitions, investments or strategic alliances or capital expenditures or for
other purposes.

Our high degree of leverage could have negative consequences for us,
including the following:



| |  |  | our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or
other purposes may be impaired or such financing may not be available on favorable terms;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we will need a substantial portion of our cash flow to pay the principal and interest on our indebtedness, including
indebtedness that we may incur in the future;                                            
|
| |  |  | payments on our indebtedness will reduce the funds that would otherwise be available for our operations and future
business opportunities;                                                                    
|
| |  |  | a substantial decrease in our net operating cash flows could make it difficult for us to meet our debt service
requirements and force us to modify our operations;                                            
|
| |  |  | we may be more highly leveraged than our competitors, which may place us at a competitive disadvantage;                                                                                                       
|
| |  |  | our debt level may make us more vulnerable than our competitors to a downturn in our business or the economy
generally;                                                                                       
|
| |  |  | our debt level reduces our flexibility in responding to changing business and economic conditions;                                                                                                            
|
| |  |  | some of our debt has a variable rate of interest, which exposes us to the risk of increased interest rates; and                                                                                               
|
| |  |  | there would be a material adverse effect on our business and financial condition if we are unable to service our
indebtedness or obtain additional financing, as needed.                                      

Our debt agreements contain operating and financial restrictions which may
restrict our business and financing activities.

The operating and financial restrictions and covenants in our bank credit
facility, the indenture governing our outstanding Senior Subordinated Notes and
any future financing agreements may adversely affect our ability to finance
future operations, meet our capital needs or engage in our business activities.
Currently, our existing debt agreements restrict our ability to:



| |  |  | incur additional indebtedness;                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | issue redeemable equity interests and preferred equity interests;                                  
|
| |  |  | pay dividends or make distributions, repurchase equity interests or make other restricted payments;
|
| |  |  | redeem indebtedness that is subordinated in right of payment to the Notes;                         
|
| |  |  | make capital expenditures;                                                                         
|
| |  |  | create liens;                                                                                      
|
| |  |  | enter into certain transactions with affiliates;                                                   
|
| |  |  | make investments;                                                                                  
|
| |  |  | sell assets; or                                                                                    
|
| |  |  | enter into mergers or consolidations.                                                              

With respect to mergers or acquisitions, our bank credit facility and the
indenture governing the Notes limit our ability to finance acquisitions through
additional borrowings. In addition, our bank credit facility prohibits us from
acquiring assets or the equity of another company without the consent of the
lenders if:

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| |  |  | we acquire less than 100% of the equity of the acquired company, in the case of an acquisition of equity;                                                                                      
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the assets or entity acquired are in a different line of business from ours;                                                                                                                   
|
| |  |  | after giving effect to the acquisition, a pro forma consolidated leverage ratio and pro forma interest coverage ratio
are not satisfied; and                                                   
|
| |  |  | the purchase price exceeds $30 million in the case of any one acquisition or $50 million in the aggregate of which no
more than $10 million may involve acquisitions outside the United States.

The bank credit facility also limits investments in joint ventures to an
aggregate limit of $3,000,000, and limits other investments to $1,000,000.

Restrictions contained in the indenture and the bank credit facility
could:



| |  |  | limit our ability to plan for or react to market conditions or
meet capital needs or otherwise restrict our activities or
business plans; and                                                           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | adversely affect our ability to finance our operations,
acquisitions, investments or strategic alliances or other
capital needs or to engage in other business activities that
would be in our interest.

A breach of any of these covenants, ratios, tests or other restrictions
could result in an event of default under the bank credit facility and/or the
indenture. Upon the occurrence of an event of default under the bank credit
facility, the lenders could elect to declare all amounts outstanding under the
bank credit facility, together with accrued interest, to be immediately due and
payable. If we were unable to repay those amounts, the lenders could proceed
against the collateral granted to them to secure such indebtedness. If the
lenders under the bank credit facility accelerate the payment of the
indebtedness, there can be no assurance that our assets would be sufficient to
repay in full such indebtedness and our other indebtedness, including the Notes
referred to below. We may not have sufficient cash to service our
indebtedness. Our ability to pay principal and interest on the Notes and to
satisfy our other obligations will depend upon, among other things:



| |  |  | our future financial and operating performance, which will be
affected by prevailing economic conditions and financial,
business, regulatory and other factors, many of which are beyond
our control; and                                  
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the future availability of borrowings under our revolving bank
credit facility or any successor facility, the availability of
which depends or may depend on, among other things, our
complying with covenants in our bank credit facility.

If we cannot service our indebtedness, we will be forced to take actions
such as reducing or delaying acquisitions, investments, strategic alliances
and/or capital expenditures, selling assets, restructuring or refinancing our
indebtedness, or seeking additional equity capital or bankruptcy protection. We
can not assure you that any of these remedies can be effected on satisfactory
terms, if at all. In addition, the terms of existing or future debt
agreements, including the bank credit facility and the indenture, may restrict
us from adopting any of these alternatives.

Special Risks For Our Note Holders

Holders of our 12 5/8% Senior Subordinated Notes due 2009 (the Notes) of
which an aggregate face amount of $75 million are outstanding, are subject to
additional market and repayment risks arising from the terms of the Notes and
our debt level and corporate structure, some of which are described below. The
Notes were issued in 1999 by dj Orthopedics, LLC, our principal operating
company, and were co-issued by DJ Capital Corporation, a company formed solely
to act as co-issuer of the Notes. Payment of the Notes is guaranteed by dj
Orthopedics, Inc, our publicly held entity, and dj Development Corporation, a
company formed solely to hold our intellectual property assets. None of our
foreign subsidiaries has guaranteed payment of the Notes. In the discussion of
risks to holders of the Notes set forth below, the terms we, us and our refer
to dj Orthopedics, LLC and DJ Orthopedics Capital Corporation, the co-issuers
of the Notes. dj Orthopedics, Inc. is referred to as dj Orthopedics, and dj
Development Corporation is referred to as dj Development. The term
indenture as used below refers to the indenture we entered into that contains
the agreements between us and the holders of the Notes.

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The Notes and the guarantees by dj Orthopedics and dj Development are, and
guarantees by any of our future subsidiaries will be, effectively subordinated
to all senior debt of our subsidiaries.

The Notes are subordinated in right of payment to the prior payment in
full of all our existing and future senior indebtedness and the guarantee of
the Notes by dj Orthopedics, dj Development and any future subsidiaries
providing a guarantee of the Notes will be subordinated in right of payment to
all senior indebtedness of the applicable guarantor. The indenture requires
each of our domestic subsidiaries that is formed or acquired in the future to
guarantee the Notes, unless we designate the subsidiary as an Unrestricted
Subsidiary (as defined in the indenture). As of December 31, 2002, we had
approximately $35.8 million of senior indebtedness outstanding (excluding $25.0
million available and unused under a revolving bank credit facility), all of
which is secured. In addition, the indenture permits us and our Restricted
Subsidiaries (as defined in the indenture) to incur additional senior
indebtedness, including indebtedness under the bank credit facility. We or the
applicable guarantor may not pay principal, premium (if any), interest or other
amounts on account of the Notes or the guarantees by dj Orthopedics and dj
Development or any subsidiary in the event of a payment default on, or another
default that has resulted in the acceleration of, certain senior indebtedness
(including debt under the bank credit facility) unless such indebtedness has
been paid in full or the default has been cured or waived. In the event of
certain other defaults with respect to certain senior indebtedness, we or the
applicable guarantor may not be permitted to pay any amount on account of the
Notes or the guarantees by dj Orthopedics and dj Development or any subsidiary
for a designated period of time. In the event of a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding with respect to us or a
guarantor, our assets or a guarantors assets, as the case may be, will be
available to pay obligations on the Notes or the guarantors guarantee, as
applicable, only after our senior indebtedness or the senior indebtedness of
that guarantor has been paid in full, and there can be no assurance that there
will be sufficient assets remaining to pay amounts due on all or any of the
Notes or any guarantee of the Notes.

Our right to receive assets of any subsidiary which is not a guarantor
upon the liquidation or reorganization of that subsidiary (and thus the rights
of the holders of Notes to realize any value with respect to those assets) will
be subject to the prior claims of creditors of that subsidiary (including trade
creditors). Accordingly, since our foreign subsidiaries are not guarantors of
the Notes, the Notes are effectively subordinated to all liabilities (including
trade payables and contingent liabilities) of our foreign subsidiaries and any
of our future subsidiaries that do not provide a guarantee of the Notes except
to the extent that we are recognized as a creditor of such subsidiary.
However, even if we were recognized as a creditor of a subsidiary that does not
guarantee the Notes, our claims would still be subordinate to any security
interest in the assets of that subsidiary, and any indebtedness of that
subsidiary senior to that held by us. As of December 31, 2002, the aggregate
amount of the liabilities of our foreign subsidiaries as reflected on our
balance sheet was $0.8 million.

Indebtedness under our bank credit facility is secured while our obligations
under the Notes are not secured and if we default under our senior debt, our
senior lenders can foreclose on the assets we have pledged to secure payment of
the senior debt to your exclusion.

In addition to being contractually subordinated to all existing and future
senior indebtedness, our obligations under the Notes (and dj Orthopedics and
dj Developments obligations under their guarantees) are unsecured while our
obligations under the bank credit facility (and dj Orthopedics and dj
Developments obligations under their guarantee of our indebtedness under the
bank credit facility) are secured by a security interest in substantially all
of our assets and the assets of dj Orthopedics (which consist principally of
100% of our equity interests) and each of our existing and subsequently
acquired or organized U.S. and, subject to certain limitations, non-U.S.
subsidiaries, including a pledge of all of the issued and outstanding equity
interests in our existing or subsequently acquired or organized U.S.
subsidiaries and 65% of the equity interests in each of our subsequently
acquired or organized non-U.S. subsidiaries. If we are declared bankrupt or
insolvent or if we default under the bank credit facility, the lenders could
declare all of the funds borrowed under the bank credit facility, together with
accrued interest, immediately due and payable. If we were unable to repay that
indebtedness, the lenders could foreclose on our equity interests pledged by dj
Orthopedics, on the pledged equity interests of our subsidiaries and on the
assets in which they have been granted a security interest, in each case to
your exclusion, even if an event of default exists under the indenture at such
time. Furthermore, if all equity interests of any future subsidiary guarantor
are sold to persons pursuant to an enforcement of the pledge of equity
interests in that subsidiary guarantor for the benefit of the senior lenders,
then the applicable subsidiary guarantor will be released from its guarantee of
the Notes automatically and immediately upon such sale.

Our bank credit facility requires us to make mandatory payments, which could
limit our ability to grow our business.

We are required to make annual mandatory payments of the term loans
under the bank credit facility in an amount equal to 50% of our excess cash
flow (75% if our ratio of total debt to EBITDA exceeds 4 to 1). Excess cash flow
represents our net income adjusted for extraordinary gains or losses,
depreciation, amortization and other non-cash charges, changes in working
capital, changes in deferred revenues, payments for capital expenditures, and
repayment of indebtedness. We had no
excess cash flow in 2002, 2001 or 2000.

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In addition, the term loans are subject to
mandatory prepayments in an amount equal to:



| |  |  | 100% of the net cash proceeds of equity and debt issuance by
us, dj Orthopedics or any of our other subsidiaries; and                 
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 100% of the net cash proceeds of asset sales or other
dispositions of property by us, dj Orthopedics or any of our other
subsidiaries,

in each case subject to certain
exceptions. A mandatory prepayment of less than $1.0 million was required
for the sale of our interest in our Australian subsidiary on December
31, 2002. On March 28, 2003, we made a total prepayment of principal on the
term loans totaling approximately $20.0 million including the
required prepayment. No mandatory prepayments were
required for 2001 or 2000. If we have to use cash to make
mandatory payments in the future, we may not have sufficient funds to
grow our business, to
make acquisitions, enter into joint ventures or make capital expenditures.

We may not have the ability to raise the funds necessary to finance the change
of control offer required by the indenture.

Upon a change of control, we are required to offer to purchase all of the
Notes then outstanding at 101% of the principal amount thereof plus accrued
interest. If a change of control were to occur, we may not have sufficient
funds to pay the purchase price for the outstanding Notes tendered, and we
expect that we would require third party financing. However, we may not be
able to obtain such financing on favorable terms, if at all. In addition, the
bank credit facility restricts our ability to repurchase the Notes, including
pursuant to an offer in connection with a change of control. A change of
control under the indenture may also result in an event of default under the
bank credit facility and may cause the acceleration of other senior
indebtedness, if any, in which case the subordination provisions of the Notes
would require payment in full of the bank credit facility and any other senior
indebtedness before repurchase of the Notes. Our future indebtedness may also
contain restrictions on our ability to repay the Notes upon certain events or
transactions that could constitute a change of control under the indenture. The
inability to repay senior indebtedness upon a change of control or to purchase
all of the tendered Notes would each constitute an event of default under the
indenture.

The change of control provision in the indenture will not necessarily
afford you protection in the event of a highly leveraged transaction, including
reorganization, restructuring, merger or other similar transaction involving us
that may adversely affect you. Such a transaction may not involve a change in
voting power or beneficial ownership, or, even if it does, may not involve a
change of the magnitude required under the definition of change of control in
the indenture to trigger this provision

Federal and state laws permit a court to void the Notes and guarantees under
certain circumstances.

Our obligations under the indenture and the Notes, the obligations
incurred by DonJoy L.L.C., under the indenture and its guarantee of the Notes
and assumed by dj Orthopedics in the reorganization and the obligations
incurred by dj Development under the indenture and its guarantee of the Notes
may be subject to review under federal bankruptcy law or relevant state
fraudulent conveyance and similar statutes in a bankruptcy or reorganization
case or lawsuit commenced by or on behalf of our or dj Orthopedics or dj
Developments unpaid creditors. Under these laws, if a court were to find that,
at the time we issued the Notes, DonJoy issued its guarantee of the Notes or dj
Development issued its guarantee of the Notes, we DonJoy, or dj Development, as
the case may be:



| |  |  | incurred such indebtedness with the intent of hindering, delaying or defrauding present or future creditors;
or                                                                           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | received less than the reasonably equivalent value or fair consideration for incurring such indebtedness; and                                                                             
|
| |  |  | were insolvent or rendered insolvent by reason of any of the recapitalization transactions;                                                                                               
|
| |  |  | were engaged or about to engage in a business or transaction for which our or the applicable guarantors
assets constituted unreasonably small capital to carry on our or its business; or
|
| |  |  | intended to incur, or did incur, or believed that we or the applicable guarantor would incur, debts beyond
our or the applicable guarantors ability to pay as they matured or became due;

then, such court might:



| |  |  | subordinate the Notes or dj Orthopedics and dj Developments guarantee of the Notes to our or dj
| | - |  | -------------------------------------------------------------------------------------------------

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| |   |  | Orthopedics and dj Developments presently existing or future
indebtedness;
| | - |  | ----------------------------------------------------------------------------
|
| |  |  | void the issuance of the Notes (in our case) or the guarantees or;          
|
| |  |  | take other actions detrimental to holders of the Notes.                     

The measure of insolvency for purposes of the foregoing will vary
depending upon the law of the jurisdiction being applied. Generally, an entity
will be insolvent if:



| |  |  | the fair salable value of its assets were less than the amount required to pay its total existing debts and
liabilities (including contingent liabilities) as they become absolute or mature; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the sum of its debts (including contingent liabilities) were greater than its assets, at fair valuation.                                                                                        

We cannot predict:



| |  |  | what standard a court would apply in order to determine whether we or the applicable guarantor were insolvent
as of the date we or the applicable guarantor issued the old Notes or the guarantee, or that regardless of the
method of valuation a court would determine that we or the applicable guarantor were insolvent on that date; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | whether a court would not determine that the payments constituted fraudulent transfers on another ground.                                                                                                                                                                                                                                   

In rendering their opinions in connection with the issuance of the Notes,
our counsel and counsel to the initial purchaser of the Notes did not express
any opinion as to the applicability of federal bankruptcy or state fraudulent
transfer and conveyance laws.

To the extent a court voids a guarantee as a fraudulent conveyance or
holds it unenforceable for any other reason, holders of the Notes would cease
to have any claim in respect of the guarantor and would be creditors solely of
us.

Based upon financial and other information available to us, we believe
that we issued the Notes and the guarantors issued the guarantees for proper
purposes and in good faith and that at the time we and the guarantors were not
insolvent or rendered insolvent thereby, had sufficient capital to run our
businesses, and were able to pay our debts as they mature or become due. In
reaching these conclusions, we relied on various valuations and estimates of
future cash flow that necessarily involve a number of assumptions and choices
of methodology. However, a court may not adopt the assumptions and
methodologies we have chosen or concur with our conclusion as to our solvency.

Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against us
or dj Orthopedics or dj Development within 90 days after any payment by us with
respect to the Notes or by dj Orthopedics and dj Development under their
guarantees of the Notes, or if we or dj Orthopedics or dj Development
anticipated becoming insolvent at the time of such payment, all or a portion of
such payment could be avoided as a preferential transfer and the recipient of
such payment could be required to return such payment.

In the event there are any subsidiary guarantors in the future, the
foregoing would apply to their guarantees.

There is no active trading market for the Notes.

The Notes are not listed on a securities exchange or any automated dealer
quotation system. J.P. Morgan Securities, Inc. (JPMSI) makes a market in the
Notes. JPMSI is not obligated to do so, however, and any market-making
activities with respect to the Notes may be discontinued at any time without
notice. In addition, this market-making activity is subject to limits imposed
by federal securities laws. Because JPMSI is our affiliate, JPMSI is required
to deliver a current market-making prospectus and otherwise comply with the
registration requirements of the Securities Act of 1933 in any secondary market
sale of the Notes. Accordingly, the ability of JPMSI to continue to make a
market in the Notes depends, in part, on our ability to maintain a current
market-making prospectus.

The liquidity of the trading market in the Notes, and the market price
quoted for the Notes may be adversely affected by changes in the overall market
for high yield securities and by changes in our financial performance or
prospects or in the prospects for companies in our industry generally. As a
result, you cannot be sure that an active trading market will develop for the
Notes.

26



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##### Table of Contents






Item 2. Properties

We are headquartered in Vista, California and operate manufacturing
locations in Vista and in Tijuana, Mexico. The manufacturing facilities located
in Tijuana, Mexico, are conducted in three buildings in a campus environment
and are within 100 miles of Vista. We also lease warehouse and office space in
Germany, Canada and the United Kingdom. As part of our restructuring, we
intend to sublease a portion of our Vista facility in the future.

|                       |  |                            |  |              |  |                   |  |                   
|---------------------- |  | -------------------------- |  | ------------ |  | ----------------- |  | ------------------
|                       |  |                            |  |              |  | Lease Termination |  |                   
|Location               |  | Use                        |  | Owned/Leased |  | Date              |  | Size (Square Feet)
|                       |  |                            |  |              |  |                   |  |                   
|Vista, California      |  | Corporate Headquarters     |  | Subleased    |  | February 2008     |  | 266,041 (1)       
|                       |  | Research & Development     |  |              |  |                   |  |                   
|                       |  | Manufacturing &            |  |              |  |                   |  |                   
|                       |  | Distribution               |  |              |  |                   |  |                   
|                       |  |                            |  |              |  |                   |  |                   
|Neudrossenfeld,        |  |                            |  |              |  |                   |  |                   
|Germany                |  | Office & Distribution      |  | Leased       |  | August 2004       |  | 7,700             
|                       |  |                            |  |              |  |                   |  |                   
|Surrey, United Kingdom |  | Office & Distribution      |  | Leased       |  | November 2011     |  | 3,111             
|                       |  |                            |  |              |  |                   |  |                   
|Tijuana, Mexico        |  | 3 Manufacturing Facilities |  | Leased       |  | December 2003     |  | 48,600            
|                       |  |                            |  |              |  | June 2003 (2)     |  | 30,000            
|                       |  |                            |  |              |  | December 2003 (3) |  | 34,000            
|                       |  |                            |  |              |  |                   |  |                   
|Mississauga, Ontario   |  | Office & Distribution      |  | Leased       |  | January 2005      |  | 4,250             



---

|(1) |  | A significant amount of this space is not utilized as a result of the
relocation of our manufacturing operations to Mexico. We are
currently pursuing a sublease of one of the Vista facilities.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Renewable at the option of the lessee for 5 additional one-year periods.                                                                                                                        
|   
|(3) |  | Renewable at the option of the lessee for 7 additional one-year periods.                                                                                                                        




Item 3. Legal Proceedings

Several class action complaints were filed in the United States District
Courts for the Southern District of New York and for the Southern District of
California on behalf of purchasers of our common stock alleging violations of
the federal securities laws in connection with our November 15, 2001 initial
public offering. dj Orthopedics, Inc. is named as a defendant along with
Leslie H. Cross, our President and Chief Executive Officer, Cyril Talbot III,
our former Senior Vice President, Finance, Chief Financial Officer, and
Secretary, Charles T. Orsatti, former Chairman of our Board of Directors, and
the underwriters of our initial public offering. The complaints sought
unspecified damages and alleged that defendants violated Sections 11, 12, and
15 of the Securities Act of 1933 by, among other things, misrepresenting and/or
failing to disclose material facts in connection with our registration
statement and prospectus for the initial public offering. On February 25, 2002,
plaintiffs agreed to dismiss the New York actions without prejudice. On
February 28, 2002, a federal district court judge consolidated the Southern
District of California actions into a single action, In re DJ Orthopedics, Inc.
Securities Litigation, Case No. 01-CV-2238-K (LSP) (S.D. Cal.), and appointed
Oracle Partners, L.P. as lead plaintiff. On May 3, 2002, the lead plaintiff
filed its consolidated amended complaint, which alleges the same causes of
action and adds our outside directors Mitchell J. Blutt, M.D., Kirby L. Cramer,
and Damion E. Wicker, M.D. as defendants. On June 17, 2002, we and the other
defendants filed a motion to dismiss the consolidated complaint. On August 6,
2002, the Court granted in part and denied in part the motion to dismiss. The
Court dismissed several categories of the misstatements and omissions alleged
by plaintiffs. The remaining allegation pertains to a purported failure to
disclose material intra-quarterly sales data in the registration statement and
prospectus. We believe the claims are without merit and intend to defend the
action vigorously. However, there can be no assurance that we will succeed in
defending or settling this action. Additionally, we cannot assure you that the
action will not have a material adverse effect on our business, financial
condition and results of operations.

On June 7, 2002, a patent infringement action was filed against us and our
former parent, Smith & Nephew, in the United States District Court, Eastern
District of Texas, Case No. 2:02CV-123-TJW by Generation II Orthotics Inc. and
Generation II USA Inc. The suit alleges that we and Smith & Nephew willfully
infringed, and are infringing, U.S. Patent

27



---



##### Table of Contents



No. 5,302,169 and U.S. Patent No. 5,400,806 by manufacturing, using and
selling certain orthopedic knee braces for the treatment of unicompartmental
osteoarthritis. The lawsuit seeks unspecified monetary damages and an
injunction to prevent us from infringing the patents and from selling the
relevant knee braces. We believe the claims are without merit and intend to
defend the action vigorously. We have filed an answer and counterclaims seeking
to invalidate the patents. Pursuant to a prior contractual obligation, we have
agreed to indemnify and defend Smith & Nephew in this matter. The parties conducted a
mediation session on this matter on March 25, 2003, and settlement discussions are
occurring. No assurance can be given that the action will settle or that we will be able to
achieve a favorable outcome in this litigation.

We are from time to time involved in lawsuits arising in the ordinary
course of business. With respect to these matters, management believes that it
has adequate legal defense, insurance and/or have provided adequate accruals
for related costs. We are not aware of any pending lawsuits not mentioned above
that could have a material adverse effect on our business, financial condition
and results of operations.




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

No matters were submitted to a vote of security holders during the quarter
ended December 31, 2002.




Item 4A. Executive Officers

The following table sets forth the name, ages and positions of the
Companys executive officers:

|                    |  |     |    |          |  |                                                                      
|------------------- |  | --- | -- | -------- |  | ---------------------------------------------------------------------
|Name                |  | Age |    | Position
|                    |  |     |    |         
|Leslie H. Cross     |  |     | 52 |          |  | President, Chief Executive Officer and Director                      
|Vickie L. Capps     |  |     | 41 |          |  | Senior Vice President¥Finance, Chief Financial Officer               
|Michael R. McBrayer |  |     | 44 |          |  | Senior Vice President¥Professional Relations and Business Development
|Donald M. Roberts   |  |     | 54 |          |  | Vice President, General Counsel and Secretary                        
|Luke T. Faulstick   |  |     | 39 |          |  | Vice President-Operations                                            

Leslie H. Crosshas been the Chief Executive Officer and President and a
director of dj Orthopedics, Inc. since its incorporation in August 2001. He
served as the Chief Executive Officer and a Manager of DonJoy, L.L.C., the
predecessor of the Company, from June 1999 until November 2001, and has served
as President of dj Orthopedics, LLC, the Companys wholly-owned operating
subsidiary, or its predecessor, the Bracing & Support Systems division of Smith
& Nephew, Inc. (the BASS Division) since June 1995. From 1990 to 1994, Mr.
Cross held the position of Senior Vice President of Marketing and Business
Development of the BASS Division. He was a Managing Director of two different
divisions of Smith & Nephew, Inc. from 1982 to 1990. Prior to that time, he
worked at American Hospital Supply Corporation. Mr. Cross earned a diploma in
Medical Technology from Sydney Technical College in Sydney, Australia and
studied Business at the University of Cape Town in Cape Town, South Africa.

Vickie L. Cappsjoined dj Orthopedics, Inc. in July 2002 and serves as
Senior Vice President- Finance and Chief Financial Officer. From September
2001 until July 2002, Ms. Capps was employed by AirFiber, a privately held
provider of broadband wireless solutions, where she served as Senior Vice
President, Finance and Administration and Chief Financial Officer. From July
1999 to July 2001, Ms. Capps served as Vice President of Finance and
Administration and CFO for Maxwell Technologies, Inc., a publicly traded
technology company. From 1992 to 1999, Ms. Capps served in various positions,
including CFO, with Wavetek Wandel Goltermann, Inc., a multinational
communications equipment company. Ms. Capps also served as a senior audit and
accounting professional for Ernst & Young LLP from 1982 to 1992. Ms. Capps is a
California Certified Public Accountant and also serves on the board of
directors for Targeted Molecules Corporation of San Diego. Ms. Capps received a
Bachelor of Science degree in Business Administration/Accounting from San Diego
State University.

Michael R. McBrayerbecame Senior Vice President¥Professional Relations
and Business Development of dj Orthopedics, LLC in 2001. He has held several
other managerial positions with dj Orthopedics, LLC, including Senior Vice
President¥Sales, since joining dj Orthopedics, LLC or its predecessor in 1987
as a national sales manager for the retail product line. Mr. McBrayer received
his B.S. (Marketing and Management) at Northern Arizona University in
Flagstaff, Arizona.

Donald M. Robertsjoined dj Orthopedics in December 2002 and currently
serves as Vice President, General Counsel and Secretary. From 1994 to December
2002, Mr. Roberts served as Vice President, Secretary and General Counsel for
Maxwell Technologies, Inc., a publicly held technology company. Previous to
that, he was with the Los Angeles-based law firm of Parker, Milliken, Clark,
OHara & Samuelian for 21 years. Mr. Roberts was a shareholder in the firm,
having served as partner in a predecessor partnership. Mr. Roberts received his
undergraduate degree in Political Science from Yale University and earned his
J.D. at the University of California, Berkeley, Boalt Hall School of Law.

28



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##### Table of Contents



Luke T. Faulstickhas served as Vice President of Operations since July of
2002. He joined dj Orthopedics as Vice President of Manufacturing in June of
2001. From 1998 to July 2002, Mr. Faulstick served as General Manager for Tyco
Healthcare. From 1996 to 1998, Mr. Faulstick served as Plant Manager for
Mitsubishi Consumer Electronics. In 1994, he started a contract manufacturing
business-supplying products to the medical, electronic and photographic
industries. Mr. Faulstick began his career in 1985 working for Eastman Kodak
Company in Rochester New York where he held various positions in Engineering,
Marketing, and Product Research and Development. Mr. Faulstick earned an MS in
Engineering from Rochester Institute of Technology and BS in Engineering from
Michigan State University.




PART II




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

Our common stock has been traded on the New York Stock Exchange since
November 15, 2001 under the symbol DJO. The following table sets forth for
the periods indicated the high and low closing sales prices of the common
stock. Prior to November 15, 2001, there was no established public trading
market for the common stock.

|                                             |  |      |       |     |  |   |       | 
|-------------------------------------------- |  | ---- | ----- | --- |  | - | ----- | 
|                                             |  | High |       | Low
|                                             |  |      |       |    
|2002:                                        |  |      |       |     |  |   |       | 
|First Quarter                                |  | $    | 13.65 |     |  | $ | 7.20  | 
|Second Quarter                               |  | $    | 9.45  |     |  | $ | 8.00  | 
|Third Quarter                                |  | $    | 7.55  |     |  | $ | 2.79  | 
|Fourth Quarter                               |  | $    | 4.38  |     |  | $ | 3.34  | 
|                                             |  |      |       |     |  |   |       | 
|2001:                                        |  |      |       |     |  |   |       | 
|Fourth Quarter (beginning November 15, 2001) |  | $    | 15.25 |     |  | $ | 12.41 | 

As of February 28, 2003, there were 18 holders of record of our common
stock. We have never declared or paid any cash dividends on our capital stock.
We are effectively prohibited from paying cash dividends on our common stock
for the foreseeable future under the terms of our credit agreement. Moreover,
we plan to retain all earnings for investment in our business and do not plan
to pay cash dividends at any time in the foreseeable future.




Item 6. Selected Financial Data

The selected financial data set forth below with respect to our
consolidated financial statements has been derived from our audited financial
statements. The data set forth below should be read in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and our audited financial statements and Notes thereto appearing
elsewhere herein.

Effective December 31, 2002, we have reclassified certain amounts within
our consolidated statements of operations, including expenses related to the
shipping and handling of our products to customers ($7.7 million, $7.9 million
and $7.2 million in 2002, 2001 and 2000, respectively), which have been
reclassified from sales and marketing expense to costs of goods sold. In
addition certain common facilities and information technology expenses have
been reclassified from general and administrative expenses, partly to costs of
goods sold ($2.0 million, $2.0 million and $1.1 million in 2002, 2001 and 2000,
respectively) and partly to sales and marketing expense ($0.6 million, $0.7
million and $0.4 million in 2002, 2001 and 2000, respectively) and research and
development expense ($0.1 million in 2002, 2001 and 2000). We have also made
certain other less material reclassifications. All statement of operations
information included herein for the year ended December 31, 2002 has been
presented in accordance with the new classifications and all historical
information has been reclassified for a consistent presentation.

29



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##### Table of Contents



|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |     |        |        |  
|-------------------------------------- | ------------------------------------------------------------------- | ------- | ---------------------------------------------------------- | ------------------------------------ | ------ | ------------------------ | ----- | ------- | ------ | ------------------------------------- | ------ | ------- | --- | ------ | - | ------- | --- | ------ | ------ | ------- | --- | ------ | ------ | -
|                                       |                                                                     |         |                                                            |                                      |        | Years Ended December 31,
|                                       |                                                                     |         |                                                            |                                      |        |                         
|                                       |                                                                     |         |                                                            |                                      |        | 2002                     |       | 2001    |        | 2000                                  |        | 1999    |     | 1998  
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |       
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        | (In thousands, except per share data) |        |         |     |       
|Statement of Income Data:              |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |        
|                                       | Net revenues                                                        |         | $                                                          | 182,636                              |        |                          | $     | 169,170 |        |                                       | $      | 143,586 |     |        | $ | 116,418 |     |        | $      | 103,643 |    
|                                       | Costs of goods sold (a)                                             |         |                                                            | 95,878                               |        |                          |       | 83,079  |        |                                       |        | 69,129  |     |        |   | 58,284  |     |        |        | 51,070  |    
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       | Gross profit                                                        |         |                                                            | 86,758                               |        |                          |       | 86,091  |        |                                       |        | 74,457  |     |        |   | 58,134  |     |        |        | 52,573  |    
|                                       | Operating expenses (a):                                             |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       |                                                                     |         | Sales and marketing (b)                                    |                                      |        | 56,216                   |       |         |        | 36,175                                |        |         |     | 29,201 |   |         |     | 22,884 |        |         |     | 25,194 |       
|                                       |                                                                     |         | General and administrative                                 |                                      |        | 26,414                   |       |         |        | 25,042                                |        |         |     | 19,829 |   |         |     | 16,172 |        |         |     | 14,264 |       
|                                       |                                                                     |         | Research and development                                   |                                      |        | 2,922                    |       |         |        | 2,285                                 |        |         |     | 2,898  |   |         |     | 2,176  |        |         |     | 2,303  |       
|                                       |                                                                     |         | Impairment of long-lived assets (c)                        |                                      |        | 3,666                    |       |         |        |                                      |        |         |     |       |   |         |     |       |        |         |     |       |       
|                                       |                                                                     |         | Performance improvement, restructuring
and other costs (d) |                                      |        | 10,008                   |       |         |        |                                      |        |         |     | 400    |   |         |     |       |        |         |     | 2,467  |       
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       | Total operating expenses                                            |         |                                                            | 99,226                               |        |                          |       | 63,502  |        |                                       |        | 52,328  |     |        |   | 41,232  |     |        |        | 44,228  |    
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       | Income (loss) from operations                                       |         |                                                            | (12,468                              | )      |                          |       | 22,589  |        |                                       |        | 22,129  |     |        |   | 16,902  |     |        |        | 8,345   |    
|                                       | Interest expense and other, net (e)                                 |         |                                                            | (12,088                              | )      |                          |       | (22,057 | )      |                                       |        | (16,970 | )   |        |   | (7,387  | )   |        |        |        |    
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       | Income (loss) before income taxes                                   |         |                                                            | (24,556                              | )      |                          |       | 532     |        |                                       |        | 5,159   |     |        |   | 9,515   |     |        |        | 8,345   |    
|                                       | Provision for income taxes:                                         |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       |                                                                     |         |                                                            | Benefit (provision) for income taxes |        |                          | 9,361 |         |        |                                       | 1,789  |         |     |        |  |         |     |        | (2,387 | )       |     |        | (3,394 | )
|                                       |                                                                     |         |                                                            | Deferred tax benefit (f)             |        |                          |      |         |        |                                       | 54,169 |         |     |        |  |         |     |        |       |         |     |        |       |  
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       | Total provision (benefit) for income taxes                          |         |                                                            | 9,361                                |        |                          |       | 55,958  |        |                                       |        |        |     |        |   | (2,387  | )   |        |        | (3,394  | )  
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       | Net income (loss)                                                   |         |                                                            | (15,195                              | )      |                          |       | 56,490  |        |                                       |        | 5,159   |     |        |   | 7,128   |     |        |        | 4,951   |    
|                                       | Less: Preferred unit dividends and accretion
of preferred unit fees |         |                                                            |                                     |        |                          |       | (5,667  | )      |                                       |        | (5,415  | )   |        |   | (2,343  | )   |        |        |        |    
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       | Net income (loss) available to stockholders                         |         | $                                                          | (15,195                              | )      |                          | $     | 50,823  |        |                                       | $      | (256    | )   |        | $ | 4,785   |     |        | $      | 4,951   |    
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       | Net income (loss) per share available to
common stockholders:       |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       |                                                                     | Basic   |                                                            | $                                    | (0.85  | )                        |       | $       | 4.80   |                                       |        |         | N/A |        |   |         | N/A |        |        |         | N/A |       
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       |                                                                     | Diluted |                                                            | $                                    | (0.85  | )                        |       | $       | 4.68   |                                       |        |         | N/A |        |   |         | N/A |        |        |         | N/A |       
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       | Weighted average shares outstanding:                                |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       |                                                                     | Basic   |                                                            |                                      | 17,873 |                          |       |         | 10,593 |                                       |        |         | N/A |        |   |         | N/A |        |        |         | N/A |       
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       |                                                                     | Diluted |                                                            |                                      | 17,873 |                          |       |         | 10,858 |                                       |        |         | N/A |        |   |         | N/A |        |        |         | N/A |       
|                                       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|Other Data:                            |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |        
|                                       | EBITDA (g)                                                          |         | $                                                          | (5,386                               | )      |                          | $     | 32,033  |        |                                       | $      | 28,445  |     |        | $ | 21,854  |     |        | $      | 15,665  |    
|                                       | Adjusted EBITDA (h)                                                 |         |                                                            | 19,745                               |        |                          |       | 32,033  |        |                                       |        | 28,713  |     |        |   | 25,082  |     |        |        | 21,957  |    
|                                       | Depreciation and amortization                                       |         |                                                            | 7,283                                |        |                          |       | 9,444   |        |                                       |        | 6,365   |     |        |   | 4,952   |     |        |        | 4,853   |    
|                                       | Capital expenditures and acquired intangibles                       |         |                                                            | 6,721                                |        |                          |       | 7,104   |        |                                       |        | 7,722   |     |        |   | 4,706   |     |        |        | 4,149   |    
|                                       | Ratio of earnings to fixed charges (i)                              |         |                                                            | (0.78)x                              |        |                          |       | 1.03x   |        |                                       |        | 1.29x   |     |        |   | 2.12x   |     |        |        | 8.84x   |    
|Cash
flows provided by (used in)       |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |         |    
|                                       | Operating activities                                                |         | $                                                          | 13,955                               |        |                          | $     | (4,066  | )      |                                       | $      | 1,229   |     |        | $ | 16,065  |     |        | $      | 3,748   |    
|                                       | Investing activities                                                |         |                                                            | (7,349                               | )      |                          |       | (8,109  | )      |                                       |        | (57,015 | )   |        |   | (4,776  | )   |        |        | (4,049  | )  
|                                       | Financing activities                                                |         |                                                            | (1,468                               | )      |                          |       | 33,993  |        |                                       |        | 53,965  |     |        |   | (6,171  | )   |        |        | 200     |    
|Balance Sheet Data (at end of period): |                                                                     |         |                                                            |                                      |        |                          |       |         |        |                                       |        |         |     |        |   |         |     |        |        |        
|                                       | Cash                                                                |         | $                                                          | 32,085                               |        |                          | $     | 25,814  |        |                                       | $      | 4,106   |     |        | $ | 5,927   |     |        | $      | 809     |    
|                                       | Working capital                                                     |         |                                                            | 67,321                               |        |                          |       | 83,896  |        |                                       |        | 38,695  |     |        |   | 27,413  |     |        |        | 15,625  |    
|                                       | Total assets                                                        |         |                                                            | 237,724                              |        |                          |       | 247,922 |        |                                       |        | 155,672 |     |        |   | 89,416  |     |        |        | 77,056  |    
|                                       | Long-term obligations                                               |         |                                                            | 109,816                              |        |                          |       | 110,934 |        |                                       |        | 157,222 |     |        |   | 113,305 |     |        |        |        |    
|                                       | Redeemable preferred units                                          |         |                                                            |                                     |        |                          |       |        |        |                                       |        | 41,660  |     |        |   | 32,539  |     |        |        |        |    
|                                       | Obligations to Smith & Nephew (including
current portion)           |         |                                                            |                                     |        |                          |       |        |        |                                       |        |        |     |        |   |        |     |        |        | 45,227  |    
|                                       | Total stockholders/members equity (deficit)                       |         |                                                            | 100,913                              |        |                          |       | 115,240 |        |                                       |        | (63,625 | )   |        |   | (70,429 | )   |        |        | 12,832  |    



---

|    |  | N/A Not applicable.                                                                                                                                                                                                                                                                                                                                                      
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) |  | Amounts in 1999 and prior years include various charges and overhead
allocations from Smith & Nephew. See note (h) below. The year ended
December 31, 2002 includes aggregate charges of $5.1 million related to
reserves for excess inventories related to product lines that have been
discontinued (see Note 3 of the Notes to the consolidated financial
statements).
|   
|(b) |  | The year ended December 31, 2002 includes an aggregate increase of $6.7
million in our estimated reserves for                                                                                                                                                                                                                                                            

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|    |  | contractual allowances and bad debts related to our OfficeCare® and Insurance
programs (see Note 3 of the Notes to our consolidated financial statements).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(c) |  | The year ended December 31, 2002 includes $3.7 million in charges related
to impairment of certain of our long-lived assets (see Note 3 of the Notes
to our consolidated financial statements).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(d) |  | For the year ended December 31, 2002, we recorded $10.0 million in
charges related to our performance improvement program (see Note 3 of the
Notes to our consolidated financial statements). We recorded merger and
integration costs in 2000 associated with the consolidation of the
Orthotech operations into our existing facilities including merger and
integration and information systems consulting. We recorded restructuring
costs in 1998 relating to the consolidation of our operations at our
Vista, California facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(e) |  | In 2002, we adopted SFAS
No. 145, which required us to reclassify the loss
on early extinguishment of debt recorded in 2001 to interest expense and
other, net. The charge of approximately $4.7 million for the write-off of
unamortized deferred debt issuance costs, debt discount and a prepayment
premium was incurred as a result of the redemption of a portion of our
Senior Subordinated Notes. The $1.9 million tax benefit related to this
charge has been included as a portion of the income benefit for 2001.
Discontinued acquisition costs of $0.2 million and $0.4 million for the
years ended December 31, 2002 and 2000, respectively, are also included as
a portion of interest expense and other, net.                                                                                                                                                                                                                                                                                                                 
|   
|(f) |  | Because DonJoy, L.L.C. operated as a limited liability company from the
date of its recapitalization in June 1999 through November 20, 2001, the
date the reorganization was consummated, in accordance with federal, state
and local income tax regulations which provide that no income taxes are
levied on U.S. limited liability companies and each member of DonJoy,
L.L.C. was individually responsible for reporting the members share of
our net income or loss, we have not provided for income taxes in our
historical consolidated financial statements. We have recorded a tax
benefit (provision) at an effective tax rate of 40% on our income before
income taxes for the period from November 20, 2001, the date of our
reorganization, to December 31, 2001 and at an effective tax rate of 38%
on our loss before income taxes for the year ended December 31, 2002.                                                                                                                                                      
|   
|(g) |  | EBITDA is defined as net income (loss) plus interest expense (net of
interest income), income taxes, depreciation and amortization. EBITDA is
not a measure of performance under generally accepted accounting
principles. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with generally
accepted accounting principles, or as a measure of profitability or
liquidity. Management has included EBITDA because it may be used by our
lenders or certain other investors to analyze and compare companies on the
basis of operating performance, leverage and liquidity and to determine a
companys ability to service debt. Under both the bank credit facility
definition of EBITDA and our definition of EBITDA, we were in compliance
with all debt covenants under the bank credit facility at December 31,
2002. Our definition of EBITDA may not be comparable to that of other
companies.
|   
|(h) |  | Adjusted EBITDA represents EBITDA, as defined above, adjusted to
eliminate amounts permitted under the bank credit facility and those
direct charges from Smith & Nephew as well as those allocations of Smith &
Nephews overhead and other expenses that we have not incurred on a
stand-alone basis. These amounts were charged or allocated to us on the
basis of direct usage where identifiable, with the remainder allocated to
us on the basis of its annual sales or the capital employed by Smith &
Nephew in our business. These charges and allocations eliminated include:                                                                                                                                                                                                                                                                                                                                                                                                                                                    



| | (1) |  | charges for brand royalties that we paid to Smith & Nephew for use of
the Smith & Nephew trademarks and trade names which amounts are no
longer paid following the recapitalization since we no longer have the
right to use Smith & Nephew trademarks and trade names; foreign sales
corporation commissions that we paid on sales to foreign sales
corporations established by Smith & Nephew for tax planning purposes
which amounts are no longer paid following the recapitalization; Smith &
Nephew overhead allocations for corporate managed accounts and new
business expense and corporate management expense which were not
incurred following consummation of the recapitalization; Smith & Nephew
overhead allocations for research and development and for amounts
charged by Smith & Nephew for services provided to us for finance (risk
management, treasury, audit and taxes), human resources and payroll and
legal services; and the incremental adjustment to the carrying value of
acquired inventories associated with the Orthotech acquisition to state
them at fair value. EBITDA has also been adjusted to reflect the
estimated costs we would have incurred to replace the services
previously provided by Smith & Nephew. On a stand-alone basis, we have
replaced these services provided by Smith & Nephew following the
recapitalization and we have incurred additional expenses associated
with external auditing and periodic filings with the SEC.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | other adjustments in accordance with our bank credit facility,
including the add back of restructuring charges and certain non-cash
charges aggregating $25.1 million in 2002, presented net of discontinued
acquisition costs, and restructuring costs in 1998.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

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The calculation of EBITDA is as follows:

|                                                                         |  |                          |         |      |  |      |         |      |  |                |        |  |  |   |        |  |  |   |        | 
|------------------------------------------------------------------------ |  | ------------------------ | ------- | ---- |  | ---- | ------- | ---- |  | -------------- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                                         |  | Years Ended December 31,
|                                                                         |  |                         
|                                                                         |  | 2002                     |         | 2001 |  | 2000 |         | 1999 |  | 1998          
|                                                                         |  |                          |         |      |  |      |         |      |  |               
|                                                                         |  |                          |         |      |  |      |         |      |  | (in thousands) |        |  |  |   |        |  |  |  
|EBITDA data:                                                             |  |                          |         |      |  |      |         |      |  |                |        |  |  |   |        |  |  |   |        | 
|Net income (loss)                                                        |  | $                        | (15,195 | )    |  | $    | 56,490  |      |  | $              | 5,159  |  |  | $ | 7,128  |  |  | $ | 4,951  | 
|Interest expense, net of interest income                                 |  |                          | 11,887  |      |  |      | 22,057  |      |  |                | 16,521 |  |  |   | 7,387  |  |  |   |       | 
|Income tax (benefit) provision                                           |  |                          | (9,361  | )    |  |      | (1,789  | )    |  |                |       |  |  |   | 2,387  |  |  |   | 3,394  | 
|Deferred tax benefit                                                     |  |                          |        |      |  |      | (54,169 | )    |  |                |       |  |  |   |       |  |  |   |       | 
|Depreciation and amortization                                            |  |                          | 7,283   |      |  |      | 9,444   |      |  |                | 6,365  |  |  |   | 4,952  |  |  |   | 4,853  | 
|                                                                         |  |                          |         |      |  |      |         |      |  |                |        |  |  |   |        |  |  |   |        | 
|EBITDA (as defined)                                                      |  |                          | (5,386  | )    |  |      | 32,033  |      |  |                | 28,045 |  |  |   | 21,854 |  |  |   | 13,198 | 
|Adjustments discussed in (h)(1) above, net                               |  |                          |        |      |  |      |        |      |  |                | 268    |  |  |   | 3,228  |  |  |   | 6,292  | 
|Net adjustments in accordance with
the bank credit facility (h)(2) above |  |                          | 25,131  |      |  |      |        |      |  |                | 400    |  |  |   |       |  |  |   | 2,467  | 
|Adjusted EBITDA                                                          |  | $                        | 19,745  |      |  | $    | 32,033  |      |  | $              | 28,713 |  |  | $ | 25,082 |  |  | $ | 21,957 | 
|                                                                         |  |                          |         |      |  |      |         |      |  |                |        |  |  |   |        |  |  |   |        | 



---

|(i) |  | For purposes of calculating ratio of earnings to fixed charges, earnings
consist of income (loss) before income taxes plus fixed charges. Fixed
charges consist of (i) interest, whether expensed or capitalized, (ii)
amortization of debt issuance costs, whether expensed or capitalized, and
(iii) an allocation of one-third of the rental expense from operating
leases which management considers to be a reasonable approximation of the
interest factor of rental expense.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Overview

We are a global designer, manufacturer and marketer of products for the
orthopedic sports medicine market. We are the successor to DonJoy, L.L.C.
(DonJoy) which, prior to June 30, 1999, was wholly owned by Smith & Nephew,
Inc. (Smith & Nephew). On June 30, 1999, DonJoy consummated a recapitalization
pursuant to which J.P. Morgan DJ Partners, LLC (JPMDJ Partners), obtained a
controlling interest in DonJoy. Concurrently with the completion of dj
Orthopedics, Inc.s initial public offering on November 20, 2001, DonJoy merged
with and into dj Orthopedics through a series of transactions, referred to
herein as the Reorganization. As a result of the foregoing transactions, dj
Orthopedics, LLC (dj Ortho) became a wholly owned subsidiary of dj Orthopedics,
Inc.

dj Orthopedics and dj Orthopedics Development Corporation (dj Development)
guarantee dj Orthos bank borrowings and the Senior Subordinated Notes (the
Notes). DJ Orthopedics Capital Corporation (DJ Capital) was formed solely to
act as a co-issuer (and as a joint and several obligor) with dj Ortho with
respect to the Notes. No separate financial information for DJ Capital has
been provided herein because management believes such information would not be
material as DJ Capital does not hold any assets or other properties or conduct
any business. Condensed consolidating financial statements showing separate
information for dj Orthopedics, dj Ortho, dj Development and our non-guarantor
subsidiaries in the aggregate have been provided within the footnotes to the
financial statements included herein.

Performance Improvement Program

In August 2002, we commenced a company-wide performance improvement
program with the objective of increasing revenues and reducing both costs of
goods sold and operating expenses as a percentage of net revenues beginning in
2003. We retained the services of AlixPartners, LLC, a consulting firm
specializing in corporate performance enhancement, to assist with the
performance improvement program.

With the objective of reducing costs by streamlining our organization
structure, we began our performance improvement program with the elimination of
several senior management positions. In September 2002, we also commenced the
move of the manufacturing of all our remaining soft goods and certain
non-custom rigid braces manufactured in the United States to our manufacturing
facilities in Mexico. The move of these manufacturing operations was completed
by the end of 2002 and resulted in the elimination of approximately 200 U.S.
positions. A comparable number of positions were added in Mexico. The
manufacturing move is expected to result in reduced manufacturing costs. Other
focuses of the performance improvement program include reducing operating
expenses; improving the profitability of revenue from our OfficeCare® and
Insurance channels; reducing working capital and improving our business
processes and information systems. We have also refocused our resources on our
core rehabilitation business and have discontinued the marketing of our Alaron
Surgical products and our knee replacement product. Although the performance
improvement program was substantially completed by the end of 2002, no
assurance can be given that it will be successful in achieving the desired
goals.

Acquisitions and Other Recent Transactions

Effective January 2002, we commenced direct distribution of our products
in Germany and the United Kingdom through two new wholly owned subsidiaries, dj
Orthopedics Deutschland GmbH (dj Germany) and dj Orthopaedics UK Ltd (dj UK).
dj Germany and dj UK replaced third party distributors in those countries.
Effective May 2002, we commenced direct distribution of our products in Canada
through a new wholly owned subsidiary, dj Ortho, Canada Inc. (dj Canada),
replacing the Smith & Nephew sales organization, which previously distributed
our products.

In June 2001, we completed the acquisition of substantially all of the
assets and liabilities of Alaron Technologies, L.L.C. for an aggregate cash
purchase price of $500,000. Alaron provided product development, manufacturing
and supply chain management services related to medical and surgical devices.
We purchased primarily equipment and technology. The Alaron acquisition was
accounted for using the purchase method of accounting whereby the total
purchase price was allocated to tangible and intangible assets acquired and
liabilities assumed based on their estimated fair market values. In connection
with our decision to discontinue marketing our surgical products, all
inventories and net intangible assets of Alaron were written off in 2002.

Effective March 2001, we invested $0.9 million for a 60% interest in an
Australian joint venture, dj Orthopaedics Pty Ltd (dj Australia). In
connection with our decision to discontinue sales of our surgical products, we
have divested our interest in dj Australia, effective December 31, 2002, with
no material gain or loss. The minority owner has assumed full ownership and
will continue to sell the Companys non-surgical products as an independent
distributor.

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In July 2000, we completed the purchase of specified assets and assumed
specified liabilities related to the rehabilitation business, referred to
herein as Orthotech or the Orthotech business, of DePuy Orthopaedic Technology,
Inc., a subsidiary of Johnson & Johnson. We acquired Orthotech for a purchase
price of $46.4 million in cash, exclusive of transaction fees and expenses.
Orthotech developed, manufactured, and marketed an array of orthopedic products
for the orthopedic sports medicine market, including braces, soft goods and
specialty products which were similar to the products offered by us. Orthotech
also had an inventory management and billing program that complemented our
OfficeCare® program. We purchased primarily inventory, equipment and certain
intellectual property. We were not required to assume any liabilities existing
prior to the closing date. The Orthotech acquisition has been accounted for
using the purchase method of accounting whereby the total purchase price has
been allocated to tangible and intangible assets acquired and liabilities
assumed based on their estimated fair market values.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates including
those related to contractual allowances, doubtful accounts, inventories,
rebates, product returns, warranty obligations, income taxes, intangibles and
investments. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other
sources. Actual results may differ from these estimates under different
assumptions or conditions.

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements and this discussion and analysis of our financial
condition and results of operations:

Provision for Contractual Allowances and Doubtful Accounts.We maintain
provisions for: i) contractual allowances for reimbursement amounts from our
third party payers based on negotiated contracts; and, ii) for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. We have contracts with third party payers for our
third party reimbursement billings which call for specified reductions in
reimbursement of billed amounts based upon contractual terms and/or product
reimbursement rates. We reserve for and reduce gross revenues by between 20%
and 28% for these contractual allowances. Our reserve for doubtful accounts is
based upon estimated losses from customers who are billed directly and amounts
disallowed by the third party payers, primarily for various reasons that we
categorize as billing exceptions. Direct billed customers represent
approximately 66% of our net receivables at December 31, 2002 and we have
historically experienced write-offs of less than 2% of these receivables. Our
third party reimbursement customers represent 34% of our net receivables at
December 31, 2002 and we estimate bad debt expense to be approximately 7% of
amounts due from these third party reimbursement customers. If the financial
condition of our customers were to deteriorate resulting in an impairment of
their ability to make payments or if third party payers were to deny claims for
late filings, incomplete information or other reasons, additional provisions
may be required. As disclosed in our Form 10-K for the year ended December 31,
2001 and our Form 10-Qs during 2002, we experienced a problem with a third
party insurance billing company, which required that a substantial portion of
the accounts receivable from our OfficeCare® and Insurance programs be
transferred to another third party billing company in the latter half of 2001.
We have provided additional reserves in prior periods for contractual
allowances and doubtful accounts for third party reimbursement receivables
which were originally billed through the third party insurance billing company
whose contract was canceled in 2001 due to lack of timely and thorough filings
with third party payers.

During the second quarter of 2002, we enhanced the ability of our systems
to obtain and analyze the information processed by our third party billing
companies. Historically, we relied heavily on these billing companies to
provide information about the OfficeCare and Insurance programs, including the
data utilized to determine reserves for contractual allowances and doubtful
accounts. Our increased ability to obtain and better analyze information in
the second quarter of 2002 revealed that, as a result of historical third party
billing problems, we had experienced an increase in write-offs and bad debts
for accounts receivable from our OfficeCare and Insurance programs. In
addition, in December 2002 we initiated the transition to a new third party
insurance billing service provider and we continue to resolve issues related to
our previous service providers and accounts receivable aged over one year.
Accordingly, we increased our related reserves by an aggregate of $6.7 million
for the year ended December 31, 2002, which is included in sales and marketing
expenses in the accompanying consolidated statements of operations for 2002.
Based on information currently available to us, we believe we have provided
adequate reserves for our third party payor accounts receivable. If claims are
denied, or amounts are otherwise not paid, in excess of our estimates, the
recoverability of the net accounts receivable could be reduced by a material
amount. In addition, if the transition to our new third party insurance
billing service provider is not successful, we may be required to increase our
reserve estimates.

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Reserve for Excess and Obsolete Inventories.We provide reserves for
estimated excess or obsolete inventories equal to the difference between the
cost of inventories on hand plus future purchase commitments and the estimated
market value based upon an assumption about future demand. If future demand is
less favorable than currently projected by management, additional inventory
write-downs may be required. In addition, reserves for inventories on hand in
our OfficeCare® locations are provided based on historical shrinkage rates. If
actual shrinkage rates differ from our estimated shrinkage rates, revisions to
the reserve may be required. We also provide reserves for newer product
inventories, as appropriate, based on any minimum purchase commitments and the
current status of any FDA approval process, if required, and our level of sales
of the new products. In connection with our decision, as part of our
performance improvement program, to discontinue marketing our Alaron Surgical
products and our knee replacement product, we recorded provisions in 2002 to
reserve all remaining net inventories related to these products. We based our
reserves for our knee replacement product on amounts we estimate will be
recoverable from our supplier of the knee replacement product. If our
estimates of the recoverability of the knee replacement product differ from
the actual amounts received, additional write-downs may be required. We have
also provided reserves in 2002 for all remaining net inventories of our
OrthoPulse product based on the inability of the manufacturer of OrthoPulse to
make any material progress in 2002 in achieving FDA approval for the product.
We also increased our estimates of reserves required for certain other excess
inventories in 2002. Aggregate inventory reserves recorded in 2002 in
connection with these decisions were $5.1 million, which is included within
cost of goods sold in the accompanying consolidated statements of operations
for 2002. See Note 3 to our Notes to the consolidated financial statements.

Rebates.We record estimated reductions to revenue for customer rebate
programs based upon estimates of the costs applicable to the rebate programs.

Returns and Warranties.We provide for the estimated cost of returns and
product warranties at the time revenue is recognized based on historical
trends. While we engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our suppliers, our
actual returns and warranty costs could differ from our estimates. If actual
product returns, failure rates, material usage or service costs differ from our
estimates, revisions to the estimated return and/or warranty liabilities may be
required.

Valuation Allowance for Deferred Tax Asset.As of December 31, 2002, the
Company had recorded approximately $65.7 million of net deferred tax assets
related primarily to tax deductible goodwill arising at the date of the
reorganization and not recognized for book purposes and net losses reported
during 2002. Realization of our deferred tax assets is dependent on our
ability to generate approximately $170.0 million of future taxable income over
the next 10 years. As discussed above, we expect that our performance
improvement program will generate cost reductions and revenue growth of a
sufficient level that management believes that it is more likely than not that
the deferred tax assets will be realized based on forecasted future taxable
income. However, there can be no assurance that we will meet our expectations
of future taxable income. Management will evaluate the realizability of the
deferred tax assets on a quarterly basis to assess any need for valuation
allowances. In the event that the Company is not profitable during 2003, no
tax benefit will be provided on the losses. If we are in a loss position by
the end of 2003, it is possible that some or all of our deferred tax assets may
need to be reserved through a valuation allowance.

Goodwill and Other Intangibles.At December 31, 2002, goodwill and other
intangible assets were evaluated for impairment as required by SFAS No. 144.
We did not recognize any goodwill impairment as a result of performing this
annual test. The determination of the fair value of certain acquired assets
and liabilities is subjective in nature and often involves the use of
significant estimates and assumptions. Determining the fair values and useful
lives of intangible assets especially requires the exercise of judgement. Upon
initially recording our goodwill and certain of our other intangible assets, we
used an independent valuation firm. Subsequently, we have used the same
methodology and updated our assumptions. While there are a number of different
generally accepted valuation methods to estimate the value of intangible assets
acquired, we primarily used the undiscounted cash flows expected to result from
the use of the assets. This method requires significant management judgement
to forecast the future operating results used in the analysis. In addition,
other significant estimates are required such as residual growth rates and
discount factors. The estimates we have used are consistent with the plans and
estimates that we use to manage our business, based on available historical
information and industry averages.

The impairment charge we recorded for certain long-lived assets in 2002
was a result of certain new products not achieving anticipated revenues or
estimated recovery values of assets being disposed of being less than
anticipated. The value of our goodwill and other intangible assets is exposed
to future impairments if we experience further declines in operating results,
if additional negative industry or economic trends occur or if our future
performance is below our projections or estimates.

Income Statement Reclassifications

Effective December 31, 2002, we have reclassified certain amounts within
our consolidated statements of operations, including expenses related to the
shipping and handling of our products to customers ($7.7 million, $7.9

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million and $7.2 million in 2002, 2001 and 2000, respectively), which have been
reclassified from sales and marketing expense to costs of goods sold. In
addition, certain common facilities and information technology expenses have
been reclassified from general and administrative expenses, partly to costs of
goods sold ($2.0 million, $2.0 million and $1.1 million in 2002, 2001 and 2000,
respectively) and partly to sales and marketing expense ($0.6 million, $0.7
million and $0.4 million in 2002, 2001 and 2000, respectively) and research and
development expense ($0.1 million in 2002, 2001 and 2000). We have also made
certain other less material reclassifications. All statement of operations
information included herein for the year ended December 31, 2002 has been
presented in accordance with the new classifications and all historical
information has been reclassified for a consistent presentation.

Segments

Prior to the fourth quarter of 2002, we had two reportable segments, as
defined by FASB SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information, identified as rigid knee bracing and soft goods.

Effective December 31, 2002, we have changed our reporting segments to
reflect segmentation by our primary distribution channels, which is consistent
with how we will manage our business prospectively. Our new reportable
segments are as follows:



| |  |  | DonJoy®, in which our products are sold by 38 independent sales agents
who employ over 200 sales representatives to orthopedic surgeons,
orthotic and prosthetic centers, hospitals and other sports medicine
outlets. After a product order is received by a sales representative,
we generally ship the product directly to the orthopedic professional
and we pay a sales commission to the agent based on sales of such
products, which commissions are reflected in sales and marketing
expense in our consolidated financial statements;                                                                                                                                                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | ProCare®, in which products are sold primarily to national third party
distributors, regional medical supply dealers and medical product
buying groups, generally at a discount from list prices. These
distributors then resell these products to large hospital chains,
hospital buying groups, primary care networks and orthopedic
physicians for use by the patients;                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | OfficeCare®, in which we maintain an inventory of product on hand at
orthopedic practices for immediate disbursement to the patient and we
arrange billing to the patient or third party payor. The majority of
these billings are performed by an independent third party contractor.
The OfficeCare® program is also intended to facilitate the
introduction of our products to orthopedic sports medicine surgeons
who had not previously been our customers. As of December 31, 2002,
the OfficeCare® program was located at over 500 physician offices
throughout the United States. Sales through our OfficeCare® channel
are subject to certain risks related to third party reimbursements.
See risk factors included in Item 1 herein; and
|
| |  |  | International, in which our products are sold in foreign countries
through wholly-owned subsidiaries or independent distributors. We
market our products in over 40 countries primarily in Europe, the
United Kingdom, Australia, Canada and Japan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Segment reporting information for prior years has been restated to reflect
the new reporting segments. Set forth below is revenue and gross profit
information, excluding the impact of other costs of sales not allocated to
segments, for our new reporting segments for the years ended December 31 (in thousands):

|               |                     |  |      |        |      |  |      |        |   |  |   |        |  
|-------------- | ------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|               |                     |  | 2002 |        | 2001 |  | 2000
|               |                     |  |      |        |      |  |     
|DonJoy:        |                     |  |      |        |      |  |      |        |   |  |   |       
|               | Net revenues        |  | $    | 86,884 |      |  | $    | 80,164 |   |  | $ | 72,640 |  
|               | Gross profit        |  |      | 57,264 |      |  |      | 52,769 |   |  |   | 48,536 |  
|               | Gross profit margin |  |      | 65.9   | %    |  |      | 65.8   | % |  |   | 66.8   | %
|ProCare:       |                     |  |      |        |      |  |      |        |   |  |   |       
|               | Net revenues        |  | $    | 45,548 |      |  | $    | 44,381 |   |  | $ | 34,226 |  
|               | Gross profit        |  |      | 15,860 |      |  |      | 15,358 |   |  |   | 12,933 |  
|               | Gross profit margin |  |      | 34.8   | %    |  |      | 34.6   | % |  |   | 37.8   | %
|OfficeCare:    |                     |  |      |        |      |  |      |        |   |  |   |       
|               | Net revenues        |  | $    | 22,966 |      |  | $    | 21,653 |   |  | $ | 14,259 |  
|               | Gross profit        |  |      | 18,794 |      |  |      | 16,948 |   |  |   | 10,894 |  
|               | Gross profit margin |  |      | 81.8   | %    |  |      | 78.3   | % |  |   | 76.4   | %
|International: |                     |  |      |        |      |  |      |        |   |  |   |       
|               | Net revenues        |  | $    | 22,202 |      |  | $    | 18,114 |   |  | $ | 18,049 |  
|               | Gross profit        |  |      | 11,657 |      |  |      | 8,871  |   |  |   | 10,123 |  
|               | Gross profit margin |  |      | 52.5   | %    |  |      | 49.0   | % |  |   | 56.1   | %

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Domestic Sales

Excluding freight revenue, domestic sales in our DonJoy, ProCare and
OfficeCare channels accounted for approximately 87%, 89% and 87% of our net
revenues in 2002, 2001 and 2000, respectively.

International

Excluding freight revenue, international sales accounted for approximately
13%, 11% and 13% of our net revenues, in 2002, 2001 and 2000, respectively. The
following table sets forth our international net revenues as a percentage of
our total net revenues, excluding freight revenue, by country:

|                          |  |                          |    |      |  |      |    |   |  |  |    |  
|------------------------- |  | ------------------------ | -- | ---- |  | ---- | -- | - |  |  | -- | -
|                          |  | Years Ended December 31,
|                          |  |                         
|                          |  | 2002                     |    | 2001 |  | 2000
|                          |  |                          |    |      |  |     
|Germany                   |  |                          | 4  | %    |  |      | 4  | % |  |  | 4  | %
|Australia                 |  |                          | 2  | %    |  |      | 1  | % |  |  | 1  | %
|Canada                    |  |                          | 1  | %    |  |      | 1  | % |  |  | 1  | %
|Other countries           |  |                          | 6  | %    |  |      | 5  | % |  |  | 7  | %
|                          |  |                          |    |      |  |      |    |   |  |  |    |  
|Total international sales |  |                          | 13 | %    |  |      | 11 | % |  |  | 13 | %
|                          |  |                          |    |      |  |      |    |   |  |  |    |  

The Other countries category consists primarily of sales in Italy,
Belgium, the United Kingdom, the Czech Republic, Denmark, France, Japan and
Spain.

International sales are currently made primarily through two distinct channels:
independent third party distributors, including Smith & Nephew sales
organizations in certain countries, and through wholly or majority owned
foreign subsidiaries in Australia (since March 2001), in Germany and the United
Kingdom (in each case since January 1, 2002) and in Canada (since May 2002). We
had formed a majority owned distribution subsidiary in Australia in 2001, and
that company was focusing on surgical products, including a knee replacement
product. In late 2002 we decided to discontinue commercial activities on that
product, as well as our other surgical products, and in light of that decision,
the establishment of a subsidiary in Australia was no longer attractive. At
the end of 2002, we sold our inventory of the knee replacement product back to
the manufacturer and sold our interest in the Australian subsidiary to the
minority shareholder. The former Australian subsidiary will continue to sell
our products as an independent distributor.

Commencing with the formation of our wholly owned subsidiaries in 2002, we
sell products through our subsidiaries in Germany, the United Kingdom and
Canada in Euros, Pounds Sterling and Canadian Dollars, respectively.
International sales in 2002 were favorably impacted by foreign currency
exchange fluctuations with the weakening of the U.S. dollar against the Euro.
In 2001, the volume of international sales was indirectly adversely impacted by
foreign currency exchange fluctuations as the strengthening of the U.S. dollar
against the Euro effectively increased the cost of our products to our European
third party distributors. As we begin to further directly distribute our
products in other selected foreign countries, we expect that future sales of
our products in these markets will be denominated in the applicable foreign
currencies which would cause currency fluctuations to more directly impact our
operating results. We may seek to reduce the potential impact of currency
fluctuations on our business through hedging transactions.

Results of Operations

We operate our business on a manufacturing calendar, with our fiscal year
always ending on December 31. Each quarter is 13 weeks, consisting of one
five-week and two four-week periods. The first and fourth quarters may have
more or less working days from year to year based on the day of the week on
which holidays and December 31 fall.

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The following table sets forth our reclassified operating results as a
percentage of net revenues:

|                                  |                                                        |  |                          |      |      |  |       |      |   |  |       |      |  
|--------------------------------- | ------------------------------------------------------ |  | ------------------------ | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                                  |                                                        |  | Years Ended December 31,
|                                  |                                                        |  |                         
|                                  |                                                        |  | 2002                     |      | 2001 |  | 2000 
|                                  |                                                        |  |                          |      |      |  |      
|Net revenues:                     |                                                        |  |                          |      |      |  |       |      |   |  |       |     
|                                  | DonJoy®                                                |  |                          | 47.6 | %    |  |       | 47.4 | % |  |       | 50.6 | %
|                                  | ProCare®                                               |  |                          | 24.9 |      |  |       | 26.2 |   |  |       | 23.8 |  
|                                  | OfficeCare®                                            |  |                          | 12.5 |      |  |       | 12.8 |   |  |       | 9.9  |  
|                                  | International                                          |  |                          | 12.2 |      |  |       | 10.7 |   |  |       | 12.6 |  
|                                  |                                                        |  |                          |      |      |  |       |      |   |  |       |     
|Revenues from sales channels      |                                                        |  | 97.2                     |      |      |  | 97.1  |      |   |  | 96.9  |     
|Freight revenue                   |                                                        |  | 2.8                      |      |      |  | 2.9   |      |   |  | 3.1   |     
|                                  |                                                        |  |                          |      |      |  |       |      |   |  |       |     
|Total consolidated net revenues   |                                                        |  | 100.0                    |      |      |  | 100.0 |      |   |  | 100.0 |     
|Costs of goods sold               |                                                        |  | 52.5                     |      |      |  | 49.1  |      |   |  | 48.1  |     
|                                  |                                                        |  |                          |      |      |  |       |      |   |  |       |     
|Gross profit                      |                                                        |  | 47.5                     |      |      |  | 50.9  |      |   |  | 51.9  |     
|Operating expenses:               |                                                        |  |                          |      |      |  |       |      |   |  |       |     
|                                  | Sales and marketing                                    |  |                          | 30.8 |      |  |       | 21.4 |   |  |       | 20.3 |  
|                                  | General and administrative                             |  |                          | 14.4 |      |  |       | 14.8 |   |  |       | 13.8 |  
|                                  | Research and development                               |  |                          | 1.6  |      |  |       | 1.3  |   |  |       | 2.1  |  
|                                  | Impairment of long-lived assets                        |  |                          | 2.0  |      |  |       |     |   |  |       |     |  
|                                  | Performance improvement, restructuring
and other costs |  |                          | 5.5  |      |  |       |     |   |  |       | 0.3  |  
|                                  |                                                        |  |                          |      |      |  |       |      |   |  |       |     
|Total operating expenses          |                                                        |  | 54.3                     |      |      |  | 37.5  |      |   |  | 36.5  |     
|                                  |                                                        |  |                          |      |      |  |       |      |   |  |       |     
|Income (loss) from operations     |                                                        |  | (6.8                     | )    |      |  | 13.4  |      |   |  | 15.4  |     
|Interest expense and other, net   |                                                        |  | (6.6                     | )    |      |  | (13.0 | )    |   |  | (11.8 | )   
|                                  |                                                        |  |                          |      |      |  |       |      |   |  |       |     
|Income (loss) before income taxes |                                                        |  | (13.4                    | )    |      |  | 0.4   |      |   |  | 3.6   |     
|Benefit for income taxes          |                                                        |  | 5.1                      |      |      |  | 1.0   |      |   |  |      |     
|Deferred tax benefit              |                                                        |  |                         |      |      |  | 32.0  |      |   |  |      |     
|                                  |                                                        |  |                          |      |      |  |       |      |   |  |       |     
|Net income (loss)                 |                                                        |  | (8.3                     | )%   |      |  | 33.4  | %    |   |  | 3.6   | %   
|                                  |                                                        |  |                          |      |      |  |       |      |   |  |       |     

Year Ended December 31, 2002 Compared To Year Ended December 31, 2001

Net Revenues.Net revenues increased $13.4 million, or 8.0%, to $182.6 million
in 2002 from $169.2 million in 2001. Domestic revenues for 2002 increased by
$9.2 million, or 6.3%, from 2001 primarily as a result of increased sales in
our DonJoy business segment. International revenues, which also represent
sales of our International business segment, for 2002 increased by $4.1
million, or 22.6%, from 2001 primarily as a result of commencing sales through
our new subsidiaries in Germany, the United Kingdom and Canada. Net revenues,
excluding freight revenue, for the DonJoy segment increased $6.7 million over
2001 due to growth in the sales of our ligament and osteoarthritic braces.
ProCare segment sales, excluding freight revenue, increased by $1.2 million
over 2001 due to increased sales of wrist splints and shoulder braces.
OfficeCare segment sales, excluding freight revenue, increased by $1.3 million
over 2001 due primarily to increased sales of lower extremity fracture boots.

Gross Profit.Gross profit increased $0.7 million, or 0.8%, to $86.8 million
for 2002 from $86.1 million for 2001. Gross profit margin decreased from 50.9%
for 2001 to 47.5% for 2002. The decrease in gross profit margin relates partly
to charges related to reserves for excess inventories, including inventories of
our OrthoPulse product and provisions for inventories associated with our
decision to exit our surgical product lines aggregating $5.1 million (see Note
3 to our Notes to the consolidated financial statements). Gross profit margin
has also been reduced by a change in product sales mix, an increase in certain
other costs of sales, such as royalties, and by a decrease in overhead
absorption due to a reduction in the volume of units manufactured, due partly
to an effort to reduce inventory levels and partly to the transition from
international sales distribution through stocking distributors to direct
distribution, particularly in Germany. Gross profit, excluding freight revenue
and other costs of sales not allocated to segments, for the DonJoy segment
increased $4.5 million, with gross profit margin increasing slightly to 65.9%
for 2002 from 65.8% for 2001. Gross profit, excluding freight revenue and other
costs of sales not allocated to segments, for the ProCare segment increased
$0.5 million, with gross profit margin remaining consistent at 34.8% for 2002
and 34.6% for 2001. Gross profit, excluding freight revenue and other costs of
sales not allocated to segments, for the OfficeCare segment increased $1.8
million, with gross profit margin increasing to 81.8% in 2002 from 78.3% for
2001. This increase in gross profit margin is primarily related to higher
standard gross profit margins on certain product lines due to movement of the
related production to our Mexican subsidiary to take advantage of labor
savings, offset by a negative impact from an increase in estimated OfficeCare
contractual allowances. Gross profit, excluding freight revenue, for the
International segment increased $2.8 million, with gross profit margin
increasing to 52.5% for 2002 as compared to 49.0% for 2001. This increase
primarily reflects the incremental gross profit gained through the transition
to direct distribution in Germany, the United Kingdom and Canada.

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Sales and Marketing Expenses.Sales and marketing expenses increased $20.0
million, or 55.3%, to $56.2 million for 2002 from $36.2 million for 2001. This
increase includes an increase of $6.7 million in our estimated reserves for
contractual allowances and bad debts related to our OfficeCare® and Insurance
programs. See Note 3 to the Notes to the consolidated financial
statements. The increase in sales and marketing expense also reflects
increased commissions due to higher sales of domestic products, increases in
the provision for doubtful accounts related to our domestic operations, not
including the OfficeCare program and costs related to our foreign subsidiaries
that became operational in March 2001 (dj Australia), January 2002 (dj Germany
and dj UK) and May 2002 (dj Canada). Overall, sales and marketing expenses
increased as a percentage of revenues to 30.8% in 2002 from 21.4% in 2001.

General and Administrative Expenses.General and administrative expenses
increased $1.4 million, or 5.6%, to $26.4 million for 2002 from $25.0 million
for 2001. The increase was primarily due to increased costs of insurance and
legal activities, and expenses associated with our status as a publicly-traded
company effective November 2001, offset by a decrease in goodwill amortization
as a result of new accounting rules. Overall, general and administrative
expenses decreased as a percentage of revenues to 14.4% for 2002 from 14.8% for
2001.

Research and Development Expenses.Research and development expenses increased
by $0.6 million, or 26.1%, from $2.3 million for 2001 to $2.9 million for 2002
primarily due to an increase in certain patent costs and other new product
development costs in 2002.

Performance Improvement, Restructuring and Other Costs.Performance
improvement and restructuring costs for 2002 amounted to $10.0 million, which
consisted of the following costs: (i) employee severance costs of $3.9 million,
(ii) lease termination and other exit costs of $1.9 million, (iii) consulting
fees of $3.5 million and (iv) other costs of $0.7 million. See Note 3 to our
consolidated financial statements.

Impairment of Long-Lived Assets.During 2002, we recognized $3.7 million in
charges related to impairment of certain of our long-lived assets. These
long-lived assets primarily include intangible assets associated with certain
newer product lines that have not achieved expected sales levels, an investment
in an internet marketing company, an investment in the manufacturer of
OrthoPulse, goodwill related to the acquisition of Alaron and fixed assets
abandoned in connection with the Companys manufacturing move to Mexico.

Interest Expense and Other, Net.Interest and other expense, Net, including
interest expense and discontinued acquisition costs, net of interest income,
decreased approximately $10.0 million, or 45.2%, to $12.1 million in 2002 from
$22.1 million in 2001. The decrease is primarily the result of a $4.7 million
charge taken in 2001 to write-off deferred debt issuance costs associated with our prepayment of $25.0 million of our
Senior Subordinated Notes and lower interest on the related lower debt balances outstanding in
2002.

Income Taxes.Our income tax benefit was $9.4 million for 2002 compared to a
tax benefit of $1.8 million for the period from November 20, 2001 through
December 31, 2001. In connection with our reorganization on November 20, 2001,
we became a corporation and subject to U.S. federal, state, and foreign income
taxes on our earnings after that date. We did not record a provision (benefit)
for income taxes prior to that date. The $1.8 million tax
benefit for 2001 related
primarily to a benefit for the write-off of deferred debt issuance
costs in connection with a prepayment of the Senior Subordinated Notes. Our annual worldwide
effective tax benefit rate was 38% for 2002. Our estimated worldwide effective
tax rate was 40% for 2001. The comparable tax benefit rate for 2002 is reduced
primarily due to the disallowance by certain states of net operating loss
carryforwards.

Net Income (Loss).Net loss was $15.2 million for 2002 compared to net income
of $56.5 million for 2001 as a result of the changes discussed above. Income in
2001 before the effect of our income tax benefit of $1.8 million and deferred
tax benefit of $54.2 million, was $0.5 million.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Net Revenues.Net revenues increased $25.6 million, or 17.8%, to $169.2
million in 2001 from $143.6 million in 2000. Our 2001 net revenues reflected a
sales reversal of $0.9 million in the fourth quarter of 2001 for inventory
returned in excess of our estimated return allowance resulting from termination
of our agreement with our former distributor in Germany and the United Kingdom.
Net revenues, excluding freight revenue, for the DonJoy® segment increased
$7.5 million over 2000 due to growth in the domestic sales of the ligament,
post-operative and OA product lines. ProCare® segment sales, excluding freight
revenue, increased by $10.2 million over 2000 due primarily to the Orthotech
acquisition. OfficeCare segment sales, excluding freight revenue, increased by
$7.4 million over 2000 primarily due to the Orthotech acquisition, which had a
line of business that complemented the OfficeCare segment. International
segment sales, excluding freight revenue, increased by $0.1 million over 2000.

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Gross Profit.Gross profit increased $11.6 million, or 15.6%, to $86.1 million
in 2001 from $74.5 million in 2000. Gross profit margin decreased from 51.9%
in 2000 to 50.9% in 2001 primarily as a result of increased sales through the
ProCare® channel, as a result of the Orthotech acquisition, which carry a lower
gross profit margin. Excluding freight revenue and other costs of sales not
allocated to segments, gross profit for the DonJoy® segment increased $4.2
million, with gross profit margins decreasing from 66.8% in 2000 to 65.8% in
2001. Excluding freight revenue and other costs of sales not allocated to
segments, gross profit for the ProCare® segment increased $2.4 million, with
gross profit margin decreasing to 34.6% in 2001 from 37.8% in 2000. The
decrease is primarily related to an increase in the cost of raw materials used
in certain products sold through this channel. Excluding freight revenue and
other costs of sales not allocated to segments, gross profit for the
OfficeCare® segment increased $6.1 million, with gross profit margin increasing
to 78.3% in 2001 from 76.4% in 2000. Excluding freight revenue and other costs
of sales not allocated to segments, gross profit for the International segment
decreased $1.3 million, with gross profit margin decreasing from 56.1% in 2000
to 49.0% in 2001.

Sales and Marketing Expenses.Sales and marketing expenses increased $7.0
million, or 24.0%, to $36.2 million in 2001 from $29.2 million in 2000. The
increase primarily reflects increased commissions due to higher sales of
domestic products, increased costs related to increased volume in the
OfficeCare program and an increase in salaries and benefits due to increased
headcount, primarily as a result of growth in the OfficeCare program. Overall,
sales and marketing expenses increased as a percentage of revenues to 21.4% in
2001 from 20.3% in 2000.

General and Administrative Expenses.General and administrative expenses
increased $5.2 million, or 26.3%, to $25.0 million in 2001 from $19.8 million
in 2000. The increase was primarily due to our investment in a new enterprise
software system, amortization associated with the intangible assets acquired as
part of the July 2000 acquisition of Orthotech, and costs related to the Alaron
Surgical business and costs related to our majority owned Australia operation.
Overall, general and administrative expenses increased as a percentage of
revenues to 14.8% in 2001 compared to 13.8% in 2000.

Research and Development Expenses.Research and development expenses decreased
$0.6 million, or 20.7%, from $2.9 million in 2000 to $2.3 million in 2001
primarily due to lower consulting fees.

Restructuring Costs.In the 2000 period, we incurred $0.4 million in merger
and integration costs associated with the consolidation of the Orthotech
operations into our existing facilities including merger and integration and
information systems consulting costs.

Interest Expense and Other, Net.Interest expense and other, net, including
interest expense and discontinued acquisition costs, net of interest income,
increased approximately $0.4 million, or 2.5%, to $17.4 million in 2001 from
$17.0 million in 2000, reflecting increased weighted average borrowings
outstanding. In 2000, we discontinued pursuit of a potential acquisition.
Costs incurred related to this terminated acquisition were expensed in the
amount of $0.4 million. In connection with the reorganization in 2001, we
recorded a $4.7 million charge to write-off deferred debt issuance costs associated with our prepayment of $25.0 million of our Senior Subordinated Notes.

Income Taxes.The income tax benefit was $1.8 million for 2001. In connection
with our reorganization on November 20, 2001, we became a corporation and
subject to U.S. federal, state, and foreign income taxes on our earnings after
that date. We did not record a provision (benefit) for income taxes prior to
that date. The $1.8 million tax benefit for 2001 related primarily to a benefit for the
write-off of deferred debt issuance costs
in connection with a prepayment of the Senior Subordinated Notes. Our estimated worldwide effective tax rate was 40%
for 2001.

Deferred Tax Benefit.In connection with the reorganization, we have recorded
a deferred tax benefit of $54.2 million related to the difference between the
book and the tax basis of certain assets and liabilities of DonJoy at November
20, 2001, the reorganization date, as the related amortization is deductible
for tax purposes. The tax basis differences arose at the time of the
recapitalization when, for income tax purposes, we elected to increase the
basis of certain assets in an amount equal to the gain recognized by our former
parent.

Net Income.Net income was $56.5 million for 2001 compared to net income of
$5.2 million 2000 as a result of the changes discussed above. Income in 2001
before the effect of our income tax benefit of $1.8 million and deferred tax
benefit of $54.2 million, was $0.5 million.

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Liquidity and Capital Resources

Our principal liquidity requirements are to service our debt and meet our
working capital and capital expenditure needs. Total indebtedness at December
31, 2002 was $109.8 million.

Net cash provided by (used in) operating activities was $14.8 million,
$(4.1) million and $1.2 million in 2002, 2001 and 2000, respectively. The
positive cash flow in 2002 primarily reflects a net decrease in accounts
receivable (which is primarily related to a decrease in our OfficeCare accounts
receivable levels), and inventories, offset by amounts paid for our performance
improvement program and a reduction in accounts payable. The cash used in 2001
primarily reflects increased accounts receivable levels associated with the
OfficeCare® program and increased inventory levels in conjunction with the
working capital needs associated with the Orthotech acquisition.

Cash flows used in investing activities were $7.3 million, $8.1 million
and $57.0 million in 2002, 2001 and 2000, respectively. Cash used in 2002
primarily reflected the acquisition of distribution rights in conjunction with
a terminated distribution agreement and maintenance capital expenditures. Cash
used in 2001 primarily reflected an increase in the capitalization of costs
directly associated with our acquisition and implementation of an enterprise
resource planning system that was completed in March 2001, investments in
manufacturing equipment, the purchase of an equity interest in IMD for an
aggregate purchase price of $0.5 million, and the Alaron acquisition in July
2001. Included in investing activities in 2000 is the $49.0 million investment
in Orthotech, including transaction fees and costs of $3.0 million, and costs
directly associated with our acquisition and implementation of an enterprise
resource planning system and investments in manufacturing equipment.

Our bank credit facility limits our ability to make capital expenditures
to $8.7 million for 2003. In accordance with our bank credit facility, if the
permitted amount of capital expenditures is greater than the actual amount of
capital expenditures during such fiscal year, then 75% of such excess may be
carried forward and utilized in the immediately succeeding fiscal year, subject
to certain restrictions.

Cash flows provided by (used in) financing activities were $(1.5) million,
$34.0 million and $54.0 million in 2002, 2001 and 2000, respectively. Cash
used in 2002 reflects principal payments related to our bank credit facility
and additional costs paid in 2002 related to our 2001 initial public offering.
The cash provided in 2001 is primarily the result of the net proceeds of $118.5
million from our initial public offering in November 2001 and $9.6 million in
net proceeds from the issuance of common units in June 2001, net of $21.9
million repaid under our bank credit facility, $25.0 million paid to redeem a
portion of our Senior Subordinated Notes and $47.3 million paid to redeem all
of the outstanding redeemable preferred units of DonJoy in connection with the
reorganization. The cash provided in 2000 primarily reflects the proceeds of a
$24.0 million term loan and $12.6 million of borrowings under our revolving
bank credit facility during the third quarter of 2000 and the net proceeds from
the issuance, by DonJoy, of common and preferred units in the third quarter of
2000, all related to the Orthotech acquisition. We borrowed an additional $8.0
million in 2000 as a result of the increase in working capital associated with
the Orthotech acquisition.

Contractual Obligations and Commercial Commitments

The $75.0 million of outstanding Senior Subordinated Notes, due 2009, bear
interest at 125/8%, payable semi-annually on June 15 and December 15. Our bank
credit facility provides for two term loans, under which $35.8 million was
outstanding at December 31, 2002. We also have available up to $25.0 million
under the revolving bank credit facility, which is available for working
capital and general corporate purposes, including financing of acquisitions,
investments and strategic alliances. As of December 31, 2002, we did not have
any amount outstanding under the revolving bank credit facility. As of
December 31, 2002, we had $1.8 million in letters of credit outstanding.
Borrowings of letters of credit under the revolving bank credit facility bear
interest at variable rates plus a fronting fee of 0.25%. Borrowings under the
term loans and on the revolving bank credit facility bear interest at variable
rates plus an applicable margin. At December 31, 2002, the effective interest
rate on the term loans was 4.19%.

We are required to make annual mandatory payments of the term loans under
the bank credit facility in an amount equal to 50% of excess cash flow (75% if
our ratio of total debt to EBITDA exceeds 4 to 1). Excess cash flow represents our net
income adjusted for extraordinary gains or losses, depreciation, amortization
and other non-cash charges, changes in working capital, changes in deferred
revenues, payments for capital expenditures, and repayment of indebtedness. We had no excess cash flow
in 2002, 2001 or 2000. In
addition, the term loans are subject to mandatory prepayments in an amount
equal to (a) 100% of the net cash proceeds of certain equity and debt issuances
by us, dj Ortho or any of our other subsidiaries and (b) 100% of the net cash
proceeds of certain asset sales or other dispositions of property by us, dj
Ortho or any of our other subsidiaries, in each case subject to certain
exceptions. A mandatory prepayment of less than $1.0 million was
required for the sale of our interest in our Australian
subsidiary on December 31, 2002. On March, 28 2003, we made a total prepayment

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of principal on the term loans totaling approximately
$20.0 million including the required prepayment. No mandatory prepayments were required for
2001 or 2000.

The bank credit facility and the indenture governing our Senior
Subordinated Notes impose certain restrictions on us, including restrictions on
our ability to incur indebtedness, incur or guarantee obligations, prepay other
indebtedness or amend other debt instruments, pay dividends or make other
distributions (except for certain tax distributions), redeem or repurchase
equity, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by us and our
subsidiaries, make capital expenditures, grant liens, sell our assets and
engage in certain other activities. Indebtedness under the bank credit facility
is secured by substantially all of our assets, including our real and personal
property, inventory, accounts receivable, intellectual property and other
intangibles. In October 2002 and February 2003, we completed amendments to our
bank credit facility (the Amendment). The Amendment changed certain financial
covenants contained in the bank credit facility for 2002 and 2003. We were in
compliance with all financial covenants, as amended, as of December 31, 2002.
The amended bank credit facility requires us to maintain a ratio of total debt
to consolidated EBITDA of no more than 5.75 to 1.00 at December 31, 2002 and
gradually decreasing during 2003 to 3.50 to 1.00 at December 31, 2003 and
thereafter, and a ratio of consolidated EBITDA to consolidated interest expense
of at least 1.70 to 1.00 at December 31, 2002 and gradually increasing during
2003 to 2.50 to 1.00 at December 31, 2003 and thereafter. At December 31,
2002, our ratio of total debt to consolidated EBITDA was approximately 5.56 to
1.00 and our ratio of consolidated EBITDA to consolidated interest expense was
approximately 1.78 to 1.00.

In addition to our obligations under our bank credit facility and
indenture, we have various contractual obligations with suppliers and are
required to pay certain minimum royalty payments related to the sale of
specified products. In 2001, we entered into an agreement with I.M.D., b.v.
(IMD) to distribute a bone growth stimulator product, Orthopulse, which was
planned to be our first product in the regeneration market. If final FDA approval of this product is obtained,
we will be required to make a $2.0 million payment, subject to exchange rate
adjustments under certain circumstances, to IMD to maintain the exclusive U.S.
distribution rights of this product. IMD has experienced continuing delays in
obtaining FDA approval for the OrthoPulse bone growth stimulator product. On
July 1, 2002, notification was received from the FDA that the premarket
approval application (PMA) for OrthoPulse was placed on an integrity hold due
to concerns that the clinical data that had been submitted in support of the
PMA were not reliable. As required by the FDA, an independent review of the
clinical data commenced on August 5, 2002. The auditors report was submitted
on September 30, 2002, and IMD is engaged in ongoing communications with the
FDA to address this matter. Under the current arrangement, we expect to make a
payment of $1.0 million upon final FDA approval and a $1.0 million payment
shortly afterwards for the U.S. distribution rights. However, the exact timing
of payments is not determinable at this time. We purchased $0.5 million, $0.5
million and $0.8 million in inventory from IMD in 2002, 2001 and 2000,
respectively, and we made a $0.5 million investment in IMD (which represents a
5% ownership in the company) in 2001. We cannot distribute such inventory in the United States until FDA
approval is obtained, and although we can distribute such inventory in certain
other countries which do not require FDA approval, the markets in these
countries are smaller than in the U.S. At this point, we do not have an
estimate of when or whether final FDA approval will occur, and we have, as a
result of this continuing uncertainty, recorded charges to fully reserve our
inventories of this product and we have written off our investment in IMD.

The following table lists our contractual obligations for the next 5 years
(in thousands):

|                                   |  |                        |         |                  |  |           |       |           |  |               |        |       |  |   |       |  |  |   |        | 
|---------------------------------- |  | ---------------------- | ------- | ---------------- |  | --------- | ----- | --------- |  | ------------- | ------ | ----- |  | - | ----- |  |  | - | ------ | 
|                                   |  | Payments Due by Period
|                                   |  |                       
|Contractual                        |  |                        |         |                  |  | 2003      |       | 2004-2006 |  | 2007-2008     |        | 2009+
|Obligations (2)                    |  |                       
|                                   |  | Total                  |         | Less than 1 Year |  | 1-3 Years |       | 4-5 Years |  | After 5 years
|                                   |  |                        |         |                  |  |           |       |           |  |              
|Long-Term Debt (1)                 |  | $                      | 109,816 |                  |  | $         | 1,274 |           |  | $             | 34,540 |       |  | $ |      |  |  | $ | 74,002 | 
|                                   |  |                        |         |                  |  |           |       |           |  |               |        |       |  |   |       |  |  |   |        | 
|Operating Leases                   |  |                        | 12,982  |                  |  |           | 3,296 |           |  |               | 7,147  |       |  |   | 2,539 |  |  |   |       | 
|Total Contractual
Cash Obligations |  | $                      | 122,798 |                  |  | $         | 4,570 |           |  | $             | 41,687 |       |  | $ | 2,539 |  |  | $ | 74,002 | 
|                                   |  |                        |         |                  |  |           |       |           |  |               |        |       |  |   |       |  |  |   |        | 



---

|(1) |  | Represents scheduled principal payments for 2003 through 2005 under
the term loan portion of our bank credit facility and the senior
subordinated note repayment, net of unamortized discount, after 2009.
The scheduled payments have not been adjusted to reflect the approximately $20.0 million prepayment made on
March 28, 2003 to reduce the outstanding term loans under our bank
credit facility.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Does not reflect any future payments to IMD which are contingent on
FDA approval of the OrthoPulse product.                                                                                                                                                                                                                                                                                               

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As part of our strategy, we may pursue acquisitions, investments and
strategic alliances. We may require new sources of financing to consummate any
such transactions, including additional debt or equity financing. We cannot
assure you that such additional sources of financing will be available on
acceptable terms, if at all. In addition, we may not be able to consummate any
such transactions due to the operating and financial restrictions and covenants
in our bank credit facility and the indenture governing our Senior Subordinated
Notes.

Our ability to satisfy our debt obligations and to pay principal and
interest on our indebtedness, fund working capital requirements and make
anticipated capital expenditures will depend on our future performance, which
is subject to general economic, financial and other factors, some of which are
beyond our control. Management believes that based on current levels of
operations and anticipated growth, cash flow from operations, together with
other available sources of funds including the availability of borrowings under
the revolving bank credit facility, will be adequate for at least the next
twelve months to make required payments of principal and interest on our
indebtedness, to fund anticipated capital expenditures and for working capital
requirements. There can be no assurance, however, that our business will
generate sufficient cash flow from operations or that future borrowings will be
available under the revolving bank credit facility in an amount sufficient to
enable us to service our indebtedness or to fund our other liquidity needs. In
such event, we may need to raise additional funds through public or private
equity or debt financings. We cannot assure you that any such funds will be
available to us on favorable terms or at all.

As of December 31, 2002, we had available a total of approximately $32.1
million in cash and cash equivalents and $25.0 million available under the
revolving bank credit facility. For 2003, we expect to spend total
cash of
approximately $39.6 million for the following requirements:



| |  |  | approximately $10.9 million scheduled principal and interest payments
on our bank credit facility and the Senior Subordinated Notes;      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | approximately $20.0 million prepayment made on the March 28, 2003 to
reduce the outstanding term loans under our bank credit facility; and
|
| |  |  | up to $8.7 million for capital expenditures.                                                                                              

In addition, we expect to make other general corporate payments in 2003.

Recent Accounting
Pronouncements

For information on the recent accounting pronouncements impacting our
business, see Note 1 to the Notes to the consolidated financial statements
included in Item 8.




Item 7A.Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain market risks as part of our ongoing business
operations. Primary exposure includes changes in interest rates. We are
exposed to interest rate risk in connection with the term loans and borrowings
under the revolving bank credit facility which bear interest at floating rates
based on London Inter-Bank Offered Rate (LIBOR) or the prime rate plus an
applicable borrowing margin. For fixed rate debt, interest rate changes affect
the fair market value but do not impact earnings or cash flows. Conversely,
for variable rate debt, interest rate changes generally do not affect the fair
market value but do impact future earnings and cash flows, assuming other
factors are held constant. As of December 31, 2002, we had $75.0 million
principal amount of fixed rate debt represented by our Senior Subordinated
Notes and $35.8 million of variable rate debt represented by borrowings under
the bank credit facility (at an interest rate of 4.19% at December 31, 2002).
Based on our current balance outstanding under the bank credit facility, an
immediate change of one percentage point in the applicable interest rate would
cause an increase or decrease in interest expense of approximately $0.4 million
on an annual basis. At December 31, 2002, up to $25.0 million of variable rate
borrowings were available under the revolving bank credit facility. We may use
derivative financial instruments, where appropriate, to manage our interest
rate risks. However, as a matter of policy, we do not enter into derivative or
other financial investments for trading or speculative purposes.

Commencing January 1, 2002, we began selling products through our
subsidiaries in Germany and the United Kingdom in Euros and Pounds Sterling,
respectively and, commencing May 7, 2002, we began selling products through our
subsidiary in Canada in Canadian Dollars. International sales in 2002 were
favorably impacted by foreign currency exchange fluctuations with the weakening
of the U.S. dollar against the Euro. In 2001, the volume and product mix of
international sales was indirectly adversely impacted by foreign currency
exchange fluctuations as the strengthening of the U.S. dollar against the Euro
effectively increased the cost of our products to our European third party
distributors. As we begin to further directly distribute our products in other
selected foreign countries, we expect that future sales of our
products in these markets will be denominated in the applicable foreign
currencies which would cause currency

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fluctuations to more directly impact our
operating results. We may seek to reduce the potential impact of currency
fluctuations on our business through hedging transactions.

Our distribution and purchase agreement with IMD has provisions tied to
the fluctuation of the Euro. In the event the value of the Euro in U.S.
dollars on the date of payment of a $2.0 million licensing fee to be paid by us
after final FDA approval of OrthoPulse is obtained changes from a specified
rate, IMD reserves the right to adjust pricing on future products purchased by
us from IMD to reflect the exchange rate in effect at that time. We may
mitigate these risks by entering into hedging transactions.

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Item 8.Financial Statements and Supplementary Data

The following documents are filed as part of this report:

|                                                                                                                                   |  |      |    | 
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                   |  | Page
|                                                                                                                                   |  |     
|Report of Ernst & Young LLP, Independent Auditors                                                                                  |  |      | 46 | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                                                       |  |      | 47 | 
|Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000                                         |  |      | 48 | 
|Consolidated Statements of Changes in Stockholders/Members Equity (Deficit) for the
years ended December 31, 2002, 2001 and 2000 |  |      | 49 | 
|Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000                                         |  |      | 50 | 
|Notes to Consolidated Financial Statements                                                                                         |  |      | 51 | 

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of Directors and Stockholders
dj Orthopedics, Inc.

We have audited the accompanying consolidated balance sheets of dj
Orthopedics, Inc. as of December 31, 2002 and 2001, and the related
consolidated statements of operations, equity and cash flows for each of the
three years in the period ended December 31, 2002. Our audits also included
the financial statement schedule listed in the Index at Item 15(a). These
consolidated financial statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of dj
Orthopedics, Inc. at December 31, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Financial Accounting Standards Board No.
142, Goodwill and Other Intangible Assets.



| | /s/ ERNST & YOUNG LLP
| | ---------------------

San Diego, California
January 31, 2003

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dj Orthopedics, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

|                                                               |                                                                                                                                                                          |   |              |        |      |   |         |        |  
|-------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ------------ | ------ | ---- | - | ------- | ------ | -
|                                                               |                                                                                                                                                                          |   | December 31,
|                                                               |                                                                                                                                                                          |   |             
|                                                               |                                                                                                                                                                          |   | 2002         |        | 2001
|                                                               |                                                                                                                                                                          |   |              |        |     
|Assets                                                         |                                                                                                                                                                          |   |              |        |      |   |         |       
|Current assets:                                                |                                                                                                                                                                          |   |              |        |      |   |         |       
|                                                               | Cash and cash equivalents                                                                                                                                                |   | $            | 32,085 |      |   | $       | 25,814 |  
|                                                               | Accounts receivable, net of provisions for contractual allowances
and doubtful accounts of $10,045 and $8,741 at December 31, 2002
and 2001, respectively                |   |              | 33,705 |      |   |         | 45,176 |  
|                                                               | Inventories, net                                                                                                                                                         |   |              | 14,583 |      |   |         | 25,139 |  
|                                                               | Deferred tax asset, current portion                                                                                                                                      |   |              | 10,247 |      |   |         | 6,350  |  
|                                                               | Other current assets                                                                                                                                                     |   |              | 4,970  |      |   |         | 4,285  |  
|                                                               |                                                                                                                                                                          |   |              |        |      |   |         |       
|Total current assets                                           |                                                                                                                                                                          |   | 95,590       |        |      |   | 106,764 |       
|Property, plant and equipment, net                             |                                                                                                                                                                          |   | 14,082       |        |      |   | 15,343  |       
|Goodwill, net                                                  |                                                                                                                                                                          |   | 55,120       |        |      |   | 55,498  |       
|Intangible assets, net                                         |                                                                                                                                                                          |   | 13,335       |        |      |   | 15,090  |       
|Debt issuance costs, net                                       |                                                                                                                                                                          |   | 3,787        |        |      |   | 4,501   |       
|Deferred tax asset                                             |                                                                                                                                                                          |   | 55,484       |        |      |   | 49,686  |       
|Other assets                                                   |                                                                                                                                                                          |   | 326          |        |      |   | 1,040   |       
|                                                               |                                                                                                                                                                          |   |              |        |      |   |         |       
|Total assets                                                   |                                                                                                                                                                          | $ | 237,724      |        |      | $ | 247,922 |       
|                                                               |                                                                                                                                                                          |   |              |        |      |   |         |       
|Liabilities and stockholders equity                           |                                                                                                                                                                          |   |              |        |      |   |         |       
|Current liabilities:                                           |                                                                                                                                                                          |   |              |        |      |   |         |       
|                                                               | Accounts payable                                                                                                                                                         |   | $            | 8,490  |      |   | $       | 9,825  |  
|                                                               | Accrued compensation                                                                                                                                                     |   |              | 4,952  |      |   |         | 2,090  |  
|                                                               | Accrued commissions                                                                                                                                                      |   |              | 1,634  |      |   |         | 1,218  |  
|                                                               | Long-term debt, current portion                                                                                                                                          |   |              | 1,274  |      |   |         | 1,274  |  
|                                                               | Accrued performance improvement and restructuring costs                                                                                                                  |   |              | 5,894  |      |   |         |       |  
|                                                               | Other accrued liabilities                                                                                                                                                |   |              | 6,025  |      |   |         | 8,461  |  
|                                                               |                                                                                                                                                                          |   |              |        |      |   |         |       
|Total current liabilities                                      |                                                                                                                                                                          |   | 28,269       |        |      |   | 22,868  |       
|12 5/8% Senior Subordinated Notes, net of unamortized discount |                                                                                                                                                                          |   | 74,002       |        |      |   | 73,848  |       
|Long-term debt, less current portion                           |                                                                                                                                                                          |   | 34,540       |        |      |   | 35,812  |       
|Minority interest                                              |                                                                                                                                                                          |   |             |        |      |   | 154     |       
|Commitments and contingencies                                  |                                                                                                                                                                          |   |              |        |      |   |         |       
|Stockholders equity:                                          |                                                                                                                                                                          |   |              |        |      |   |         |       
|                                                               | Preferred stock, $0.01 par value; 25,000,000 shares authorized, none issued
and outstanding at December 31, 2002 and 2001                                                |   |              |       |      |   |         |       |  
|                                                               | Common stock, $0.01 par value; 100,000,000 shares authorized,
17,872,956 shares and 17,855,566 shares issued and outstanding
at December 31, 2002 and 2001, respectively |   |              | 179    |      |   |         | 179    |  
|                                                               | Additional paid-in capital                                                                                                                                               |   |              | 65,478 |      |   |         | 65,642 |  
|                                                               | Notes receivable from stockholders and officers for stock purchases                                                                                                      |   |              | (2,197 | )    |   |         | (2,082 | )
|                                                               | Accumulated other comprehensive income (loss)                                                                                                                            |   |              | 1,037  |      |   |         | (110   | )
|                                                               | Retained earnings                                                                                                                                                        |   |              | 36,416 |      |   |         | 51,611 |  
|                                                               |                                                                                                                                                                          |   |              |        |      |   |         |       
|Total stockholders equity                                     |                                                                                                                                                                          |   | 100,913      |        |      |   | 115,240 |       
|                                                               |                                                                                                                                                                          |   |              |        |      |   |         |       
|Total liabilities and stockholders equity                     |                                                                                                                                                                          | $ | 237,724      |        |      | $ | 247,922 |       
|                                                               |                                                                                                                                                                          |   |              |        |      |   |         |       

See accompanying Notes.

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dj Orthopedics, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)

|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |         |     | 
|---------------------------------------------------------------------------- | ------------------------------------------------------------------------- | ------- | ------- | ------------------------ | ------ | ---- | ------- | ------- | ------ | - | ------- | ------- | --- | 
|                                                                             |                                                                           |         |         | Years Ended December 31,
|                                                                             |                                                                           |         |         |                         
|                                                                             |                                                                           |         |         | 2002                     |        | 2001 |         | 2000   
|                                                                             |                                                                           |         |         |                          |        |      |         |        
|Net revenues                                                                 |                                                                           | $       | 182,636 |                          |        | $    | 169,170 |         |        | $ | 143,586 |        
|Costs of goods sold                                                          |                                                                           |         | 95,878  |                          |        |      | 83,079  |         |        |   | 69,129  |        
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|Gross profit                                                                 |                                                                           |         | 86,758  |                          |        |      | 86,091  |         |        |   | 74,457  |        
|Operating expenses:                                                          |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|                                                                             | Sales and marketing                                                       |         |         | 56,216                   |        |      |         | 36,175  |        |   |         | 29,201  |    
|                                                                             | General and administrative                                                |         |         | 26,414                   |        |      |         | 25,042  |        |   |         | 19,829  |    
|                                                                             | Research and development                                                  |         |         | 2,922                    |        |      |         | 2,285   |        |   |         | 2,898   |    
|                                                                             | Impairment of long-lived assets                                           |         |         | 3,666                    |        |      |         |        |        |   |         |        |    
|                                                                             | Performance improvement, restructuring
and other costs                    |         |         | 10,008                   |        |      |         |        |        |   |         | 400     |    
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|Total operating expenses                                                     |                                                                           |         | 99,226  |                          |        |      | 63,502  |         |        |   | 52,328  |        
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|Income (loss) from operations                                                |                                                                           |         | (12,468 | )                        |        |      | 22,589  |         |        |   | 22,129  |        
|Other
income (expense):                                                      |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|                                                                             | Interest expense                                                          |         |         | (12,477                  | )      |      |         | (17,796 | )      |   |         | (16,958 | )  
|                                                                             | Interest income                                                           |         |         | 590                      |        |      |         | 408     |        |   |         | 437     |    
|                                                                             | Prepayment premium and other costs on Senior
Subordinated Note redemption |         |         |                         |        |      |         | (4,669  | )      |   |         |        |    
|                                                                             | Discontinued acquisition costs                                            |         |         | (201                     | )      |      |         |        |        |   |         | (449    | )  
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|Other
income (expense), net                                                  |                                                                           |         | (12,088 | )                        |        |      | (22,057 | )       |        |   | (16,970 | )      
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|Income (loss) before income taxes                                            |                                                                           |         | (24,556 | )                        |        |      | 532     |         |        |   | 5,159   |        
|Benefit for income taxes:                                                    |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|                                                                             | Benefit for income taxes                                                  |         |         | 9,361                    |        |      |         | 1,789   |        |   |         |        |    
|                                                                             | Deferred tax benefit                                                      |         |         |                         |        |      |         | 54,169  |        |   |         |        |    
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|Total benefit for income taxes                                               |                                                                           |         | 9,361   |                          |        |      | 55,958  |         |        |   |        |        
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|Net income (loss)                                                            |                                                                           |         | (15,195 | )                        |        |      | 56,490  |         |        |   | 5,159   |        
|Less: Preferred unit dividends and accretion
of preferred unit fees          |                                                                           |         |        |                          |        |      | (5,667  | )       |        |   | (5,415  | )      
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|Net income (loss) available to common
stockholders                           |                                                                           | $       | (15,195 | )                        |        | $    | 50,823  |         |        | $ | (256    | )      
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|Net income (loss) per share available to common
stockholders:                |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|                                                                             |                                                                           | Basic   |         | $                        | (0.85  | )    |         | $       | 4.80   |   |         |         | N/A | 
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|                                                                             |                                                                           | Diluted |         | $                        | (0.85  | )    |         | $       | 4.68   |   |         |         | N/A | 
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|Weighted average shares outstanding used to
calculate per share information: |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|                                                                             |                                                                           | Basic   |         |                          | 17,873 |      |         |         | 10,593 |   |         |         | N/A | 
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        
|                                                                             |                                                                           | Diluted |         |                          | 17,873 |      |         |         | 10,858 |   |         |         | N/A | 
|                                                                             |                                                                           |         |         |                          |        |      |         |         |        |   |         |        

For the required information related to the pro forma impact of income taxes on
2001 and 2000 results, see Note 1.

See accompanying Notes.

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dj Orthopedics, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS/MEMBERS EQUITY (DEFICIT)
(In thousands, except unit/share and per unit/share data)



|                                                                                                                                                              |  |              |          |              |  |            |         |        |  |                 |            |  |  |   |     |  |  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | ------------ |  | ---------- | ------- | ------ |  | --------------- | ---------- |  |  | - | --- |  |  | - | -------- | -
|                                                                                                                                                              |  | Common Units |          | Common Stock |  |            |         |       
|                                                                                                                                                              |  |              |          |              |  | Additional
|                                                                                                                                                              |  | Units        |          | Amount       |  | Shares     |         | Amount |  | Paid-in Capital
|                                                                                                                                                              |  |              |          |              |  |            |         |        |  |                
|Balance at December 31, 1999                                                                                                                                  |  |              | 718,000  |              |  | $          | 66,521  |        |  |                 |           |  |  | $ |    |  |  | $ |         |  
|Issuance of common units at $10.08 per
unit, in exchange for cash and notes
receivable                                                                        |  |              | 75,890   |              |  |            | 8,272   |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Notes
receivable issued to management stockholders for
purchase of common units                                                                               |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Transfer of interest receivable to
notes receivable from management                                                                                           |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Transaction fees in connection with
the Recapitalization                                                                                                      |  |              |         |              |  |            | (39     | )      |  |                 |           |  |  |   |    |  |  |   |         |  
|Stock options granted for services                                                                                                                            |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Tax distributions to preferred unit holders                                                                                                                   |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Preferred unit dividends and accretion
of preferred unit fees                                                                                                 |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Net income (excluding $274 allocated to
preferred unit holders)                                                                                               |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|                                                                                                                                                              |  |              |          |              |  |            |         |        |  |                 |            |  |  |   |     |  |  |   |          |  
|Balance at December 31, 2000                                                                                                                                  |  |              | 793,890  |              |  |            | 74,754  |        |  |                 |           |  |  |   |    |  |  |   |         |  
|                                                                                                                                                              |  |              |          |              |  |            |         |        |  |                 |            |  |  |   |     |  |  |   |          |  
|Issuance of common units at $10.08 per
unit, in exchange for cash and notes
receivable, net of transaction fees
of $234                                       |  |              | 91,743   |              |  |            | 9,763   |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Exchange of 885,633 common units and
44,405 preferred units at the exchange
ratio of 10.812 shares of our common
stock in conjunction with the
Reorganization |  |              | (885,633 | )            |  |            | (84,517 | )      |  |                 | 10,055,566 |  |  |   | 101 |  |  |   | 84,416   |  
|Issuance of common stock at par value in
conjunction with Reorganization at
$17.00 per share, net of transaction fees
of $13,793                              |  |              |         |              |  |            |        |        |  |                 | 7,800,000  |  |  |   | 78  |  |  |   | 118,729  |  
|Reclassification of accumulated deficit to
additional paid-in capital at Reorganization date                                                                  |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   | (137,503 | )
|Transfer of interest receivable to notes
receivable from management                                                                                           |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Stock options granted for services                                                                                                                            |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Tax distributions to preferred unit holders                                                                                                                   |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Preferred unit dividends and accretion
of preferred unit fees                                                                                                 |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Foreign currency translation adjustment                                                                                                                       |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Net income                                                                                                                                                    |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|                                                                                                                                                              |  |              |          |              |  |            |         |        |  |                 |            |  |  |   |     |  |  |   |          |  
|Balance at December 31, 2001                                                                                                                                  |  |              |         |              |  |            |        |        |  |                 | 17,855,566 |  |  |   | 179 |  |  |   | 65,642   |  
|                                                                                                                                                              |  |              |          |              |  |            |         |        |  |                 |            |  |  |   |     |  |  |   |          |  
|Transfer of interest receivable to notes
receivable from management                                                                                           |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Stock options granted for services                                                                                                                            |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   | 32       |  
|Unearned compensation expense                                                                                                                                 |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Additional costs related to initial public
offering                                                                                                           |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   | (317     | )
|Net proceeds from issuance of common
stock under Employee Stock Purchase
Plan                                                                                 |  |              |         |              |  |            |        |        |  |                 | 17,390     |  |  |   |    |  |  |   | 121      |  
|Foreign currency translation adjustment                                                                                                                       |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|Net loss                                                                                                                                                      |  |              |         |              |  |            |        |        |  |                 |           |  |  |   |    |  |  |   |         |  
|                                                                                                                                                              |  |              |          |              |  |            |         |        |  |                 |            |  |  |   |     |  |  |   |          |  
|Balance at December 31, 2002                                                                                                                                  |  |              |         |              |  | $          |        |        |  |                 | 17,872,956 |  |  | $ | 179 |  |  | $ | 65,478   |  
|                                                                                                                                                              |  |              |          |              |  |            |         |        |  |                 |            |  |  |   |     |  |  |   |          |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                                                                                              |  |                   |        |                   |  |          |       |                 |  |               |          |               |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ------ | ----------------- |  | -------- | ----- | --------------- |  | ------------- | -------- | ------------- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                                              |  | Notes             |        |                   |  |          |       |                 |  |               |          |               |  |   |         |   |  |  
|                                                                                                                                                              |  | Receivable        |        |                   |  |          |       |                 |  |               |          | Total         |  |   |         |   | 
|                                                                                                                                                              |  | from Stockholders |        | Accumulated
Other |  |          |       |                 |  | Stockholders |          | Comprehensive | 
|                                                                                                                                                              |  | and Officers for  |        | Comprehensive     |  | Retained |       | Equity/Members |  | Income       
|                                                                                                                                                              |  | Stock Purchases   |        | income (Loss)     |  | Earnings |       | (Deficit)       |  | (Loss)       
|                                                                                                                                                              |  |                   |        |                   |  |          |       |                 |  |              
|Balance at December 31, 1999                                                                                                                                  |  | $                 | (1,400 | )                 |  | $        |      |                 |  | $             | (135,550 | )             |  | $ | (70,429 | ) |  |   |         |  
|Issuance of common units at $10.08 per
unit, in exchange for cash and notes
receivable                                                                        |  |                   | (174   | )                 |  |          |      |                 |  |               |         |               |  |   | 8,098   |   |  |   |         |  
|Notes
receivable issued to management for
purchase of common units                                                                                            |  |                   | (124   | )                 |  |          |      |                 |  |               |         |               |  |   | (124    | ) |  |   |         |  
|Transfer of interest receivable to
notes receivable from management                                                                                           |  |                   | (74    | )                 |  |          |      |                 |  |               |         |               |  |   | (74     | ) |  |   |         |  
|Transaction fees in connection with
the Recapitalization                                                                                                      |  |                   |       |                   |  |          |      |                 |  |               |         |               |  |   | (39     | ) |  |   |         |  
|Stock options granted for services                                                                                                                            |  |                   |       |                   |  |          |      |                 |  |               | 36       |               |  |   | 36      |   |  |   |         |  
|Tax distributions to preferred unit holders                                                                                                                   |  |                   |       |                   |  |          |      |                 |  |               | (563     | )             |  |   | (563    | ) |  |   |         |  
|Preferred unit dividends and accretion
of preferred unit fees                                                                                                 |  |                   |       |                   |  |          |      |                 |  |               | (5,415   | )             |  |   | (5,415  | ) |  |   |         |  
|Net income (excluding $274 allocated to
preferred unit holders)                                                                                               |  |                   |       |                   |  |          |      |                 |  |               | 4,885    |               |  |   | 4,885   |   |  | $ | 4,885   |  
|                                                                                                                                                              |  |                   |        |                   |  |          |       |                 |  |               |          |               |  |   |         |   |  |   |         |  
|Balance at December 31, 2000                                                                                                                                  |  |                   | (1,772 | )                 |  |          |      |                 |  |               | (136,607 | )             |  |   | (63,625 | ) |  |   | 4,885   |  
|                                                                                                                                                              |  |                   |        |                   |  |          |       |                 |  |               |          |               |  |   |         |   |  |   |         |  
|Issuance of common units at $10.08 per
unit, in exchange for cash and notes
receivable, net of transaction fees
of $234                                       |  |                   | (211   | )                 |  |          |      |                 |  |               |         |               |  |   | 9,552   |   |  |   |         |  
|Exchange of 885,633 common units and
44,405 preferred units at the exchange
ratio of 10.812 shares of our common
stock in conjunction with the
Reorganization |  |                   |       |                   |  |          |      |                 |  |               |         |               |  |   |        |   |  |   |         |  
|Issuance of common stock at par value in
conjunction with Reorganization at
$17.00 per share, net of transaction fees
of $13,793                              |  |                   |       |                   |  |          |      |                 |  |               |         |               |  |   | 118,807 |   |  |   |         |  
|Reclassification of accumulated deficit to
additional paid-in capital at Reorganization date                                                                  |  |                   |       |                   |  |          |      |                 |  |               | 137,503  |               |  |   |        |   |  |   |         |  
|Transfer of interest receivables to notes
receivable from management                                                                                          |  |                   | (99    | )                 |  |          |      |                 |  |               |         |               |  |   | (99     | ) |  |   |         |  
|Stock options granted for services                                                                                                                            |  |                   |       |                   |  |          |      |                 |  |               | 92       |               |  |   | 92      |   |  |   |         |  
|Tax distributions to preferred unit holders                                                                                                                   |  |                   |       |                   |  |          |      |                 |  |               | (200     | )             |  |   | (200    | ) |  |   |         |  
|Preferred unit dividends and accretion
of preferred unit fees                                                                                                 |  |                   |       |                   |  |          |      |                 |  |               | (5,667   | )             |  |   | (5,667  | ) |  |   |         |  
|Foreign currency translation adjustment                                                                                                                       |  |                   |       |                   |  | $        | (110  | )               |  |               |          |               |  |   | (110    | ) |  |   | (110    | )
|Net income                                                                                                                                                    |  |                   |       |                   |  |          |      |                 |  |               | 56,490   |               |  |   | 56,490  |   |  |   | 56,490  |  
|                                                                                                                                                              |  |                   |        |                   |  |          |       |                 |  |               |          |               |  |   |         |   |  |   |         |  
|Balance at December 31, 2001                                                                                                                                  |  |                   | (2,082 | )                 |  |          | (110  | )               |  |               | 51,611   |               |  |   | 115,240 |   |  |   | 56,380  |  
|                                                                                                                                                              |  |                   |        |                   |  |          |       |                 |  |               |          |               |  |   |         |   |  |   |         |  
|Transfer of interest receivable to notes
receivable from management                                                                                           |  |                   | (115   | )                 |  |          |      |                 |  |               |          |               |  |   | (115    | ) |  |  
|Stock options granted for services                                                                                                                            |  |                   |       |                   |  |          |      |                 |  |               |         |               |  |   | 32      |   |  |   |         |  
|Unearned compensation expense                                                                                                                                 |  |                   |       |                   |  |          | 14    |                 |  |               |          |               |  |   | 14      |   |  |   | 14      |  
|Additional costs related to initial public
offering                                                                                                           |  |                   |       |                   |  |          |      |                 |  |               |         |               |  |   | (317    | ) |  |   |         |  
|Net proceeds from issuance of common
stock under Employee Stock Purchase
Plan                                                                                 |  |                   |       |                   |  |          |      |                 |  |               |         |               |  |   | 121     |   |  |   |         |  
|Foreign currency translation adjustment                                                                                                                       |  |                   |       |                   |  |          | 1,133 |                 |  |               |          |               |  |   | 1,133   |   |  |   | 1,133   |  
|Net loss                                                                                                                                                      |  |                   |       |                   |  |          |      |                 |  |               | (15,195  | )             |  |   | (15,195 | ) |  |   | (15,195 | )
|                                                                                                                                                              |  |                   |        |                   |  |          |       |                 |  |               |          |               |  |   |         |   |  |   |         |  
|Balance at December 31, 2002                                                                                                                                  |  | $                 | (2,197 | )                 |  | $        | 1,037 |                 |  | $             | 36,416   |               |  | $ | 100,913 |   |  | $ | (14,048 | )
|                                                                                                                                                              |  |                   |        |                   |  |          |       |                 |  |               |          |               |  |   |         |   |  |   |         |  

See accompanying Notes.

49



---



##### Table of Contents



dj Orthopedics, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |   |        |         |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------- | - | ------------------------ | ------- | ------- | - | ------ | ------- | ------- | - | ------ | ------- | -
|                                                                                                   |  |                                                                                                              |                                                         |   | Years Ended December 31,
|                                                                                                   |  |                                                                                                              |                                                         |   |                         
|                                                                                                   |  |                                                                                                              |                                                         |   | 2002                     |         | 2001    |   | 2000  
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |       
|Operating activities                                                                               |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|Net income (loss)                                                                                  |  | $                                                                                                            | (15,195                                                 | ) |                          | $       | 56,490  |   |        | $       | 5,159   |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities: |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|                                                                                                   |  | Provision for contractual allowances and doubtful accounts                                                   |                                                         |   | 22,269                   |         |         |   | 10,701 |         |         |   | 6,285  |        
|                                                                                                   |  | Provision for excess and obsolete inventories                                                                |                                                         |   | 6,124                    |         |         |   | 604    |         |         |   | 583    |        
|                                                                                                   |  | Impairment of long-lived assets                                                                              |                                                         |   | 3,666                    |         |         |   |       |         |         |   |       |        
|                                                                                                   |  | Performance improvement and restructuring costs                                                              |                                                         |   | 10,008                   |         |         |   |       |         |         |   |       |        
|                                                                                                   |  | Depreciation and amortization                                                                                |                                                         |   | 7,283                    |         |         |   | 9,444  |         |         |   | 6,365  |        
|                                                                                                   |  | Amortization of debt issuance costs and discount on Senior
Subordinated Notes                                |                                                         |   | 935                      |         |         |   | 2,636  |         |         |   | 1,082  |        
|                                                                                                   |  | Other                                                                                                        |                                                         |   | 46                       |         |         |   | 246    |         |         |   | 704    |        
|                                                                                                   |  | Changes in operating assets and liabilities:                                                                 |                                                         |   |                          |         |         |   |        |         |         |   |        |        
|                                                                                                   |  |                                                                                                              | Accounts receivable                                     |   |                          | (10,409 | )       |   |        | (21,379 | )       |   |        | (19,377 | )
|                                                                                                   |  |                                                                                                              | Inventories                                             |   |                          | 8,248   |         |   |        | (7,233  | )       |   |        | (3,159  | )
|                                                                                                   |  |                                                                                                              | Other current assets                                    |   |                          | (3,571  | )       |   |        | (1,114  | )       |   |        | (2,427  | )
|                                                                                                   |  |                                                                                                              | Accounts payable                                        |   |                          | (1,659  | )       |   |        | 843     |         |   |        | 2,571   |  
|                                                                                                   |  |                                                                                                              | Accrued compensation                                    |   |                          | 2,829   |         |   |        | (847    | )       |   |        | 494     |  
|                                                                                                   |  |                                                                                                              | Accrued commissions                                     |   |                          | 416     |         |   |        | (226    | )       |   |        | 490     |  
|                                                                                                   |  |                                                                                                              | Deferred income taxes                                   |   |                          | (9,695  | )       |   |        | (56,036 | )       |   |        |        |  
|                                                                                                   |  |                                                                                                              | Accrued performance improvement and restructuring costs |   |                          | (3,961  | )       |   |        |        |         |   |        |        |  
|                                                                                                   |  |                                                                                                              | Other accrued liabilities                               |   |                          | (2,495  | )       |   |        | 1,805   |         |   |        | 2,459   |  
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|Net cash provided by (used in) operating activities                                                |  |                                                                                                              | 14,839                                                  |   |                          |         | (4,066  | ) |        |         | 1,229   |  
|                                                                                                  
|Investing activities                                                                               |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|Purchases of property, plant and equipment                                                         |  |                                                                                                              | (4,131                                                  | ) |                          |         | (5,964  | ) |        |         | (6,522  | )
|Proceeds from sale of property, plant and equipment                                                |  |                                                                                                              | 288                                                     |   |                          |         |        |   |        |         | 126     |  
|Purchase of intangible assets                                                                      |  |                                                                                                              | (2,590                                                  | ) |                          |         | (1,140  | ) |        |         | (1,200  | )
|Orthotech acquisition                                                                              |  |                                                                                                              |                                                        |   |                          |         |        |   |        |         | (49,019 | )
|Change in other assets, net                                                                        |  |                                                                                                              | (916                                                    | ) |                          |         | (1,005  | ) |        |         | (400    | )
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|Net cash used in investing activities                                                              |  |                                                                                                              | (7,349                                                  | ) |                          |         | (8,109  | ) |        |         | (57,015 | )
|                                                                                                  
|Financing activities                                                                               |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|Repayment
of Senior Subordinated Notes                                                             |  |                                                                                                              |                                                        |   |                          |         | (25,000 | ) |        |         |        |  
|Proceeds from long-term debt                                                                       |  |                                                                                                              |                                                        |   |                          |         |        |   |        |         | 44,600  |  
|Repayment of long-term debt                                                                        |  |                                                                                                              | (1,272                                                  | ) |                          |         | (21,876 | ) |        |         | (888    | ) |       
|Distributions to preferred unit holders                                                            |  |                                                                                                              |                                                        |   |                          |         | (200    | ) |        |         | (563    | )
|Debt issuance costs                                                                                |  |                                                                                                              |                                                        |   |                          |         |        |   |        |         | (551    | )
|Net proceeds from issuance of common stock under Employee Stock
Purchase Plan                      |  |                                                                                                              | 121                                                     |   |                          |         |        |   |        |         |        |  
|Net proceeds from (costs of) issuance of common stock and common units                             |  |                                                                                                              | (317                                                    | ) |                          |         | 128,359 |   |        |         | 8,059   |  
|Repurchase of preferred units in connection with Reorganization                                    |  |                                                                                                              |                                                        |   |                          |         | (47,290 | ) |        |         |        |  
|Net proceeds from issuance of preferred units                                                      |  |                                                                                                              |                                                        |   |                          |         |        |   |        |         | 3,432   |  
|Note receivable issued for purchase of common units                                                |  |                                                                                                              |                                                        |   |                          |         |        |   |        |         | (124    | )
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|Net cash (used in) provided by financing activities                                                |  |                                                                                                              | (1,468                                                  | ) |                          |         | 33,993  |   |        |         | 53,965  |  
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|Effect of exchange rate changes on cash and cash equivalents                                       |  |                                                                                                              | 249                                                     |   |                          |         | (110    | ) |        |         |        |  
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|Net increase (decrease) in cash and cash equivalents                                               |  |                                                                                                              | 6,271                                                   |   |                          |         | 21,708  |   |        |         | (1,821  | )
|Cash and cash equivalents at beginning of year                                                     |  |                                                                                                              | 25,814                                                  |   |                          |         | 4,106   |   |        |         | 5,927   |  
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|Cash and cash equivalents at end of year                                                           |  | $                                                                                                            | 32,085                                                  |   |                          | $       | 25,814  |   |        | $       | 4,106   |  
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|                                                                                                  
|Supplemental disclosure of cash flow information:                                                  |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|                                                                                                   |  | Interest paid                                                                                                |                                                         | $ | 11,308                   |         |         | $ | 16,974 |         |         | $ | 15,716 |        
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|                                                                                                   |  | Income taxes paid                                                                                            |                                                         | $ | 760                      |         |         | $ |       |         |         | $ |       |        
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|Supplemental disclosure of non-cash transactions:                                                  |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|                                                                                                   |  | Dividends and accretion of preferred unit fee related to redeemable
preferred units                          |                                                         | $ |                         |         |         | $ | 5,667  |         |         | $ | 5,415  |        
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  
|                                                                                                   |  | Common units issued in exchange for notes receivable and
transfer of interest receivable to notes receivable |                                                         | $ | 115                      |         |         | $ | 310    |         |         | $ | 248    |        
|                                                                                                   |  |                                                                                                              |                                                         |   |                          |         |         |   |        |         |         |  

See accompanying Notes.

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dj Orthopedics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands)



|1. |  | Organization and Summary of Significant Accounting Policies
|-- |  | -----------------------------------------------------------

dj Orthopedics, Inc. (dj Orthopedics), through its subsidiary dj
Orthopedics, LLC (dj Ortho) and dj Orthos subsidiaries (collectively, the
Company) is a global designer, manufacturer and marketer of products for the
orthopedic sports medicine market. The Company is the successor to DonJoy,
L.L.C. (DonJoy) which, prior to June 30, 1999, was wholly owned by Smith &
Nephew, Inc. (Smith & Nephew). On June 30, 1999, DonJoy consummated a
recapitalization pursuant to which J.P. Morgan DJ Partners, LLC (JPMDJ
Partners), obtained a controlling interest in DonJoy. Concurrently with the
completion of dj Orthopedics, Inc.s initial public offering on November 20,
2001, DonJoy merged with and into dj Orthopedics through a series of
transactions, referred to herein as the Reorganization. As a result of the
foregoing transactions, dj Ortho became a wholly owned
subsidiary of dj Orthopedics, Inc.

dj Orthopedics and dj Orthopedics Development Corporation (dj Development)
guarantee dj Orthos bank borrowings and the Senior Subordinated Notes (the
Notes). DJ Orthopedics Capital Corporation (DJ Capital) was formed solely to
act as a co-issuer (and as a joint and several obligor) with dj Ortho with
respect to the Notes. No separate financial information for DJ Capital has
been provided herein because management believes such information would not be
material as DJ Capital does not hold any assets or other properties or conduct
any business. Condensed consolidating financial statements showing separate
information for dj Orthopedics, dj Ortho, dj Development and our non-guarantor
subsidiaries in the aggregate have been provided within Note 12.

2001 Reorganization and Initial Public Offering

In the Reorganization, holders of the common and preferred units of DonJoy
received shares of dj Orthopedics, Inc.s common stock on the basis of 10.812
shares of common stock for each outstanding unit and, in the case of a
preferred unit, an amount in cash equal to approximately $1,082, representing
the liquidation preference of the preferred unit, plus accrued and unpaid
distributions thereon but excluding the date that the Reorganization was
effective. A total of 10,055,566 shares of common stock were issued in the
merger. Prior to the Reorganization, the operating results of DonJoy were
allocated to the members. At the time of the Reorganization, members equity
was reclassified into common stock and additional paid-in capital. Deferred
income taxes of $54.2 million represent the deferred income taxes related to
the difference in the book and tax basis of the assets of DonJoy at November
20, 2001 and which were recorded at the time of the Reorganization. Immediately
following the Reorganization, dj Orthopedics, Inc. sold 7,800,000 shares of
common stock in an initial public offering at $17.00 per share.

All references to per unit amounts in the Notes to the consolidated
financial statements regarding per share and stock option information have been
restated to their equivalent shares based on the conversion of the common and
preferred units of DonJoy into shares of dj Orthopedics, Inc.s common stock at
the Reorganization.

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements present the historical
financial position and results of operations of dj Orthopedics and include the
accounts of dj Ortho, the accounts of dj Orthos wholly owned subsidiaries, dj
Orthopedics Development Corporation (dj Development) and DJ Orthopedics Capital
Corporation (DJ Capital), the accounts of dj Orthos wholly owned Mexican
subsidiary that manufactures a majority of dj Orthos products under Mexicos
maquiladora program, the accounts of dj Orthos wholly owned subsidiaries in
Canada, Germany and the United Kingdom, and the accounts of dj Orthos majority
owned subsidiary in Australia (formed in March 2001 and divested in December
2002). All intercompany accounts and transactions have been eliminated in
consolidation.

Effective January 1, 2002, the Company commenced direct distribution of
its products in Germany and the United Kingdom through its two new wholly owned
subsidiaries, dj Orthopedics Deutschland GmbH (dj Germany) and dj Orthopaedics
UK Ltd (dj UK). dj Germany and dj UK replaced third party distributors in
those countries. Effective May 7, 2002, the Company commenced direct
distribution of its products in Canada through its wholly owned subsidiary, dj
Ortho, Canada Inc. (dj Canada), replacing the Smith & Nephew sales organization
which previously distributed the Companys products in Canada.

Effective December 31, 2002, the Company has divested its interest in its
majority owned subsidiary in Australia (dj Australia), with no material gain or
loss. The minority owner of the subsidiary has assumed full ownership in the
subsidiary, which will continue to sell the Companys products as an
independent distributor. Minority interest at December 31, 2001 represented the
minority stockholders proportionate share of the net assets of dj Australia at
that time.

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Use of Estimates in the Preparation of Financial Statements

The preparation of these financial statements requires that the Company
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. On an ongoing basis, the Company evaluates its estimates,
including those related to contractual allowances, doubtful accounts,
inventories, rebates, product returns, warranty obligations, income taxes,
intangibles and investments. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Cash Equivalents

Cash equivalents are short-term, highly liquid investments and consist of
investments in money market funds and commercial paper with maturities of three
months or less at the time of purchase.

Fair Value of Financial Instruments

In accordance with Financial Accounting Standards Board (FASB) Statement
of Financial Accounting Standards (SFAS) No. 107, Disclosures about Fair Value
of Financial Instruments, the following methods and assumptions were used in
estimating the fair value disclosures:



| |  |  | Cash and Cash Equivalents and Accounts Receivable.The
carrying amounts approximate fair values because of short maturities
of these instruments and the reserves for contractual allowances and
doubtful accounts which, in the opinion of management, are adequate
to state accounts receivable at their fair value.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Discounts and Allowances

Accounts receivable in the accompanying consolidated balance sheets are
presented net of reserves for estimated payment discounts, contractual
allowances related to third party payers, and allowances for doubtful accounts.

Long-Lived Assets

Property, plant and equipment and intangible assets are recorded at cost.
The Company provides for depreciation of property, plant and equipment (3 to 7
years) and amortization of intangible assets (3 to 20 years) using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the lesser of their estimated useful lives or
the terms of the related leases.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. However, SFAS No. 144 retains the fundamental provisions of
SFAS No. 121 for recognition and measurement of the impairment of long-lived
assets to be held and used. The Company adopted SFAS No. 144 effective January
1, 2002.

Computer Software Costs

The Company applies the American Institute of Certified Public Accountants
Statement of Position 98-1, Accounting for Costs of Computer Software Developed
or Obtained for Internal Use. This standard requires companies to capitalize
qualifying computer software costs, incurred during the application development
stage and then amortize the costs over the estimated useful life of the
software. During 2001 and 2000, the Company capitalized $1.2 million and $3.9
million, respectively, related to the acquisition and implementation of its
enterprise resource planning system. The Company is amortizing these costs over
seven years.

Debt Issuance Costs

The Company capitalized debt issuance costs of $6.6 million associated
with the issuance of its Senior Subordinated Notes and the commencement of its
bank credit facility. These costs are reflected on the accompanying
consolidated balance sheets net of accumulated amortization of $2.8 million and
$2.1 million as of December 31, 2002 and 2001, respectively. The Company is
amortizing these costs over the life of the related debt instruments, ranging
from six to ten years and classifies the amortization expense with interest
expense in the accompanying consolidated statements of operations. In December
2001, the Company recorded a charge to interest expense of $1.1 million to
write-off unamortized debt issuance costs in connection with the redemption of
a portion of the Senior Subordinated Notes.

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Inventories

Inventories are stated at the lower of cost or market, with cost
determined on a first-in, first-out (FIFO) basis.

Revenue Recognition

The Company distributes its products in the United States and
international markets primarily through networks of agents and distributors who
market and sell to orthopedic sports medicine surgeons, orthotic and prosthetic
centers, third party distributors, hospitals, surgery centers, physical
therapists and trainers within the orthopedic sports medicine community.

The Company recognizes revenue pursuant to Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements. Accordingly, revenue is
recognized when all four of the following criteria are met: (i) persuasive
evidence that an arrangement exists; (ii) shipment of goods and passage of
title; (iii) the selling price is fixed or determinable; and (iv)
collectibility is reasonably assured. Revenues from third party insurance
payers are recorded net of estimated contractual allowances which are accrued
as a percent of revenues based on actual historical experience. Revenues are
also reduced by allowances for estimated returns and rebates related to sales
transacted through distribution agreements that provide the distributors with a
right to return excess and obsolete inventory. Estimated returns based on
historical actual returns are accrued in accordance with the provisions of SFAS
No. 48, Revenue Recognition When Right of Return Existsin the period sales are
recognized. Some products have a limited warranty and estimated warranty costs
are accrued based on historical experience in the period sales are recognized.
In addition, rebates are accrued at the time of sale based upon agreed upon
terms with customers. The Company implemented Emerging Issues Task Force (EITF) Issue 00-10
(EITF 00-10),Accounting for Shipping and Handling Fees and
Costs, in 2000 and includes amounts
billed to customers for freight in revenue.

Foreign Currency Translation

The financial statements of the Companys international operations where
the local currency is the functional currency are translated into U.S. dollars
using period-end exchange rates for assets and liabilities and average exchange
rates during the period for revenues and expenses. Cumulative translation gains
and losses are excluded from results of operations and recorded as a separate
component of consolidated stockholders equity. Gains and losses resulting
from foreign currency transactions (transactions denominated in a currency
other than the entitys local currency) are included in the consolidated
statements of operations and are not material.

Concentration of Credit Risk

dj Ortho sells the majority of its products in the United States to
orthopedic professionals, large distributors, specialty dealers and buying
groups. Excluding freight revenue, international sales comprised 13%, 11% and
13% of the Companys net revenues for the years ended December 31, 2002, 2001
and 2000, respectively, and are sold through wholly-owned subsidiaries and
independent distributors. Credit is extended based on an evaluation of the
customers financial condition and generally collateral is not required. The
Company also provides a reserve for estimated bad debts. In addition,
approximately 34% of the Companys net receivables at December 31, 2002 are
from third party payers (see Note 3). Management reviews and revises its estimates for
credit losses from time to time and such credit losses have been within
managements estimates.

During the three years ended December 31, 2002, the Company had no
individual customer or distributor which accounted for 10% or more of total
annual revenues.

Per Share Information

Earnings per share are computed in accordance with Financial Accounting
Standards Board SFAS No. 128, Earnings Per Share. Basic earnings per share are
computed using the weighted average number of common shares outstanding during
each period. Diluted earnings per share include the dilutive effect of
weighted average common share equivalents potentially issuable upon the
exercise of stock options. Shares used for the calculations of basic and
diluted shares were the same for the year ended December 31, 2002 since all
weighted average common share equivalents were antidilutive due to the net loss
position of the Company. For purposes of computing diluted earnings per share,
weighted

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average common share equivalents (computed using the treasury stock method) do
not include stock options with an exercise price that exceeds the average fair
market value of the Companys common stock during the periods presented. For
the year ended December 31, 2001, the shares used to calculate basic and
diluted share information consist of the following (in thousands):

|                                                                                       |  |  |        | 
|-------------------------------------------------------------------------------------- |  |  | ------ | 
|Shares used in basic net income per share  weighted
average common shares outstanding |  |  | 10,593 | 
|Net effect of dilutive common share equivalents based
on treasury stock method         |  |  | 265    | 
|                                                                                       |  |  |        | 
|Shares used in computations of diluted net income per share                            |  |  | 10,858 | 
|                                                                                       |  |  |        | 

Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which is effective for fiscal years
ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition to
SFAS No. 123s fair value method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No.
123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effect of an entitys
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The Company has currently elected to not record compensation expense in
accordance with the provisions of SFAS No. 123. Therefore, the Companys
adoption of the disclosure provisions of SFAS No. 148 is not expected to have a
significant effect on the Companys financial position or results of
operations.

As permitted under SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, the Company has elected to follow
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, in accounting for outstanding stock options and warrants issued
to employees. Under APB Opinion No. 25, compensation expense relating to
employee stock options is determined based on the excess of the market price of
the stock over the exercise price on the date of grant, but does not require
the recognition of compensation expense for stock options issued under plans
defined as non-compensatory. The Company has not recognized any material
expense related to its employee stock options. Adoption of SFAS No. 148 for
options issued to employees would require recognition of employee compensation
expense based on the computed fair value of the options on the date of grant.
In accordance with SFAS No. 148 and EITF 96-18, stock options and warrants
issued to consultants and other non-employees as compensation for services
provided to the Company are accounted for based upon the fair value of the
services provided or the estimated fair market value of the option or warrant,
whichever can be more clearly determined. The Company recognizes this expense
over the period the services are provided; however, the amount of expense
related to these types of arrangements has never been significant.

Pro forma information regarding net income is required by SFAS No. 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS No. 123. The fair value of these
options was estimated at the date of grant using the Black-Scholes valuation
model for option pricing with the following assumptions for 2002, 2001 and
2000: a risk-free interest rate of 2.92%, 5.5% and 6.25%, respectively; a
dividend yield of zero; expected volatility of the market price of the
Companys common stock of 90.9%, 70.0% and 70.0%, respectively, and a weighted average life of an option of four
years.

Option valuation models require the input of highly subjective
assumptions. Because the Companys employee options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in managements opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee options.

For purposes of adjusted pro forma disclosures, the estimated fair value
of the options is amortized to expense over the vesting period. The Companys
pro forma information is as follows for the years ended December 31 (in
thousands, except per share amounts):

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|                                                                                                                                     |             |   |         |       |      |   |        |      |  |   |        |     | 
|------------------------------------------------------------------------------------------------------------------------------------ | ----------- | - | ------- | ----- | ---- | - | ------ | ---- |  | - | ------ | --- | 
|                                                                                                                                     |             |   | 2002    |       | 2001 |   | 2000  
|                                                                                                                                     |             |   |         |       |      |   |       
|Net income (loss) available to common
stockholders, as reported                                                                      |             | $ | (15,195 | )     |      | $ | 50,823 |      |  | $ | (256   | )  
|Stock-based employee compensation expense
included in reported net income (loss), net of
related tax effects                         |             |   |        |       |      |   |       |      |  |   |       |    
|Total stock-based employee compensation
expense determined under fair value based
method for all options, net of related tax effects |             |   | (654    | )     |      |   | (1,699 | )    |  |   | (1,180 | )  
|                                                                                                                                     |             |   |         |       |      |   |        |      |  |   |        |    
|Pro forma net income (loss) available to common
stockholders                                                                         |             | $ | (15,849 | )     |      | $ | 49,124 |      |  | $ | (1,436 | )  
|                                                                                                                                     |             |   |         |       |      |   |        |      |  |   |        |    
|Basic net income (loss) per share available
to common stockholders:                                                                  |             |   |         |       |      |   |        |      |  |   |        |    
|                                                                                                                                     | As reported |   | $       | (0.85 | )    |   | $      | 4.80 |  |   |        | N/A | 
|                                                                                                                                     |             |   |         |       |      |   |        |      |  |   |        |    
|                                                                                                                                     | Pro forma   |   | $       | (0.89 | )    |   | $      | 4.64 |  |   |        | N/A | 
|                                                                                                                                     |             |   |         |       |      |   |        |      |  |   |        |    
|Diluted net income (loss) per share available
to common stockholders:                                                                |             |   |         |       |      |   |        |      |  |   |        |    
|                                                                                                                                     | As reported |   | $       | (0.85 | )    |   | $      | 4.68 |  |   |        | N/A | 
|                                                                                                                                     |             |   |         |       |      |   |        |      |  |   |        |    
|                                                                                                                                     | Pro forma   |   | $       | (0.89 | )    |   | $      | 4.52 |  |   |        | N/A | 
|                                                                                                                                     |             |   |         |       |      |   |        |      |  |   |        |    

The pro forma effect on net income shown above is not necessarily
indicative of potential pro forma effects on results for future years. The
weighted average fair value of options granted during 2002, 2001 and 2000 was
$3.20, $7.02 and $5.68 per share, respectively.

Pro Forma Income Taxes and Pro Forma Per Share Information

Pro forma income tax expense represents estimated tax expense based on the
Companys operating results for the years ended December 31, 2001 and 2000 as
if the Company were a corporation from the beginning of the respective years,
using an estimated combined worldwide effective tax rate of 40.0%. The pro
forma basic and diluted per share information shown below is computed based on
the weighted average number of shares of common stock outstanding for each
year. For comparative purposes, the 7,800,000 shares of common stock issued as
part of the Companys initial public offering have been included in the
weighted averaged number of shares outstanding for the years ended December 31,
2001 and 2000, as if the shares were outstanding for the entire period. The
computation of pro forma diluted per share information for the year ended
December 31, 2001 includes the dilutive effect of common stock equivalents for
outstanding common stock options using the treasury stock method. Basic and
diluted shares used in the calculation of pro forma earnings per share for the
year ended December 31, 2000 were the same since all weighted average common
share equivalents were antidilutive for that year due to the net loss position
of the Company. The following table presents the pro forma income taxes and
pro forma per share information for the Company and reconciles the denominators
used in computing basic and diluted earnings per share for the years ended
December 31 (in thousands, except per share amounts):

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|                                                                                                                                              |                                     |         |        |        |      |      |        |        |       |  
|--------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ------- | ------ | ------ | ---- | ---- | ------ | ------ | ----- | -
|                                                                                                                                              |                                     |         |        | 2001   |      | 2000
|                                                                                                                                              |                                     |         |        |        |      |     
|Income before income taxes                                                                                                                    |                                     | $       | 532    |        |      | $    | 5,159  |       
|Pro forma provision for income taxes:                                                                                                         |                                     |         |        |        |      |      |        |       
|                                                                                                                                              | Historical benefit for income taxes |         |        | 1,789  |      |      |        |       |      
|                                                                                                                                              | Historical deferred tax benefit     |         |        | 54,169 |      |      |        |       |      
|                                                                                                                                              | Pro forma adjustment                |         |        | (2,001 | )    |      |        | (2,064 | )    
|                                                                                                                                              |                                     |         |        |        |      |      |        |       
|Total pro forma benefit (provision) for income taxes                                                                                          |                                     |         | 53,957 |        |      |      | (2,064 | )     
|                                                                                                                                              |                                     |         |        |        |      |      |        |       
|Pro forma net income                                                                                                                          |                                     |         | 54,489 |        |      |      | 3,095  |       
|Less: Preferred unit dividends and accretion of preferred unit fees                                                                           |                                     |         | (5,667 | )      |      |      | (5,415 | )     
|                                                                                                                                              |                                     |         |        |        |      |      |        |       
|Pro forma net income (loss) available to common stockholders/members                                                                          |                                     | $       | 48,822 |        |      | $    | (2,320 | )     
|                                                                                                                                              |                                     |         |        |        |      |      |        |       
|Pro forma net income (loss) per share available to common
stockholders:                                                                       |                                     |         |        |        |      |      |        |       
|                                                                                                                                              |                                     | Basic   |        | $      | 2.80 |      |        | $      | (0.14 | )
|                                                                                                                                              |                                     |         |        |        |      |      |        |       
|                                                                                                                                              |                                     | Diluted |        | $      | 2.76 |      |        | $      | (0.14 | )
|                                                                                                                                              |                                     |         |        |        |      |      |        |       
|Shares used in pro forma basic net income (loss) per share and pro forma
income (loss) per share  weighted average common shares
outstanding |                                     |         | 17,410 |        |      |      | 16,431 |       
|Net effect of dilutive common share equivalents based on treasury stock
method                                                                |                                     |         | 265    |        |      |      |       |       
|                                                                                                                                              |                                     |         |        |        |      |      |        |       
|Shares used in pro forma diluted net income (loss) per share  weighted
average                                                               |                                     |         | 17,675 |        |      |      | 16,431 |       
|                                                                                                                                              |                                     |         |        |        |      |      |        |       

Income Taxes

In connection with the Reorganization, the Company became a corporation
and is subject to U.S., state, and foreign income taxes on its earnings after
November 20, 2001. The Companys estimated worldwide effective tax rate was
40% for the period from November 20 to December 31, 2001. Based on its net
loss, the Companys estimated effective worldwide tax benefit effective rate is
38% for 2002. The comparable tax benefit is reduced primarily due to the
disallowance by certain states of net operating loss carryforwards. As of
December 31, 2002, the Company had recorded approximately $65.7 million of net
deferred tax assets related primarily to tax deductible goodwill not recognized
for book purposes and net losses reported during 2002. Realization of the
Companys deferred tax assets is dependent on the Companys ability to generate
approximately $170.0 million of future taxable income over the next 10 years.
Management believes that it is more likely than not that the net
deferred tax assets will be
realized based on forecasted taxable income.

Comprehensive Income (Loss)

The Company has adopted SFAS No. 130, Reporting Comprehensive Income,
which requires that all components of comprehensive income (loss), including
net income (loss), be reported in the financial statements in the period in
which they are recognized. Comprehensive income (loss) is defined as the change
in equity during a period from transactions and other events and circumstances
from non-owner sources. Net income (loss) and other comprehensive income
(loss), including foreign currency translation adjustments, and unrealized
gains and losses on investments, are reported, net of related tax, to arrive at
comprehensive income (loss).

Recently Issued Accounting Standards

In June 2001, the FASB issued SFAS Nos. 141 and 142, Business Combinations
and Goodwill and Other Intangible Assets.SFAS No. 141 replaces prior
accounting standards and eliminates pooling-of-interests accounting
prospectively. It also provides guidance on purchase accounting related to the
recognition of intangible assets and accounting for negative goodwill. SFAS No.
142 changes the accounting for goodwill from an amortization method to an
impairment write-off approach. Under SFAS No. 142, goodwill will be tested
annually and whenever events or circumstances occur indicating that goodwill
might be impaired. In addition, SFAS No. 142 requires the completion of a
transitional impairment test within six months of adoption, with any impairment
treated as a cumulative effect of a change in accounting principle as of the
date of adoption. The Company completed the transitional impairment test during
the second quarter of 2002 and the annual impairment test in the
fourth quarter of 2002 and determined that no impairment existed as of the
date of adoption. SFAS No. 141 and SFAS No. 142 are effective for all business
combinations completed after June 30, 2001. Effective January 1, 2002,
amortization of goodwill recorded for business combinations consummated prior
to July 1, 2001 ceased, and intangible assets acquired

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prior to July 1, 2001 that do not meet the criteria for separate recognition
under SFAS No. 141 have been reclassified to goodwill. On an ongoing basis,
absent any indicators of impairment, the Company expects to perform an annual
impairment evaluation during the fourth quarter.

The following table presents the impact of SFAS No. 142 on net income
(loss) had the standard been in effect for the years ended December 31 (in
thousands):

|                                                                       |                     |                                          |        |        |       |      |       |       |       | 
|---------------------------------------------------------------------- | ------------------- | ---------------------------------------- | ------ | ------ | ----- | ---- | ----- | ----- | ----- | 
|                                                                       |                     |                                          |        | 2001   |       | 2000
|                                                                       |                     |                                          |        |        |       |     
|Reported net income                                                    |                     | $                                        | 56,490 |        |       | $    | 5,159 |      
|Adjustments:                                                           |                     |                                          |        |        |       |      |       |      
|                                                                       |                     | Amortization of goodwill and intangibles |        |        | 3,537 |      |       |       | 2,481 | 
|                                                                       |                     | Income tax effect                        |        |        | (357  | )    |       |       |      | 
|                                                                       |                     |                                          |        |        |       |      |       |      
|                                                                       | Net adjustments     |                                          |        | 3,180  |       |      |       | 2,481 |      
|                                                                       |                     |                                          |        |        |       |      |       |      
|                                                                       | Adjusted net income |                                          | $      | 59,670 |       |      | $     | 7,640 |      
|                                                                       |                     |                                          |        |        |       |      |       |      
|Reported diluted net
income per
share
available to common
stockholders |                     | $                                        | 4.68   |        |       |      | N/A   |      
|Amortization of goodwill and
intangibles, net of taxes                 |                     | $                                        | 0.29   |        |       |      | N/A   |      
|                                                                       |                     |                                          |        |        |       |      |       |      
|Adjusted diluted
net income per
share
available to common
stockholders |                     | $                                        | 4.97   |        |       |      | N/A   |      
|                                                                       |                     |                                          |        |        |       |      |       |      

Comparative per share information for 2000 is not presented in the table
above because it is not meaningful.

Components of intangible assets acquired in prior purchase business
combinations and acquired as individual assets are as follows (in thousands):

|                                               |                      |  |         |     |                |        |                   |        |                   |       |              |        |   |        |        |        |   |       |        |        | 
|---------------------------------------------- | -------------------- |  | ------- | --- | -------------- | ------ | ----------------- | ------ | ----------------- | ----- | ------------ | ------ | - | ------ | ------ | ------ | - | ----- | ------ | ------ | 
|                                               |                      |  |         |     |                |        | December 31, 2002 |        | December 31, 2001
|                                               |                      |  |         |     |                |        |                   |        |                  
|                                               |                      |  | Useful  |     | Gross Carrying |        | Net Carrying      |        | Gross Carrying    |       | Net Carrying
|                                               |                      |  | Life    |     | Amount         |        | Amount            |        | Amount            |       | Amount      
|                                               |                      |  |         |     |                |        |                   |        |                   |       |             
|                                               |                      |  | (years) |     |                |        |                   |        |                   |       |             
|Intangible assets
subject to
amortization:     |                      |  |         |     |                |        |                   |        |                   |       |              |        |   |        |        |        |   |       |        |       
|                                               | Patented technology  |  | 5-20    |     | $              | 13,987 |                   |        | $                 | 2,986 |              |        | $ | 13,651 |        |        | $ | 3,094 |       
|                                               | Customer base        |  | 15-20   |     |                | 12,200 |                   |        |                   | 7,843 |              |        |   | 12,200 |        |        |   | 8,459 |       
|                                               | Licensing agreements |  | 5       |     |                | 2,000  |                   |        |                   | 533   |              |        |   | 4,215  |        |        |   | 2,751 |       
|                                               | Other                |  | 3-20    |     |                | 3,404  |                   |        |                   | 1,973 |              |        |   | 1,250  |        |        |   | 786   |       
|                                               |                      |  |         |     |                |        |                   |        |                   |       |              |        |   |        |        |        |   |       |        |       
|                                               |                      |  |         |     |                | $      | 31,591            |        |                   | $     | 13,335       |        |   | $      | 31,316 |        |   | $     | 15,090 |       
|                                               |                      |  |         |     |                |        |                   |        |                   |       |              |        |   |        |        |        |   |       |        |       
|Intangible assets not
subject to amortization: |                      |  |         |     |                |        |                   |        |                   |       |              |        |   |        |        |        |   |       |        |       
|                                               | Goodwill             |  |         | N/A |                |        | $                 | 69,067 |                   |       | $            | 55,120 |   |        | $      | 69,153 |   |       | $      | 55,260 | 
|                                               | Other                |  |         | N/A |                |        |                   |       |                   |       |              |       |   |        |        | 337    |   |       |        | 238    | 
|                                               |                      |  |         |     |                |        |                   |        |                   |       |              |        |   |        |        |        |   |       |        |       
|                                               |                      |  |         |     |                | $      | 69,067            |        |                   | $     | 55,120       |        |   | $      | 69,490 |        |   | $     | 55,498 |       
|                                               |                      |  |         |     |                |        |                   |        |                   |       |              |        |   |        |        |        |   |       |        |       

The amortization expense on intangible assets was $2.8 million, $5.9
million and $4.0 million for the years ended December 31, 2002, 2001 and 2000,
respectively.

Future amortization expense of intangible assets is estimated to be $13.3
million, as follows: 2003 - $2.8 million,
2004 - $2.1 million, 2005 - $1.5 million,
2006 - $1.0 million,
2007 - $0.7 million, and thereafter - $5.2 million.

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In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.SFAS No. 144 replaces SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. The FASB issued SFAS No. 144 to establish a single
accounting model, based on the framework established in SFAS No. 121. SFAS No.
144 also resolves significant implementation issues related to SFAS No. 121.
The Company adopted SFAS No. 144 as of the beginning of 2002 (see Note 3).

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. In addition to rescinding the three FASB Statements, this
Statement amended SFAS No. 13, Accounting for Leases, to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amended other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe applicability under changed
conditions. The Company adopted SFAS No. 145 in 2002. The adoption of SFAS
No. 145 on the Companys financial statements resulted in the reclassification
of $4.7 million previously reported as an extraordinary item to interest
expense in the 2001 statement of operations and $1.8 million of tax benefit
previously reported as an extraordinary item to income tax benefit in the
2001 statement of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The principal
difference between SFAS No. 146 and Issue 94-3 relates to SFAS No. 146s
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recorded as a liability when
incurred. Under Issue 94-3, a liability for an exit cost as generally defined
in Issue 94-3 was recognized at the date of an entitys commitment to an exit
plan. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company elected not to early apply SFAS No. 146 in connection
with its performance improvement program commenced in 2002 (see Note 3). The
Company has recorded its performance improvement and restructuring costs in
accordance with Issue 94-3. If the Company had elected early adoption of SFAS
No. 146, $1.9 million of lease termination and other exit costs recorded in
2002 would have been deferred until the leased facilities were actually
vacated. The Company does not expect the adoption of SFAS No. 146 in 2003 to
have a material impact on its financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, which is effective for fiscal years
ending after December 15, 2002. SFAS No. 148 amends SFAS No. 123, Accounting
for Stock-Based Compensation, to provide alternative methods of transition to
SFAS No. 123s fair value method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No.
123 and APB Opinion No. 28, Interim Financial Reporting, to require disclosure
in the summary of significant accounting policies of the effect of an entitys
accounting policy with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim financial statements.
The Company has currently elected to not record compensation expense in
accordance with the provisions of SFAS No. 123. Therefore, the Companys
adoption of the disclosure provisions of SFAS No. 148 is not expected to have a
significant effect on the Companys financial position or results of
operations.

Reclassifications

Effective December 31, 2002, the Company has reclassified certain amounts
within its consolidated statements of operations, including expenses related to
the shipping and handling of the Companys products to customers, which have
been reclassified from sales and marketing expense to costs of goods sold. The
Company implemented Emerging Issues Task Force (EITF) Issue
00-10 (EITF 00-10), Accounting for Shipping and Handling Fees and
Costs,
in the fourth quarter of 2000. EITF 00-10 permits shipping and
handling costs to be recorded as costs of goods sold or as sales expense within
operating expenses. The Company historically included shipping and
handling costs in sales and marketing expenses. In the fourth quarter of 2002 the Company changed its
classification of these costs to include them within costs of goods sold.
Accordingly, the Company reclassified $7.7 million, $7.9 million and $7.2
million for 2002, 2001 and 2000, respectively, of shipping and handling costs
from sales and marketing expenses to costs of goods sold. In addition certain
common facilities and information technology expenses have been reclassified
from general and administrative expenses, to costs of goods sold ($2.0 million,
$2.0 million and $1.1 million in 2002, 2001 and 2000, respectively) and to
sales and marketing expense ($0.6 million, $0.7 million and $0.4 million in
2002, 2001 and 2000, respectively) and research and development expense ($0.1
million in 2002, 2001 and 2000). The Company has also made certain other less
material reclassifications. All statement of operations information included
herein for the year ended December 31, 2002 has been presented in accordance
with the new classifications and all historical information has been
reclassified for a consistent presentation.

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|2. |  | Financial Statement Information
|-- |  | -------------------------------

Inventories

Inventories consist of the following at December 31 (in thousands):

|                                                             |  |      |        |      |  |   |        |  
|------------------------------------------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                                                             |  | 2002 |        | 2001
|                                                             |  |      |        |     
|Raw materials                                                |  | $    | 5,774  |      |  | $ | 12,852 |  
|Work-in-progress                                             |  |      | 1,090  |      |  |   | 1,049  |  
|Finished goods                                               |  |      | 12,283 |      |  |   | 14,238 |  
|                                                             |  |      |        |      |  |   |        |  
|                                                             |  |      | 19,147 |      |  |   | 28,139 |  
|Less reserves, primarily for excess and obsolete inventories |  |      | (4,564 | )    |  |   | (3,000 | )
|                                                             |  |      |        |      |  |   |        |  
|                                                             |  | $    | 14,583 |      |  | $ | 25,139 |  
|                                                             |  |      |        |      |  |   |        |  

As of December 31, 2001, the inventory reserves included $1.0 million
relating to inventory acquired in the Orthotech Acquisition. Inventory
reserves of $5.1 million were originally recorded upon closing of the Orthotech
acquisition of which $1.0 million remained as of December 31, 2001 and was
utilized in full for inventory write-offs during the year ended December 31,
2002.

Property, Plant and Equipment

Property, plant and equipment consists of the following at December 31 (in
thousands):

|                                               |                                      |   |         |        |      |   |         |        | 
|---------------------------------------------- | ------------------------------------ | - | ------- | ------ | ---- | - | ------- | ------ | 
|                                               |                                      |   | 2002    |        | 2001
|                                               |                                      |   |         |        |     
|                                               | Buildings and leasehold improvements |   | $       | 4,265  |      |   | $       | 4,232  | 
|                                               | Furniture, fixtures and equipment    |   |         | 32,773 |      |   |         | 30,315 | 
|                                               |                                      |   |         |        |      |   |         |       
|                                               |                                      |   | 37,038  |        |      |   | 34,547  |       
|Less accumulated depreciation and amortization |                                      |   | (22,956 | )      |      |   | (19,204 | )     
|                                               |                                      |   |         |        |      |   |         |       
|                                               |                                      | $ | 14,082  |        |      | $ | 15,343  |       
|                                               |                                      |   |         |        |      |   |         |       

Other Accrued Liabilities

Other accrued liabilities consists of the following at December 31, (in thousands):

|                             |  |      |       |      |  |   |       | 
|---------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                             |  | 2002 |       | 2001
|                             |  |      |       |     
|Accrued freight expenses     |  | $    | 565   |      |  |   | 265   | 
|Accrued product costs        |  |      | 1,719 |      |  |   | 1,569 | 
|Accrued professional fees    |  |      | 716   |      |  |   | 392   | 
|Accrued Reorganization costs |  |      |      |      |  |   | 1,132 | 
|Accrued taxes                |  |      | 320   |      |  |   | 183   | 
|Accrued credit memos         |  |      | 913   |      |  |   | 1,984 | 
|Other accruals               |  |      | 1,792 |      |  |   | 2,936 | 
|                             |  |      |       |      |  |   |       | 
|                             |  | $    | 6,025 |      |  | $ | 8,461 | 
|                             |  |      |       |      |  |   |       | 



|3. |  | Performance Improvement, Restructuring and Other Charges
|-- |  | --------------------------------------------------------

Performance Improvement Program

In August 2002, the Company commenced a company-wide performance
improvement program with the objective of increasing revenues and reducing both
costs of goods sold and operating expenses as a percentage of net revenues
beginning in 2003. The Company retained the services of AlixPartners, LLC, a
consulting firm specializing in corporate performance enhancement, to assist
with its performance improvement program.

With the objective of reducing costs by streamlining the Companys
organization structure, the Company began its performance improvement program
with the elimination of several senior management positions. In September
2002, the Company also commenced the move of the manufacturing of all its
remaining soft goods and certain non-custom rigid braces manufactured in the
United States to its manufacturing facilities in Mexico. The move of these
manufacturing operations was completed by the end of 2002 and resulted in the
elimination of approximately 200 United States positions. A comparable number of
positions were added in Mexico. The manufacturing move is expected to result in
reduced manufacturing costs. Other focuses of the performance improvement
program include reducing operating expenses; improving the profitability of
revenue from its OfficeCare® and Insurance channels; reducing working capital
and

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improving its business processes and information systems. The Company has
also refocused its resources on its core rehabilitation business and has
discontinued the marketing of its Alaron Surgical products and its knee
replacement product. Although the performance improvement program was
substantially completed by the end of 2002, no assurance can be given that it
will be successful in achieving the desired goals.

The results for 2002 include charges totaling $10.0 million ($6.4 million
net of tax) related to the
Companys performance improvement program, including charges for severance pay,
consultants, moving costs and accrued rent related to manufacturing facilities
vacated by the Company in the United States.

The severance pay relates to the elimination of the United States
manufacturing positions, certain senior management positions and certain
positions within the Companys sales and general and administrative
departments. In connection with the manufacturing move, a portion of the
Companys United States manufacturing facilities has been vacated. The Company
has estimated the net rent that will be paid for the vacated facilities, in
excess of estimated sublease income. In accordance with Emerging Issues Task
Force Issue 94-3 and Staff Accounting Bulletin No. 100, the employee severance
costs and the net lease expense related to the vacated facilities have been
deemed to be performance improvement and restructuring costs, and were accrued
in 2002.

Other performance improvement costs recognized in 2002 consist primarily
of consulting expenses and moving costs, which have been expensed as incurred.
The Companys agreement with AlixPartners, LLC provided for hourly fees for
services rendered during the implementation phase of the performance
improvement program, as well as certain success and bonus fees based upon the
attainment of agreed upon qualitative and quantitative milestones established
for the program.

Contractual Allowances and Doubtful Accounts

During the second quarter of 2002, the Company enhanced the ability of its
systems to obtain and analyze the information processed by its third party
billing companies. Historically, the Company relied heavily on these billing
companies to provide information about the OfficeCare® and Insurance programs,
including the data utilized to determine reserves for contractual allowances
and doubtful accounts. The Companys increased ability to obtain and better
analyze information in the second quarter of 2002 revealed that, as a result of
historical third party billing problems, the Company had experienced an
increase in write-offs and bad debts for accounts receivable from its
OfficeCare and Insurance programs. In addition, in December 2002 the Company
initiated the transition to a new third party insurance billing service
provider and continues to resolve issues related to its previous service
providers and accounts receivable aged over one year. Accordingly, the Company
changed its accounting estimates and increased its related reserves by an
aggregate of $6.7 million ($4.3 million net of tax) for the year ended December 31, 2002, which is included
in sales and marketing expenses in the accompanying consolidated statements of
operations for 2002. Based on information currently available, the Company
believes it has provided adequate reserves for its third party payer accounts
receivable. If claims are denied, or amounts are otherwise not paid, in excess
of its estimates, the recoverability of the net accounts receivable could be
reduced by a material amount. In addition, if the transition to the Companys
new third party insurance billing service provider is not successful, the
Company may be required to increase its estimates.

Excess and Obsolete Inventories

In connection with its performance improvement program, the Company has
refocused its resources on its core business within the rehabilitation segment
of the orthopedic sports medicine market. As a result, the Company has ceased
active commercialization of its surgical product lines and has discontinued
marketing its knee replacement product. In 2002, the Company recorded
provisions for inventories related to discontinued surgical and knee
replacement product lines in the aggregate amount of $2.8 million ($1.8 million
net of tax, with an effect of $0.16 on diluted loss per share).

Additionally, the Company provided incremental provisions for estimated
excess inventories in the amount of $2.3 million ($1.5 million net of tax) in 2002. The increase in the
Companys accounting estimate for these reserves was primarily related to
inventories on hand for certain new product areas which had not achieved
anticipated market share, including the Companys OrthoPulse bone growth
stimulator product. The manufacturer of OrthoPulse, I.M.D., b.v. (IMD), has
experienced continuing delays in obtaining FDA approval for the bone growth
stimulator product. On July 1, 2002, notification was received from the FDA
that the premarket approval application (PMA) for OrthoPulse was placed on an
integrity hold due to concerns that the clinical data submitted in support of
the PMA were not reliable. As required by the FDA, an independent review of
the clinical data commenced on August 5, 2002. The auditors report was
submitted on September 30, 2002, and IMD is engaged in ongoing communications
with the FDA to address this matter. Without approval by the FDA, marketing of
this product in the United States cannot proceed. In 2001, the Company
purchased a beginning inventory of this product from IMD. The Company cannot
distribute such inventory in the United States until FDA approval is obtained,
and although the Company

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can distribute such inventory in certain other countries which do not
require FDA approval, the markets in these countries are smaller than in the
U.S. At this point, the Company does not have an estimate of when or whether
final FDA approval will occur, and the Company has, as a result of this
continuing uncertainty, recorded charges aggregating $1.8 million in 2002 to
fully reserve its inventories of this product.

Impairment of Long-Lived Assets

As a result of certain new products not achieving anticipated revenues or
estimated recovery values of assets being disposed of being less than
anticipated, the Companys cash flows from such new products or assets have
been lower than originally estimated. In accordance with SFAS No. 144, the
Company recognized charges of $3.7 million related to impairment of certain
long-lived assets during 2002. These long-lived assets primarily include
intangible assets associated with the Companys DonJoy Vista Rehabilitation
System product line, estimated impairment related to an investment in an
internet marketing company, which was sold during 2002, an investment in the
manufacturer of OrthoPulse, goodwill related to the acquisition of Alaron, and
fixed assets abandoned in connection with the Companys manufacturing move to
Mexico.

Total performance improvement, restructuring and other charges in the
accompanying consolidated statement of operations for the year ended December
31, 2002, are as follows (in thousands):

|                                                 |                                                                                                   |                                        |        |             |        |               |        |         |        |                   |         |          |      |            |       |   |       | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------- | -------------------------------------- | ------ | ----------- | ------ | ------------- | ------ | ------- | ------ | ----------------- | ------- | -------- | ---- | ---------- | ----- | - | ----- | 
|                                                 |                                                                                                   |                                        |        |             |        |               |        |         |        |                   |         | Non-cash |      | Accrual at
|                                                 |                                                                                                   |                                        |        | Total costs |        | Cash payments |        | charges |        | December 31, 2002
|                                                 |                                                                                                   |                                        |        |             |        |               |        |         |        |                  
|Cost of goods sold:                              |                                                                                                   |                                        |        |             |        |               |        |         |        |                   |         |          |      |            |       |  
|                                                 | Reserves for inventories                                                                          |                                        | $      | 5,082       |        |               | $      |        |        |                   | $       | (5,082   | )    |            | $     |  |      
|Sales and marketing expenses:                    |                                                                                                   |                                        |        |             |        |               |        |         |        |                   |         |          |      |            |       |  
|                                                 | Increase in estimated contractual
allowances and bad debts for
OfficeCare® and Insurance channels |                                        |        | 6,747       |        |               |        |        |        |                   |         | (6,747   | )    |            |       |  |      
|Impairment of long-lived assets                  |                                                                                                   |                                        | 3,666  |             |        |               |       |         |        |                   | (3,666  | )        |      |            |      |  
|Performance improvement and
restructuring costs: |                                                                                                   |                                        |        |             |        |               |        |         |        |                   |         |          |      |            |       |  
|                                                 |                                                                                                   | Employee severance costs               |        |             | 3,936  |               |        |         | (2,106 | )                 |         |          |     |            |       |   | 1,830 | 
|                                                 |                                                                                                   | Consulting fees                        |        |             | 3,460  |               |        |         | (1,439 | )                 |         |          |     |            |       |   | 2,021 | 
|                                                 |                                                                                                   | Lease termination and other exit
costs |        |             | 1,926  |               |        |         |       |                   |         |          |     |            |       |   | 1,926 | 
|                                                 |                                                                                                   | Other                                  |        |             | 686    |               |        |         | (416   | )                 |         |          | (153 | )          |       |   | 117   | 
|                                                 |                                                                                                   |                                        |        |             |        |               |        |         |        |                   |         |          |      |            |       |  
|                                                 |                                                                                                   | Subtotal                               |        |             | 10,008 |               |        |         | (3,961 | )                 |         |          | (153 | )          |       |   | 5,894 | 
|                                                 |                                                                                                   |                                        |        |             |        |               |        |         |        |                   |         |          |      |            |       |  
|Total                                            |                                                                                                   | $                                      | 25,503 |             |        | $             | (3,961 | )       |        | $                 | (15,648 | )        |      | $          | 5,894 |  
|                                                 |                                                                                                   |                                        |        |             |        |               |        |         |        |                   |         |          |      |            |       |  

The Company does not expect to incur material additional costs in
connection with the performance improvement program.



|4. |  | Acquisitions
|-- |  | ------------

Alaron Acquisition

On June 1, 2001, the Company acquired Alaron Technologies, L.L.C. (Alaron)
under an asset purchase agreement. Alaron provided product development,
manufacturing and supply chain management services related to medical and
surgical devices. The asset purchase agreement provided for the purchase of
certain assets, primarily equipment and technology, and the assumption of
certain liabilities of Alaron, for a cash purchase price of $0.5 million. The
acquisition was accounted for using the purchase method of accounting whereby
the total purchase price was allocated to tangible and intangible assets
acquired and liabilities based on their estimated fair values. In connection
with the performance improvement program, the Company has ceased active
marketing of its Alaron Surgical products and has written off all tangible and
intangible assets related to Alaron.

Orthotech Acquisition

In July 2000, the Company completed the purchase of certain assets and
assumed certain liabilities of the bracing and soft goods business of DePuy
Orthopaedic Technology, Inc., a subsidiary of Johnson & Johnson (Orthotech).
Orthotech

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developed, manufactured, and marketed an array of orthopedic products for
the sports medicine market, including braces, soft goods and specialty products
which were similar to the products offered by the Company.

The asset purchase agreement provided for the purchase of certain assets
of Orthotech, comprising the Orthotech business, for a purchase price of $46.4
million in cash and related costs of $3.0 million, including debt issuance
costs of $0.4 million (Orthotech Acquisition). The Company purchased primarily
inventory, equipment, certain intellectual property and other intangible
assets. The Company was not required to assume any liabilities existing prior
to the closing date. The sources of funds for the Orthotech Acquisition
consisted of:



| |  |  | The sale of common units to J.P. Morgan DJ Partners, LLC (JPMDJ
Partners) and certain members of management for an aggregate of $8.3
million, of which $0.2 million was received in management notes
receivable;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The sale of Redeemable Preferred Units to existing holders of the
Redeemable Preferred Units for net proceeds of $3.4 million (excluding
preferred unit expense of $0.2 million);                               
|
| |  |  | Proceeds from bank borrowing of approximately $36.6 million; and                                                                                                                                                
|
| |  |  | $1.3 million from available cash.                                                                                                                                                                               

The Orthotech Acquisition was accounted for using the purchase method of
accounting whereby the purchase price was allocated to the acquired tangible
and intangible assets based on their estimated fair values at the date of
acquisition as determined by the Company, in accordance with Accounting
Principles Board Opinion No. 16, as follows (in thousands):

|                           |                     |   |        |        | 
|-------------------------- | ------------------- | - | ------ | ------ | 
|Inventories                |                     | $ | 2,538  |       
|Equipment and furniture    |                     |   | 1,295  |       
|Other assets held for sale |                     |   | 126    |       
|Intangible assets:         |                     |   |        |       
|                           | Goodwill            |   | $      | 36,623 | 
|                           | Customer list       |   |        | 8,400  | 
|                           | Assembled workforce |   |        | 37     | 
|                           |                     |   |        |       
|Total intangible assets    |                     |   | 45,060 |       
|                           |                     |   |        |       
|Total assets acquired      |                     | $ | 49,019 |       
|                           |                     |   |        |       

The accompanying consolidated statements of operations reflect the
operating results of Orthotech since July 7, 2000, including $0.4 million in
post-closing merger and integration costs. Assuming the purchase of Orthotech
had occurred on January 1, 2000, the pro forma unaudited results of operations
for the year ended December 31, 2000, would have reflected net revenues of
$165,858 and net income of $5,386.



|5. |  | Long Term Debt
|-- |  | --------------

The Companys long-term debt consists of the following at December 31 (in
thousands):

|                                                                                                                                      |  |      |        |      |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                                                                                                      |  | 2002 |        | 2001
|                                                                                                                                      |  |      |        |     
|125/8% Senior Subordinated Notes due 2009, net of unamortized discount
of $998 and $1,152 at December 31, 2002 and 2001, respectively |  | $    | 74,002 |      |  | $ | 73,848 |  
|                                                                                                                                      |  |      |        |      |  |   |        |  
|Bank term loans due in installments through 2005 bearing interest at
4.19% and 4.94% at December 31, 2002 and 2001, respectively      |  |      | 35,814 |      |  |   | 37,086 |  
|Less current portion                                                                                                                  |  |      | (1,274 | )    |  |   | (1,274 | )
|                                                                                                                                      |  |      |        |      |  |   |        |  
|Long-term portion of bank term loans                                                                                                  |  | $    | 34,540 |      |  | $ | 35,812 |  
|                                                                                                                                      |  |      |        |      |  |   |        |  

125/8% Senior Subordinated Notes Due 2009

On June 30, 1999, dj Ortho issued $100.0 million of 125/8% Senior
Subordinated Notes due 2009 (the Notes) to various investors in connection with
the financing of the Recapitalization. The Notes were issued at a discount of
$2.0 million which is being amortized to interest expense over the life of the
Notes and accreted to the Notes balance. The Notes are general unsecured
obligations of dj Ortho, subordinated in right of payment to all existing and
future senior indebtedness of dj Ortho, pari passu in right of payment to any
senior subordinated indebtedness of dj Ortho and senior in right of payment to
any subordinated indebtedness.
Interest on the Notes is payable in cash semi-annually on each June 15 and
December 15. The aggregate principal amount of the Notes matures on June 15,
2009.

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Covenants. The Notes contain covenants restricting the ability of dj
Ortho and its subsidiaries to (i) incur additional indebtedness; (ii) prepay,
redeem or repurchase debt; (iii) make loans and investments; (iv) incur liens
and engage in sale lease-back transactions; (v) enter into transactions with
affiliates; (vi) engage in mergers, acquisitions and asset sales; (vii) make
optional payments on or modify the terms of the subordinated debt; (viii)
restrict preferred and capital stock of subsidiaries; (ix) declare dividends or
redeem or repurchase capital stock; and (x) engage in other lines of
businesses.

Guarantees; Co-Issuers. The Notes are guaranteed by dj Orthopedics, Inc.
and dj Development and co-issued by dj Ortho and DJ Capital, but are not
guaranteed by any of dj Orthos foreign subsidiaries.

Optional Redemption. Before June 15, 2002, up to 35% of the aggregate
principal amount of the Notes could be redeemed with the proceeds from sales of
common equity at a redemption price of 112.625% of their principal amount, plus
any accrued and unpaid interest. Pursuant to such provision, following its
initial public offering in 2001, the Company redeemed $25 million principal
amount of the Notes for an aggregate price, including the prepayment premium
and accrued interest, of $28.3 million.

On or after June 15, 2004, the Notes may be redeemed, in whole or in part,
at the following redemption prices (expressed as percentages of principal
amount), plus accrued and unpaid interest, if any, to the redemption date if
redeemed during the 12-month period commencing on June 15 of the years set
forth below:

|                    |  |            |         |  
|------------------- |  | ---------- | ------- | -
|                    |  | Redemption
|Year                |  | Price     
|                    |  |           
|2004                |  |            | 106.313 | %
|2005                |  |            | 104.208 | %
|2006                |  |            | 102.104 | %
|2007 and thereafter |  |            | 100.000 | %

Bank Credit Facility

In connection with the Recapitalization, dj Ortho entered into a bank
credit facility with Wachovia Securities, JP Morgan Chase Bank and other
lenders. Under the bank credit facility, as amended, dj Ortho may borrow up to
$25.0 million under a revolving bank credit facility (the revolving bank credit
facility) and is obligated under two term loans in an aggregate principal
amount of $34.5 million (the term loans). The revolving bank credit facility
permits dj Ortho to enter into revolving loans of up to $25.0 million, enter
into swingline loans and obtain letters of credit from time to time. As of
December 31, 2002, dj Ortho had no amounts outstanding under the revolving bank
credit facility, but was contingently liable for letters of credit outstanding
under the facility in an aggregate stated amount of
$1.8 million, maturing through
June 2004. Borrowings under the revolving bank credit facility and term loans
bear interest at variable rates plus an applicable margin (4.19% and 4.94% as
of December 31, 2002 and December 31, 2001, respectively). Borrowings of
letters of credit under the revolving bank credit facility bear interest at
variable rates plus a fronting fee of 0.25%.

Repayment. The term loans will mature on June 30, 2005 and are subject to
mandatory repayments and reductions as defined in the bank credit facility, as
amended. Principal payments on the term loans through maturity are $1.3 million
in 2003, $17.2 million in 2004 and $17.3 million in 2005.

In addition, dj Ortho is required to make annual mandatory payments of the
term loans under the bank credit facility, as amended, in an amount equal to
50% of excess cash flow (75% if our ratio of total debt to EBITDA exceeds 4 to
1). Excess cash flow represents the Companys net income adjusted for
extraordinary gains or losses, depreciation, amortization and other non-cash
charges, changes in working capital, changes in deferred revenues, payments for
capital expenditures and repayment of indebtedness. dj Ortho had no excess
cash flow in 2002, 2001 or 2000. In addition, the term
loans are subject to mandatory prepayments in an amount equal to (a) 100% of
the net cash proceeds of certain equity and debt issuances by dj Orthopedics,
Inc., dj Ortho or any of its subsidiaries and (b) 100% of the net cash proceeds
of certain asset sales or other dispositions of property by dj Orthopedics,
Inc., dj Ortho or any of its subsidiaries, in each case subject to certain
exceptions. A mandatory prepayment of less than $1.0 million was
required for the sale of the Companys interest in its
Australian subsidiary on December 31, 2002. On March 28, 2003,
the Company made a total prepayment of principal on the
term loans totaling approximately $20.0 million including the
required prepayment. No mandatory prepayments were required for 2001
or 2000.

Security; Guarantees. The obligations of dj Ortho under the bank credit
facility, as amended, are irrevocably guaranteed, jointly and severally, by dj
Orthopedics, Inc., dj Development, DJ Capital and future U.S. subsidiaries. In
addition, the bank credit facility, as amended, and the guarantees thereunder
are secured by substantially all the assets of the Company.

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Covenants. The bank credit facility, as amended, contains a number of
covenants that, among other things, restrict the ability of dj Ortho and its
subsidiaries to (i) dispose of assets; (ii) incur additional indebtedness;
(iii) incur or guarantee obligations; (iv) prepay subordinated indebtedness or
amend other debt instruments; (v) pay dividends or make other distributions
(except for certain tax distributions prior to the Reorganization); (vi) redeem
or repurchase membership interests or capital stock, create liens on assets,
make investments, loans or advances, make acquisitions; (vii) engage in mergers
or consolidations; (viii) change the business conducted by dj Ortho and its
subsidiaries; (ix) make capital expenditures; (x) or engage in certain
transactions with affiliates and otherwise engage in certain activities. In
addition, the bank credit facility, as amended, requires dj Ortho and its
subsidiaries to maintain specified financial ratios, including a maximum
consolidated leverage ratio and a minimum consolidated interest coverage ratio.
The bank credit facility, as amended, also contains provisions that prohibit
any modifications of the Notes in any manner adverse to the lenders under the
bank credit facility, as amended, and that limit dj Orthos ability to
refinance or otherwise prepay the Notes without the consent of such lenders. In
October 2002 and February 2003, the Company completed amendments to its bank
credit facility, as amended, which modified certain financial covenants
contained in the bank credit facility for 2002 and 2003. The Company was in
compliance with all covenants, as amended, as of December 31, 2002.



|6. |  | Related Party Transactions
|-- |  | --------------------------

In each of 2001 and 2000, dj Ortho paid affiliates of JPMDJ Partners
$250,000 per annum for providing financial advisory services in connection with
financings and acquisitions, including providing the services of Charles T.
Orsatti, the Companys former Chairman. In connection with its initial public
offering, the Company entered into a management consulting agreement with an
affiliate of JPMDJ Partners providing for an annual payment of $250,000. The
management consulting agreement terminated in July 2002.

On June 30, 1999, DonJoy consummated a recapitalization pursuant to which
JPMDJ Partners obtained a controlling interest in DonJoy. On June 28, 2000,
JPMDJ Partners and certain members of management repurchased the remaining
common units held by DonJoys former parent, Smith & Nephew. In connection
with an equity investment in June 2001, JPMDJ Partners and certain members of
management purchased additional common units in DonJoy. In connection with
these equity transactions, certain members of management financed their common
unit purchases with full recourse promissory notes (see Note 7).



|7. |  | Common and Preferred Stock
|-- |  | --------------------------

The Company issued 7,800,000 shares of common stock in its initial public
offering in November 2001 for proceeds of $118.8 million, net of $13.8 million
in related costs. At December 31, 2002, the Company had a total of 17,872,956
shares of common stock outstanding.

In connection with the Reorganization in 2001, the outstanding 885,633
common units of DonJoy were converted to common stock at an exchange ratio of
10.812 shares for each unit, for a total of 9,575,459 shares of common stock
and the outstanding 44,405 redeemable preferred units of dj Ortho were
exchanged for $47.3 million in cash (representing the liquidation value of the
units plus accrued and unpaid distributions as of the Reorganization date) and
480,107 shares of common stock based on an exchange ratio of 10.812 shares for
each unit. Prior to the Reorganization, the redeemable preferred units accrued
a cumulative quarterly preferred dividend at a fixed rate of 14.0% per annum.
Total dividends accrued for the year ended December 31, 2001 and 2000 were $5.7
and $5.3 million, respectively.

Other Equity Transactions

In June 2001, DonJoy sold 89,186 common units to JPMDJ Partners for gross
proceeds of $9.7 million and 2,557 common units to certain members of
management for gross proceeds of $0.3 million (for which $0.2 million was paid
through the issuance of full recourse promissory notes to DonJoy).

In 2000, in connection with the Orthotech Acquisition, 73,775 common units
were sold to JPMDJ Partners for gross proceeds of $8.0 million and 2,115 common
units were sold to certain members of management for gross proceeds of $231,000
(for which $174,000 was paid through the issuance of full recourse promissory
notes by the management members). In addition, 4,221 redeemable preferred
units were sold to existing redeemable preferred unit holders for net proceeds
of $3.4 million (after preferred unit fees).

In
connection with a unit purchase agreement dated as of June 28,
2000, Smith & Nephew sold its remaining interest in DonJoy to
JPMDJ Partners and certain members of management for
$5.9 million. JPMDJ Partners purchased 52,495 common units for a total
consideration of $5.7 million and the members of management
purchased 1,505 units for a total consideration of
$0.2 million, substantially all of which was financed by dj
Orthopedics and evidenced by full recourse promissory notes. dj
Orthopedics agreed to amend and restate the promissory notes originally
received from certain members of management in connection with the
Recapitalization. The principal amount of each amended and restated note was
equal to the sum of outstanding principal on the original notes and any accrued
and unpaid interest on the notes. In addition to increasing the rate of
interest payable on the notes from 5.30% to 6.62% per annum, the amended and
restated notes permit the members of management to increase the principal
amount due under the note by the amount of a scheduled interest payment (the
PIK Option). If a member of management elects the PIK Option, the principal
amount of his note is increased by the amount of the scheduled interest

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payment and interest then accrues on the principal amount of the note as
so increased. The amended and restated notes mature in 2007. Total promissory notes due from current and former management stockholders
amount to $2.2 million and $2.1 million at December 31, 2002 and 2001,
respectively. The notes are secured by all of the shares of common stock of dj
Orthopedics owned by that noteholder.

Stock Options

2001 Omnibus Plan

The 2001 Omnibus plan provides for awards of stock options, stock
appreciation rights, performance awards, restricted stock, restricted stock
units, stock bonuses, stock unit awards and cash bonuses to key personnel,
including consultants and advisors. Except as hereafter described and subject
to equitable adjustments to reflect certain corporate events, the maximum
number of shares of our common stock with respect to which awards may be
granted under the Omnibus Plan is 3,800,000 at December 31, 2002. On each
January 1, commencing with January 1, 2003, the number of shares of common
stock available for issuance under the Omnibus Plan will be automatically
increased by a number of shares equal to 3% of the number of shares of common
stock outstanding on the previous December 31. In addition, shares of common
stock reserved for but not subject to options granted under the 1999 Option
Plan or subject to awards that are forfeited, terminated, canceled or settled
without the delivery of common stock under the Omnibus Plan and the 1999 Option
Plan will increase the number of shares available for awards under the Omnibus
Plan. Also, shares tendered to dj Orthopedics, Inc. in satisfaction or partial
satisfaction of the exercise price of any award under the Omnibus Plan or the
1999 Option Plan will increase the number of shares available for awards under
the Omnibus Plan to the extent permitted by Rule 16b-3 under the Securities
Exchange Act of 1934, as amended. The Omnibus Plan is administered by the
Companys Compensation Committee which has the sole and complete authority to
grant awards under the Omnibus Plan to eligible employees and officers of, and
consultants and advisors to, dj Orthopedics, Inc. and its subsidiaries. At
December 31, 2002 and 2001, options to purchase 1,116,650 and 123,900 shares,
respectively, had been granted and 5,000 and no shares were
exercisable, respectively, at December 31, 2002 and 2001. On December 31,
2002, 3,585,774 shares were available for future grant under the Omnibus Plan.
On January 1, 2003, the shares available for future grant were increased by
536,189 shares.

1999 Option Plan

Under the Companys Fifth Amended and Restated 1999 Option Plan (the 1999
Option Plan), 1,933,174 common shares have been reserved for issuance upon
exercise of options granted under the plan. The 1999 Option Plan is
administered by the Compensation Committee of the Board of Directors. The plan
will expire on August 19, 2015 unless the Company terminates it before that
date. The 1999 Option Plan provides for the grant of nonqualified options to
officers, directors and employees of, and consultants and advisors to, dj
Orthopedics, Inc.

Options granted under the 1999 Option Plan generally vest either:



| |  |  | 25% beginning on June 30, 2000 and thereafter ratably
over a 3 year period for those options granted on June 30, 2000
(Tier I), or                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 25% at the end of 1 year from the date of the grant and
the balance vesting ratably thereafter for all options granted
after June 30, 2000 (Tier I), or
|
| |  |  | Tier II options which became fully vested after the 2001
reorganization.                                                                               

The Company has granted options to purchase an aggregate of 1,030,750
shares of common stock under the 1999 Option Plan of which approximately 68%
are time-vesting options and approximately 32% are event-vesting options. As
of December 31, 2002 and 2001, options to purchase 726,374 and 728,488 shares,
respectively, issued under the 1999 Option Plan were exercisable. No future
options will be granted under the 1999 Option Plan, and all shares of common
stock which would otherwise have been available for issuance under the 1999
Option Plan will be available for issuance under the 2001 Omnibus Plan. In
connection with the initial public offering, all of the Tier II options vested
in accordance with their terms and all Tier III options previously outstanding
were cancelled.

2001 Non-Employee Directors Stock Option Plan

The Company has adopted the dj Orthopedics, Inc. 2001 Non-Employee
Directors Stock Option Plan. Each of our directors who has been a director
for at least one year, is not our employee or the employee of any of our
subsidiaries and who was not initially elected to the board of directors, and
was not our employee or the employee of any of our subsidiaries, within the
previous 12 months will, immediately following each annual stockholders
meeting, commencing with the annual meeting in 2003, automatically receive an
annual grant of options to purchase 15,000 shares of our common stock at an
exercise price equal to 100% of the fair market value of our common stock at
the date of grant of the option. Except as discussed below, each non-employee
director, upon initially joining our board of directors, will also

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receive under the plan an initial grant of options to purchase 15,000 shares
of our common stock (30,000 shares if such director joins the Board of
Directors prior to November 15, 2002) at an exercise price equal to 100% of
the fair market value of the common stock as of such date. A total of
1,500,000 shares of our common stock have been reserved for issuance under the
plan. Options granted under the plan will vest ratably over a three-year
period, commencing on the first anniversary of the date of grant. A total of
60,000 options had been granted under the Plan at December 31, 2002. No
options had been granted under this plan prior to 2002.

A director and former director also received a grant of a right to
purchase 21,624 shares of our common stock at a purchase price equal to the
fair market value at the time of purchase.

The following table summarizes option activity under all plans through
December 31, 2002:

|                                    |  |                  |           |                 |  |       |             |  |  |                    |       | 
|----------------------------------- |  | ---------------- | --------- | --------------- |  | ----- | ----------- |  |  | ------------------ | ----- | 
|                                    |  |                  |           |                 |  |       |             |  |  | Weighted Average  
|                                    |  |                  |           |                 |  |       |             |  |  | Exercise Price per
|                                    |  | Number of Shares |           | Price per Share |  | Share
|                                    |  |                  |           |                 |  |      
|Outstanding as of December 31, 1999 |  |                  | 1,302,975 |                 |  | $     | 9.25        |  |  | $                  | 9.25  | 
|Granted                             |  |                  | 306,283   |                 |  | $     | 9.25-$10.08 |  |  | $                  | 9.61  | 
|Cancelled                           |  |                  | (13,019   | )               |  | $     | 9.25        |  |  | $                  | 9.25  | 
|                                    |  |                  |           |                 |  |       |             |  |  |                    |       | 
|Outstanding as of December 31, 2000 |  |                  | 1,596,239 |                 |  | $     | 9.25-$10.08 |  |  | $                  | 9.32  | 
|Granted                             |  |                  | 607,142   |                 |  | $     | 9.25-$17.00 |  |  | $                  | 14.34 | 
|Cancelled                           |  |                  | (193,492  | )               |  | $     | 9.25-$10.08 |  |  | $                  | 9.39  | 
|                                    |  |                  |           |                 |  |       |             |  |  |                    |       | 
|Outstanding as of December 31, 2001 |  |                  | 2,009,889 |                 |  | $     | 9.25-$17.00 |  |  | $                  | 12.36 | 
|Granted                             |  |                  | 1,111,350 |                 |  | $     | 2.97-$12.80 |  |  | $                  | 4.85  | 
|Cancelled                           |  |                  | (913,839  | )               |  | $     | 3.52-$17.00 |  |  | $                  | 10.54 | 
|                                    |  |                  |           |                 |  |       |             |  |  |                    |       | 
|Outstanding at December 31, 2002    |  |                  | 2,207,400 |                 |  | $     | 2.97-$17.00 |  |  | $                  | 8.03  | 
|                                    |  |                  |           |                 |  |       |             |  |  |                    |       | 

No options have been exercised through December 31, 2002.

The following table summarizes information concerning currently
outstanding and exercisable options:

|                  |  |                     |         |                     |  |                  |     |                    |  |                     |       |  |  |         |  |       
|----------------- |  | ------------------- | ------- | ------------------- |  | ---------------- | --- | ------------------ |  | ------------------- | ----- |  |  | ------- |  | ------
|                  |  | Options Outstanding |         | Options Exercisable
|                  |  |                     |         |                    
|                  |  | Options Outstanding |         | Weighted Average    |  |                  |     |                    |  | Options Exercisable |       | 
|Range of Exercise |  | as of December 31,  |         | Remaining Life in   |  | Weighted Average |     | as of December 31, |  | Weighted Average   
|Prices            |  | 2002                |         | Years               |  | Exercise Price   |     | 2002               |  | Exercise Price     
|                  |  |                     |         |                     |  |                  |     |                    |  |                    
|$2.97-$4.10       |  |                     | 956,471 |                     |  |                  | 9.9 |                    |  | $                   | 3.85  |  |  |        |  | N/A   
|$8.41-$10.80      |  |                     | 849,234 |                     |  |                  | 6.9 |                    |  | $                   | 9.32  |  |  | 600,685 |  | $9.27 
|$12.80-$17.00     |  |                     | 401,695 |                     |  |                  | 8.3 |                    |  | $                   | 14.92 |  |  | 130,689 |  | $14.27

Employee Stock Purchase Plan

The Employee Stock Purchase Plan provides for the issuance of up to
1,000,000 shares of our common stock. During each purchase period eligible
employees may designate between 1% and 15% of their cash compensation, subject
to certain limitations, to be deducted from their cash compensation for the
purchase of Common Stock under the Plan. The purchase price of the shares
under the Plan is equal to 85% of the lesser of the fair market value per share
on the first day of each twenty four month offering period or the last day of
each six month purchase period during the offering period. On January 1 of
each year, commencing with January 1, 2003, the aggregate number of shares
reserved for issuance under this plan will increase automatically by a number
of shares equal to 1.0% of our outstanding shares on December 31 of the
preceding year. Our Board of Directors or the Compensation Committee may
reduce the amount of the increase in any particular year. The aggregate number
of shares reserved for issuance under the Employee Stock Purchase Plan may not
exceed 5,000,000 shares. On January 1, 2003, the number of shares reserved for
issuance under the Employee Stock Purchase Plan was increased by 178,729
shares.



|8. |  | Income Taxes
|-- |  | ------------

In connection with the Reorganization on November 20, 2001, the Company
became a corporation and subject to U.S. federal, state, and foreign income
taxes on its earnings after that date. For 2001, the Company incurred a loss
before income taxes of $4.5 million attributable to operations for the period
following the Reorganization, including expenses related to an early

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extinguishment of debt of $4.7 million. The deferred tax benefit
of $54.2 million in 2001 resulted from future tax benefits related to the
difference in the book and tax basis of the assets of the Company at the time
of the Reorganization.

The
benefit for income taxes, excluding the deferred tax benefit, on income (loss) before income taxes is as follows for the years ended December 31 (in
thousands):

|                         |         |   |       |       |      |   |       |       | 
|------------------------ | ------- | - | ----- | ----- | ---- | - | ----- | ----- | 
|                         |         |   | 2002  |       | 2001
|                         |         |   |       |       |     
|Current                  |         |   |       |       |      |   |       |      
|                         | Federal |   | $     |      |      |   | $     |      | 
|                         | State   |   |       | (150  | )    |   |       |      | 
|                         | Foreign |   |       | (183  | )    |   |       |      | 
|                         |         |   |       |       |      |   |       |      
|                         |         |   | (333  | )     |      |   |      |      
|Deferred                 |         |   |       |       |      |   |       |      
|                         | Federal |   | $     | 9,279 |      |   | $     | 1,522 | 
|                         | State   |   |       | 415   |      |   |       | 267   | 
|                         | Foreign |   |       |      |      |   |       |      | 
|                         |         |   |       |       |      |   |       |      
|                         |         |   | 9,694 |       |      |   | 1,789 |      
|                         |         |   |       |       |      |   |       |       | 
|Benefit for income taxes |         | $ | 9,361 |       |      | $ | 1,789 |      
|                         |         |   |       |       |      |   |       |      

Significant components of the Companys deferred tax assets and
liabilities as of December 31 are as follows (in thousands):

|                          |                                  |   |        |        |      |   |        |        |  
|------------------------- | -------------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | -
|                          |                                  |   | 2002   |        | 2001
|                          |                                  |   |        |        |     
|Deferred tax assets       |                                  |   |        |        |      |   |        |       
|                          | Goodwill for tax purposes        |   | $      | 44,024 |      |   | $      | 49,108 |  
|                          | Accrued expenses                 |   |        | 4,381  |      |   |        | 1,014  |  
|                          | Allowance for bad debts          |   |        | 2,780  |      |   |        | 3,482  |  
|                          | Inventories                      |   |        | 3,086  |      |   |        | 1,616  |  
|                          | Net operating loss carryforwards |   |        | 10,323 |      |   |        | 1,841  |  
|                          | Fixed assets                     |   |        | 1,038  |      |   |        | (1,273 | )
|                          | Other, net                       |   |        | 99     |      |   |        | 248    |  
|                          |                                  |   |        |        |      |   |        |        |  
|Total deferred tax assets |                                  | $ | 65,731 |        |      | $ | 56,036 |       
|                          |                                  |   |        |        |      |   |        |       

Realization of the Companys deferred tax assets is dependent on the
Companys ability to generate approximately $170.0 million of future taxable
income over the next 10 years. Based on the Companys historical and expected
future taxable earnings, management believes it is more likely than not that
the Company will realize the benefit of the existing deferred tax assets at
December 31, 2002.

The reconciliation of income tax attributable to income before benefit for
income taxes at the United States federal statutory rate to income tax benefit in the
accompanying statements of operations for the years ended December 31 is as
follows (in thousands):

|                                       |  |      |      |      |  |  |      |  
|-------------------------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                                       |  | 2002 |      | 2001
|                                       |  |      |      |     
|Federal tax at statutory rate          |  |      | 34.0 | %    |  |  | 34.0 | %
|Sate income tax net of federal benefit |  |      | 1.0  | %    |  |  | 6.0  | %
|Other                                  |  |      | 3.1  | %    |  |  |     |  
|                                       |  |      |      |      |  |  |      |  
|                                       |  |      | 38.1 | %    |  |  | 40.0 | %
|                                       |  |      |      |      |  |  |      |  

As of
December 31, 2002, the Company has United States federal net operating loss
carryforwards of $27.8 million, which begin to expire in 2021. The Company
also has $16.6 million of various state net operating loss carryforwards, which
begin to expire in 2011 and $1.0 million of various foreign net operating loss
carryforwards, which begin to expire in 2009.



|9. |  | Segment and Related Information
|-- |  | -------------------------------

Prior to the fourth quarter of 2002, the Company had two reportable
segments, as defined by FASB SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, identified as rigid knee bracing and soft
goods.

Effective December 31, 2002, the Company changed its reporting segments to
reflect segmentation by its primary distribution channels, which is consistent
with how the Company will manage its business prospectively. The new
reportable segments are as follows:

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| |  | DonJoy®, in which the Companys products are sold by 38 independent
sales agents who employ over 200 sales representatives to orthopedic
surgeons, orthotic and prosthetic centers, hospitals and other sports
medicine outlets. After a product order is received by a sales
representative, the Company generally ships the product directly to
the orthopedic professional and pays a sales commission to the agent
based on sales of such products, which commissions are reflected in
sales and marketing expense in the consolidated financial statements;                                           
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | ProCare®, in which products are sold primarily to national third party
distributors, regional medical supply dealers and medical product
buying groups, generally at a discount from list prices. These
distributors then resell these products to large hospital chains,
hospital buying groups, primary care networks and orthopedic
physicians for use by the patients;                                                                                                                                                                                                                                 
| 
| |  | OfficeCare®, in which the Company maintains an inventory of product on
hand at orthopedic practices for immediate disbursement to the patient
and arranges billing to the patient or third party payer. The
majority of these billings are performed by an independent third party
contractor. The OfficeCare® program is also intended to facilitate
the introduction of the Companys products to orthopedic sports
medicine surgeons who had not previously been customers. As of
December 31, 2002, the OfficeCare® program was located at over 500
physician offices throughout the United States; and
| 
| |  | International, in which the Companys products are sold in foreign
countries through wholly-owned subsidiaries or independent
distributors. The Company markets its products in over 40 countries
primarily in Europe, the United Kingdom, Australia, Canada and Japan.                                                                                                                                                                                                                                                                                                                                    

Segment reporting information for prior years has been restated to reflect
the new reporting segments. Information regarding the new reporting segments
is as follows for the years ended December 31 (in thousands):

|                                |                                                     |   |         |         |      |   |         |        |   |   |         |        |  
|------------------------------- | --------------------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                |                                                     |   | 2002    |         | 2001 |   | 2000   
|                                |                                                     |   |         |         |      |   |        
|Net revenues:                   |                                                     |   |         |         |      |   |         |        |   |   |         |       
|                                | DonJoy®                                             |   | $       | 86,884  |      |   | $       | 80,164 |   |   | $       | 72,640 |  
|                                | ProCare®                                            |   |         | 45,548  |      |   |         | 44,381 |   |   |         | 34,226 |  
|                                | OfficeCare®                                         |   |         | 22,966  |      |   |         | 21,653 |   |   |         | 14,259 |  
|                                | International                                       |   |         | 22,202  |      |   |         | 18,114 |   |   |         | 18,049 |  
|                                | Freight revenue                                     |   |         | 5,036   |      |   |         | 4,858  |   |   |         | 4,412  |  
|                                |                                                     |   |         |         |      |   |         |        |   |   |         |       
|Total consolidated net revenues |                                                     | $ | 182,636 |         |      | $ | 169,170 |        |   | $ | 143,586 |       
|                                |                                                     |   |         |         |      |   |         |        |   |   |         |       
|Gross profit:                   |                                                     |   |         |         |      |   |         |        |   |   |         |       
|                                | DonJoy®                                             |   | $       | 57,264  |      |   | $       | 52,769 |   |   | $       | 48,536 |  
|                                | ProCare®                                            |   |         | 15,860  |      |   |         | 15,358 |   |   |         | 12,933 |  
|                                | OfficeCare®                                         |   |         | 18,794  |      |   |         | 16,948 |   |   |         | 10,894 |  
|                                | International                                       |   |         | 11,657  |      |   |         | 8,871  |   |   |         | 10,123 |  
|                                | Other costs of goods sold not allocated
to segments |   |         | (17,343 | )    |   |         | (8,370 | ) |   |         | (8,483 | )
|                                |                                                     |   |         |         |      |   |         |        |   |   |         |       
|Total consolidated gross profit |                                                     | $ | 86,232  |         |      | $ | 85,576  |        |   | $ | 74,003  |       
|                                |                                                     |   |         |         |      |   |         |        |   |   |         |       

The accounting policies of the reportable segments are the same as those
described in Note 1. dj Ortho allocates resources and evaluates the
performance of segments based on gross profit and therefore has not disclosed
certain other items, such as interest, depreciation and amortization by segment
as permitted by SFAS No. 131. dj Ortho does not allocate assets to reportable
segments because a significant portion of assets are shared by all segments.

For the years ended December 31, 2002, 2001 and 2000, dj Ortho had no
individual customer or distributor within a segment that accounted for 10% or
more of total annual revenues.

Net revenues, excluding freight revenue, attributed to countries based on
the location of the customer, were as follows for the years ended December 31,
(in thousands):

|                                |  |      |         |      |  |      |         |  |  |   |         | 
|------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                |  | 2002 |         | 2001 |  | 2000
|                                |  |      |         |      |  |     
|United States                   |  | $    | 155,398 |      |  | $    | 146,198 |  |  | $ | 121,125 | 
|Europe                          |  |      | 13,272  |      |  |      | 11,047  |  |  |   | 11,124  | 
|Other countries                 |  |      | 8,930   |      |  |      | 7,067   |  |  |   | 6,925   | 
|Freight revenue                 |  |      | 5,036   |      |  |      | 4,858   |  |  |   | 4,412   | 
|                                |  |      |         |      |  |      |         |  |  |   |         | 
|Total consolidated net revenues |  | $    | 182,636 |      |  | $    | 169,170 |  |  | $ | 143,586 | 
|                                |  |      |         |      |  |      |         |  |  |   |         | 

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Total assets by region were as follows at December 31 (in thousands):

|                          |  |      |         |      |  |   |         | 
|------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                          |  | 2002 |         | 2001
|                          |  |      |         |     
|United States             |  | $    | 232,772 |      |  | $ | 244,973 | 
|Europe                    |  |      | 2,505   |      |  |   |        | 
|Other countries           |  |      | 2,447   |      |  |   | 2,949   | 
|                          |  |      |         |      |  |   |         | 
|Total international       |  |      | 4,952   |      |  |   | 2,949   | 
|                          |  |      |         |      |  |   |         | 
|Total consolidated assets |  | $    | 237,724 |      |  | $ | 247,922 | 
|                          |  |      |         |      |  |   |         | 



|10. |  | Commitments and Contingencies
|--- |  | -----------------------------

The Company is obligated under various noncancellable operating leases for
land, buildings, equipment and vehicles through February 2008. Certain of the
leases provide that dj Ortho pay all or a portion of taxes, maintenance,
insurance and other operating expenses, and certain of the rents are subject to
adjustment for changes as determined by certain consumer price indices and
exchange rates. In connection with the Recapitalization, the Company entered
into a subleasing agreement with Smith & Nephew for its Vista facility. dj
Orthopedics, Inc. has guaranteed the payment of rent and other amounts owed
under the sublease.

Minimum annual lease commitments for noncancellable operating leases as of
December 31, 2002 are as follows (in thousands):

|                    |  |   |        | 
|------------------- |  | - | ------ | 
|2003                |  | $ | 3,296  | 
|2004                |  |   | 2,568  | 
|2005                |  |   | 2,375  | 
|2006                |  |   | 2,204  | 
|2007                |  |   | 2,206  | 
|2008 and thereafter |  |   | 333    | 
|                    |  |   |        | 
|                    |  | $ | 12,982 | 
|                    |  |   |        | 

The Company is currently pursuing a sublease of one of its Vista
facilities. The above commitments will be reduced once a sublease is entered
into. Aggregate rent expense was approximately $3.9 million, $3.6 million and
$3.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively.

License Agreement and Minimum Purchase Requirement

In 2001,
the Company entered into an agreement with I.M.D. b.v. (IMD) to
distribute a bone growth stimulator product, OrthoPulse. If final FDA approval
of this product is obtained, the Company will be required to make a $2.0
million payment, subject to exchange rate adjustments under certain
circumstances, to IMD to maintain the exclusive U.S. distribution rights of
this product. As discussed in Note 3, IMD has experienced continuing delays in obtaining FDA
approval for the OrthoPulse bone growth stimulator product. Under the current arrangement, we expect to make a
payment of $1.0 million upon final FDA approval and a $1.0 million payment
shortly afterwards for the U.S. distribution rights. However, the exact timing
of payments are not determinable at this time.

Contingencies

Several class action complaints were filed in the United States District
Courts for the Southern District of New York and for the Southern District of
California on behalf of purchasers of the Companys common stock alleging
violations of the federal securities laws in connection with the Companys
November 15, 2001 initial public offering. The Company is named as a defendant
along with Leslie H. Cross, President and Chief Executive Officer, Cyril Talbot
III, former Senior Vice President, Finance, Chief Financial Officer, and
Secretary, Charles T. Orsatti, former Chairman of the Companys Board of
Directors, and the underwriters of the Companys initial public offering. The
complaints sought

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unspecified damages and alleged that defendants violated Sections 11, 12,
and 15 of the Securities Act of 1933 by, among other things, misrepresenting
and/or failing to disclose material facts in connection with the Companys
registration statement and prospectus for the initial public offering. On
February 25, 2002, plaintiffs agreed to dismiss the New York actions without
prejudice. On February 28, 2002, a federal district court judge consolidated
the Southern District of California actions into a single action, In re DJ
Orthopedics, Inc. Securities Litigation, Case No. 01-CV-2238-K (LSP) (S.D.
Cal.), and appointed Oracle Partners, L.P. as lead plaintiff. On May 3, 2002,
the lead plaintiff filed its consolidated amended complaint, which alleges the
same causes of action and adds our outside directors Mitchell J. Blutt, M.D.,
Kirby L. Cramer, and Damion E. Wicker, M.D. as defendants. On June 17, 2002,
the Company and the other defendants filed a motion to dismiss the Consolidated
Complaint. On August 6, 2002, the Court granted in part and denied in part the
motion to dismiss. The Court dismissed several categories of the misstatements
and omissions alleged by plaintiffs. The remaining allegation pertains to a
purported failure to disclose material intra-quarterly sales data in the
registration statement and prospectus. The Company believes the claims are
without merit and intends to defend the action vigorously. However, there can
be no assurance that the Company will succeed in defending or settling this
action. Additionally, there can be no assurance that the action will not have a
material adverse effect on the Companys business.

On June 7, 2002, a patent infringement action was filed against the
Company and its former parent, Smith & Nephew, in the United States District
Court, Eastern District of Texas, by Generation II Orthotics Inc. and
Generation II USA Inc. (the Plaintiffs). The suit alleges that the Company and
Smith & Nephew willfully infringed, and are infringing, certain United States
patents owned by the Plaintiffs by manufacturing, using and selling certain
orthopedic knee braces for the treatment of unicompartmental osteoarthritis.
The lawsuit seeks unspecified monetary damages and an injunction to prevent the
Company from infringing the patents and from selling the relevant knee braces.
The Company believes the claims are without merit and intends to defend the
action vigorously. The Company has filed an answer and counterclaims seeking
to invalidate the patents. Pursuant to a prior contractual obligation, the
Company has agreed to indemnify and defend Smith & Nephew in this matter.
The parties conducted a mediation session on this matter on
March 25, 2003, and settlement discussions are occurring. No
assurance can be given that the action will settle or that the Company will be
able to achieve a favorable outcome in this litigation.

The Company is from time to time involved in lawsuits arising in the
ordinary course of business. With respect to these matters, management believes
that it has adequate legal defense, insurance and/or has provided adequate
accruals for related costs. The Company is not aware of any pending lawsuits
not mentioned above that could have a material adverse effect on the Companys
business, financial condition and results of operations.



|11. |  | Employee Benefit Plan
|--- |  | ---------------------

dj Orthopedics, Inc. has a qualified 401(k) profit-sharing plan covering
substantially all of its U.S. employees. The Company matches 100% of the first
$500 contributed annually by each employee and 30 percent of additional
employee contributions up to 6 percent of total compensation. The Companys
matching contributions related to this plan were $0.4 million, $0.5 million and
$0.4 million for the years ended December 31, 2002, 2001 and 2000,
respectively. The plan also provides for discretionary Company contributions as
approved by the Board of Directors. There were no discretionary contributions
for the years ended December 31, 2002, 2001 or 2000.



|12. |  | Condensed Consolidating Financial Information
|--- |  | ---------------------------------------------

dj Ortho is a wholly owned operating subsidiary of dj Orthopedics and
represents substantially all of the revenues, operating results and assets of
dj Orthopedics. DJ Capital is a wholly owned subsidiary of dj Ortho, has no
independent assets or operations and was formed solely for the purpose of being
a co-issuer of the Notes. dj Orthos obligations under the Notes are
guaranteed by dj Orthopedics and dj Development. The guarantees of the Notes
by dj Orthopedics and dj Development and any guarantee of the Notes by a future
parent or wholly owned subsidiary guarantor are full and unconditional. dj
Ortho, DJ Capital and dj Development comprise all the direct and indirect
subsidiaries of dj Orthopedics other than foreign subsidiaries, which are
non-guarantors of the Notes. The indenture governing the Notes (Indenture) and
the bank credit facility, as amended, contain certain covenants restricting the
ability of dj Ortho and DJ Capital to, among other things, pay dividends or
make other distributions (other than certain tax distributions) or loans or
advances to dj Orthopedics unless certain financial tests are satisfied in the
case of the Indenture or the consent of the lenders is obtained in the case of
the bank credit facility, as amended. The indenture and the bank credit
facility permit dj Ortho to make distributions to dj Orthopedics in amounts
required by dj Orthopedics to pay federal, state and local income taxes to the
extent such income taxes are attributable to the income of dj Ortho and its
subsidiaries.

The following supplemental condensed consolidating financial information
presents the balance sheet as of December 31, 2002 and the statements of
operations and cash flows for the year ended December 31, 2002. Since the
Company did not establish dj Development until the second quarter of 2002 and
the non-guarantor foreign subsidiaries were previously not material, a
supplemental condensed consolidating balance sheet as of December 31, 2001 and
condensed consolidating statements of operations and cash flows for the year
ended December 31, 2001 are not required under the Securities Exchange Act of
1934. As discussed in Note 1 above, during 2002, the Company established new
operating subsidiaries in Germany, the United Kingdom and Canada. Therefore,
in the aggregate, the non-guarantor subsidiaries are no longer minor. For
purposes of the financial information below, DJO, Inc. represents dj
Orthopedics,

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DJO, LLC represents dj Ortho, DJODC represents dj Development
(subsidiary guarantor), Non-Guarantors represents the Companys subsidiaries
in Mexico, Germany, Australia (divested in December 2002), the United Kingdom
and Canada (non-guarantor subsidiaries) and Elims represents the
consolidating elimination entries recorded by the Company. No separate
financial information has been provided herein for DJ Capital because
management believes such information would not be meaningful as DJ Capital has
no financial or other data to report in response to the requirements of Form
10-K. The accompanying unaudited condensed consolidating financial statements
for the year ended December 31, 2002 have been prepared in accordance with
accounting principles generally accepted in the United States and include all
adjustments (consisting of normal recurring accruals, and the adjustments
discussed in Note 3) which, in the opinion of management, are necessary for a
fair presentation of the financial position, operating results and cash flows
for the date and periods presented.

|                                                  |                                                |   |                                       |        |          |   |         |         |                |   |       |       |              |   |        |        |   |   |        |        |   |   |         |        | 
|------------------------------------------------- | ---------------------------------------------- | - | ------------------------------------- | ------ | -------- | - | ------- | ------- | -------------- | - | ----- | ----- | ------------ | - | ------ | ------ | - | - | ------ | ------ | - | - | ------- | ------ | 
|                                                  |                                                |   | Condensed Consolidating Balance Sheet
|                                                  |                                                |   | December 31, 2002                    
|                                                  |                                                |   | DJO, Inc.                             |        | DJO, LLC |   | DJODC   |         | Non-Guarantors |   | Elims |       | Consolidated
|                                                  |                                                |   |                                       |        |          |   |         |         |                |   |       |       |             
|                                                  |                                                |   | (In thousands)                       
|Assets:                                           |                                                |   |                                       |        |          |   |         |         |                |   |       |       |              |   |        |        |   |   |        |        |   |   |         |       
|Current assets:                                   |                                                |   |                                       |        |          |   |         |         |                |   |       |       |              |   |        |        |   |   |        |        |   |   |         |       
|                                                  | Cash and cash equivalents                      |   | $                                     | 25,211 |          |   | $       | 5,424   |                |   | $     |      |              |   | $      | 1,450  |   |   | $      |       |   |   | $       | 32,085 | 
|                                                  | Accounts receivable, net                       |   |                                       |       |          |   |         | 31,860  |                |   |       |      |              |   |        | 1,845  |   |   |        |       |   |   |         | 33,705 | 
|                                                  | Inventories, net                               |   |                                       |       |          |   |         | 13,074  |                |   |       |      |              |   |        | 4,070  |   |   |        | (2,561 | ) |   |         | 14,583 | 
|                                                  | Deferred tax asset, current portion            |   |                                       | 10,247 |          |   |         |        |                |   |       |      |              |   |        |       |   |   |        |       |   |   |         | 10,247 | 
|                                                  | Intercompany, net                              |   |                                       | 18,563 |          |   |         | (20,315 | )              |   |       | 5,885 |              |   |        | (3,869 | ) |   |        | (264   | ) |   |         |       | 
|                                                  | Other current assets                           |   |                                       | 591    |          |   |         | 4,056   |                |   |       |      |              |   |        | 2      |   |   |        | 321    |   |   |         | 4,970  | 
|                                                  |                                                |   |                                       |        |          |   |         |         |                |   |       |       |              |   |        |        |   |   |        |        |   |   |         |        | 
|Total current assets                              |                                                |   | 54,612                                |        |          |   | 34,099  |         |                |   | 5,885 |       |              |   | 3,498  |        |   |   | (2,504 | )      |   |   | 95,590  |       
|Property, plant and equipment, net                |                                                |   |                                      |        |          |   | 12,912  |         |                |   | 10    |       |              |   | 1,160  |        |   |   |       |        |   |   | 14,082  |       
|Goodwill, intangible assets and
other assets, net |                                                |   |                                      |        |          |   | 73,998  |         |                |   | 2,986 |       |              |   | (1,903 | )      |   |   | (2,513 | )      |   |   | 72,568  |       
|Investment in subsidiaries                        |                                                |   | (9,183                                | )      |          |   | 10,810  |         |                |   |      |       |              |   |       |        |   |   | (1,627 | )      |   |   |        |       
|Deferred tax asset                                |                                                |   | 55,484                                |        |          |   |        |         |                |   |      |       |              |   |       |        |   |   |       |        |   |   | 55,484  |       
|                                                  |                                                |   |                                       |        |          |   |         |         |                |   |       |       |              |   |        |        |   |   |        |        |   |   |         |        | 
|Total assets                                      |                                                | $ | 100,913                               |        |          | $ | 131,819 |         |                | $ | 8,881 |       |              | $ | 2,755  |        |   | $ | (6,644 | )      |   | $ | 237,724 |       
|                                                  |                                                |   |                                       |        |          |   |         |         |                |   |       |       |              |   |        |        |   |   |        |        |   |   |         |        | 
|Liabilities and stockholders equity:             |                                                |   |                                       |        |          |   |         |         |                |   |       |       |              |   |        |        |   |   |        |        |   |   |         |       
|Current liabilities:                              |                                                |   |                                       |        |          |   |         |         |                |   |       |       |              |   |        |        |   |   |        |        |   |   |         |       
|                                                  | Accounts payable and other
accrued liabilities |   | $                                     |       |          |   | $       | 26,169  |                |   | $     | 20    |              |   | $      | 806    |   |   | $      |       |   |   | $       | 26,995 | 
|                                                  | Long-term debt, current portion                |   |                                       |       |          |   |         | 1,274   |                |   |       |      |              |   |        |       |   |   |        |       |   |   |         | 1,274  | 
|                                                  |                                                |   |                                       |        |          |   |         |         |                |   |       |       |              |   |        |        |   |   |        |        |   |   |         |        | 
|Total current liabilities                         |                                                |   |                                      |        |          |   | 27,443  |         |                |   | 20    |       |              |   | 806    |        |   |   |       |        |   |   | 28,269  |       
|Long-term debt, less current portion              |                                                |   |                                      |        |          |   | 108,542 |         |                |   |      |       |              |   |       |        |   |   |       |        |   |   | 108,542 |       
|Total stockholders equity                        |                                                |   | 100,913                               |        |          |   | (4,166  | )       |                |   | 8,861 |       |              |   | 1,949  |        |   |   | (6,644 | )      |   |   | 100,913 |       
|                                                  |                                                |   |                                       |        |          |   |         |         |                |   |       |       |              |   |        |        |   |   |        |        |   |   |         |        | 
|Total liabilities and stockholders
equity        |                                                | $ | 100,913                               |        |          | $ | 131,819 |         |                | $ | 8,881 |       |              | $ | 2,755  |        |   | $ | (6,644 | )      |   | $ | 237,724 |       
|                                                  |                                                |   |                                       |        |          |   |         |         |                |   |       |       |              |   |        |        |   |   |        |        |   |   |         |        | 

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|                                         |                                                 |   |                                                 |    |          |   |         |        |                 |   |       |       |              |   |        |       |  |   |         |   |  |   |         |        | 
|---------------------------------------- | ----------------------------------------------- | - | ----------------------------------------------- | -- | -------- | - | ------- | ------ | --------------- | - | ----- | ----- | ------------ | - | ------ | ----- |  | - | ------- | - |  | - | ------- | ------ | 
|                                         |                                                 |   | Condensed Consolidating Statement of Operations
|                                         |                                                 |   | For the Year Ended December 31, 2002           
|                                         |                                                 |   | (In thousands)                                 
|                                         |                                                 |   | DJO, Inc.                                       |    | DJO, LLC |   | DJODC   |        | Non- Guarantors |   | Elims |       | Consolidated
|                                         |                                                 |   |                                                 |    |          |   |         |        |                 |   |       |       |             
|Net revenues                             |                                                 | $ |                                                |    |          | $ | 170,130 |        |                 | $ | 7,046 |       |              | $ | 15,794 |       |  | $ | (10,334 | ) |  | $ | 182,636 |       
|Costs of goods sold                      |                                                 |   |                                                |    |          |   | 94,629  |        |                 |   |      |       |              |   | 8,923  |       |  |   | (7,674  | ) |  |   | 95,878  |       
|                                         |                                                 |   |                                                 |    |          |   |         |        |                 |   |       |       |              |   |        |       |  |   |         |   |  |   |         |       
|Gross profit                             |                                                 |   |                                                |    |          |   | 75,501  |        |                 |   | 7,046 |       |              |   | 6,871  |       |  |   | (2,660  | ) |  |   | 86,758  |       
|Operating expenses:                      |                                                 |   |                                                 |    |          |   |         |        |                 |   |       |       |              |   |        |       |  |   |         |   |  |   |         |       
|                                         | Sales and marketing                             |   |                                                 |   |          |   |         | 51,148 |                 |   |       | 51    |              |   |        | 5,017 |  |   |         |  |  |   |         | 56,216 | 
|                                         | General and administrative                      |   |                                                 | 47 |          |   |         | 22,558 |                 |   |       | 1,315 |              |   |        | 2,494 |  |   |         |  |  |   |         | 26,414 | 
|                                         | Research and development                        |   |                                                 |   |          |   |         | 2,523  |                 |   |       | 399   |              |   |        |      |  |   |         |  |  |   |         | 2,922  | 
|                                         | Impairment of long-lived assets                 |   |                                                 |   |          |   |         | 3,666  |                 |   |       |      |              |   |        |      |  |   |         |  |  |   |         | 3,666  | 
|                                         | Performance improvement and
restructuring costs |   |                                                 |   |          |   |         | 10,008 |                 |   |       |      |              |   |        |      |  |   |         |  |  |   |         | 10,008 | 
|                                         |                                                 |   |                                                 |    |          |   |         |        |                 |   |       |       |              |   |        |       |  |   |         |   |  |   |         |       
|Total operating expenses                 |                                                 |   | 47                                              |    |          |   | 89,903  |        |                 |   | 1,765 |       |              |   | 7,511  |       |  |   |        |   |  |   | 99,226  |       
|                                         |                                                 |   |                                                 |    |          |   |         |        |                 |   |       |       |              |   |        |       |  |   |         |   |  |   |         |       
|Income (loss) from operations            |                                                 |   | (47                                             | )  |          |   | (14,402 | )      |                 |   | 5,281 |       |              |   | (640   | )     |  |   | (2,660  | ) |  |   | (12,468 | )     
|Income (loss) from subsidiaries          |                                                 |   | (24,609                                         | )  |          |   | 4,389   |        |                 |   |      |       |              |   |       |       |  |   | 20,220  |   |  |   |        |       
|Interest income (expense) and other, net |                                                 |   | (83                                             | )  |          |   | (13,676 | )      |                 |   |      |       |              |   | (101   | )     |  |   | 1,772   |   |  |   | (12,088 | )     
|                                         |                                                 |   |                                                 |    |          |   |         |        |                 |   |       |       |              |   |        |       |  |   |         |   |  |   |         |       
|Income (loss) before income taxes        |                                                 |   | (24,739                                         | )  |          |   | (23,689 | )      |                 |   | 5,281 |       |              |   | (741   | )     |  |   | 19,332  |   |  |   | (24,556 | )     
|Benefit (provision) for income taxes     |                                                 |   | 9,544                                           |    |          |   |        |        |                 |   |      |       |              |   | (183   | )     |  |   |        |   |  |   | 9,361   |       
|                                         |                                                 |   |                                                 |    |          |   |         |        |                 |   |       |       |              |   |        |       |  |   |         |   |  |   |         |       
|Net income (loss)                        |                                                 | $ | (15,195                                         | )  |          | $ | (23,689 | )      |                 | $ | 5,281 |       |              | $ | (924   | )     |  | $ | 19,332  |   |  | $ | (15,195 | )     
|                                         |                                                 |   |                                                 |    |          |   |         |        |                 |   |       |       |              |   |        |       |  |   |         |   |  |   |         |       

|                                                                              |  |                                                           |        |          |  |       |        |            |  |              |        |   |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------- |  | --------------------------------------------------------- | ------ | -------- |  | ----- | ------ | ---------- |  | ------------ | ------ | - |  | ---- | ------ | - |  | - | ------ | -
|                                                                              |  | Unaudited Condensed Consolidating Statement of Cash Flows
|                                                                              |  | For the Year Ended December 31, 2002                     
|                                                                              |  | (In thousands)                                           
|                                                                              |  |                                                           |        |          |  |       |        |            |  |              |        |   |  | Non- |        |   |  |  
|                                                                              |  | DJO, Inc.                                                 |        | DJO, LLC |  | DJODC |        | Guarantors |  | Consolidated
|                                                                              |  |                                                           |        |          |  |       |        |            |  |             
|Operating activities                                                          |  |                                                           |        |          |  |       |        |            |  |              |        |   |  |      |        |   |  |   |        |  
|Net cash provided by (used in)
operating activities                           |  | $                                                         | (3,478 | )        |  | $     | 10,287 |            |  | $            | 5,706  |   |  | $    | 2,324  |   |  | $ | 14,839 |  
|Investing activities                                                          |  |                                                           |        |          |  |       |        |            |  |              |        |   |  |      |        |   |  |   |        |  
|Purchases of property, plant and
equipment                                    |  |                                                           |       |          |  |       | (3,019 | )          |  |              | (14    | ) |  |      | (1,098 | ) |  |   | (4,131 | )
|Proceeds from the sale of property,
plant and equipment                       |  |                                                           |       |          |  |       |       |            |  |              |       |   |  |      | 288    |   |  |   | 288    |  
|Disposal (purchase) of intangible assets                                      |  |                                                           |       |          |  |       | 797    |            |  |              | (3,387 | ) |  |      |       |   |  |   | (2,590 | )
|Other assets, net                                                             |  |                                                           |       |          |  |       | (2,747 | )          |  |              |       |   |  |      | 1,831  |   |  |   | (916   | )
|                                                                              |  |                                                           |        |          |  |       |        |            |  |              |        |   |  |      |        |   |  |   |        |  
|Net
cash provided by (used in) investing
activities                           |  |                                                           |       |          |  |       | (4,969 | )          |  |              | (3,401 | ) |  |      | 1,021  |   |  |   | (7,349 | )
|Financing activities                                                          |  |                                                           |        |          |  |       |        |            |  |              |        |   |  |      |        |   |  |   |        |  
|Repayment of long-term debt                                                   |  |                                                           |       |          |  |       | (1,272 | )          |  |              |       |   |  |      |       |   |  |   | (1,272 | )
|Net proceeds from issuance of
equity securities                               |  |                                                           |       |          |  |       | (2,621 | )          |  |              | 3,580  |   |  |      | (959   | ) |  |   |       |  
|Additional costs related to initial
public offering                           |  |                                                           | (317   | )        |  |       |       |            |  |              |       |   |  |      |       |   |  |   | (317   | )
|Net proceeds from issuance of common
stock under Employee Stock Purchase
Plan |  |                                                           | 121    |          |  |       |       |            |  |              |       |   |  |      |       |   |  |   | 121    |  
|Intercompany obligations                                                      |  |                                                           | 3,311  |          |  |       | 3,180  |            |  |              | (5,885 | ) |  |      | (606   | ) |  |   |       |  
|                                                                              |  |                                                           |        |          |  |       |        |            |  |              |        |   |  |      |        |   |  |   |        |  
|Net cash (used in) provided by
financing activities                           |  |                                                           | 3,115  |          |  |       | (713   | )          |  |              | (2,305 | ) |  |      | (1,565 | ) |  |   | (1,468 | )
|Effect of exchange rate changes on cash                                       |  |                                                           |       |          |  |       |       |            |  |              |       |   |  |      | 249    |   |  |   | 249    |  
|                                                                              |  |                                                           |        |          |  |       |        |            |  |              |        |   |  |      |        |   |  |   |        |  
|Net increase (decrease) in cash and
cash equivalents                          |  |                                                           | (363   | )        |  |       | 4,605  |            |  |              |       |   |  |      | 2,029  |   |  |   | 6,271  |  
|Cash and cash equivalents
at beginning of year                                |  |                                                           | 25,572 |          |  |       |       |            |  |              |       |   |  |      | 242    |   |  |   | 25,814 |  
|                                                                              |  |                                                           |        |          |  |       |        |            |  |              |        |   |  |      |        |   |  |   |        |  
|Cash and cash equivalents
at end of year                                      |  | $                                                         | 25,209 |          |  | $     | 4,605  |            |  | $            |       |   |  | $    | 2,271  |   |  | $ | 32,085 |  
|                                                                              |  |                                                           |        |          |  |       |        |            |  |              |        |   |  |      |        |   |  |   |        |  

72



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|13. |  | Quarterly Results (unaudited)
|--- |  | -----------------------------

The following table summarizes certain of our operating results by quarter
for 2002 and 2001:

|                                                                               |  |                                       |        |         |  |         |        |         |  |       |        |   |  |   |        |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                               |  | Year Ended December 31, 2002         
|                                                                               |  |                                      
|                                                                               |  | First                                 |        | Second  |  | Third   |        | Fourth  |  | Total
|                                                                               |  | Quarter                               |        | Quarter |  | Quarter |        | Quarter |  | Year 
|                                                                               |  |                                       |        |         |  |         |        |         |  |      
|                                                                               |  | (In thousands, except per share data)
|Net revenues                                                                   |  | $                                     | 44,439 |         |  | $       | 45,709 |         |  | $     | 45,828 |   |  | $ | 46,660 |   |  | $ | 182,636 |  
|Gross profit                                                                   |  |                                       | 23,833 |         |  |         | 21,259 |         |  |       | 20,356 |   |  |   | 21,310 |   |  |   | 86,758  |  
|Income (loss) from operations                                                  |  |                                       | 5,515  |         |  |         | (4,715 | )       |  |       | (6,171 | ) |  |   | (7,097 | ) |  |   | (12,468 | )
|Net
income (loss)(1)                                                           |  | $                                     | 1,450  |         |  | $       | (4,859 | )       |  | $     | (5,814 | ) |  | $ | (5,972 | ) |  | $ | (15,195 | )
|Basic and diluted net income
(loss) per share available to
common stockholders |  | $                                     | 0.08   |         |  | $       | (0.27  | )       |  | $     | (0.33  | ) |  | $ | (0.33  | ) |  | $ | (0.85   | )
|Number of operating days                                                       |  |                                       | 63     |         |  |         | 64     |         |  |       | 63     |   |  |   | 63     |   |  |   | 253     |  

|                                                              |  |                                       |        |         |  |         |        |         |  |       |        |  |  |   |        |  |  |   |         | 
|------------------------------------------------------------- |  | ------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                                              |  | Year Ended December 31, 2001         
|                                                              |  |                                      
|                                                              |  | First                                 |        | Second  |  | Third   |        | Fourth  |  | Total
|                                                              |  | Quarter                               |        | Quarter |  | Quarter |        | Quarter |  | Year 
|                                                              |  |                                       |        |         |  |         |        |         |  |      
|                                                              |  | (In thousands, except per share data)
|Net revenues                                                  |  | $                                     | 40,295 |         |  | $       | 42,988 |         |  | $     | 44,078 |  |  | $ | 41,809 |  |  | $ | 169,170 | 
|Gross profit                                                  |  |                                       | 20,882 |         |  |         | 22,046 |         |  |       | 22,153 |  |  |   | 21,010 |  |  |   | 86,091  | 
|Income from operations                                        |  |                                       | 5,994  |         |  |         | 5,731  |         |  |       | 6,036  |  |  |   | 4,828  |  |  |   | 22,589  | 
|Net
income (2)(3)                                             |  | $                                     | 1,303  |         |  | $       | 1,259  |         |  | $     | 1,728  |  |  | $ | 52,200 |  |  | $ | 56,490  | 
|Basic net income per share
available to common
stockholders   |  |                                       | N/A    |         |  |         | N/A    |         |  |       | N/A    |  |  | $ | 3.67   |  |  | $ | 4.80    | 
|Diluted net income per
share available to common
stockholders |  |                                       | N/A    |         |  |         | N/A    |         |  |       | N/A    |  |  | $ | 3.56   |  |  | $ | 4.68    | 
|Number of operating days                                      |  |                                       | 64     |         |  |         | 63     |         |  |       | 63     |  |  |   | 62     |  |  |   | 252     | 



---

|(1) |  | Includes performance improvement,
restructuring and other charges of $7.6 million,
$9.4 million and $8.5 million in the second, third and
fourth quarters of 2002, respectively.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Due to the Reorganization and its impact on the
financial statements, earnings per share information is not
presented as it would not be meaningful.                            
|   
|(3) |  | Includes a deferred tax benefit of $54,169 due to
the Reorganization in the fourth quarter.                                                                                     




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

Not applicable.

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##### Table of Contents






PART III




Item 10.Directors and Executive Officers of the Registrant

Item 10 is hereby incorporated by reference from dj Orthopedics, Inc.s
Definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or prior to April 30, 2003. See also Item 4A. of this Form 10-K.




Item 11.Executive Compensation

Item 11 is hereby incorporated by reference from dj Orthopedics, Inc.s
Definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or prior to April 30, 2003.




Item 12.Security Ownership of Certain Beneficial Owners and Management

Item 12 is hereby incorporated by reference from dj Orthopedics, Inc.s
Definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or prior to April 30, 2003.




Item 13.Certain Relationships and Related Transactions

Item 13 is hereby incorporated by reference from dj Orthopedics, Inc.s
Definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or prior to April 30, 2003.




Item 14.Controls and Procedures

The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in our Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.

Within 90 days prior to the date of this report, the Company carried out
an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective.

There have been no significant changes in our internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date we completed our evaluation.




PART IV




Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)  The following documents are filed as part of this report:

| |  |  |    |  |  |                                                                                                                                         
| |  |  | -- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 1. |  |  | Consolidated Financial Statements:                                                                                                      
| |  |  |    |  |  |                                                                                                                                         
| |  |  |    |  |  | The Audited Consolidated Financial Statements of dj Orthopedics, Inc.
listed below and the report thereon are included in Item 8 hereof:
| |  |  |    |  |  |                                                                                                                                         
| |  |  |    |  |  | Report of Ernst & Young LLP, Independent Auditors                                                                                       
| |  |  |    |  |  | Consolidated Balance Sheets as of December 31, 2002 and 2001                                                                            
| |  |  |    |  |  | Consolidated Statements of Operations for the years ended December 31,
2002, 2001 and 2000                                              
| |  |  |    |  |  | Consolidated Statements of Changes in Stockholders/Members Equity
(Deficit) for the years ended December 31, 2002, 2001 and 2000      
| |  |  |    |  |  | Consolidated Statements of Cash Flows for the years ended December 31,
2002, 2001 and 2000                                              
| |  |  |    |  |  | Notes to Consolidated Financial Statements                                                                                              

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| |  |  |    |  |  |                                                                                                                                                                                                                       
| |  |  | -- |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 2. |  |  | Financial Statement Schedules:                                                                                                                                                                                        
| |  |  |    |  |  |                                                                                                                                                                                                                       
| |  |  |    |  |  | Schedule II  Valuation and Qualifying Accounts and Reserves                                                                                                                                                          
| |  |  |    |  |  |                                                                                                                                                                                                                       
| |  |  |    |  |  | All other schedules are omitted because they are not applicable or not
required or because the required information is shown in the dj
Orthopedics, Inc.s Audited Consolidated Financial Statements or Notes
thereto.
| |  |  |    |  |  |                                                                                                                                                                                                                       
| |  |  | 3. |  |  | Exhibits:                                                                                                                                                                                                             

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.1     |  | Amended and Restated Certificate of Incorporation of dj Orthopedics, Inc. (Incorporated by
reference to Exhibit 4.1 to the Registration Statement of dj Orthopedics, Inc. on Form S-8
(Reg. No. 333-73966))                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.2     |  | Amended and Restated By-laws of dj Orthopedics, Inc. (Incorporated by reference to Exhibit
4.2 to the Registration Statement of dj Orthopedics, Inc. on Form S-8 (Reg. No. 333-73966))                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.3     |  | Amended and Restated Operating Agreement of dj Orthopedics, LLC (Incorporated by reference to
Exhibit 3.1 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.4     |  | By-laws of dj Orthopedics, LLC (Incorporated by reference to Exhibit 3.4 to the Registration
Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.5     |  | Certificate of Incorporation of DJ Orthopedics Capital Corporation (Incorporated by reference
to Exhibit 3.3 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.6     |  | By-laws of DJ Orthopedics Capital Corporation (Incorporated by reference to Exhibit 3.6 to
the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|4.1     |  | Indenture dated as of June 30, 1999 among dj Orthopedics, Inc., as successor to DonJoy,
L.L.C., dj Orthopedics, LLC and DJ Orthopedics Capital Corporation and The Bank of New York,
as Trustee (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form
S-4 (Reg. No. 333-86835))                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|4.2     |  | Form of 12 5/8% Senior Subordinated Note due 2009 (included as Exhibit B to Exhibit 4.1)                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.1    |  | Recapitalization Agreement dated as of April 29, 1999 among J.P. Morgan DJ Partners, LLC
(f/k/a Chase DJ Partners LLC), dj Orthopedics, Inc., as successor to DonJoy, L.L.C., and
Smith & Nephew (Incorporated by reference to Exhibit 10.1 to the Registration Statement on
Form S-4 (Reg. No. 333-86835))                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.2    |  | Group Research Centre Technology Agreement dated as of June 30, 1999 between dj Orthopedics,
Inc., as successor to DonJoy, L.L.C., and Smith & Nephew (Incorporated by reference to
Exhibit 10.2 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.3    |  | Supply Agreement dated as of June 30, 1999 between dj Orthopedics, Inc., as successor to
DonJoy, L.L.C., and Smith & Nephew (Incorporated by reference to Exhibit 10.3 to the
Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.4    |  | Distribution Agreement dated as of June 30, 1999 between dj Orthopedics, Inc., as successor
to DonJoy, L.L.C., Smith & Nephew and the affiliates of Smith & Nephew listed on Schedule I
thereto (Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-4
(Reg. No. 333-86835))                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.5    |  | Subleases dated as of June 30, 1999 between dj Orthopedics, LLC and Smith & Nephew
(Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-4 (Reg.
No. 333-86835))                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.6    |  | Guaranties dated as of June 30, 1999 of dj Orthopedics, Inc., as successor to DonJoy, L.L.C.
(Incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-4 (Reg.
No. 333-86835))                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.7    |  | Preferred Unit Purchase Agreement dated as of June 30, 1999 among dj Orthopedics, Inc., as
successor to DonJoy, L.L.C., J.P. Morgan Partners (23A SBIC), L.L.C. (formerly CB Capital
Investors, L.L.C.) and First Union Investors, Inc. (Incorporated by reference to Exhibit 10.9
to the Registration Statement of Form S-4 (Reg. No. 333-86835))                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.8    |  | Agreement and Plan of Merger dated as of October 26, 2001 between DonJoy, L.L.C., dj
Orthopedics, Inc. and dj Acquisition Corporation (Incorporated by reference to Exhibit 10.8
to the Registration Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.9    |  | Credit Agreement dated as of June 30, 1999 among dj Orthopedics, Inc. as successor to DonJoy,
L.L.C., dj Orthopedics, LLC, DJ Orthopedics Capital Corporation, the Lenders party thereto
and First Union National Bank, as Administrative Agent (Incorporated by reference to Exhibit
10.11 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.10   |  | Agreement dated as of July 13, 2000 among dj Orthopedics, Inc., as successor to DonJoy,
L.L.C., dj Orthopedics, LLC, the Lenders under that certain Credit Agreement dated as of June
30, 1999, as amended, First Union National Bank, as administrative agent, and The Chase
Manhattan Bank, as syndication agent. (Incorporated by reference to Exhibit 10.3 to DonJoy,
L.L.C.s report on Form 8-K dated July 21, 2000))

75



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.11   |  | Indemnity, Subrogation and Contribution Agreement dated as of June 30, 1999 among dj
Orthopedics, LLC, J.P. Morgan Partners (23A SBIC), L.L.C. (formerly CB Capital Investors,
L.L.C.), DJ Capital Investors L.L.C. and First Union National Bank, as Collateral Agent
(Incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-4 (Reg.
No. 333-86835))                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.12   |  | Parent Guarantee Agreement dated as of June 30, 1999 between dj Orthopedics, Inc., as
successor to DonJoy, L.L.C., and First Union National Bank, as Collateral Agent (Incorporated
by reference to Exhibit 10.13 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.13   |  | Subsidiary Guarantee Agreement dated as of June 30, 1999 between DJ Orthopedics Capital
Corporation and First Union National Bank, as Collateral Agent (Incorporated by reference to
Exhibit 10.14 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.14   |  | Pledge Agreement dated as of June 30, 1999 among dj Orthopedics, LLC, dj Orthopedics, Inc.,
as successor to DonJoy, L.L.C., and First Union National Bank, as Collateral Agent
(Incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-4 (Reg.
No. 333-86835))                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.15   |  | Security Agreement dated as of June 30, 1999 among dj Orthopedics, LLC, dj Orthopedics, Inc.,
as successor to DonJoy, L.L.C., J.P. Morgan Partners (23A SBIC), L.L.C. (formerly CB Capital
Investors, L.L.C.), DJ Capital Investors, L.L.C. and First Union National Bank, as Collateral
Agent (Incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-4
(Reg. No. 333-86835))                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.16   |  | Leasehold Deed of Trust, Security Agreement and Assignment of Leases and Rents dated as of
June 30, 1999 by dj Orthopedics, LLC, as grantor, to First American Title Insurance Company,
as trustee (Incorporated by reference to Exhibit 10.17 to the Registration Statement on Form
S-4 (Reg. No. 333-86835))                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.17   |  | Employment Agreement dated as of June 30, 1999 between dj Orthopedics, LLC and Leslie H.
Cross (Incorporated by reference to Exhibit 10.18 to the Registration Statement on Form S-4
(Reg. No. 333-86835))                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.18   |  | Employment Agreement dated as of June 30, 1999 between dj Orthopedics, LLC and Cyril Talbot
III (Incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-4
(Reg. No. 333-86835))                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.19   |  | Employment Agreement dated as of June 30, 1999 between dj Orthopedics, LLC and Michael R.
McBrayer (Incorporated by reference to Exhibit 10.20 to the Registration Statement on Form
S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.20   |  | Fifth Amended and Restated 1999 Option Plan of dj Orthopedics, Inc. dated October 25, 2001
(Incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 of dj
Orthopedics, Inc. (Reg. No. 333-73966))                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.21   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Leslie Cross
(Incorporated by reference to Exhibit 10.22 to the Registration Statement on Form S-4 (Reg.
No. 333-86835))                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.22   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Cyril Talbot
(Incorporated by reference to Exhibit 10.23 to the Registration Statement on Form S-4 (Reg.
No. 333-86835))                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.23   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Michael McBrayer
(Incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-4 (Reg.
No. 333-86835))                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.24   |  | Asset Purchase Agreement dated as of July 7, 2000 among DePuy Orthopaedic Technology, Inc.,
dj Orthopedics, LLC, and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated
by reference to Exhibit 2.1 to DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.25   |  | Preferred Unit Purchase Agreement dated as of July 7, 2000, among dj Orthopedics, Inc., as
successor to DonJoy, L.L.C., and J.P. Morgan Partners (23A SBIC), LLC (formerly CB Capital
Investors, L.L.C.) First Union Capital Partners, LLC, DJC, Inc., TCW/Crescent Mezzanine Trust
II, and TCW Leveraged Income Trust II, L.P. (Incorporated by reference to Exhibit 4.1 to
DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.26   |  | Common Unit Purchase Agreement dated as of July 7, 2000, among dj Orthopedics, Inc., as
successor to DonJoy, L.L.C., and J.P. Morgan DJ Partners, LLC (formerly Chase DJ Partners,
L.L.C.), Leslie H. Cross & Deborah L. Cross Family Trust, Michael R. McBrayer, and Cyril
Talbot III, (Incorporated by reference to Exhibit 4.2 to DonJoy, L.L.C.s report on Form 8-K
dated July 21, 2000)                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.27   |  | Secured Promissory Note dated as of July 7, 2000 between Leslie H. Cross and dj Orthopedics,
Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.3 to DonJoy,
L.L.C.s report on Form 8-K dated July 21, 2000)                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.28   |  | Secured Promissory Note dated as of July 7, 2000 between Cyril Talbot III and dj Orthopedics,
Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.4 to DonJoy,
L.L.C.s report on Form 8-K dated July 21, 2000)                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.29   |  | Secured Promissory Note dated as of July 7, 2000 between Michael R. McBrayer and dj
Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.5
to DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.30   |  | Third Amended and Restated Pledge Agreement dated as of June 11, 2001, among Leslie H. Cross,
Leslie H. Cross & Deborah L. Cross Family Trust, and dj Orthopedics, Inc., as successor to
DonJoy, L.L.C. (Incorporated by reference to Exhibit 10.7 to DonJoy, L.L.C.s quarterly
report on Form 10-Q for the quarter ended June 30, 2001)                                                                                            

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|        |  |                                                                                                                                                                                                                                                                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.31   |  | Third Amended and Restated Pledge Agreement dated as of June 11, 2001, between Cyril Talbot
III and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to
Exhibit 10.8 to DonJoy, L.L.C.s quarterly report on Form 10-Q for the quarter ended June 30,
2001)                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.32   |  | Third Amended and Restated Pledge Agreement dated as of June 11, 2001, between Michael R.
McBrayer and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference
to Exhibit 10.9 to DonJoy, L.L.C.s quarterly report on Form 10-Q for the quarter ended June
30, 2001)                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.33   |  | Unit Purchase Agreement dated as of June 28, 2000, among Smith & Nephew Disposal, Inc. and
J.P. Morgan DJ Partners, LLC (formerly Chase DJ Partners, L.L.C.), Leslie H. Cross & Deborah
L. Cross Family trust, Michael R. McBrayer, and Cyril Talbot III. (Incorporated by reference
to Exhibit 4.9 to DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.34   |  | Amended and Restated Secured Promissory Note dated as of June 28, 2000 between Michael R.
McBrayer and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference
to Exhibit 4.10 to DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.35   |  | Amended and Restated Secured Promissory Note dated as of June 28, 2000 among Leslie H. Cross
& Deborah L. Cross Family Trust, Leslie H. Cross and dj Orthopedics, Inc., as successor to
DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.11 to DonJoy, L.L.C.s report on Form
8-K dated July 21, 2000)                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.36   |  | Amended and Restated Secured Promissory Note dated as of June 28, 2000 between Cyril Talbot
III and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to
Exhibit 4.12 to DonJoys report on Form 8-K dated July 21, 2000)                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.37   |  | Secured Promissory Note dated as of June 28, 2000 among Leslie H. Cross & Deborah L. Cross
Family Trust, Leslie H. Cross and dj Orthopedics, Inc., as successor to DonJoy, L.L.C.
(Incorporated by reference to Exhibit 4.13 to DonJoys report on Form 8-K dated July 21,
2000)                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.38   |  | Secured Promissory Note dated as of June 28, 2000 between Cyril Talbot III and dj
Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.14
to DonJoys report on Form 8-K dated July 21, 2000)                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.39   |  | Secured Promissory Note dated as of June 28, 2000 between Michael R. McBrayer and dj
Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.15
to DonJoys report on Form 8-K dated July 21, 2000)                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.40   |  | Secured Promissory Note dated as of June 11, 2001 among Leslie H. Cross & Deborah L. Cross
Family Trust, Leslie H. Cross and dj Orthopedics, Inc., as successor to DonJoy, L.L.C.
(Incorporated by reference to Exhibit 10.4 to DonJoy, L.L.C.s quarterly report on Form 10-Q
for the quarter ended June 30, 2001)                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.41   |  | Secured Promissory Note dated as of June 11, 2001 between Cyril Talbot III and dj
Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 10.5
to DonJoy, L.L.C.s quarterly report on Form 10-Q for the quarter ended June 30, 2001)                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.42   |  | Secured Promissory Note dated as of June 11, 2001 between Michael R. McBrayer and dj
Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 10.6
to DonJoy, L.L.C.s quarterly report on Form 10-Q for the quarter ended June 30, 2001)                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.43   |  | Amendment No. 1 dated as of May 25, 2000 to the Credit Agreement dated as of June 30, 1999
(Incorporated by reference to Exhibit 10.1 to DonJoy, L.L.C.s report on Form 8-K dated July
21, 2000)                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.44   |  | dj Orthopedics, Inc. 2001 Omnibus Plan (Incorporated by reference to Exhibit 4.6 to the
Registration Statement on Form S-8 of dj Orthopedics, Inc. (Reg. No. 333-73966))                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.45   |  | Merger Agreement dated as of November 7, 2001 between dj Orthopedics, Inc. and DonJoy, L.L.C.
(Incorporated by reference to Exhibit 10.45 to the Registration Statement on Form S-1 (Reg.
No. 333-74998) dated December 12, 2001)                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.46   |  | dj Orthopedics, Inc. 2001 Non-Employee Director Plan (Incorporated by reference to Exhibit
4.5 to the Registration Statement on Form S-8 of dj Orthopedics, Inc. (Reg. No. 333-73966))                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.47   |  | dj Orthopedics, Inc. 2001 Employee Stock Purchase Plan (Incorporated by reference to Exhibit
4.4 to the Registration Statement on Form S-8 of dj Orthopedics, Inc. (Reg. No. 333-73966))                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.48   |  | Common Unit Purchase Agreement dated June 11, 2001 among DonJoy, L.L.C., JP Morgan DJ
Partners, L.L.C., Leslie H. Cross and Deborah L. Cross Family Trust, Michael R. McBrayer and
Cyril Talbot III (Incorporated by reference to Exhibit 10.3 to DonJoy, L.L.C.s Report on
Form 10-Q for the quarter ended June 30, 2001)                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.49   |  | Employment Agreement dated as of June 1, 2001 between dj Orthopedics, LLC and Paul K.
Nichols, Jr. (Incorporated by reference to Exhibit 10.2 to DonJoy, L.L.C.s Report on Form
10-Q for the quarter ended June 30, 2001)                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.50   |  | Asset Purchase Agreement dated June 1, 2001 by and among Alaron Technologies, L.L.C., seller,
Paul K. Nichols, Jr., Jamal D. Rushdy, Members, and dj Orthopedics, L.L.C., Buyer
(Incorporated by reference to Exhibit 10.1 to DonJoy, L.L.C.s Report on Form 10-Q for the
quarter ended June 30, 2001)                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                
|10.51   |  | Management Consulting Agreement dated November 7, 2001 between dj Orthopedics, Inc., as
successor to DonJoy, L.L.C., and JPM Fairfield (Incorporated by reference to Exhibit 10.51 to
the Registration Statement on Form S-1 (Reg. No. 333-74998))                                                                                                             

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.52   |  | Consent and Termination Agreement dated November 20, 2001 by and among DonJoy, L.L.C., J.P.
Morgan DJ Partners, L.L.C., Leslie H. Cross & Deborah L. Cross Family Trust, Michael R.
McBrayer, Cyril Talbot III, J.P. Morgan Partners (23A SBIC), LLC, First Union Capital
Partners, LLC, DJ Investment, LLC, DJC, Inc., TCW/Crescent Mezzanine Trust II, TCW Leveraged
Income Trust II, L.P., TCW Investment Management Company and Crescent Mach I Partners, L.P.
(Incorporated by reference to Exhibit 10.52 to the Registration Statement on Form S-1 (Reg.
No. 333-74998))   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.53   |  | Registration Rights Agreement dated November 20, 2001 by and among dj Orthopedics, Inc., J.P.
Morgan DJ Partners, L.L.C., Leslie H. Cross & Deborah L. Cross Family Trust, Michael R.
McBrayer, Cyril Talbot III, J.P. Morgan Partners (23A SBIC), LLC, First Union Capital
Partners, LLC, DJ Investment, LLC, DJC, Inc., TCW/ Crescent Mezzanine Trust II, TCW Leveraged
Income Trust II, L.P., TCW Investment Management Company and Crescent Mach I Partners, L.P.
(Incorporated by reference to Exhibit 10.53 to the Registration Statement on Form S-1 (Reg.
No. 333-74998))
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.54   |  | Letter Agreement dated November 20, 2001 between dj Orthopedics, Inc. and the Leslie H. Cross
and Deborah L. Cross Family Trust (Incorporated by reference to Exhibit 10.54 to the
Registration Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.55   |  | Letter Agreement dated November 20, 2001 between dj Orthopedics, Inc. and Cyril Talbot III
(Incorporated by reference to Exhibit 10.55 to the Registration Statement on Form S-1 (Reg.
No. 333-74998))                                                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.56   |  | Letter Agreement dated November 20, 2001 between dj Orthopedics, Inc. and Michael R. McBrayer
(Incorporated by reference to Exhibit 10.56 to the Registration Statement on Form S-1 (Reg.
No. 333-74998))                                                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.57   |  | Assignment and Assumption Agreement dated November 20, 2001 between DonJoy, L.L.C. and dj
Orthopedics, Inc. (Incorporated by reference to Exhibit 10.57 to the Registration Statement
on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.58   |  | Assignment and Assumption Agreement dated November 20, 2001 among DonJoy, L.L.C., dj
Orthopedics, Inc., First Union National Bank and The Chase Manhattan Bank (Incorporated by
reference to Exhibit 10.58 to the Registration Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.59   |  | Supplement No. 1 dated as of April 4, 2002
to the Security Agreement dated as of June
30, 1999 among dj Orthopedics, LLC, dj
Orthopedics, Inc., and Wachovia Bank,
National Association (Incorporated by
reference to Exhibit 10.59 to dj
Orthopedics, Inc.s Report on Form 10-Q for
the quarter ended June 29, 2002)                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.60   |  | Supplement No. 1 dated as of April 4, 2002
to the Indemnity, Subrogation and
Contribution Agreement dated as of June 30,
1999 among dj Orthopedics, LLC and Wachovia
Bank, National Association (Incorporated by
reference to Exhibit 10.60 to dj
Orthopedics, Inc.s Report on Form 10-Q for
the quarter ended June 29, 2002)                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.61   |  | Supplement No. 1 dated as of April 4, 2002
to the Subsidiary Guarantee Agreement dated
as of June 30, 1999, among each of the
subsidiaries of dj Orthopedics, LLC and
Wachovia Bank, National Association
(Incorporated by reference to Exhibit 10.61
to dj Orthopedics, Inc.s Report on Form
10-Q for the quarter ended June 29, 2002)                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.62   |  | Supplemental Indenture dated as of April 4,
2002 among dj Orthopedics Development
Corporation, dj Orthopedics Capital
Corporation, dj Orthopedics, Inc. and The
Bank of New York (Incorporated by reference
to Exhibit 10.62 to dj Orthopedics, Inc.s
Report of Form 10-Q for the quarter ended
June 29, 2002)                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.63   |  | Agreement dated as of April 4, 2002 between
dj Orthopedics, LLC and Wachovia Bank,
National Association (Incorporated by
reference to Exhibit 10.63 to dj
Orthopedics, Inc.s Report of Form 10-Q for
the quarter ended June 29, 2002)                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.64   |  | Amended and Restated Employment Agreement
dated as of July 11, 2002 among dj
Orthopedics, LLC, dj Orthopedics, Inc. and
Cyril Talbot III (Incorporated by reference
to Exhibit 10.64 of Post-Effective
Amendment #1 to dj Orthopedics, Inc.s
Registration Statement on Form S-1 (Reg.
No. #333-74998))                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.65   |  | Amendment No. 2 to Credit Agreement, dated as of October 29, 2002 among dj Orthopedics, Inc., dj Orthopedics, LLC, Wachovia Bank,
National Association, and JPMorgan Chase Bank (Incorporated by reference to dj Orthopedics, Inc.s Report of Form 10-Q for the quarter
ended September 28, 2002)                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.66*  |  | Outsourcing Agreement, dated as of December 30, 2002 by and between Creditek MediFinancial, Inc. and dj Orthopedics, LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.67*  |  | Amendment No. 3 to Credit Agreement, dated as of February 14, 2003 among dj Orthopedics, Inc., dj Orthopedics, LLC, Wachovia Bank,
National Association, and JPMorgan Chase Bank                                                                                                                                                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|12.1*   |  | Statement re: Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|21.1*   |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|23.1*   |  | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



---

|* |  | Filed herewith
|- |  | --------------

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(b)  Reports on Form 8-K:

A Report on Form 8-K was filed on October 4, 2002, reporting under Item 5
the appointment of Lesley H. Howe to our Board of Directors.

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DJ ORTHOPEDICS, INC.
SCHEDULE II  Valuation and Qualifying Accounts and Reserve
For the Three Years Ended December 31, 2002

|                             |                                |   |                   |             |                    |   |           |            |  
|---------------------------- | ------------------------------ | - | ----------------- | ----------- | ------------------ | - | --------- | ---------- | -
|                             |                                |   | Allowance for     |             | Reserve for       
|                             |                                |   | Doubtful Accounts |             | Excess and        
|                             |                                |   | and Sales Returns |             | Obsolete Inventory
|                             |                                |   |                   |             |                   
|Balance at December 31, 1999 |                                | $ | 989,000           |             |                    | $ | 991,000   |           
|                             | Provision                      |   |                   | 6,285,000   |                    |   |           | 583,000    |  
|                             | Write-offs and recoveries, net |   |                   | (2,996,000  | )                  |   |           | 2,200,000  |  
|                             |                                |   |                   |             |                    |   |           |           
|Balance at December 31, 2000 |                                |   | 4,278,000         |             |                    |   | 3,774,000 |           
|                             | Provision                      |   |                   | 10,701,000  |                    |   |           | 604,000    |  
|                             | Write-offs and recoveries, net |   |                   | (6,238,000  | )                  |   |           | (1,378,000 | )
|                             |                                |   |                   |             |                    |   |           |           
|Balance at December 31, 2001 |                                |   | 8,741,000         |             |                    |   | 3,000,000 |           
|                             | Provision                      |   |                   | 22,269,000  |                    |   |           | 6,124,000  |  
|                             | Write-offs and recoveries, net |   |                   | (20,965,000 | )                  |   |           | (4,560,000 | )
|                             |                                |   |                   |             |                    |   |           |           
|Balance at December 31, 2002 |                                | $ | 10,045,000        |             |                    | $ | 4,564,000 |           
|                             |                                |   |                   |             |                    |   |           |           

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SIGNATURES

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

|                     |  |                      |  |                                                                          
|-------------------- |  | -------------------- |  | -------------------------------------------------------------------------
|Date: March 28, 2003 |  | DJ ORTHOPEDICS, INC.
|                     |  |                      |  |                                                                          
|                     |  | By:                  |  | /s/ LESLIE H. CROSS

Leslie H. CrossPresident and Chief Executive Officer

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

|                                               |  |                                                                                                          |  |               
|---------------------------------------------- |  | -------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                      |  | Title                                                                                                    |  | Date          
|                                               |  |                                                                                                          |  |               
|                                               |  |                                                                                                          |  |               
|/s/ LESLIE H. CROSS

Leslie H. Cross           |  | President, Chief Executive Officer and Director
(Principal Executive Officer)                            |  | March 28, 2003
|                                               |  |                                                                                                          |  |               
|/s/ VICKIE L. CAPPS

Vickie L. Capps           |  | Senior Vice President  Finance and Chief Financial
Officer (Principal Financial and Accounting Officer) |  | March 28, 2003
|                                               |  |                                                                                                          |  |               
|/s/ JACK R. BLAIR

Jack R. Blair               |  | Chairman of the Board of Directors                                                                       |  | March 28, 2003
|                                               |  |                                                                                                          |  |               
|/s/ MITCHELL J. BLUTT

Mitchell J. Blutt, M.D. |  | Director                                                                                                 |  | March 28, 2003
|                                               |  |                                                                                                          |  |               
|/s/ DAMION E. WICKER

Damion E. Wicker, M.D.   |  | Director                                                                                                 |  | March 28, 2003
|                                               |  |                                                                                                          |  |               
|/s/ CHARLES T. ORSATTI

Charles T. Orsatti     |  | Director                                                                                                 |  | March 28, 2003
|                                               |  |                                                                                                          |  |               
|/s/ LESLEY H. HOWE

Lesley H. Howe             |  | Director                                                                                                 |  | March 28, 2003
|                                               |  |                                                                                                          |  |               
|/s/ KIRBY L. CRAMER

Kirby L. Cramer           |  | Director                                                                                                 |  | March 28, 2003

81



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##### Table of Contents






CERTIFICATIONS OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
REGARDING FACTS AND CIRCUMSTANCES RELATING TO QUARTERLY REPORTS

I, Leslie H. Cross, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of dj Orthopedics, Inc.;                                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                



| | (a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                    
|
| | (c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal
controls, which could adversely affect the registrants ability to
record, process, summarize and report financial data and have identified
for the registrants auditors any material weaknesses in internal
controls; and
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal
controls; and                                                                                                                                         



|6. |  | The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |     |  |                                                                          
|-------------------- |  | --- |  | -------------------------------------------------------------------------
|Date: March 28, 2003 |  | BY: |  | /s/ LESLIE H. CROSS
Leslie H. Cross
President and Chief Executive Officer

82



---



##### Table of Contents



I, Vickie L. Capps, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of dj Orthopedics, Inc.;                                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;                   
|  
|4. |  | The registrants other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:                                                                                                



| | (a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | evaluated the effectiveness of the registrants disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the Evaluation Date); and                                                                                                    
|
| | (c) |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) |  | all significant deficiencies in the design or operation of internal
controls, which could adversely affect the registrants ability to
record, process, summarize and report financial data and have
identified for the registrants auditors any material weaknesses in
internal controls; and
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                         



|6. |  | The registrants other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |     |  |                                                                                                
|-------------------- |  | --- |  | -----------------------------------------------------------------------------------------------
|Date: March 28, 2003 |  | BY: |  | /s/ VICKIE L. CAPPS
Vickie L. Capps
Senior Vice President  Finance and Chief Financial Officer

83



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##### Table of Contents






INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.1     |  | Amended and Restated Certificate of Incorporation of dj Orthopedics, Inc. (Incorporated by reference
to Exhibit 4.1 to the Registration Statement of dj Orthopedics, Inc. on Form S-8 (Reg. No.
333-73966))                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.2     |  | Amended and Restated By-laws of dj Orthopedics, Inc. (Incorporated by reference to Exhibit 4.2 to the
Registration Statement of dj Orthopedics, Inc. on Form S-8 (Reg. No. 333-73966))                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.3     |  | Amended and Restated Operating Agreement of dj Orthopedics, LLC (Incorporated by reference to Exhibit
3.1 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.4     |  | By-laws of dj Orthopedics, LLC (Incorporated by reference to Exhibit 3.4 to the Registration
Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.5     |  | Certificate of Incorporation of DJ Orthopedics Capital Corporation (Incorporated by reference to
Exhibit 3.3 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.6     |  | By-laws of DJ Orthopedics Capital Corporation (Incorporated by reference to Exhibit 3.6 to the
Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|4.1     |  | Indenture dated as of June 30, 1999 among dj Orthopedics, Inc., as successor to DonJoy, L.L.C., dj
Orthopedics, LLC and DJ Orthopedics Capital Corporation and The Bank of New York, as Trustee
(Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 (Reg. No.
333-86835))                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|4.2     |  | Form of 12 5/8% Senior Subordinated Note due 2009 (included as Exhibit B to Exhibit 4.1)                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.1    |  | Recapitalization Agreement dated as of April 29, 1999 among J.P. Morgan DJ Partners, LLC (f/k/a Chase
DJ Partners LLC), dj Orthopedics, Inc., as successor to DonJoy, L.L.C., and Smith & Nephew
(Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4 (Reg. No.
333-86835))                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.2    |  | Group Research Centre Technology Agreement dated as of June 30, 1999 between dj Orthopedics, Inc., as
successor to DonJoy, L.L.C., and Smith & Nephew (Incorporated by reference to Exhibit 10.2 to the
Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.3    |  | Supply Agreement dated as of June 30, 1999 between dj Orthopedics, Inc., as successor to DonJoy,
L.L.C., and Smith & Nephew (Incorporated by reference to Exhibit 10.3 to the Registration Statement
on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.4    |  | Distribution Agreement dated as of June 30, 1999 between dj Orthopedics, Inc., as successor to
DonJoy, L.L.C., Smith & Nephew and the affiliates of Smith & Nephew listed on Schedule I thereto
(Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-4 (Reg. No.
333-86835))                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.5    |  | Subleases dated as of June 30, 1999 between dj Orthopedics, LLC and Smith & Nephew (Incorporated by
reference to Exhibit 10.7 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.6    |  | Guaranties dated as of June 30, 1999 of dj Orthopedics, Inc., as successor to DonJoy, L.L.C.
(Incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-4 (Reg. No.
333-86835))                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.7    |  | Preferred Unit Purchase Agreement dated as of June 30, 1999 among dj Orthopedics, Inc., as successor
to DonJoy, L.L.C., J.P. Morgan Partners (23A SBIC), L.L.C. (formerly CB Capital Investors, L.L.C.)
and First Union Investors, Inc. (Incorporated by reference to Exhibit 10.9 to the Registration
Statement of Form S-4 (Reg. No. 333-86835))                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.8    |  | Agreement and Plan of Merger dated as of October 26, 2001 between DonJoy, L.L.C., dj Orthopedics,
Inc. and dj Acquisition Corporation (Incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.9    |  | Credit Agreement dated as of June 30, 1999 among dj Orthopedics, Inc. as successor to DonJoy, L.L.C.,
dj Orthopedics, LLC, DJ Orthopedics Capital Corporation, the Lenders party thereto and First Union
National Bank, as Administrative Agent (Incorporated by reference to Exhibit 10.11 to the
Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.10   |  | Agreement dated as of July 13, 2000 among dj Orthopedics, Inc., as successor to DonJoy, L.L.C., dj
Orthopedics, LLC, the Lenders under that certain Credit Agreement dated as of June 30, 1999, as
amended, First Union National Bank, as administrative agent, and The Chase Manhattan Bank, as
syndication agent. (Incorporated by reference to Exhibit 10.3 to DonJoy, L.L.C.s report on Form 8-K
dated July 21, 2000))
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.11   |  | Indemnity, Subrogation and Contribution Agreement dated as of June 30, 1999 among dj Orthopedics,
LLC, J.P. Morgan Partners (23A SBIC), L.L.C. (formerly CB Capital Investors, L.L.C.), DJ Capital
Investors L.L.C. and First Union National Bank, as Collateral Agent (Incorporated by reference to
Exhibit 10.12 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.12   |  | Parent Guarantee Agreement dated as of June 30, 1999 between dj Orthopedics, Inc., as successor to
DonJoy, L.L.C., and First Union National Bank, as Collateral Agent (Incorporated by reference to
Exhibit 10.13 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                            
|10.13   |  | Subsidiary Guarantee Agreement dated as of June 30, 1999 between DJ Orthopedics Capital Corporation
and First Union National Bank, as Collateral Agent (Incorporated by reference to Exhibit 10.14 to the
Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                         





---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.14   |  | Pledge Agreement dated as of June 30, 1999 among dj Orthopedics, LLC, dj Orthopedics, Inc., as
successor to DonJoy, L.L.C., and First Union National Bank, as Collateral Agent (Incorporated by
reference to Exhibit 10.15 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.15   |  | Security Agreement dated as of June 30, 1999 among dj Orthopedics, LLC, dj Orthopedics, Inc., as
successor to DonJoy, L.L.C., J.P. Morgan Partners (23A SBIC), L.L.C. (formerly CB Capital Investors,
L.L.C.), DJ Capital Investors, L.L.C. and First Union National Bank, as Collateral Agent
(Incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-4 (Reg. No.
333-86835))                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.16   |  | Leasehold Deed of Trust, Security Agreement and Assignment of Leases and Rents dated as of June 30,
1999 by dj Orthopedics, LLC, as grantor, to First American Title Insurance Company, as trustee
(Incorporated by reference to Exhibit 10.17 to the Registration Statement on Form S-4 (Reg. No.
333-86835))                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.17   |  | Employment Agreement dated as of June 30, 1999 between dj Orthopedics, LLC and Leslie H. Cross
(Incorporated by reference to Exhibit 10.18 to the Registration Statement on Form S-4 (Reg. No.
333-86835))                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.18   |  | Employment Agreement dated as of June 30, 1999 between dj Orthopedics, LLC and Cyril Talbot III
(Incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-4 (Reg. No.
333-86835))                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.19   |  | Employment Agreement dated as of June 30, 1999 between dj Orthopedics, LLC and Michael R. McBrayer
(Incorporated by reference to Exhibit 10.20 to the Registration Statement on Form S-4 (Reg. No.
333-86835))                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.20   |  | Fifth Amended and Restated 1999 Option Plan of dj Orthopedics, Inc. dated October 25, 2001
(Incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-8 of dj
Orthopedics, Inc. (Reg. No. 333-73966))                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.21   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Leslie Cross (Incorporated by
reference to Exhibit 10.22 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.22   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Cyril Talbot (Incorporated by
reference to Exhibit 10.23 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.23   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Michael McBrayer (Incorporated
by reference to Exhibit 10.24 to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.24   |  | Asset Purchase Agreement dated as of July 7, 2000 among DePuy Orthopaedic Technology, Inc., dj
Orthopedics, LLC, and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference
to Exhibit 2.1 to DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.25   |  | Preferred Unit Purchase Agreement dated as of July 7, 2000, among dj Orthopedics, Inc., as successor
to DonJoy, L.L.C., and J.P. Morgan Partners (23A SBIC), LLC (formerly CB Capital Investors, L.L.C.)
First Union Capital Partners, LLC, DJC, Inc., TCW/Crescent Mezzanine Trust II, and TCW Leveraged
Income Trust II, L.P. (Incorporated by reference to Exhibit 4.1 to DonJoy, L.L.C.s report on Form
8-K dated July 21, 2000)
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.26   |  | Common Unit Purchase Agreement dated as of July 7, 2000, among dj Orthopedics, Inc., as successor to
DonJoy, L.L.C., and J.P. Morgan DJ Partners, LLC (formerly Chase DJ Partners, L.L.C.), Leslie H.
Cross & Deborah L. Cross Family Trust, Michael R. McBrayer, and Cyril Talbot III, (Incorporated by
reference to Exhibit 4.2 to DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.27   |  | Secured Promissory Note dated as of July 7, 2000 between Leslie H. Cross and dj Orthopedics, Inc., as
successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.3 to DonJoy, L.L.C.s report on
Form 8-K dated July 21, 2000)                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.28   |  | Secured Promissory Note dated as of July 7, 2000 between Cyril Talbot III and dj Orthopedics, Inc.,
as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.4 to DonJoy, L.L.C.s report
on Form 8-K dated July 21, 2000)                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.29   |  | Secured Promissory Note dated as of July 7, 2000 between Michael R. McBrayer and dj Orthopedics,
Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.5 to DonJoy, L.L.C.s
report on Form 8-K dated July 21, 2000)                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.30   |  | Third Amended and Restated Pledge Agreement dated as of June 11, 2001, among Leslie H. Cross, Leslie
H. Cross & Deborah L. Cross Family Trust, and dj Orthopedics, Inc., as successor to DonJoy, L.L.C.
(Incorporated by reference to Exhibit 10.7 to DonJoy, L.L.C.s quarterly report on Form 10-Q for the
quarter ended June 30, 2001)                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.31   |  | Third Amended and Restated Pledge Agreement dated as of June 11, 2001, between Cyril Talbot III and
dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 10.8 to
DonJoy, L.L.C.s quarterly report on Form 10-Q for the quarter ended June 30, 2001)                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.32   |  | Third Amended and Restated Pledge Agreement dated as of June 11, 2001, between Michael R. McBrayer
and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 10.9
to DonJoy, L.L.C.s quarterly report on Form 10-Q for the quarter ended June 30, 2001)                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.33   |  | Unit Purchase Agreement dated as of June 28, 2000, among Smith & Nephew Disposal, Inc. and J.P.
Morgan DJ Partners, LLC (formerly Chase DJ Partners, L.L.C.), Leslie H. Cross & Deborah L. Cross
Family trust, Michael R. McBrayer, and Cyril Talbot III. (Incorporated by reference to Exhibit 4.9 to
DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)                                                                      





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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.34   |  | Amended and Restated Secured Promissory Note dated as of June 28, 2000 between Michael R. McBrayer
and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.10
to DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)                                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.35   |  | Amended and Restated Secured Promissory Note dated as of June 28, 2000 among Leslie H. Cross &
Deborah L. Cross Family Trust, Leslie H. Cross and dj Orthopedics, Inc., as successor to DonJoy,
L.L.C. (Incorporated by reference to Exhibit 4.11 to DonJoy, L.L.C.s report on Form 8-K dated July
21, 2000)                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.36   |  | Amended and Restated Secured Promissory Note dated as of June 28, 2000 between Cyril Talbot III and
dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.12 to
DonJoys report on Form 8-K dated July 21, 2000)                                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.37   |  | Secured Promissory Note dated as of June 28, 2000 among Leslie H. Cross & Deborah L. Cross Family
Trust, Leslie H. Cross and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by
reference to Exhibit 4.13 to DonJoys report on Form 8-K dated July 21, 2000)                                                                                                                                                                                                                                                                                              
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.38   |  | Secured Promissory Note dated as of June 28, 2000 between Cyril Talbot III and dj Orthopedics, Inc.,
as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.14 to DonJoys report on Form
8-K dated July 21, 2000)                                                                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.39   |  | Secured Promissory Note dated as of June 28, 2000 between Michael R. McBrayer and dj Orthopedics,
Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.15 to DonJoys report on
Form 8-K dated July 21, 2000)                                                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.40   |  | Secured Promissory Note dated as of June 11, 2001 among Leslie H. Cross & Deborah L. Cross Family
Trust, Leslie H. Cross and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (Incorporated by
reference to Exhibit 10.4 to DonJoy, L.L.C.s quarterly report on Form 10-Q for the quarter ended
June 30, 2001)                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.41   |  | Secured Promissory Note dated as of June 11, 2001 between Cyril Talbot III and dj Orthopedics, Inc.,
as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 10.5 to DonJoy, L.L.C.s
quarterly report on Form 10-Q for the quarter ended June 30, 2001)                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.42   |  | Secured Promissory Note dated as of June 11, 2001 between Michael R. McBrayer and dj Orthopedics,
Inc., as successor to DonJoy, L.L.C. (Incorporated by reference to Exhibit 10.6 to DonJoy, L.L.C.s
quarterly report on Form 10-Q for the quarter ended June 30, 2001)                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.43   |  | Amendment No. 1 dated as of May 25, 2000 to the Credit Agreement dated as of June 30, 1999
(Incorporated by reference to Exhibit 10.1 to DonJoy, L.L.C.s report on Form 8-K dated July 21,
2000)                                                                                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.44   |  | dj Orthopedics, Inc. 2001 Omnibus Plan (Incorporated by reference to Exhibit 4.6 to the Registration
Statement on Form S-8 of dj Orthopedics, Inc. (Reg. No. 333-73966))                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.45   |  | Merger Agreement dated as of November 7, 2001 between dj Orthopedics, Inc. and DonJoy, L.L.C.
(Incorporated by reference to Exhibit 10.45 to the Registration Statement on Form S-1 (Reg. No.
333-74998) dated December 12, 2001)                                                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.46   |  | dj Orthopedics, Inc. 2001 Non-Employee Director Plan (Incorporated by reference to Exhibit 4.5 to the
Registration Statement on Form S-8 of dj Orthopedics, Inc. (Reg. No. 333-73966))                                                                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.47   |  | dj Orthopedics, Inc. 2001 Employee Stock Purchase Plan (Incorporated by reference to Exhibit 4.4 to
the Registration Statement on Form S-8 of dj Orthopedics, Inc. (Reg. No. 333-73966))                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.48   |  | Common Unit Purchase Agreement dated June 11, 2001 among DonJoy, L.L.C., JP Morgan DJ Partners,
L.L.C., Leslie H. Cross and Deborah L. Cross Family Trust, Michael R. McBrayer and Cyril Talbot III
(Incorporated by reference to Exhibit 10.3 to DonJoy, L.L.C.s Report on Form 10-Q for the quarter
ended June 30, 2001)                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.49   |  | Employment Agreement dated as of June 1, 2001 between dj Orthopedics, LLC and Paul K. Nichols, Jr.
(Incorporated by reference to Exhibit 10.2 to DonJoy, L.L.C.s Report on Form 10-Q for the quarter
ended June 30, 2001)                                                                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.50   |  | Asset Purchase Agreement dated June 1, 2001 by and among Alaron Technologies, L.L.C., seller, Paul K.
Nichols, Jr., Jamal D. Rushdy, Members, and dj Orthopedics, L.L.C., Buyer (Incorporated by reference
to Exhibit 10.1 to DonJoy, L.L.C.s Report on Form 10-Q for the quarter ended June 30, 2001)                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.51   |  | Management Consulting Agreement dated November 7, 2001 between dj Orthopedics, Inc., as successor to
DonJoy, L.L.C., and JPM Fairfield (Incorporated by reference to Exhibit 10.51 to the Registration
Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.52   |  | Consent and Termination Agreement dated November 20, 2001 by and among DonJoy, L.L.C., J.P. Morgan DJ
Partners, L.L.C., Leslie H. Cross & Deborah L. Cross Family Trust, Michael R. McBrayer, Cyril Talbot
III, J.P. Morgan Partners (23A SBIC), LLC, First Union Capital Partners, LLC, DJ Investment, LLC,
DJC, Inc., TCW/Crescent Mezzanine Trust II, TCW Leveraged Income Trust II, L.P., TCW Investment
Management Company and Crescent Mach I Partners, L.P. (Incorporated by reference to Exhibit 10.52 to
the Registration Statement on Form S-1 (Reg. No. 333-74998))





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##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.53   |  | Registration Rights Agreement dated November 20, 2001 by and among dj Orthopedics, Inc., J.P. Morgan
DJ Partners, L.L.C., Leslie H. Cross & Deborah L. Cross Family Trust, Michael R. McBrayer, Cyril
Talbot III, J.P. Morgan Partners (23A SBIC), LLC, First Union Capital Partners, LLC, DJ Investment,
LLC, DJC, Inc., TCW/ Crescent Mezzanine Trust II, TCW Leveraged Income Trust II, L.P., TCW Investment
Management Company and Crescent Mach I Partners, L.P. (Incorporated by reference to Exhibit 10.53 to
the Registration Statement on Form S-1 (Reg. No. 333-74998))
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.54   |  | Letter Agreement dated November 20, 2001 between dj Orthopedics, Inc. and the Leslie H. Cross and
Deborah L. Cross Family Trust (Incorporated by reference to Exhibit 10.54 to the Registration
Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.55   |  | Letter Agreement dated November 20, 2001 between dj Orthopedics, Inc. and Cyril Talbot III
(Incorporated by reference to Exhibit 10.55 to the Registration Statement on Form S-1 (Reg. No.
333-74998))                                                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.56   |  | Letter Agreement dated November 20, 2001 between dj Orthopedics, Inc. and Michael R. McBrayer
(Incorporated by reference to Exhibit 10.56 to the Registration Statement on Form S-1 (Reg. No.
333-74998))                                                                                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.57   |  | Assignment and Assumption Agreement dated November 20, 2001 between DonJoy, L.L.C. and dj
Orthopedics, Inc. (Incorporated by reference to Exhibit 10.57 to the Registration Statement on Form
S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.58   |  | Assignment and Assumption Agreement dated November 20, 2001 among DonJoy, L.L.C., dj Orthopedics,
Inc., First Union National Bank and The Chase Manhattan Bank (Incorporated by reference to Exhibit
10.58 to the Registration Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                       
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.59   |  | Supplement No. 1 dated as of
April 4, 2002 to the Security
Agreement dated as of June
30, 1999 among dj
Orthopedics, LLC, dj
Orthopedics, Inc., and
Wachovia Bank, National
Association (Incorporated by
reference to Exhibit 10.59 to
dj Orthopedics, Inc.s Report
on Form 10-Q for the quarter
ended June 29, 2002)                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.60   |  | Supplement No. 1 dated as of
April 4, 2002 to the
Indemnity, Subrogation and
Contribution Agreement dated
as of June 30, 1999 among dj
Orthopedics, LLC and Wachovia
Bank, National Association
(Incorporated by reference to
Exhibit 10.60 to dj
Orthopedics, Inc.s Report on
Form 10-Q for the quarter
ended June 29, 2002)                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.61   |  | Supplement No. 1 dated as of
April 4, 2002 to the
Subsidiary Guarantee
Agreement dated as of June
30, 1999, among each of the
subsidiaries of dj
Orthopedics, LLC and Wachovia
Bank, National Association
(Incorporated by reference to
Exhibit 10.61 to dj
Orthopedics, Inc.s Report on
Form 10-Q for the quarter
ended June 29, 2002)                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.62   |  | Supplemental Indenture dated
as of April 4, 2002 among dj
Orthopedics Development
Corporation, dj Orthopedics
Capital Corporation, dj
Orthopedics, Inc. and The
Bank of New York
(Incorporated by reference to
Exhibit 10.62 to dj
Orthopedics, Inc.s Report of
Form 10-Q for the quarter
ended June 29, 2002)                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.63   |  | Agreement dated as of April
4, 2002 between dj
Orthopedics, LLC and Wachovia
Bank, National Association
(Incorporated by reference to
Exhibit 10.63 to dj
Orthopedics, Inc.s Report of
Form 10-Q for the quarter
ended June 29, 2002)                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.64   |  | Amended and Restated
Employment Agreement dated as
of July 11, 2002 among dj
Orthopedics, LLC, dj
Orthopedics, Inc. and Cyril
Talbot III (Incorporated by
reference to Exhibit 10.64 of
Post-Effective Amendment #1
to dj Orthopedics, Inc.s
Registration Statement on
Form S-1 (Reg. No.
#333-74998))                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.65   |  | Amendment No. 2 to Credit Agreement, dated as of October 29, 2002 among dj Orthopedics, Inc., dj
Orthopedics, LLC, Wachovia Bank, National Association, and JPMorgan Chase Bank (Incorporated by
reference to dj Orthopedics, Inc.s Report of Form 10-Q for the quarter ended September 28, 2002)                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.66*  |  | Outsourcing Agreement, dated as of December 30, 2002 by and between Creditek MediFinancial, Inc. and
dj Orthopedics, LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.67*  |  | Amendment No. 3 to Credit Agreement, dated as of February 14, 2003 among dj Orthopedics, Inc., dj
Orthopedics, LLC, Wachovia Bank, National Association, and JPMorgan Chase Bank                                                                                                                                                                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|12.1*   |  | Statement re: Computation of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|21.1*   |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|23.1*   |  | Consent of Ernst & Young LLP, Independent Auditors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



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|* |  | Filed herewith
|- |  | --------------