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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, 1999

                                       OR

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

            FOR THE TRANSITION PERIOD FROM __________ TO __________.

                        COMMISSION FILE NUMBER 333-86835
                               DJ ORTHOPEDICS, LLC
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                <C>                             <C>
            DELAWARE                            3842                      52-2165554
(STATE OR OTHER JURISDICTION OF    (PRIMARY STANDARD INDUSTRIAL        (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)     CLASSIFICATION CODE NUMBER)    IDENTIFICATION NUMBER)
</TABLE>

                       DJ ORTHOPEDICS CAPITAL CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                 <C>                            <C>
            DELAWARE                            3842                     52-2157537
(STATE OR OTHER JURISDICTION OF     (PRIMARY STANDARD INDUSTRIAL      (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)      CLASSIFICATION CODE NUMBER)   IDENTIFICATION NUMBER)
</TABLE>

                                 DONJOY, L.L.C.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                 <C>                             <C>
            DELAWARE                            3842                      33-0848317
(STATE OR OTHER JURISDICTION OF     (PRIMARY STANDARD INDUSTRIAL       (I.R.S. EMPLOYER
 INCORPORATION OR ORGANIZATION)      CLASSIFICATION CODE NUMBER)    IDENTIFICATION NUMBER)
</TABLE>

                                2985 SCOTT STREET
                             VISTA, CALIFORNIA 92083
                                 (800) 336-5690
    (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                  OF REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)

                                 ---------------

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

           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.

   DJ ORTHOPEDICS, LLC                                    Yes [X]  No [ ]

   DJ ORTHOPEDICS CAPITAL CORPORATION                     Yes [X]  No [ ]

   DONJOY, L.L.C.                                         Yes [X]  No [ ]

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

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<PAGE>   2
                               DJ ORTHOPEDICS, LLC
                       DJ ORTHOPEDICS CAPITAL CORPORATION
                                 DONJOY, L.L.C.

                                    FORM 10-K

                                TABLE OF CONTENTS

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                                                                            PAGE NO.
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                                     PART I
Item 1.  Business.........................................................     3
Item 2.  Properties.......................................................    29
Item 3.  Legal Proceedings................................................    30
Item 4.  Submission of Matters to a Vote of Security Holders..............    30

                                     PART II
Item 5.  Market for the Registrant's Common Equity and Related
           Stockholder Matters............................................    30
Item 6.  Selected Financial Data..........................................    31
Item 7.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations .........................................    33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......    42
Item 8.  Financial Statements and Supplementary Data......................    43
Item 9.  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosures .........................................    60

                                    PART III
Item 10. Directors and Executive Officers of the Registrant...............    61
Item 11. Executive Compensation...........................................    63
Item 12. Security Ownership of Certain Beneficial Owners and Management...    66
Item 13. Certain Relationships and Related Transactions...................    69

                                     PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports On
           Form 8-K.......................................................    75

SIGNATURES................................................................    77

</TABLE>



EXPLANATORY NOTE

This integrated Form 10-K is filed pursuant to the Securities Exchange Act of
1934, as amended, for each of DonJoy, L.L.C. ("DonJoy"), a Delaware limited
liability company, dj Orthopedics, LLC, a Delaware limited liability company
("dj Ortho"), a wholly-owned subsidiary of DonJoy and DJ Orthopedics Capital
Corporation ("DJ Capital"), a Delaware corporation, a wholly-owned subsidiary of
dj Ortho, (collectively, "the Company"). dj Ortho is a wholly-owned subsidiary
of DonJoy and represents substantially all of the revenues and net income of the
Company. DJ Capital was formed solely to act as a co-issuer (and as a joint and
several obligor) with dj Ortho of $100,000,000 aggregate principal amount at
maturity of 12 5/8% Senior Subordinated Notes due 2009. DJ Capital does not hold
any assets or other properties or conduct any business. No separate financial
information for DJ Capital has been provided herein because management believes
such information would not be meaningful because DJ Capital has no financial or
other data to report in response to the requirements of Form 10-K and thus,
there is no separate information regarding DJ Capital to report herein.

BACKGROUND

The Company was established in 1982 under the laws of California as DonJoy, Inc.
The Company was acquired by Smith & Nephew, Inc. (formerly Smith & Nephew
Consolidated, Inc., the "Former Parent") effective September 18, 1987 through a
purchase of all the then outstanding shares of the Company's stock. The Former
Parent is a wholly-owned subsidiary of Smith & Nephew plc., a United Kingdom
company. In November 1996, Smith & Nephew DonJoy, Inc. was merged into the
Former Parent and began to operate as a division. Effective December 29, 1998,
the Former Parent contributed the Company's net assets and shares of a Mexican
subsidiary into DonJoy, L.L.C. a newly formed Delaware limited liability company
and became the sole member of the new entity. In June 1999, the Former Parent
sold approximately 90% of its member's interest back to the Company in
connection with a series of recapitalization transactions (See Note 1 of Notes
to Consolidated Financial Statements). The Company's principal executive offices
are located at 2985 Scott Street, Vista, California 92083, and its telephone
number is (800) 336-5690.



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                                     PART I

ITEM 1. BUSINESS

This annual report on Form 10-K contains certain forward-looking statements that
involve risks and uncertainties. The actual future results for the Company may
differ materially from those discussed herein. Additional information concerning
factors that could cause or contribute to such differences can be found in Part
II, Item 7 entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and elsewhere throughout this annual report. Unless
the context requires otherwise, the "Company," "we," "us" and "our" each refers
to DonJoy and dj Ortho and its wholly owned subsidiaries, DJ Capital and dj
Orthopedics de Mexico, S.A. de C.V.

OVERVIEW

The Company is a world leading designer, manufacturer and marketer of orthopedic
recovery products. Based on U.S. sales, the Company believes it is the leading
provider of orthopedic recovery products and certain complementary products in
the United States. The Company's broad product lines of rigid knee braces, soft
goods and specialty and other orthopedic products provide a range of solutions
for patients and orthopedic professionals during the various stages of the
orthopedic treatment and recovery process. The Company's products are used
before, after and as an alternative to surgery, during and after rehabilitation
and for the treatment of osteoarthritis. The Company is a market leader in the
orthopedic recovery products industry, selling more than 500 individual products
in over 50 countries throughout the world. The Company sells its products under
the DonJoy and ProCare brand names, each of which the Company believes enjoys
one of the highest levels of brand name recognition within the orthopedic
recovery products industry. In addition to the typical orthopedic patient, the
Company's products are used by professional athletes, NCAA athletic programs and
the U.S. Ski Team. The Company believes that its leading market positions,
strong brand names, reputation for quality products, broad product lines,
established distribution networks in the United States and commitment to
research and development provide it with significant opportunities to further
grow revenues and earnings. For 1999 and 1998, the Company's net revenues were
$114.3 million and $100.8 million, respectively, and the Company's adjusted
EBITDA (as defined) was $25.1 million and $22.0 million, respectively.

The Company's product lines include rigid knee braces, soft goods and a
portfolio of specialty and other orthopedic products.

-      Rigid Knee Braces. The Company's rigid knee braces include ligament
       braces, which provide durable support for knee ligament instabilities,
       post-operative braces, which provide both knee immobilization and a
       protected range of motion; and osteoarthritic ("OA") braces, which
       provide relief of knee pain due to osteoarthritis. These
       technologically-advanced products are generally prescribed to a patient
       by an orthopedic professional. The Company's 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. Substantially all of the Company's rigid knee
       braces are marketed under the DonJoy brand name. These products
       represented approximately 43% of the Company's net revenues for the year
       ended December 31, 1999.

-      Soft Goods. The Company's 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. Approximately 61% of the Company's
       soft goods products are marketed under the ProCare brand name, with the
       remainder marketed under the DonJoy brand name. These products
       represented approximately 35% of the Company's net revenues for the year
       ended December 31, 1999.

-      Specialty and Other Orthopedic Products. The Company's portfolio of
       specialty and other orthopedic products, which are designed to facilitate
       orthopedic rehabilitation, include lower extremity walkers (boots which
       are an alternative to lower extremity casting), upper extremity braces
       (shoulder and arm braces and slings), cold therapy systems (a form of
       pain management which provides continuous cold therapy to assist in the
       reduction of pain and swelling) and pain management delivery systems (a
       range of ambulatory infusion pumps for the delivery of local anesthetic
       directly into a joint following surgery). Approximately 85% of the
       Company's specialty and other orthopedic products are marketed under the
       DonJoy brand name, with the remainder marketed under the ProCare brand
       name. These products represented approximately 22% of the Company's net
       revenues for the year ended December 31, 1999.

The Company sells its DonJoy products primarily to orthopedic surgeons, orthotic
and prosthetic centers, hospitals, surgery centers, physical therapists and
trainers to meet the specific needs of their patients. The Company sells its
ProCare products under private label brand names primarily to third party
distributors who generally resell the Company's products to large hospital
chains, hospital buying groups, primary care networks and orthopedic physicians.
The Company's products are used by people who have sustained an injury, have
recently completed an orthopedic surgical procedure and/or suffer from an
affliction of the joint. In addition, a number of high profile professional and
amateur athletes who participate in sports such as football, basketball and
skiing, choose to use the Company's products.


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COMPETITIVE STRENGTHS

The Company believes that the following competitive strengths provide it with a
strong and stable base to enable the Company to further enhance growth and
profitability.

Leading Market Positions. The Company is a world leading designer, manufacturer
and marketer of orthopedic recovery products and, based on U.S. sales, the
Company believes it is the leading provider of orthopedic recovery products and
certain complementary products in the United States, with an estimated market
share of 20%. Based on U.S. sales, the Company believes it holds the leading
U.S. market position for ligament and post-operative braces, with estimated
market shares of 28% and 25%, respectively, the number two market position for
OA braces, with an estimated market share of 13%, and leading positions in the
markets for certain of the Company's other products. The Company has established
its leadership positions:

-      by delivering innovative products that provide patients with superior
       quality and value;

-      through successful marketing and sales programs which focus on gaining
       the support of widely recognized orthopedic professionals and maintaining
       strong relationships with the Company's customers; and

-      by delivering quality products with a high standard of customer service,
       including by shipping the majority of the Company's products within 24
       hours of receipt of the customer order, or 72 hours in the case of
       customized knee braces.

Strong Brand Name Recognition and Reputation for Quality. The Company's products
have achieved a high degree of brand name recognition and loyalty from its
customers. The Company believes DonJoy is the most recognized brand name of knee
braces in the orthopedic recovery products industry. In addition, the Company's
ProCare brand name is well recognized by third party distributors of soft goods
in the orthopedic recovery products industry. The Company's other trademarks
include product names that are well known among orthopedic professionals which
the Company believes provide it with a significant competitive advantage. The
Company's products are known for their design, quality construction and
durability. The Company's braces are used by a number of professional athletes
and NCAA athletic programs. The Company is also the official and exclusive
supplier of braces and supports to the U.S. Ski Team and the Company believes it
is the leading supplier of knee braces to players in the National Football
League.

Broad Product Lines. The Company believes that it has one of the broadest
product lines in the orthopedic recovery products industry. The Company markets
over 500 individual products which provide solutions to patients and orthopedic
professionals in addressing the various stages of the orthopedic treatment and
recovery process.

-      The Company's quality soft goods products are used by patients to address
       a wide range of orthopedic injuries and afflictions.

-      The Company's customized and off-the-shelf rigid knee braces are used as
       an alternative to surgery, to help bring patients back to pre-injury
       levels post-surgery or to support the normal functioning of the knee for
       patients who have returned to pre-injury activity levels.

-      The Company's other specialized devices such as cold therapy systems and
       pain management delivery systems are used by patients who have just
       undergone orthopedic surgery.

Established U.S. Distribution Networks. The Company has established broad
distribution networks within the United States. The Company's DonJoy product
lines are marketed by 26 commissioned sales organizations (referred to herein as
agents) which employ approximately 185 sales representatives. These sales
representatives undergo extensive training by both the Company and the agent and
use their technical expertise to market our products to orthopedic surgeons,
orthotic and prosthetic centers, hospitals, surgery centers, physical therapists
and trainers. The Company sells its ProCare products primarily to large,
national third party distributors, including Owens & Minor Inc., McKesson Corp.,
General Medical Corp. and Bergen Brunswig Corp., as well as to regional medical
surgical dealers and medical products buying groups. The Company believes that
its strong distribution networks in the United States provide the Company with
an established base from which to introduce new or enhanced products and expand
sales of existing product lines.

Successful Record of New Product Development. The Company has developed a
reputation as a research and development leader by introducing a steady flow of
product enhancements and new products into the market. Since 1995, the Company
introduced 10 significant new products, sales of which represented approximately
32% of the Company's net revenues for the year ended December 31, 1999. The
Company owns or has licensing rights to more than 50 patents, including the
"Four Points of Leverage" system, which is a critical element in the design of
the Company's ligament braces. In addition, the Company maintains close
relationships with a number of widely recognized orthopedic surgeons and sports
medicine specialists who assist in product research, development and marketing.
These professionals often become product "champions," speaking about the
Company's products at medical seminars,



                                       4
<PAGE>   5
assisting in the training of other professionals in the use and/or fitting of
the products and providing us with feedback on the industry's acceptance of the
new products.

Experienced and Incentivized Management Team. The Company's management team has
extensive experience in the orthopedic recovery products industry. The Company's
six senior executives have an average of 10 years of experience with the Company
and an average of over 18 years of experience within the orthopedic recovery
products industry. As a result of the recapitalization, management owns or has
the right to acquire pursuant to options, subject to certain conditions, up to
approximately 17% of DonJoy's equity interests on a fully diluted basis.

BUSINESS STRATEGY

The Company's strategic objectives are to strengthen its leadership position in
the orthopedic recovery products industry and to increase its revenues and
profitability. As a stand alone entity, the Company is able to pursue strategic
initiatives which were previously not possible. The Company intends to:

-      broaden its market reach,

-      enhance and grow its core business, and

-      expand its business platform.

The key elements of its business strategy are to:

Increase International Sales. International sales, primarily in Europe and
Japan, accounted for approximately 16% of the Company's net revenues for the
year ended December 31, 1999, and represent a significant area for potential
growth. The Company plans to increase its international sales by reorganizing
and expanding its international distribution network and implementing the
marketing and distribution strategies which the Company successfully utilizes in
the United States and certain international territories. For example, in
Germany, the Company's largest international market representing approximately
35% of international revenues in 1999, where the Company markets its products
through an independent distributor, the Company believes it has achieved market
shares comparable to those it has achieved in the United States through an
independent distributor. Historically, approximately 55% of the Company's
international sales were made through 30 Smith & Nephew sales organizations,
with the remainder made through 14 independent distributors. The Company has
replaced 19 Smith & Nephew sales organizations with independent distributors who
will focus on building strong relationships with its targeted customers and will
be responsible for achieving specified sales targets. In addition, the Company
is developing relationships with orthopedic professionals who are well
recognized in our targeted countries, some of whom the Company expect will
become product "champions," similar to orthopedic professionals in the United
States who speak about our products at medical seminars, assist in training
other professionals how to use and fit our products and provide us with feedback
on the industry's acceptance of our new products. The Company will focus on
implementing its strategies in the United Kingdom, France, Italy, Japan and
Spain and will continue its focus in Germany, all countries with substantial per
capita health care expenditures.

Improve Operating Efficiencies. The Company is actively pursuing opportunities
to improve the efficiencies of its vertically integrated manufacturing
operations. By upgrading its computer systems to achieve more efficient
production, the Company expects to achieve material and labor cost reductions as
well as economies of scale across its entire manufacturing operation. The
Company also plans to further automate its manufacturing operations through the
use of more technologically advanced fabrication equipment and systems. In
addition, the Company will continue to move portions of its labor intensive
operations to its facilities in Mexico to generate labor cost savings and
utilize the resulting additional capacity in its U.S. facility to manufacture
its more technologically advanced products. The Company also intends to
implement lean manufacturing techniques and further automate its manufacturing
operations through the use of more technologically advanced fabrication and
equipment systems. The Company will continue to rationalize the raw materials
used in the production of its existing products, thereby enabling the Company to
leverage its purchasing power. The Company also plans to achieve cost savings by
further reducing the number of stock keeping units (SKUs) without impacting
service or breadth of the Company's product range.

Introduce New Products and Product Enhancements. The Company intends to maintain
its position as a leading innovator of orthopedic recovery products through its
commitment to research and development and its close working relationships with
orthopedic professionals. Using its materials, process and design expertise in
bracing and supports, the Company will continue to enhance its current range of
products to address changing customer needs. In addition, the Company intends to
add complementary products through its own research and development efforts and
arrangements with third parties. For example, the Company has introduced two
pain management systems, the IceMan, a cold therapy system which it developed,
and, more recently, the PainBuster(TM) Pain Management System, a range of
ambulatory infusion pumps which it distributes under a licensing arrangement and
which the Company believes provides it with a platform for further opportunities
in the surgical market. The Company is also currently developing the



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VISTA System, a computerized post-operative brace designed to optimize a
patient's rehabilitation in the treatment of knee injuries, which the Company
believes is the only such system currently under development.

Pursue Strategic Growth Opportunities. The orthopedic recovery products industry
is highly fragmented and provides the Company with a number of potential
acquisition, investment and strategic alliance opportunities. The Company
intends to pursue strategic growth opportunities that will allow it to leverage
its existing distribution networks, brand name recognition and expertise in
research and development to increase revenues and cash flow. For example, the
Company will seek growth opportunities through acquisitions, investments or
strategic alliances that will:

-      expand the Company's core business,

-      enable the Company to offer complementary products, and

-      diversify into the broader orthopedic products industry.

INDUSTRY

The orthopedic recovery products industry, the primary industry in which the
Company currently competes, is a segment of the worldwide orthopedic products
industry, which had estimated sales in 1998, the last year for which data is
available, of $8.5 billion, including estimated U.S. sales of $5.1 billion. The
worldwide orthopedic products market includes reconstructive implants, tissue
fixation and healing products, orthopedic recovery products, spinal implants,
arthroscopy products, and other related products. The orthopedic recovery
products industry includes retail and non-retail sales of braces and supports
for the knee, ankle, back and upper extremities, including the shoulder, elbow,
neck and wrist and other related products. The U.S. orthopedic recovery products
industry generated estimated revenues of $630 million in 1998. The Company
currently competes in the non-retail segment of the U.S. orthopedic recovery
products industry, which generated estimated revenues of $535 million in 1998.
The European orthopedic recovery products industry generated estimated revenues
of $330 million in 1998. Comparable data for the rest of the world is not
readily available. Complementary market segments to the orthopedic recovery
products industry within the overall orthopedic products industry include
orthopedic pain management systems and devices, a market in which the Company
currently competes, and which generated estimated 1998 U.S. revenues of $150
million, and soft tissue fixation products and tissue healing products, which
represent attractive markets for the Company and which generated estimated 1998
U.S. revenues of $350 million. Comparable data for 1999 and for Europe and the
rest of the world is not readily available.

The orthopedic recovery products industry is highly fragmented and characterized
by competition among a few large, diversified orthopedic companies and numerous
smaller niche competitors. Revenues in the U.S. orthopedic recovery products
industry grew at an estimated compound annual growth rate of 3.5% from 1994
through 1998. This growth has been driven by increased participation in
exercise, sports and other physical activity, the aging "baby boomer" population
including adults suffering from osteoarthritis, and a growing awareness of the
importance of preventive bracing. Comparable data for 1999 and for Europe and
the rest of the world is not readily available.

The Company believes data set forth in this annual report regarding the
orthopedic products industry and its segments and the Company's market position
and market share within that industry or its segments are inherently imprecise,
but are generally indicative of their relative size and the Company's market
position and market share within that industry or its segments. Estimated
revenues for the orthopedic recovery products industry and its segments and the
historical growth rates for such industry and its segments were compiled by the
Company based on information obtained from Frost & Sullivan, an international
marketing consulting firm. The Company's estimates are subject to change based
on various factors, including those described under the caption "Factors
Affecting Future Performance" in this annual report. The following are
descriptions of segments of the U.S. orthopedic recovery products industry.
Comparable data for 1999 and for Europe and the rest of the world is not readily
available.

Knee Braces and Supports

The retail and non-retail knee brace and support market generated estimated
revenues of $272 million in 1998, of which approximately $242 million was
generated in the non-retail segment in which the Company competes. The knee
brace and support market consists of ligament braces, post-operative braces,
osteoarthritic braces, and soft knee supports. Revenues in this segment of the
industry grew at an estimated compound annual growth rate of 3.0% from 1994
through 1998. This stable market growth is characterized by increased volume and
modestly declining prices. Knee injuries are the most common affliction treated
by orthopedic professionals, with approximately 644,000 knee procedures
performed in 1998, including ligament repair, tissue repair and total knee
replacement procedures.

The Company believes it is the U.S. market leader in ligament braces and
post-operative braces with an estimated 28% and 25% market share, respectively,
and the number two U.S. provider of OA braces, with an estimated 13% market
share. The knee brace and support market is highly fragmented. Many of the
participants in this market are primarily suppliers of soft knee supports.



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Ankle Braces and Supports

The retail and non-retail ankle brace and support market generated estimated
revenues of $157 million in 1998, of which approximately $131 million was
generated in the non-retail segment in which the Company competes. The ankle
brace and support market consists of lower extremity walkers, rigid ankle
stirrups and soft ankle supports sold through an orthopedic prescribing
professional and other soft ankle supports sold primarily in the retail segment.
Revenues in this segment of the industry grew at an estimated compound annual
growth rate of 6.6% from 1994 through 1998. In 1998, over 2,000,000 people
sought medical attention for ankle and foot injuries. In the non-retail segment,
the Company believes it is the market leader in soft ankle supports with an
estimated 17% market share and one of the market leaders of lower extremity
walkers with an estimated 10% market share.

Back, Wrist, and Upper Extremity Braces and Supports

The retail and non-retail back, wrist and upper extremity markets collectively
generated estimated revenues of $175 million in 1998, of which approximately
$147 million was generated in the non-retail segment in which the Company
competes. The back, wrist and upper extremity markets consist of orthopedic
braces and supports to address afflictions of the back, wrist, shoulder, elbow
and neck which are sold in the prescriptive non-retail segment as well as in the
retail segment. Aggregate revenues in these segments of the industry grew at an
estimated compound annual growth rate of 3.1% from 1994 through 1998. The
Company believes certain of the Company's products enjoy leading market
positions in these markets.

Complementary Orthopedic Products

Complementary orthopedic products include orthopedic pain management systems and
devices, markets in which the Company currently competes, and soft tissue
fixation and tissue healing products, which represent attractive markets for the
Company. These markets represented revenues of approximately $150 million and
approximately $350 million, respectively, in 1998. Pain management systems and
devices include infusion pumps that administer local anesthetic into the joint
after a patient has undergone surgery. Soft tissue fixation products include
devices to reattach soft tissue to the bone and tissue healing products include
bone growth stimulation products.

PRODUCTS

The Company offers a broad range of products that provide a range of solutions
for patients and orthopedic professionals during various stages of the
orthopedic treatment and recovery process. The Company's core products are rigid
knee braces and soft goods. In addition, the Company offers a growing number of
complementary specialty and other orthopedic products. The Company's product
lines provide a range of treatment during the orthopedic recovery process, from
soft goods which are generally used after injury, whether or not surgery is
contemplated, to rigid knee braces and other specialty products which are
generally prescribed for use after surgery and during and after rehabilitation.

The Company markets its products under the DonJoy and ProCare brand names. The
Company marketed approximately 96% of its rigid knee braces, 85% of its
specialty and other orthopedic products and 39% of its soft goods products under
the DonJoy brand name during the year ended December 31, 1999. The Company
believes DonJoy is the most recognized brand name of knee braces in the
orthopedic recovery products industry. The Company marketed approximately 61% of
its soft goods products, 15% of its specialty and other orthopedic products and
4% of its rigid knee braces under the ProCare brand name during the year ended
December 31, 1999. The ProCare brand name is well recognized by third party
distributors of soft goods in the orthopedic recovery products industry.

Rigid Knee Bracing

The Company designs, manufactures and markets a broad range of rigid knee
bracing products, including ligament braces, post-operative braces and OA
braces. These technologically-advanced products are generally prescribed to a
patient by an orthopedic professional. The Company's 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. Rigid knee
bracing products represented approximately 43% of the Company's net revenues for
the year ended December 31, 1999.

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. They are generally prescribed six to
eight weeks after knee surgery, often after use of a more restrictive
post-operative brace. The Company's ligament braces can also be used to support
the normal functioning of the knee for patients who have returned to pre-injury
activity levels. The Company's 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 the Company's ligament braces are designed using the Company's patented "Four
Points of Leverage" system.



                                       7
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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 otherwise 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
surgeon. The Company's post-operative bracing product line includes a range of
premium to lower-priced off-the-shelf braces and accessory products.

OA Braces. OA braces are used to treat patients suffering from osteoarthritis, a
form of damage to the articular surface of the knee joint. The Company's line of
customized and off-the-shelf OA braces is designed to shift the resultant 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.

The following table sets forth information on the Company's primary products
within the three rigid knee bracing product lines, all of which are sold under
the DonJoy brand name and a new product category for the VISTA technology:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
PRODUCT                   TYPE OF BRACE            YEAR INTRODUCED         FUNCTION/DESCRIPTION
--------------------------------------------------------------------------------------------------------
<S>                       <C>                      <C>                     <C>
Defiance Custom Knee      Ligament/Osteoarthritic  1992                    The Company's hallmark premium
Brace                                                                      brace.  Custom-built,
                                                                           lightweight, strong and
Enhanced Defiance Custom  Ligament                 1998                    durable. Designed for strenuous
Knee Brace                                                                 athletic activity.


4TITUDE Brace             Ligament                 1999                    The Company's newest
                                                                           off-the-shelf brace. Introduced
                                                                           in June 1999.

Legend Brace              Ligament                 1995                    Sturdy, low-profile,
                                                                           off-the-shelf brace. Designed
                                                                           for athletic use.
--------------------------------------------------------------------------------------------------------
TROM Post-Operative       Post-operative           1998                    Allows for both immobilization
Brace                                                                      and protected range of motion
                                                                           after surgery.  Utilizes the
                                                                           Company's easy-to-use patented
                                                                           hinge assembly.

TROM Rehabilitation       Post-operative           1998                    Designed to provide protection
Brace                                                                      for the recovering knee up to 8
                                                                           months within a program of
                                                                           aggressive long-term
                                                                           rehabilitation.  Utilizes the
                                                                           Company's easy to use patented
                                                                           hinge assembly.

IROM Brace                Post-operative           1992                    Used for ligament instabilities.
                                                                           Allows for both immobilization
                                                                           and protected range of motion.
--------------------------------------------------------------------------------------------------------
Monarch Custom OA Brace   Osteoarthritic           1994                    Custom-built or off-the-shelf,
                                                                           flexible premium braces
Patient Ready Monarch     Osteoarthritic           1996                    recommended for relief of
OA Brace                                                                   osteoarthritic pain and ease of
                                                                           use. Can be easily adjusted by
                                                                           the patient.

OAdjuster Brace           Osteoarthritic           2000                    The OAdjuster off-the-shelf
                                                                           brace was introduced at the
                                                                           AAOS conference in March 2000.

OPAL OA Knee Brace        Osteoarthritic           1998                    Off-the-shelf, comfortable,
                                                                           light-weight, low-profile,
                                                                           slip-on sleeve-style Drytex
                                                                           brace.  Specifically designed
                                                                           for women.
--------------------------------------------------------------------------------------------------------
VISTA Technology          Rehabilitation System    2000 (anticipated)      The VISTA System includes a
                                                                           post-op brace, hand-held
                                                                           patient device and Clinician
                                                                           computer software to reduce the
                                                                           overall cost to rehab an ACL
                                                                           reconstruction.  The rehab
                                                                           system has individualized
                                                                           protocols and records the
                                                                           patients' progress and
                                                                           compliance.
--------------------------------------------------------------------------------------------------------
</TABLE>



                                       8
<PAGE>   9
Soft Goods

The Company's 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. The Company currently offers 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 Company's
soft goods products include the RocketSoc, an ankle support designed for chronic
sprains, the Playmaker, a neoprene knee brace for mild to moderate ligament
instabilities, and the Air DonJoy, a line of knee sleeves with air inflatable
cushions designed to treat and ease pain from knee malalignment. Soft goods
products represented approximately 35% of the Company's net revenues for the
year ended December 31, 1999.

Specialty and Other Orthopedic Products

The Company has a portfolio of specialty and other orthopedic recovery products
designed to facilitate orthopedic rehabilitation, including lower extremity
walkers, upper extremity braces, cold therapy systems, pain management delivery
systems and other related products and accessories. These products represented
approximately 22% of the Company's net revenues for the year ended December 31,
1999.

Lower Extremity Walkers. These products are boots which fit on a patient's foot
and provide comfort and stability for ankle and foot injuries. Because they can
be removed for showering or therapy, the Company's walkers are used as an
alternative to traditional casts. Sales of walkers represented approximately 37%
of the net revenues from specialty and other orthopedic products in 1999.

Upper Extremity Braces. The Company offers a line of shoulder and arm braces and
slings, including the Quadrant Shoulder Brace and the UltraSling. The Quadrant
Shoulder Brace is technologically advanced and designed for immobilization after
shoulder surgery and allows for controlled motion. The UltraSling is a durable
oversized sling which offers lower-priced immobilization and support for mild
shoulder sprains and strains.

Cold Therapy Systems. The Company manufactures, markets and sells the IceMan, a
cold therapy product which was introduced in 1996, as well as other cold therapy
products such as ice packs and wraps. The IceMan is a 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 which is used to circulate cold water from
a reservoir to a pad which is designed to fit the afflicted area, such as the
ankle, knee or shoulder. The IceMan 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 Delivery Systems. The Company entered into an arrangement in
1998 with I-Flow Corporation ("I-Flow") for the exclusive North American
distribution rights for the PainBuster(TM) Pain Management System manufactured
by I-Flow for use after surgical procedures. These pain management and relief
systems provide a continuous infusion of local anesthetic dispensed by the
physician directly into the wound site following surgical procedures. The
portable PainBuster(TM) 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 120 hours. The PainBuster(TM) Pain Management
Systems are intended to provide direct pain relief, reduce hospital stays and
allow earlier and greater ambulation. The Company believes that the
PainBuster(TM) Pain Management System provides it with a platform for further
opportunities in the surgical market.

The Company has reached agreement with I-Flow on certain interpretive questions
within the agreement which had arisen as a result of the distribution of the
product in North America by another company and the regulatory registration for
the distribution rights granted by I-Flow Corporation to the Company under the
agreement. The Company continues to make the Painbuster(TM) Pain Management
Systems available for sale under the amended agreement.

RESEARCH AND DEVELOPMENT

The Company's research and development program is aimed at developing and
enhancing products, processes and technologies to maintain the Company's
position as an innovator in the orthopedic recovery products industry. The
Company's research and development expenditures were $2.1 million, $2.2 million
and $2.1 million during the years ended December 31, 1999, 1998 and 1997,
respectively.



                                       9
<PAGE>   10
The Company's research and development activities are conducted in its Vista
facility by a group of 14 product engineers and designers who have an average of
over 10 years experience in developing and designing products using advanced
technologies, processes and materials. The research and development team uses a
variety of 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.

The Company's 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 the Company's existing products. The
Company is also pursuing strategic initiatives to identify areas for
technological innovation and to develop products that improve rehabilitation by
utilizing advanced technologies. For example, the Company is currently
developing the VISTA system, a rehabilitation management system that
incorporates an instrumented post-op brace, patient hand-held device and PC
software. The VISTA system is designed to lower the cost and enhance the
delivery of rehabilitation for knee injuries. The Company believes the VISTA
system is the only such system currently under development.

The Company has developed and maintains close relationships with a number of
widely recognized orthopedic surgeons and sports medicine specialists who assist
in product research, development and marketing. These professionals often become
product "champions", speaking about the Company's products at medical seminars,
assisting in the training of other professionals in the use and/or fitting of
the products and providing the Company with feedback on the industry's
acceptance of the new products. Some of these surgeons and specialists who
participate in the design of products and/or provide consulting services have
contractual relationships with the Company under which they receive royalty
payments or consultant fees in connection with the development of particular
products with which they have been involved. See "--Government Regulation."

The Company maintains the Clinical Education Research Facility (CERF) Laboratory
in its Vista facility which is used by orthopedic surgeons to practice surgical
techniques. These surgeons often provide the Company with feedback which assists
the Company in the development and enhancement of products. In addition, the
Company utilizes its biomechanical laboratory in its Vista facility to test the
effectiveness of the Company's products. U.S. based and international
surgeons/researchers collaborate with the research staff to perform
biomechanical testing. The tests are designed to demonstrate functionality of
new products and effectiveness of new surgical procedures. State of the art
mechanical models are used to simulate behavior of normal, injured and
osteoarthritic knees and look at the performance of new product designs as well
as competitive products. The Company believes it is the only orthopedic recovery
products manufacturer which has both surgical techniques and biomechanical
laboratories, the combination of which allows professionals to practice
procedures and then to measure the effectiveness of those procedures. In
addition, the Company provides external clinical and academic research grants to
leading health care professionals and institutions. The focus of these projects
is to evaluate treatments on specific patient populations, for example, after
knee surgery or subjects with knee osteoarthritis. Recent projects include
measurement of ACL strain with and without brace use, patient outcome after ACL
surgery with and without brace use, strength of ACL fixation devices, and cold
therapy effectiveness.

SALES, MARKETING AND DISTRIBUTION

The Company distributes its products in the U.S. and international markets
primarily through networks of agents and distributors who market and sell to
orthopedic surgeons, orthotic and prosthetic centers, third party distributors,
hospitals, surgery centers, physical therapists and trainers within the
orthopedic community. The Company's products are used by people who have
sustained an injury, have recently completed an orthopedic surgical procedure
and/or suffer from an affliction of the joint. In addition, a number of high
profile professional and amateur athletes who participate in sports such as
football, basketball and skiing, choose to use the Company's products. The
Company is the official and exclusive supplier of braces and supports to the
U.S. Ski Team. In addition, the Company believes it is the leading supplier of
knee braces to players in the National Football League, among whom use of knee
braces has more than tripled over the last two years according to a recent
survey of NFL team physicians. No individual customer, supplier or distributor
accounted for more than 10% of the Company's net revenues for the year ended
December 31, 1999.

The Company is committed to providing its customers with a superior standard of
customer service. The Company's 26 customer service representatives strive for
prompt product processing and delivery by coordinating between the customer and
the Company's sales, operations and shipping departments. The Company ships the
majority of its products within 24 hours of receipt of the customer order, or 72
hours in the case of customized braces. In addition, customer service
representatives provide follow-up and technical support.

UNITED STATES

The Company markets products in the United States under the DonJoy and ProCare
brands through two distinct sales and distribution channels as well as under
national contracts and through the OfficeCare program, described below. Sales in
the United States accounted for approximately 84% of the Company's net revenues
for the year ended December 31, 1999.



                                       10
<PAGE>   11
DonJoy. DonJoy products are marketed by 26 commissioned sales organizations
(referred to herein as agents) which employ approximately 185 sales
representatives. These sales representatives market to orthopedic surgeons,
orthotic and prosthetic centers, hospitals, surgery centers, physical therapists
and trainers. Because the DonJoy product line generally requires customer
education on the application and use of the product, the sales representatives
are technical specialists who receive extensive training from both the Company
and the agent and use their technical expertise to help fit the patient with the
Company's product and assist the orthopedic professional in choosing the
appropriate product to meet the patient's needs. After a product order is
received by a sales representative, the Company ships and bills the product
directly to the orthopedic professional and the Company pays a sales commission
to the agent.

The Company enjoys long-standing relationships with most of its 26 agents and
the 185 sales representatives, many of whom have marketed DonJoy products for
over 10 years. Under the arrangements with the agents, each agent is granted an
exclusive geographic territory for sales of the Company's products and is not
permitted to market products, or represent competitors who sell or distribute
products, that compete with the Company. The agents receive a commission which
varies based on the type of product being sold. If an agent fails to achieve
specified sales quotas during any quarter, the Company may terminate the agent,
which the Company has done in the past.

ProCare. ProCare products are 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 Corp.,
General Medical Corp., Allegiance Corp., PSS World Medical Inc. and Bergen
Brunswig Corp.; 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 ProCare products to large
hospital chains, hospital buying groups, primary care networks and orthopedic
physicians for use by the patient. Unlike DonJoy products, ProCare products
generally do not require significant customer education for their use.

National Contracts. 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, the Company has entered into
national contracts for DonJoy and ProCare products with large health care
providers and buying groups, such as Kaiser Permanente, HealthSouth Corp.,
NovaCare Inc., Premier Purchasing Partners, L.P., AmeriNet Inc., US
Government/Military hospitals, VHA Inc. and Columbia Healthcare. Under these
contracts, the Company provides discounted pricing to the buying group and is
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 the Company's products. The Company expects that in the
future it will enter into additional national contracts with other health care
providers and buying groups. See "Factors Affecting Future Performance --
Responses by Health Care Providers to Price Pressures; Formation of Buying
Groups" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview -- Third Party Reimbursement; Health Care
Reform; Managed Care."

OfficeCare. The Company provides an inventory management and insurance billing
system to orthopedic physicians in the U.S. through its OfficeCare program,
which was initiated in 1996. The Company supplies the physician with a working
inventory of orthopedic products for immediate disbursement to the physician's
patients. The Company then directly seeks reimbursement from the patient's
insurance company or other third party payer or from the patient where self-pay
is applicable.

INTERNATIONAL

The Company markets products in 44 countries, primarily in Europe and Japan,
under the DonJoy and ProCare brand names. International sales accounted for
approximately 16% and 18% of the Company's net revenues for the years ended
December 31, 1999 and 1998, respectively. Sales in Germany, the Company's
largest foreign market, accounted for approximately 35% of the Company's 1999
international net revenues, and sales in Canada accounted for approximately 10%
of the Company's 1999 international net revenues, with no other country
accounting for more than approximately 10% of the Company's 1999 international
net revenues. Total sales in Europe accounted for approximately 72% of the
Company's 1999 international net revenues, while sales in Germany, the United
Kingdom, France, Spain and Italy accounted for approximately 51% of the
Company's 1999 international net revenues. Sales in Japan accounted for
approximately 9% of the Company's 1999 international net revenues. The Company
expects its international net revenues to increase as a percentage of its total
net revenues in the future.

Historically, the Company has sold and distributed its products in foreign
markets through 30 Smith & Nephew sales organizations and 14 independent
distributors. The Company plans to increase its international sales by
continuing the reorganization and expansion of its international distribution
network started in 1999 and implementing the marketing and distribution
strategies which the Company successfully utilizes in the United States and
certain international territories. For example, in Germany, where the Company
markets its products through an independent distributor, the Company believes it
has achieved market shares comparable to those it has achieved in the United
States. Historically, approximately 55% of the Company's international sales
have been made through Smith & Nephew sales organizations. The Company has
replaced 19 Smith & Nephew sales organizations with independent distributors who
will focus on building strong relationships with its targeted customers and will
be responsible for achieving specified sales targets. In addition, the Company
is developing relationships with orthopedic professionals who are well
recognized in targeted countries and who are



                                       11
<PAGE>   12
expected to become product "champions", similar to orthopedic professionals in
the United States. The Company will focus on implementing its strategies in the
United Kingdom, France, Italy, Japan and Spain and will continue its focus in
Germany, all countries with substantial per capita health care expenditures. See
"Factors Affecting Future Performance - Transition to New Independent
Distributors in International Markets," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- International Sales," "--
Business Strategy."

MANUFACTURING

The Company manufactures substantially all of its products at its three
facilities in the United States and Mexico. See "Item 2. Properties." The
Company operates a vertically integrated manufacturing operation at its Vista,
California facility and is capable of producing a majority of its subassemblies
and components in-house. These include metal stamped parts, injection molding
components and fabric-strapping materials. The Company also has 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 computer aided design (CAD)
systems during the development process, the Company can produce a design
directly on computer-based fabrication equipment, reducing both production time
and costs.

The Company has achieved ISO 9001 certification, EN46001 certification and
Certification to the European Medical Device Directive at its Vista facility.
These certifications are internationally recognized quality standards for
manufacturing and assist the Company in marketing its products in certain
foreign markets.

Utilizing the latest production technologies and lean manufacturing practices at
its Vista facility, the Company is able to reduce the labor content of many of
its products. For labor intensive operations, primarily sewing, the Company
utilizes its two facilities in Mexico for subassembly and finished product
manufacturing. The Company will continue to move its more labor intensive
operations to its facilities in Mexico to generate labor cost savings and
utilize the resulting additional capacity at its Vista facility to manufacture
its more technologically advanced products.

The Company's manufacturing operations use new and innovative technologies and
materials including thermoplastics, various composites and polypropylene glass,
as well as a variety of light weight metals and alloys. The Company also uses
Velcro(TM) and neoprene, as well as Drytex, a wrap-knit nylon and polyester
composite, in the manufacture of its products. Most of the raw materials used by
the Company in the manufacture of its products are available from more than one
source and are generally readily available on the open market.

The Company outsources some of its finished products from manufacturers in
China. In addition, the Company distributes the PainBuster(TM) Pain Management
Systems which are manufactured by I-Flow as well as certain other products which
are manufactured by third parties.

COMPETITION

The orthopedic recovery products industry is highly competitive and fragmented.
The Company's competitors include a few large, diversified orthopedic companies
and numerous smaller niche companies. Some of the Company's competitors are part
of corporate groups that have significantly greater financial, marketing and
other resources than the Company. The Company's primary competitors in the rigid
knee brace market include DePuy OrthoTech (a division of Johnson & Johnson),
Innovation Sports Incorporated, Townsend Industries Inc., Bledsoe Brace Systems
(a division of Medical Technology, Inc.), Generation II USA, Inc. and Breg, Inc.
The Company competes in the non-retail sector of the soft goods products market
and its competitors include DeRoyal Industries, Zimmer, Inc. (a division of
Bristol-Meyers Squibb Company), Technol Orthopedic Products (a division of
Kimberly Clark Corp.) and DePuy OrthoTech (a division of Johnson & Johnson). The
Company competes with a variety of manufacturers of specialty and other
orthopedic products, depending on the type of product. In addition, in certain
foreign countries, the Company competes with one or more local competitors.

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.
Competitors have initiated stock and bill programs similar to our OfficeCare
program to provide value to their customers. Electro-Biology, Inc. ("EBI")
Medical Systems is the market leader with this type of program. Competition in
specialty and other orthopedic products is based on a variety of factors,
depending on the type of product.

The Company believes that its extensive product lines, advanced product design,
strong U.S. distribution networks, reputation with leading orthopedic surgeons
and sports medicine specialists and customer service performance provide it with
a competitive advantage over its competitors. In particular, the Company
believes that its broad product lines provide it with a competitive advantage
over the smaller niche companies which generally have innovative technology in a
focused product category, while its established distribution networks and
relationship-based selling efforts provide it with a competitive advantage over
larger manufacturers.



                                       12
<PAGE>   13
INTELLECTUAL PROPERTY

The Company's most significant intellectual property rights are its patents,
trademarks, including the Company's DonJoy and ProCare brand names, and
proprietary know-how.

The Company owns or has licensing rights to over 50 patents and has several
pending patent applications. The Company anticipates that it will apply for
additional patents in the future as it develops new products and product
enhancements. The Company's most significant patent involves the bracing
technology and design which it has patented as the "Four Points of Leverage"
system. Many of the Company's ligament bracing products have been designed using
the "Four Points of Leverage" system which effectively produces pressure to the
upper portion of the tibia, which, in turn, reduces strain on the damaged,
reconstructed or torn ligament. Because this system is patented, the Company's
competitors are prohibited from designing products which apply pressure to the
tibia using the Company's technique. The Company's patent covering the "Four
Points of Leverage" system expires in January 2005. The Company is currently
developing an alternate to this system. The Company's other significant patents
include the Custom Contour Measuring Instrument, which serves as an integral
part of the measurement process for patients ordering the Company's customized
ligament and OA braces. In addition, the Company owns patents covering a series
of hinges for its 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 and the Patient Ready Monarch. The Company also has patents relating to
its OA braces and specific mechanisms in a number of the Company's products. In
addition to these patents, the Company relies on non-patented know-how, trade
secrets, process and other proprietary information, which the Company protects
through a variety of methods, including confidentiality agreements and
proprietary information agreements with vendors, employees, consultants and
others who have access to the Company's proprietary information. See "Factors
Affecting Future Performance -- Patents and Proprietary Know-How."

The Company owns or has the licensing rights to a number of trademarks. In
addition to the DonJoy(R) and ProCare(R) brand names, the Company's most
significant trademarks are Defiance(R), GoldPoint(R), Monarch(R), RocketSoc(R),
IceMan(R), Air DonJoy(R), Quadrant(R), Legend(TM), TROM(TM), Playmaker(TM),
PainBuster(TM) Pain Management System, OPAL(TM). dj Ortho(TM), Never Stop
Getting Better(TM), 4TITUDE(TM), OAdjuster(TM) and dj Orthopedics(TM) are
registered worldwide.

In August 1998, Smith & Nephew entered into a five-year exclusive arrangement
with IZEX Technologies to license know-how and technology for the design,
manufacture and distribution of the VISTA System, a computerized post-operative
brace designed to optimize a patient's rehabilitation in the treatment of knee
injuries, which the Company believes is the only such system currently under
development. In connection with the recapitalization, Smith & Nephew assigned
this license to the Company.

The Company believes that its patents, trademarks and other proprietary rights
are important to the development and conduct of its business and the marketing
of its products. As a result, the Company aggressively protects its intellectual
property rights.

EMPLOYEES

As of December 31, 1999 the Company had 802 employees. The Company's workforce
is not unionized. The Company has not experienced any strikes or work stoppages,
and management generally considers its relationships with its employees to be
satisfactory.

GOVERNMENT REGULATION

Medical Device Regulation

United States. The Company's products and operations are subject to extensive
and rigorous regulation by the Federal 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 (the "Act"), 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. The Company's
current products are all Class I or Class II medical devices. All of the
Company's currently marketed products hold the relevant exemption or premarket
clearance required under the Act.

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"). Some Class I devices also require premarket clearance
by the FDA through the 510(k) premarket notification process described below.



                                       13
<PAGE>   14
Class II devices are those which are subject to the General Controls and most
require premarket demonstration of adherence to certain performance standards or
other special controls, as specified by the FDA, and clearance by the FDA.
Premarket review and clearance by the FDA for these devices is accomplished
through the 510(k) premarket notification procedure. For most Class II devices,
the manufacturer must submit to the FDA a premarket notification submission,
demonstrating that the device is "substantially equivalent" to either:

        (1) a device that was legally marketed prior to May 28, 1976, the date
        upon which the Medical Device Amendments of 1976 were enacted, or

        (2) to another commercially available, similar device which was
        subsequently cleared through the 510(k) process.


If the FDA agrees that the device is substantially equivalent, it will grant
clearance to commercially market the device. By regulation, the FDA is required
to clear a 510(k) within 90 days of submission of the application. As a
practical matter, clearance often takes longer; however, the Company's products
have generally been cleared within the 90-day time period. The FDA may require
further information, including clinical data, to make a determination regarding
substantial equivalence. If the FDA determines that the device, or its intended
use, is not "substantially equivalent", the FDA will place the device, or the
particular use of the device, into Class III, and the device sponsor must then
fulfill much more rigorous premarketing requirements.

A Class III product 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 effectiveness of Class III
devices cannot be assured solely by the General Controls and the other
requirements described above. These devices almost always require formal
clinical studies to demonstrate safety and effectiveness.

Approval of a premarket approval application ("PMA") from the FDA is required
before marketing of a Class III product can proceed. The PMA process is much
more demanding than the 510(k) premarket notification process. A PMA
application, which is intended to demonstrate that the device is safe and
effective, must be supported by extensive data, including data from preclinical
studies and human clinical trials and existing research material, and must
contain a full description of the device and its components, a full description
of the methods, facilities, and controls used for manufacturing, and proposed
labeling. Following receipt of a PMA application, once the FDA determines that
the application is sufficiently complete to permit a substantive review, the FDA
will accept the application for review. The FDA, by statute and by regulation,
has 180 days to review a filed PMA application, although the review of an
application more often occurs over a significantly longer period of time, up to
several years. In approving a PMA application or clearing a 510(k) application,
the FDA may also require some form of post-market surveillance, whereby the
manufacturer follows certain patient groups for a number of years and makes
periodic reports to the FDA on the clinical status of those patients when
necessary to protect the public health or to provide additional safety and
effectiveness data for the device.

When FDA approval of a Class I, Class II or Class III device requires human
clinical trials, if the device presents a "significant risk" (as defined by the
FDA) to human health, the device sponsor is required to file an investigational
device exemption ("IDE") application with the FDA and obtain IDE approval prior
to commencing the human clinical trial. If the device is considered a
"non-significant" risk, IDE submission is not required. Instead, only approval
from the Institutional Review Board conducting the clinical trial is required.
Human clinical studies are generally required in connection with approval of
Class III devices and to a much lesser extent for Class I and II devices. None
of the Company's current products have required human clinical trials for
approval.

In addition, the Company's 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 the Company's products. The QSR also, among
other things, requires maintenance of a device master record, device history
record, and complaint files. The Company's domestic facility, records, and
manufacturing processes are subject to periodic unscheduled inspections by the
FDA. The Company's Mexican facilities, which export products to the United
States, may also be inspected by the FDA. The Company's U.S. facility was
recently inspected by the FDA and was found to be in compliance with the
applicable QSR regulations. Based on the Company's own internal audits of its
Mexican facilities, the Company believes that its Mexican facilities are in
substantial compliance with the applicable QSR regulations.'

Failure to comply with the applicable U.S. medical device regulatory
requirements could result in, among other things, warning letters, fines,
injunctions, civil penalties, repairs, replacements, refunds, recalls or
seizures of products, total or partial suspension of production, the FDA's
refusal to grant future premarket clearances or approvals, withdrawals or
suspensions of current product applications, and criminal prosecution. There are
currently no adverse regulatory compliance issues or actions pending with the
FDA at any of the Company's facilities or relating to the Company's products and
none of the recent FDA audits of its Vista, California facility has resulted in
any enforcement actions by the FDA.



                                       14
<PAGE>   15
There are no restrictions under U.S. law on the export from the United States of
any medical device that can be legally distributed in the United States. In
addition, there are only limited 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,
but is eligible for approval under the 510(k) process, 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. Class
III devices which do not have PMA approval may be exported to any foreign
country, if the product complies with the laws of that country and, with respect
to the following countries, has valid marketing authorization under the laws of
such country: Australia, Canada, Israel, Japan, New Zealand, Switzerland, South
Africa, the European Union, a country in the European Economic Area or such
other countries as may be approved by the FDA. The unapproved device must also
satisfy the criteria required to be satisfied by Class I and Class II devices as
well as additional criteria applicable to the devices. All of the Company's
products which are exported to foreign countries currently comply with the
restrictions described in this paragraph.

Certificates for export (certifying the status of a product under the Act) are
not required by the FDA for export. However, they are often required by the
foreign country importing the product.

International. In many of the foreign countries in which the Company markets its
products, it is 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 the Company's devices and products in such countries are similar
to those of the FDA, including those in Germany, the Company's largest foreign
market. In many countries, the national health or social security organizations
require the Company's products to be qualified before they can be marketed with
the benefit of reimbursement eligibility. To date, the Company has not
experienced difficulty in complying with these regulations. Due to the movement
towards harmonization of standards in the European Union, the Company expects 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 the Company cannot
currently be predicted.

The Company is implementing policies and procedures intended to position itself
for the expected international harmonization of regulatory requirements. The
International Standards Organization ("ISO") 9000 series of standards have been
developed as an internationally recognized set of guidelines that are aimed at
ensuring the design and manufacture of quality products. ISO 9001 is the highest
level of ISO certification, covering both the quality system for manufacturing
as well as that for product design control; ISO 9002 covers the quality system
for manufacturing operations that do not include product design. The Company's
Vista facility has received ISO 9001 certification. See "-- Manufacturing." A
company that passes an ISO audit and obtains ISO registration becomes
internationally recognized as functioning under a competent quality system. In
certain foreign markets, it may be necessary or advantageous to obtain ISO 9000
series certification, which, in certain respects, is analogous to compliance
with the FDA's QSR requirements. The European Economic Community has promulgated
rules which require that medical products receive a CE mark. All of the
Company's products currently distributed in Europe have received the Conformite
Europeenne ("CE") mark. A CE mark is an international symbol indicating that the
device meets common European standards of performance and safety.

Fraud and Abuse

The Company is subject to various federal and state laws pertaining to health
care fraud and abuse, including antikickback 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 health care programs, including Medicare,
Medicaid, VA health programs and TRICARE. The Company has never been challenged
by a governmental authority under any of these laws and believes that its
operations are in material compliance with such laws. However, because of the
far-reaching nature of these laws, there can be no assurance that the Company
would not be required to alter one or more of its 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 would not result in a material adverse
effect on the Company's financial condition and results of operations.

Antikickback Laws. The Company's operations are subject to federal and state
antikickback laws. Certain provisions of the Social Security Act that commonly
are known collectively as the "Medicare Fraud and Abuse Statute," prohibit
entities, such as the Company, from offering, paying, soliciting or receiving
any form of remuneration in return for the referral of Medicare or state health
program patients or patient care opportunities, or in return for the
recommendation, arrangement, purchase, lease or order of items or services that
are covered by Medicare or state health programs. Violation of the Medicare
Fraud and Abuse Statute is a felony, punishable by fines up to $25,000 per
violation and imprisonment for up to five years. In addition, the Department of
Health and Human Services may impose civil penalties of up to $50,000 per act
plus three times the renumeration offered and exclude violators from
participation in Medicare or state health programs. Many states have adopted
similar prohibitions against payments intended to induce referrals to Medicaid
and other third party payor patients.



                                       15
<PAGE>   16
Physician Self-Referral Laws. The Company is also subject to federal and state
physician self-referral laws. Federal physician self-referral legislation (known
as the "Stark" law) prohibits, subject to certain exceptions, a physician or a
member of his immediate family from referring Medicare or Medicaid patients to
an entity providing "designated health services" in which the physician has an
ownership or investment interest, or with which the physician has entered into a
compensation arrangement. The Stark law also prohibits the entity receiving the
referral from billing any good or service furnished pursuant to an unlawful
referral. The penalties for violations include a prohibition on payment by these
government programs and civil penalties of as much as $15,000 for each violative
referral and $100,000 for participation in a "circumvention scheme." Various
state laws also contain similar provisions and penalties.

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 allows any person to bring
suit alleging false or fraudulent Medicare or Medicaid claims or other
violations of the statute and to share in any amounts paid by the entity to the
government in fines or settlement. Such suits, known as qui tam actions, have
increased significantly in recent years and have increased the risk that a
health care company will have to defend a false claim action, pay fines or be
excluded from the Medicare and for Medicaid programs as a result of an
investigation arising out of such action.

The Company provides compensation to physicians pursuant to certain consulting
and licensing agreements and through its OfficeCare program. The consulting
agreements generally provide for the payment of a flat fee in return for a fixed
number of hours or days of consulting services and the licensing agreements
generally provide for the payment of a fixed percentage of sales of products
developed by the physician. In the OfficeCare program, the Company pays
participating physicians a rental fee for office space used for inventory
storage and, in some cases, a pro rata portion of the salary of a member of the
physician's staff who assists in fitting products and/or handling paperwork.

The payment of compensation to physicians who refer patients to the Company can
implicate the Medicare Fraud and Abuse Statute and the Stark law. In particular,
the rental of space in physicians' offices by persons or entities to which the
physicians may refer has been the subject of a recent Special Fraud Alert issued
by the Office of Inspector General of the Department of Health and Human
Services (OIG). Under the Fraud Alert, the OIG indicates that it may scrutinize
stock and bill programs involving excessive rental payments for possible
violation of the Medicare Fraud and Abuse Statute, but notes that legitimate
arrangements, including fair market value rental agreements that meet the
requirements of applicable safe harbors, will be immune from prosecution under
the Statute. Accordingly, the OIG strongly recommends that stock and bill
programs be structured so as to comply with such safe harbors. The Company
believes that its relationships with physicians described above fall within
recognized safe harbors and exceptions in both statutes. In addition to
structuring relationships with referring physicians in order to comply with the
relevant statutes, the Company also monitors these relationships on an ongoing
basis in an attempt to ensure continued compliance.

Environmental and Other Matters

The Company's facilities and operations are subject to federal, state and local
environmental and occupational health and safety requirements of the U.S. and
foreign countries, including those relating to discharges of substances to the
air, water and land, the handling, storage and disposal of wastes and the
cleanup of properties affected by pollutants. The Company believes it is
currently in compliance with such requirements and does not currently anticipate
any material adverse effect on its business or financial condition as a result
of its efforts to comply with such requirements.

In the future, federal, state, local or foreign governments could enact new or
more stringent laws or issue new or more stringent regulations concerning
environmental and worker health and safety matters that could effect the
Company's operations. Also, in the future, contamination may be found to exist
at the Company's current or former facilities or off-site locations where the
Company has sent wastes. The Company could be held liable for such
newly-discovered contamination which could have a material adverse effect on the
Company's business or financial condition. In addition, changes in environmental
and worker health and safety requirements or liabilities from newly-discovered
contamination could have a material effect on the Company's business or
financial condition.

Governmental Audits

The Company's operations are subject to periodic survey by governmental entities
or contractors to assure compliance with Medicare and Medicaid standards and
requirements. From time to time in the ordinary course of business, the Company,
like other health care companies, receives survey audits or reviews from
governmental entities, which may cite certain deficiencies based on the
Company's alleged failure to comply with applicable supplier standards and other
requirements. The Company reviews such audits or reports and attempts 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 the Company's business, results of operations or
financial condition and could prevent the programs involved from offering
products and services to patients.



                                       16
<PAGE>   17
Other Federal and State Regulations

There may be other federal, state and local laws, rules and regulations that
affect the Company's business. In addition, new laws, rules and regulations may
be adopted to regulate new and existing products, services and industries. There
can be no assurances that either the states or the federal government will not
impose additional regulations upon the activities of the Company that might
adversely affect its business, results of operations and financial condition.



                                       17
<PAGE>   18
                      FACTORS AFFECTING FUTURE PERFORMANCE


SUBSTANTIAL LEVERAGE - OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
ABILITY TO OPERATE OUR BUSINESS AND TO FULFILL OUR OBLIGATIONS UNDER THE 12 5/8%
SENIOR SUBORDINATED NOTES ISSUED IN CONNECTION WITH THE RECAPITALIZATION
TRANSACTION, OR THE NOTES.

As a result of the recapitalization transactions, we are highly leveraged, which
means we have a large amount of indebtedness in relation to our members'
deficit. The following chart shows certain important credit statistics:


<TABLE>
<CAPTION>
                                                                   December 31, 1999
                                                                   -----------------
                                                                     (in thousands)
<S>                                                                <C>
                 Long-term debt                                        $113,305
                 Redeemable preferred units                            $  32,539
                 Members' deficit                                      $(70,429)
</TABLE>


<TABLE>
<CAPTION>
                                                           Year Ended             Year Ended
                                                        December 31, 1999      December 31, 1998
                                                        -----------------      -----------------
<S>                                                     <C>                    <C>
  Ratio of earnings to fixed charges.................       2.06x (a)               8.84x(b)
</TABLE>


(a)    Calculation is based on dj Ortho's financial statements subsequent to the
       recapitalization on June 30, 1999.

(b)    Calculation does not take into account any of the debt acquired as part
       of the recapitalization on June 30, 1999.

We may also incur additional indebtedness from time to time to finance
acquisitions, investments or strategic alliances or capital expenditures or for
other purposes subject to the restrictions contained in the new credit facility
and the indenture. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources".

Our high degree of leverage could have important consequences to 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.

-      Debt under the new credit facility is secured and matures prior to the
       notes.

-      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.

-      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.



                                       18
<PAGE>   19
ABILITY TO SERVICE DEBT - TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH. OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS
BEYOND OUR CONTROL.

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 performance will be
       affected by prevailing economic conditions and financial, business,
       regulatory and other factors, certain of which are beyond our control;

-      The future availability of borrowings under the new revolving credit
       facility or any successor facility, the availability of which is or may
       depend on, among other things, our complying with certain covenants.

Based on our current and expected levels of operations, we expect that our
operating cash flow and borrowings under the new revolving credit facility
should be sufficient for us to meet our operating expenses, to make necessary
capital expenditures and to service our debt requirements as they become due.
However, our operating results and borrowings under the new revolving credit
facility may not be sufficient to service our indebtedness, including the notes.
In addition, we may incur additional indebtedness in order to make acquisitions,
investments or strategic alliances. 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 (which could include the notes),
or seeking additional equity capital or bankruptcy protection. There is no
assurance 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 new credit facility and the indenture, may restrict us from adopting any of
these alternatives.

SUBORDINATION OF THE NOTES AND THE GUARANTEE; STRUCTURAL SUBORDINATION OF THE
NOTES - THE NOTES AND THE GUARANTEE BY DONJOY 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 DonJoy 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
such subsidiary as an Unrestricted Subsidiary (as defined). As of December 31,
1999, we have approximately $15.3 million of senior indebtedness outstanding
(excluding unused commitments under the new revolving credit facility), all of
which is secured, and DonJoy has no senior indebtedness outstanding (other than
its guarantee of our borrowings under the new credit facility). In addition, the
indenture permits us and our Restricted Subsidiaries (as defined in the
indenture) to incur additional senior indebtedness, including indebtedness under
the new 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 guarantee by DonJoy 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 new 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 guarantee by
DonJoy 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 Mexican subsidiary is not a guarantor of the
notes, the notes are effectively subordinated to all liabilities (including
trade payables and contingent liabilities) of our Mexican subsidiary 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. The aggregate amount of the liabilities of our Mexican
subsidiary as reflected on its balance sheet was $0.1 million as of December 31,
1999.

LIMITED VALUE OF DONJOY GUARANTEE - YOU SHOULD NOT RELY ON THE GUARANTEE BY
DONJOY IN THE EVENT WE CANNOT MAKE PAYMENTS UPON THE NEW NOTES.

As a result of the recapitalization transactions, all of the operations of
DonJoy are conducted through dj Ortho and DonJoy has no material assets other
than its ownership of 100% of our equity interests. Accordingly, DonJoy's cash
flow and, consequently, its ability



                                       19
<PAGE>   20
to service debt, including its guarantee of the notes and our new credit
facility, depends on our operations. As a result, you should not rely on the
guarantee by DonJoy for repayment of the notes.

ASSET ENCUMBRANCES TO SECURE THE NEW CREDIT FACILITY - 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 DonJoy's obligations
under its guarantee) are unsecured while our obligations under the new credit
facility (and DonJoy's obligations under its guarantee of our indebtedness under
the new credit facility) are secured by a security interest in substantially all
of our assets and the assets of DonJoy (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 new credit facility, the lenders could declare all of the funds borrowed
under our new 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 DonJoy, 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.

RESTRICTIVE DEBT COVENANTS - OUR DEBT AGREEMENTS RESTRICT OUR BUSINESS IN MANY
WAYS.

The new credit facility and the indenture impose, and the terms of any future
indebtedness may impose, operating and other restrictions on us. Such
restrictions affect, and in many respects limit or prohibit, among other things,
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,

-      create liens,

-      enter into certain transactions with affiliates,

-      make certain investments,

-      sell assets, or

-      enter into mergers or consolidations.

The new credit facility also requires us to achieve certain financial and
operating results and satisfy certain financial ratios and prohibits us from
prepaying our other indebtedness (including the notes) while indebtedness under
the new credit facility is outstanding. Our ability to comply with such
provisions may be affected by events beyond our control.

These restrictions contained in the indenture and the new 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 new credit facility and/or the
indenture. Upon the occurrence of an event of default under the new credit
facility, the lenders could elect to declare all amounts outstanding under the
new 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



                                       20
<PAGE>   21
lenders under the new 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.
See "-- Subordination of the Notes and the Guarantee; Structural Subordination
of the Notes," "-- Asset Encumbrances to Secure the New Credit Facility,"

UNCERTAINTY RELATING TO THIRD PARTY REIMBURSEMENT - CHANGES IN REIMBURSEMENT
POLICIES FOR OUR PRODUCTS BY THIRD PARTY PAYORS OR REDUCTIONS IN REIMBURSEMENT
RATES FOR OUR PRODUCTS COULD ADVERSELY AFFECT US.

The ability of our customers (or persons to whom our customers 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. Although we are unable to
give precise data because, subject to some exceptions, we are not directly
involved in the third party reimbursement process, we believe that a substantial
portion of our sales to customers (or by them to their customers) are reimbursed
by third party payers. In the United States, third party reimbursement is
generally based on the medical necessity of the product to the user, and
generally products which are prescribed by doctors are eligible for
reimbursement. As such, we believe that substantially all of our U.S. sales of
rigid knee braces and a substantial portion of our U.S. sales of soft goods and
specialty and other orthopedic products are reimbursed by third party payers. In
response to the historic and forecasted reductions of U.S. reimbursement rates,
we and many of our competitors are introducing new product offerings at lower
prices. 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. There can be no assurance that third party reimbursement for our
products will continue to be available or at what rate such products will be
reimbursed.

Congress and certain state legislatures are considering reforms in the health
care industry that may lower reimbursement practices, including controls on
health care spending through limitations on the growth of Medicare and Medicaid
spending. In particular, President Clinton's budget request for 2001 proposes an
over $100 million reduction in reimbursement in Fiscal Year 2001 for orthotic
and prosthetic devices, including some of our products, and an over $900 million
reduction over Fiscal Years 2001-2005. The President's proposal is not specific
as to how the reduction in reimbursement would be implemented. We cannot predict
whether or in what form the reduction of, or elimination of the annual increases
in, reimbursement rates will be adopted, or if adopted, what effect such
reduction or elimination will have on reimbursement rates for our products.
Private health insurance plans generally set reimbursement rates at a discount
to Medicare. Any Congressional or regulatory developments that reduce Medicare
reimbursement rates could reduce reimbursement rates for our products, which
could have an adverse effect on our ability to sell our products or cause our
customers to use less expensive products, which could have a material adverse
effect on our results of operations.

Similar to our domestic business, our success in international markets also
depends upon the eligibility of our products for reimbursement through
government sponsored health care payment systems and third party payers,
particularly in Europe and Japan, our principal international markets.
Reimbursement practices vary significantly by country, with certain
jurisdictions, most notably France, requiring products to undergo lengthy
regulatory review in order to be eligible for reimbursement. In addition, health
care cost containment efforts similar to those we face in the United States are
prevalent in many of the foreign jurisdictions in which our products are sold
and these efforts are expected to continue. For example, in Germany, our largest
foreign market representing approximately 35% of international sales in 1999,
reimbursement for our products was decreased in 1997 to 80% from 100% by
government sponsored health care payment systems and third party payers. In
Italy, our rigid knee bracing products and cold therapy systems, among others,
are no longer eligible for reimbursement at all. 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. In France, while we believe our rigid knee braces would be
eligible for reimbursement, our knee brace products have not gone through the
lengthy regulatory process necessary for reimbursement eligibility and,
accordingly, the cost of these products is not currently reimbursed in France.
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 customers to use less expensive products, which could have
a material adverse effect on our results of operations.

RESPONSES BY HEALTH CARE PROVIDERS TO PRICE PRESSURES; FORMATION OF BUYING
GROUPS - HEALTHCARE REFORM AND THE EMERGENCE OF MANAGED CARE AND BUYING GROUPS
HAS PUT DOWNWARD PRESSURE ON THE PRICES OF OUR PRODUCTS.

Within the United States, health care reform and the emergence of managed care
are changing the dynamics of the health care industry as it seeks ways to
control rising health care costs. As a result of health care reform, the U.S.
health care industry has seen a rapid expansion of managed care at the expense
of traditional private insurance. The development of managed care programs in
which the providers contract to provide comprehensive health care to a patient
population at a fixed cost per person (referred to as capitation) has given rise
to, and is expected to continue to cause, pressures on health care 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 recovery 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



                                       21
<PAGE>   22
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. These lower priced products have in part contributed to our
minimal sales growth in our rigid knee bracing product lines over the past few
years and could have a material adverse effect on our business, financial
condition and results of operations in the future.

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 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 can
offset the financial impact of discounting. We believe that our ability to enter
into more of such arrangements will be important to our future success and the
growth of our revenues. However, 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 such 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 health care reform and the
development of managed care are generally not as advanced as in the United
States, we have experienced similar downward pressure on product pricing and
other effects of health care reform as we have experienced in the United States.
We expect health care reform and managed care to continue to develop in our
primary international markets, including Europe and Japan, which we expect will
result in further downward pressure in product pricing. The timing and the
effects on us of health care reform and the development of managed care in
international markets cannot currently be predicted.

POTENTIAL REGULATION LIMITING CUSTOMER BASE - PROPOSED LAWS COULD LIMIT THE
TYPES OF ORTHOPEDIC PROFESSIONALS WHO CAN FIT, SELL OR SEEK REIMBURSEMENT FOR
OUR PRODUCTS.

Congress and state legislatures have from time to time, in response to pressure
from certain orthopedic professionals, considered proposals which would have the
effect of limiting the types of orthopedic professionals who can fit and/or sell
our products or who can seek reimbursement for our products. In particular,
Texas and Florida have adopted legislation which prohibits the practice of
orthotics and prosthetics, including the measuring, fitting and adjusting of
certain medical devices, without a license. The effect of such laws could be to
substantially limit our potential customers in those jurisdictions in which such
legislation or regulations are enacted and could provide the authorized
providers of our products with greater purchasing power. In such event, we would
seek to ensure that orthopedic professionals continue to prescribe our products
and enhance our relationships with authorized providers. However, we may not be
successful in responding to such laws and therefore the adoption of such laws
could have a material adverse effect on our business, financial condition and
results of operations.

PATENTS AND PROPRIETARY KNOW-HOW - 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 certain of our components and
products and have patent applications pending with respect to certain components
and products. We also anticipate that we will apply for additional patents as we
deem appropriate. We believe that certain of our existing patents, particularly
the patents for 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 OA
       braces,

-      series of hinges for our post-operative braces, and

-      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 and the Patient
       Ready Monarch,

are and will continue to be extremely important to our success. 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



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<PAGE>   23
-      our patents will not be circumvented or invalidated.

The patent for our "Four Points of Leverage" system expires in January 2005. The
expiration of this patent could have a material adverse effect on our business,
financial condition and results of operations.

In addition, we hold licenses from third parties to utilize certain patents,
patents pending and technology utilized in the design of some of our existing
products and products under development, including the IceMan and the VISTA
system. If we lost any one of these licenses, we would not be able to
manufacture and sell the related products, which 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. See "Business -- Intellectual Property."

PATENT LITIGATION - WE COULD BE ADVERSELY AFFECTED IF WE BECOME INVOLVED IN
LITIGATION REGARDING OUR PATENTS OR OTHER INTELLECTUAL PROPERTY RIGHTS.

The medical device 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") to determine
the priority of inventions. The defense and prosecution of intellectual property
suits, USPTO interference proceedings and related legal and administrative
proceedings are both costly and time-consuming. 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. Any future litigation or
interference proceedings will result in substantial expense to us and
significant diversion of effort by our technical and management personnel. 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 failure to obtain necessary licenses could prevent
us from manufacturing and selling certain of our products, which would have a
material adverse effect on our business, financial condition and results of
operations.

UNCERTAINTY OF DOMESTIC AND FOREIGN REGULATORY CLEARANCE AND APPROVAL - WE MAY
NOT RECEIVE REGULATORY CLEARANCE OR APPROVAL FOR OUR PRODUCTS OR OPERATIONS IN
THE UNITED STATES OR ABROAD.

Our products and operations are subject to extensive regulation in the United
States by the 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 particular, in order for us to market certain products for clinical use
in the United States, we generally must first obtain clearance from the FDA,
pursuant to Section 510(k) of the Act. Clearance under Section 510(k) requires
demonstration that a new device is substantially equivalent to another legally
marketed device. In addition, if we develop products in the future that are not
considered to be substantially equivalent to a legally marketed device, we will
be required to obtain FDA approval by submitting a PMA. All of our currently
manufactured products hold the relevant exemption or premarket clearance under
the Act. See "Business -- Government Regulation."

The FDA may not act favorably or quickly in its review of our 510(k) or PMA
submissions, or we may encounter significant difficulties and costs in our
efforts to obtain FDA clearance or approval, all of which could delay or
preclude sale of new products in the United States. Furthermore, the FDA may
request additional data, require us to conduct further testing, or compile more
data, including clinical data, in support of a 510(k) submission. The FDA may
also, instead of accepting a 510(k) submission, require us to submit a PMA,
which is typically a much more complex application than a 510(k). To support a
PMA, the FDA would likely require that we conduct one or more clinical studies
to demonstrate that the device is safe and effective, rather than substantially
equivalent to another legally marketed device. We may not be able to meet the
requirements to obtain 510(k) clearance or PMA approval, or the



                                       23
<PAGE>   24
FDA may not grant any necessary clearances or approvals. In addition, the FDA
may place significant limitations upon the intended use of our products as a
condition to a 510(k) clearance or PMA approval. Product applications can also
be denied or withdrawn due to failure to comply with regulatory requirements or
the occurrence of unforeseen problems following approval. Failure to obtain FDA
clearance or approvals of new products we develop, any limitations imposed by
the FDA on new product 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 order to conduct a clinical investigation involving human subjects for the
purpose of demonstrating the safety and effectiveness of a device, a company
must, among other things, apply for and obtain Institutional Review Board
("IRB") approval of the proposed investigation. In addition, if the clinical
study involves a "significant risk" (as defined by the FDA) to human health, the
sponsor of the investigation must also submit and obtain FDA approval of an IDE
application. We may not be able to obtain FDA and/or IRB approval to undertake
clinical trials in the U.S. for any new devices we intend to market in the
United States in the future. If we obtain such approvals, we may not be able to
comply with the IDE and other regulations governing clinical investigations or
the data from any such trials may not support clearance or approval of the
investigational device. Failure to obtain such approvals or to comply with such
regulations could have a material adverse effect on our business, financial
condition and results of operations.

Once the medical device sponsor obtains clearance or approval for a product,
rigorous regulatory requirements apply to medical devices. These requirements
include, among other things, the Quality System Regulation ("QSR"),
recordkeeping regulations, labeling requirements and adverse event reporting
regulations. See "Business -- Government Regulation -- Medical Device
Regulation." Failure to comply with applicable FDA medical device regulatory
requirements could result in, among other things, warning letters, fines,
injunctions, civil penalties, repairs, replacements, refunds, recalls or
seizures of products, total or partial suspension of production, the FDA's
refusal to grant future premarket clearances or approvals, withdrawals or
suspensions of current product applications, and criminal prosecution. Any of
these actions, in combination or alone, 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 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 addition, 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. 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. See "Business -- Government
Regulation." 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.

DEPENDENCE ON ORTHOPEDIC PROFESSIONALS, AGENTS AND DISTRIBUTORS - WE RELY
HEAVILY ON OUR RELATIONSHIPS WITH ORTHOPEDIC PROFESSIONALS, AGENTS AND
DISTRIBUTORS FOR MARKETING OUR PRODUCTS.

The sales of our rigid knee braces depend to a significant extent on the
prescription and/or recommendation of such products by widely recognized
orthopedic surgeons and sports medicine specialists. We have developed and
maintain close relationships with a number of widely recognized orthopedic
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/or fitting of our products and providing us
with feedback on the industry's acceptance of our new products. The failure of
our rigid knee braces to retain the support of such surgeons or specialists, or
the failure of our new rigid knee braces to secure and retain similar support
from leading surgeons or specialists, could have a material adverse effect on
our business, financial condition and results of operations.

Our marketing success in the United States also depends largely upon marketing
arrangements with independent agents and distributors. Our success depends upon
our agents' and distributors' sales and service expertise and 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. See "Business -- Sales, Marketing
and Distribution."

TRANSITION TO NEW INDEPENDENT DISTRIBUTORS IN INTERNATIONAL MARKETS - WE COULD
BE ADVERSELY AFFECTED IF WE ARE NOT SUCCESSFUL IN FINDING AND RETAINING NEW
INDEPENDENT DISTRIBUTORS IN INTERNATIONAL MARKETS.

In international markets our products have historically been sold through 30
Smith & Nephew sales organizations and 14 independent distributors, with
approximately 55% of our international sales having been made through Smith &
Nephew sales organizations. As a result of the recapitalization, we have
replaced many of the Smith & Nephew sales organizations with independent
distributors. The Company has replaced 19 Smith & Nephew sales organizations
with independent distributors. We believe that we will be able to increase sales
by switching to independent distributors who will be responsible for achieving
sales targets and focused on building strong relationships with our targeted
customers. However, we may not be able to find and retain independent
distributors on favorable



                                       24
<PAGE>   25
terms or successfully effect the transition to such new distributors without a
significant disruption or loss of sales in the applicable foreign jurisdiction.
In addition, the new distributors may not become technically proficient in the
use and benefits of our products in a timely manner, if at all. Accordingly, our
transition to new independent distributors could have a material adverse effect
on our business, financial condition and results of operations.

In connection with the recapitalization, we entered into a distribution
agreement pursuant to which the 30 Smith & Nephew sales organizations which sold
our products prior to the recapitalization would continue to do so, and 11 Smith
& Nephew sales organizations continue to sell our products under this agreement.
However, Smith & Nephew has the right to cease distributing our products in a
specific territory on either 30 or 60 days notice, depending on the territory.
See "Certain Relationships and Related Transactions - Other Agreements between
DonJoy and Smith & Nephew -- Distribution Agreement." If Smith & Nephew
terminates the distribution of our products in a territory, we may not be able
to find a new independent distributor to replace the Smith & Nephew sales
organization, which could have a material adverse effect on our sales in such
jurisdiction. The termination of distribution by Smith & Nephew in a sufficient
number of jurisdictions prior to the time we are able to replace the Smith &
Nephew sales organizations being terminated with new independent distributors
could have a material adverse effect on our business, financial condition and
results of operations. Smith & Nephew has not given notice to terminate any of
the remaining distributors.

INTERNATIONAL OPERATIONS - OUR INTERNATIONAL SALES MAY BE ADVERSELY AFFECTED BY
FOREIGN CURRENCY EXCHANGE FLUCTUATIONS AND OTHER RISKS.

Sales in foreign markets, primarily Europe and Japan, represented approximately
16% of our net revenues for the year ended December 31, 1999, with Germany
representing approximately 35% of international net revenues. See Note 7 of
Notes to Consolidated Financial Statements. We expect that our international
sales will increase. See "Business -- Business Strategy." Since our
international sales are denominated in U.S. dollars, our operating results are
not directly impacted by foreign currency exchange fluctuations. However, the
volume and product mix of our international sales may be adversely impacted by
foreign currency exchange fluctuations as changes in the rate of exchange
between the U.S. dollar and the applicable foreign currency will affect the cost
of our products to our foreign customers and thus may impact the overall level
of customer purchases or result in the customer purchasing less expensive, lower
margin products. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview." In addition, future sales of
our products may be denominated in 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, 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. These and other factors may have a material adverse
effect on our international operations or on our business, financial condition
and results of operations.

INTERNATIONAL OPERATIONS - OUR LACK OF MANUFACTURING OPERATIONS OUTSIDE THE
UNITED STATES MAY CAUSE OUR PRODUCTS TO BE LESS COMPETITIVE IN INTERNATIONAL
MARKETS.

We currently have no manufacturing operations in any foreign jurisdiction other
than Mexico. The cost of transporting our products to foreign jurisdictions is
currently borne by our customers, who are also often required to pay foreign
import duties on our products. As a result, the cost of our products to
customers who use or distribute them outside the United States is often greater
than products manufactured in the local foreign jurisdiction. 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 increase our exposure to the risks
of doing business in international jurisdictions. We may not be able to
successfully operate off-shore manufacturing operations, which could have a
material adverse effect on our international operations or on our business,
financial condition and results of operations.

RISKS GENERALLY ASSOCIATED WITH STRATEGIC GROWTH OPPORTUNITIES - WE INTEND TO
PURSUE, BUT MAY NOT BE ABLE TO IDENTIFY, FINANCE OR SUCCESSFULLY COMPLETE
STRATEGIC GROWTH OPPORTUNITIES.

One element of our growth strategy is to pursue acquisitions, investments and
strategic alliances that either expand or complement our business. We may not be
able to identify acceptable opportunities or complete any acquisitions,
investments or strategic alliances on favorable terms or in a timely manner.
Acquisitions and, to a lesser extent, investments and strategic alliances
involve a number of risks, including:

-      the diversion of management's attention to the assimilation of the
       operations and personnel of the new business,

-      adverse short-term effects on our operating results, and



                                       25
<PAGE>   26
-      the inability to successfully integrate the new businesses with our
       existing business, including financial reporting, management and
       information technology systems.

In addition, we may require additional debt or equity financings for future
acquisitions, investments or strategic alliances which may not be available on
favorable terms, if at all. We may not be able to successfully integrate or
operate profitably any new business we acquire and we cannot assure you that any
other investments we make or strategic alliances we enter into will be
successful.

IMPLEMENTATION OF BUSINESS STRATEGY - IF WE CANNOT SUCCESSFULLY IMPLEMENT OUR
BUSINESS STRATEGY, WE MAY NOT BE ABLE TO SERVICE OUR INDEBTEDNESS.

Our business strategy is to:

-      increase international sales,

-      improve operating efficiencies,

-      introduce new products and product enhancements, and

-      pursue strategic growth opportunities.

Our ability to achieve our objectives is subject to a variety of factors, many
of which are beyond our control, and 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 certain aspects of
our business strategy and may adopt alternative or additional strategies due to
competitive factors or factors not currently foreseen, such as unforeseen costs
and expenses or events beyond our control, such as an economic downturn. See "--
Substantial Leverage and Ability to Service and Refinance Debt."

Any failure to successfully implement our business strategy may adversely affect
our ability to service our indebtedness, including our ability to make principal
and interest payments on the notes.

DEPENDENCE UPON KEY PERSONNEL - WE MAY BE ADVERSELY AFFECTED IF WE LOSE ANY
MEMBER OF OUR SENIOR MANAGEMENT.

We are dependent on the continued services of our senior management team,
including Leslie H. Cross, our President and Chief Executive Officer, Cyril
Talbot III, our Vice President -- Finance and Chief Financial Officer, and
Michael R. McBrayer, our Vice President -- Domestic Sales. The loss of these key
personnel could have a material adverse effect on us.

COMPETITION - WE OPERATE IN A VERY COMPETITIVE BUSINESS ENVIRONMENT.

The orthopedic recovery products industry is highly competitive and fragmented.
Our competitors include numerous smaller niche companies and a few large,
diversified orthopedic companies. Some of our competitors are part of corporate
groups that have significantly greater financial, marketing and other resources
than us. As such, we may be at a competitive disadvantage with respect to these
competitors. Our primary competitors in the rigid knee brace market include
DePuy OrthoTech (a division of Johnson & Johnson), Innovation Sports
Incorporated, Townsend Industries Inc., Bledsoe Brace Systems (a division of
Medical Technology, Inc.), Generation II USA, Inc. and Breg, Inc. We compete in
the non-retail sector of the soft goods products market and our competitors
include DeRoyal Industries, Zimmer, Inc. (a division of Bristol-Meyers Squibb
Company), Technol Orthopedics (a division of Kimberly Clark Corp.) and DePuy
OrthoTech (a division of Johnson & Johnson). We compete with a variety of
manufacturers of specialty and other orthopedic products, depending on the type
of product. In addition, in certain foreign countries, we compete with one or
more local competitors.

TECHNOLOGICAL CHANGE - WE MAY NOT BE ABLE TO DEVELOP AND MARKET NEW PRODUCTS OR
PRODUCT ENHANCEMENTS TO REMAIN COMPETITIVE.

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. For example, the recent development and use of joint lubricants to treat
osteoarthritis in the knee may prove to be an effective alternative to the use
of our OA braces.

Further, our ongoing success requires the continued development of new products
and the enhancement of our existing products. We may not be able to:



                                       26
<PAGE>   27

-      continue to develop successful new products and enhance existing
       products,

-      obtain required regulatory approvals for such products,

-      market such products in a commercially viable manner, or

-      gain market acceptance for such products.

Our failure to develop and market new products and product enhancements could
have a material adverse effect on our business, financial condition and results
of operations. See "Business -- Competition."

PRODUCT LIABILITY EXPOSURE - WE COULD BE ADVERSELY AFFECTED IF A PRODUCT
LIABILITY CLAIM IS BROUGHT AGAINST US AND WE DON'T HAVE ADEQUATE INSURANCE.

The manufacturing and marketing of our products entails risks of product
liability and from time to time we have been subject to product liability
claims. Although we maintain product liability insurance in amounts which we
believe to be reasonable and standard in the industry, the amount and scope of
any coverage may be inadequate to protect us in the event of a substantial
adverse product liability judgment.

CONCENTRATION OF OWNERSHIP AND CONTROL OF THE COMPANY - WE ARE CONTROLLED BY
CDP, FAIRFIELD CHASE AND THEIR MEMBERS AND THEIR INTERESTS MAY NOT BE ALIGNED
WITH YOURS.

As a result of the recapitalization, Chase DJ Partners, LLC ("CDP") owns
approximately 85.1% of the outstanding voting units of our parent company,
DonJoy, which owns all of our equity interests. The members of CDP are CB
Capital Investors, L.L.C. ("CB Capital"), First Union Investors, Inc., Fairfield
Chase Medical Partners, LLC ("Fairfield Chase") and affiliates of TCW/Crescent
Mezzanine, L.L.C. ("TCW"). CB Capital owns a majority of the interests of CDP
and Fairfield Chase, which is controlled by Charles T. Orsatti, is the initial
managing member of CDP. In addition, through their ownership of redeemable
preferred units, CB Capital and First Union Investors also directly own
approximately 3.5% of the outstanding voting units of DonJoy and TCW owns
approximately 1.8% of the outstanding voting units of DonJoy. Accordingly, CDP,
Fairfield Chase, which as managing member initially controls CDP, and their
members have the power, subject to certain exceptions, to control us and DonJoy.
Under certain circumstances CB Capital can become the managing member of CDP.
For a description of the ownership, voting and management arrangements regarding
DonJoy and CDP, see "Security Ownership of Certain Beneficial Owners and
Management." The interests of CDP, Fairfield Chase and their members may not in
all cases be aligned with yours.

PURCHASE OF THE NOTES UPON CHANGE OF CONTROL - 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 new 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 new 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 new
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 a
reorganization, restructuring, merger or other similar transaction involving us,
that may adversely affect you. Such 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 these provisions. Except for certain provisions, the
indenture does not contain provisions that permit the holders of the notes to
require us to repurchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.

YEAR 2000 - OUR OPERATIONS MAY BE ADVERSELY AFFECTED BY THE YEAR 2000 PROBLEM.

During fiscal 1999, the Company continued its company-wide program to prepare
the Company's computer systems for year 2000 compliance. The year 2000 issue
relates to computer systems that use the last two digits rather than all four to
define a year and whether such systems would properly and accurately process
information when the year changed to 2000. At the date of this report, the
Company had not yet experienced and does not expect to experience any material
problems related to the year 2000. The Company has



                                       27
<PAGE>   28
not become aware of any significant year 2000 issues affecting the Company's
major customers or suppliers. The Company also has not received any material
complaints regarding any year 2000 issues related to its products. Year 2000
related costs through February 29, 2000 were approximately $360,000 and have
been expensed as incurred. These costs included labor expended in contacting
customers and suppliers, testing systems and software, and software upgrades for
year 2000.

IMPACT OF ENVIRONMENTAL AND OTHER REGULATION - WE ARE SUBJECT TO A VARIETY OF
ENVIRONMENTAL LAWS AND OTHER REGULATIONS WHICH COULD ADVERSELY AFFECT US.

We are subject to the requirements of federal, state and local environmental and
occupational health and safety laws and regulations of the U.S. and foreign
countries. We cannot assure you that we have been or will be at all times in
complete compliance with all such requirements or that we will not incur
material costs or liabilities in connection with such requirements in the
future. These requirements are complex, constantly changing and have tended to
become more stringent over time. It is possible that these requirements may
change or liabilities may arise in the future in a manner that could have a
material effect on our business. For more information about our environmental
compliance and potential environmental liabilities see "Business --
Environmental and Other Matters."

REGULATION OF FRAUD AND ABUSE IN HEALTH CARE - WE MAY NEED TO CHANGE OUR
BUSINESS PRACTICES TO COMPLY WITH HEALTH CARE FRAUD AND ABUSE REGULATIONS.

We are subject to various federal and state laws pertaining to health care fraud
and abuse, including antikickback 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 health care programs, including Medicare, Medicaid, VA health
programs and TRICARE. We have never 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. In addition, we cannot assure you that the
occurrence of one or more violations of these laws would not 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. See "Business -- Government Regulation."

UNCERTAINTY RELATING TO GOVERNMENTAL AUDITS

Medicare contractors and Medicaid agencies periodically conduct pre- and
post-payment reviews and other audits of claims, and are under increasing
pressure to scrutinize more closely health care claims. There can be no
assurances 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.

FRAUDULENT CONVEYANCE STATUTES - FEDERAL AND STATE LAWS PERMIT A COURT TO VOID
THE NOTES AND GUARANTEES UNDER CERTAIN CIRCUMSTANCES.

The new notes have been exchanged for the old notes. We used the net proceeds
from the offering of the old notes, together with borrowings under the term loan
portion of our new credit facility, to purchase the assets and operations of
DonJoy. DonJoy used such amounts, together with the proceeds from the issuance
of the common units to CDP and the management members and the redeemable
preferred units to repurchase a portion of the equity interests of DonJoy owned
by Smith & Nephew. The obligations we incurred under the indenture and the old
notes and the obligations incurred by DonJoy under the indenture and its
guarantee 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 DonJoy's
unpaid creditors. Under these laws, if a court were to find that, at the time we
issued the old notes or DonJoy issued its guarantee of the old notes, we or
DonJoy, 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 the recapitalization
       transactions,

-      were engaged or about to engage in a business or transaction for which
       our or DonJoy's assets constituted unreasonably small capital to carry on
       our or its business, or

-      intended to incur, or did incur, or believed that we or DonJoy would
       incur, debts beyond our or its ability to pay as they matured or became
       due then, such court might:



                                       28
<PAGE>   29

-      subordinate the notes or DonJoy's guarantee of the notes to our or
       DonJoy's presently existing or future indebtedness,

-      void the issuance of the notes (in our case) or DonJoy's Guarantee, 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. However, we or DonJoy generally would
be considered insolvent at the time we incurred indebtedness under the old notes
or DonJoy issued its guarantee, as the case may be, if either:

-      the fair salable value of our or DonJoy's assets, as applicable, were
       less than the amount required to pay our or DonJoy's probable liability
       on our or its total existing debts and liabilities (including contingent
       liabilities) as they become absolute or matured, or

-      the sum of our or DonJoy's debts (including contingent liabilities) were
       greater than our or DonJoy's assets, at fair valuation.

We cannot predict:

-      what standard a court would apply in order to determine whether we or
       DonJoy were insolvent as of the date we or DonJoy issued the old notes or
       its guarantee, or that regardless of the method of valuation a court
       would determine that we or DonJoy 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 recapitalization
transactions, our counsel and counsel to the initial purchaser of the old 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 DonJoy's 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 DonJoy and would be creditors solely of us.

Based upon financial and other information available to us, we believe that we
and DonJoy issued the old notes and the guarantee of the old notes for proper
purposes and in good faith and that at the time we and DonJoy issued the old
notes and the guarantee of the old notes, we and DonJoy (i) were not insolvent
or rendered insolvent thereby, (ii) had sufficient capital to run our business
and (iii) 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
DonJoy within 90 days after any payment by us with respect to the notes or by
DonJoy under its guarantee of the notes, or if we or DonJoy 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 their guarantees.

NO PRIOR MARKET FOR THE NEW NOTES - YOU CANNOT BE SURE THAT AN ACTIVE TRADING
MARKET WILL DEVELOP FOR THE NEW NOTES.

The new notes are a new issue of securities with no established trading market
and will not be listed on any securities exchange. The liquidity of the trading
market in the new notes, and the market price quoted for the new 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. Since the notes have only been on the
trading market since December 1999, you cannot be sure that an active trading
market will develop for the new notes.


ITEM 2. PROPERTIES

The Company is headquartered in Vista, California and operates 3 manufacturing
facilities. Manufacturing operations in the United States were consolidated in
1998 into the Vista facility which consists of three buildings. The Vista
facility is subleased from Smith & Nephew. See Item 13., "Certain Relationships
and Related Transactions -- Other Agreements between DonJoy and Smith & Nephew
-- Sublease." The two other facilities are located in Tijuana, Mexico, within
100 miles of Vista, and are managed from the Vista facility.




                                       29
<PAGE>   30
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
LOCATION           USE               OWNED/LEASED           LEASE TERMINATION DATE    SIZE (SQUARE FEET)
-------------------------------------------------------------------------------------------------------
<S>                <C>               <C>                    <C>                       <C>
Vista, California  Corporate         Leased                 February 2008             266,000
                   Headquarters

                   Research &
                   Development

                   Manufacturing &
                   Distribution

                   Warehousing


Tijuana, Mexico    Manufacturing     Leased                 December 2000 (1)         48,600

Tijuana, Mexico    Manufacturing     Owned                                            13,000
-------------------------------------------------------------------------------------------------------
</TABLE>

(1)    The lease for the Tijuana facility automatically renews for additional
       one year periods unless terminated by either party on 30 days prior
       written notice.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved from time to time in litigation arising in the ordinary
course of business, including product liability claims, none of which is
currently expected to have a material adverse effect on the Company. The Company
maintains product liability insurance in amounts which it believes to be
reasonable and standard in the industry.


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

Not applicable.


PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

There is no established public trading market for DonJoy's membership units, and
it is not expected that such a market will develop in the future. DonJoy is
authorized to issue up to 2,900,000 common units and up to 100,000 preferred
units. As of December 31, 1999, DonJoy had 718,000 common units and 40,184
preferred units issued and outstanding, and 15% of the common units on a fully
diluted basis have been reserved for issuance to employees, directors and
independent consultants and contractors of the Company or any subsidiary thereof
pursuant to the 1999 Option Plan. There were 11 unit holders of record as of
December 31, 1999.

To the extent permitted by restrictions contained in the new credit facility and
the indenture, the Company will make distributions in agreed upon amounts to its
members to enable them to pay income taxes payable in respect of their allocable
share of the taxable income of the Company and its subsidiaries.

The preferred units accrue a cumulative quarterly preferred return at a fixed
rate of 14.0% per annum, subject to increase to 16.0% per annum upon the
occurrence of certain events of non-compliance. In addition to the rights with
respect to the preferred return (including related tax distributions and
distributions to the holders of preferred units of their original capital
investment), the preferred units will share ratably with the common units in any
distributions (including tax distributions and upon liquidation) made by the
Company in respect of common units (the Redeemable Preferred Units Participating
Interest).

The preferred units are subject to mandatory redemption ten and one-half years
following the closing of the recapitalization and may be redeemed at the
Company's option at any time ("Redeemable Preferred Unit"). Upon a change of
control, holders of Redeemable Preferred Units will have the right, subject to
certain conditions, to require the Company to redeem their Redeemable Preferred
Units (including the Redeemable Preferred Units Participating Interest). In
addition, at any time following the sixth anniversary of the closing of the
recapitalization, holders will have the right, subject to certain conditions, to
require the Company to redeem their Redeemable Preferred Units Participating
Interest. Unless equity proceeds or other funds are available to the Company for
the purpose, the ability of the Company to make any of the foregoing payments
will be subject to receipt of distributions from the Company in amounts
sufficient to make such payments and such distributions will be subject to the
restrictions contained in the new credit facility and the indenture.



                                       30
<PAGE>   31
On June 30, 1999, dj Ortho, together with DJ Capital, issued $100.0 million of
12 5/8% Senior Subordinated Notes, resulting in net proceeds of $98.0 million.
The Notes were issued to qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended (the "Securities Act"). The initial
sale of the Notes were exempt from registration under the Securities Act
pursuant to section 4(2) thereof, as a transaction not involving any public
offering.

On November 9, 1999, the Company commenced an exchange offer to exchange $100
million aggregate amount outstanding of 12 5/8% Senior Subordinated Notes (the
"Old Notes") for $100 million aggregate principal amount of 12 5/8% Senior
Subordinated Notes (the "Exchange Notes"). The form and term of the Exchange
Notes are the same as the form and the term of the Old Notes except the Exchange
Notes have been registered under the Securities Act of 1933 as amended and
therefore, will not bear legends restricting the transfer thereof. The Exchange
Notes evidence the same debt as the Old Notes (which they replace). All notes
were exchanged by December 9, 1999. There were 14 record holders of the Exchange
Notes as of December 31, 1999.

ITEM  6. SELECTED FINANCIAL DATA

The selected financial data set forth below with respect to our consolidated
financial statements has been derived from the 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 financial
statements and notes thereto appearing elsewhere herein:

<TABLE>
<CAPTION>
                                                                                  YEARS ENDED DECEMBER 31,
                                                           -----------------------------------------------------------------
                                                             1999           1998          1997          1996          1995
                                                           ---------     ---------     ---------     ---------     ---------
                                                                                    (DOLLARS IN THOUSANDS)
<S>                                                        <C>           <C>           <C>           <C>           <C>
STATEMENT OF INCOME DATA:
     Net revenues ......................................   $ 114,252     $ 100,785     $  92,624     $  83,112     $  67,756
     Cost of goods sold(a) .............................      51,056        45,945        38,913        36,396        25,193
                                                           ---------     ---------     ---------     ---------     ---------
     Gross profit ......................................      63,196        54,840        53,711        46,716        42,563
     Operating expenses(a):
         Sales and marketing ...........................      27,424        25,296        22,878        20,067        18,148
         General and administrative ....................      16,755        16,484        15,802        12,941        10,178
         Research and development ......................       2,115         2,248         2,055         1,766         1,808
         Restructuring costs(b) ........................          --         2,467            --            --            --
                                                           ---------     ---------     ---------     ---------     ---------
     Total operating expenses ..........................      46,294        46,495        40,735        34,774        30,134
                                                           ---------     ---------     ---------     ---------     ---------
     Income from operations ............................      16,902         8,345        12,976        11,942        12,429
     Interest expense ..................................      (7,568)           --        (2,072)       (2,459)         (989)
     Interest income ...................................         181            --            --            --            --
                                                           ---------     ---------     ---------     ---------     ---------
     Income before income taxes ........................       9,515         8,345        10,904         9,483        11,440
     Provision for income taxes ........................       2,387         3,394         4,367         3,828         4,535
                                                           ---------     ---------     ---------     ---------     ---------
     Net income ........................................   $   7,128     $   4,951     $   6,537     $   5,655     $   6,905
                                                           ---------     ---------     ---------     ---------     ---------
     Less: Preferred stock dividends and accretion
         of preferred unit fees ........................      (2,343)           --            --            --            --
                                                           ---------     ---------     ---------     ---------     ---------
     Net income available to members ...................   $   4,785            --            --            --            --
                                                           =========     =========     =========     =========     =========

OTHER DATA:
     EBITDA(c) .........................................   $  21,854     $  15,665     $  17,779     $  16,584     $  15,183
     Adjusted EBITDA(d) ................................      25,082        21,957        22,090        19,187            NA
     Depreciation and amortization .....................       4,952         4,853         4,803         4,642         2,754
     Capital expenditures and acquired intangibles .....       4,706         4,149         2,273         1,848         1,044
     Ratio of earnings to fixed charges(e) .............       2.06x         8.84x         4.83x         3.94x         8.45x
CASH FLOWS PROVIDED BY (USED IN):
     Operating activities ..............................   $  16,065     $   3,748     $  11,076     $   9,631     $  11,282
     Investing activities ..............................      (4,776)       (4,049)       (2,322)       (1,860)       (1,048)
     Financing activities ..............................      (6,171)          200        (8,401)       (7,932)       (9,863)
BALANCE SHEET DATA (AT END OF PERIOD):
     Cash ..............................................   $   5,927     $     809     $     910     $     557     $     718
     Working capital ...................................      27,413        15,625         9,749         9,675         8,511
     Total assets ......................................      89,416        77,056        71,288        70,787        73,184
     Long-term obligations .............................     112,805            --            --            --            --
     Redeemable preferred units ........................      32,539            --            --            --            --
     Obligations to Smith & Nephew (including current
       portion) ........................................          --        45,227        45,027        53,428        44,456
     Total equity (deficit) ............................     (70,429)       12,832         7,881         1,344        12,593
</TABLE>



----------

NA: Not applicable

(a)    Includes various charges and overhead allocations from Smith & Nephew.
       See note (d) below.

(b)    DonJoy recorded restructuring costs in 1998 relating to the consolidation
       of its operations at its Vista, California facility. See Note 10 of Notes
       to Consolidated Financial Statements and "Management's Discussion and
       Analysis of Financial Condition and Results of Operations - Overview -
       Manufacturing Cost Reduction Initiatives."



                                       31
<PAGE>   32
(c)    "EBITDA" is defined as income from operations plus restructuring costs,
       and 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. However, management has
       included EBITDA because it may be used by certain 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. The
       Company's definition of EBITDA may not be comparable to that of other
       companies.

(d)    "Adjusted EBITDA" represents EBITDA (as defined above) adjusted to
       eliminate

       (1)    charges for brand royalties paid by DonJoy to Smith & Nephew for
              use of the Smith & Nephew trademarks and trade names;

       (2)    foreign sales corporation commissions paid by DonJoy on sales to
              foreign sales corporations established by Smith & Nephew for tax
              planning purposes;

       (3)    Smith & Nephew overhead allocations for corporate managed accounts
              and new business expense and corporate management expense which
              will not be incurred following consummation of the
              Recapitalization (the "Eliminated Allocations");

       (4)    Smith & Nephew overhead allocations for research and development
              and for amounts charged by Smith & Nephew for services provided to
              DonJoy for finance (risk management, treasury, audit and taxes),
              human resources and payroll and legal services (collectively, the
              "Other Corporate Allocations");

       and adjusted to include the estimated costs expected to be incurred by
       DonJoy to replace the services previously provided by Smith & Nephew as
       part of the Other Corporate Allocations.


<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31
                                                        ---------------------------------------
                                                          1999           1998           1997
                                                        --------       --------       --------
                                                                    (IN THOUSANDS)
<S>                                                     <C>            <C>            <C>
EBITDA ................................................ $ 21,854       $ 15,665       $ 17,779
Brand royalties .......................................    1,817          3,249          1,605
Brand royalties .......................................       --            439            661
Eliminated Allocations ................................      979          1,726          1,652
Other Corporate Allocations ...........................      832          1,678          1,193
Estimated costs to replace Smith & Nephew services ....     (400)          (800)          (800)
                                                        --------       --------       --------
Adjusted EBITDA ....................................... $ 25,082       $ 21,957       $ 22,090
</TABLE>


       Adjusted EBITDA does not reflect adjustments for Smith & Nephew
       allocations for bonus, pension and insurance or payroll taxes and
       benefits or charges for direct legal expenses incurred by Smith & Nephew
       on DonJoy's behalf, which costs and expenses DonJoy believes it would
       have incurred in approximately the same amounts on a stand-alone basis,
       and are of a nature it will continue to incur following the
       recapitalization. Accordingly, no adjustments for these items have been
       made. For a more complete description of the corporate charges and
       allocations, the services performed by Smith & Nephew after the
       recapitalization and the ability of DonJoy to replace such services, see
       Note 9 of Notes to the Consolidated Financial Statements, "Management's
       Discussion and Analysis of Financial Condition and Results of Operations
       - Overview - Smith & Nephew Allocations and Sales" and "Certain
       Relationships and Related Transactions - Other Agreements between DonJoy
       and Smith & Nephew - Transition Services Agreement."

(e)    Earnings consist of income 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 or rental expense.




                                       32
<PAGE>   33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

On June 30, 1999, DonJoy consummated a $215.3 million recapitalization. In
connection with the recapitalization transactions, the Company established dj
Ortho and DJ Capital. DonJoy sold all of its net assets to dj Ortho for cash
which was funded with the net proceeds of $100 million principal amount of 12
5/8% Notes issued by dj Ortho and DJ Capital, as co-issuers, and the remainder
by funds borrowed by dj Ortho under a senior credit facility. In addition, new
investors, including certain members of management, invested new capital of
$96.4 million in equity in DonJoy. The proceeds of the equity investment
together with debt financings were used (i) for approximately $199.1 million of
consideration paid to redeem a portion of members' equity from the Company's
Former Parent, and (ii) approximately $8.8 million of costs and fees paid in
association with the recapitalization. As part of the recapitalization
agreement, immediately prior to the recapitalization, the Company's Former
Parent canceled and capitalized the assets listed under cash and the liabilities
listed under intercompany obligations (which included current and deferred
income taxes due to Former Parent) and restructuring reserve. All such amounts
were treated as a capital contribution by the Former Parent to members' equity.

The matters discussed in this Management's Discussion and Analysis of Financial
Condition and Results of Operations contain forward-looking statements and
involve risks and uncertainties regarding the Company and its business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements in this report. Additionally, statements concerning
future matters such as the development of new products, enhancements or
technologies, possible changes in legislation and other statements regarding
matters that are not historical are forward-looking statements.

Although forward-looking statements in this report reflect the good faith
judgment of the Company's management, such statements can only be based on facts
and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include without
limitation those discussed in "Factors Affecting Future Performance" in Item 1
above as well as those discussed elsewhere in this report. Readers are urged not
to place undue reliance on these forward-looking statements, which speak only as
of the date of this report. The Company undertakes no obligation to revise or
update any forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this report. Readers are urged to
carefully review and consider the various disclosures made in this report, which
attempt to advise interested parties of the risks and factors that may affect
the Company's business, financial condition, results of operations and
prospects. The following discussion should be read in conjunction with DonJoy's
historical consolidated financial statements and the related notes thereto and
the other financial data included elsewhere in this report.

OVERVIEW

SEGMENTS. The Company designs, manufactures and markets orthopedic recovery
products and complementary products. The Company's product lines include rigid
knee braces, soft goods and a portfolio of specialty and other orthopedic
products. The Company's rigid knee braces include ligament braces, which provide
durable support for knee ligament instabilities, post-operative braces, which
provide both knee immobilization and a protected range of motion, and OA braces,
which provide relief of knee pain due to osteoarthritis. The Company's 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. The
Company's portfolio of specialty and other orthopedic products, which are
designed to facilitate orthopedic rehabilitation, include lower extremity
walkers, upper extremity braces, cold therapy systems and pain management
delivery systems. The rigid knee brace product lines and the soft goods product
lines constitute reportable segments under generally accepted accounting
principles. Set forth below is revenue and gross profit information for the
Company's three product lines for the years ended December 31, 1999, 1998 and
1997. Gross profit information is presented before brand royalties charged by
Smith & Nephew for use of Smith & Nephew trademarks and trade names (which
charges are no longer incurred by the Company following the recapitalization)
and certain other cost of goods sold, primarily manufacturing variances, which
have not been directly allocated to any of the product lines. See Note 7 of
Notes to Consolidated Financial Statements.



                                       33
<PAGE>   34
<TABLE>
<CAPTION>
                                                       YEARS ENDED DECEMBER 31,
                                               -------------------------------------
                                                1999           1998           1997
                                               -------        -------        -------
                                                          (IN THOUSANDS)
<S>                                            <C>            <C>            <C>
RIGID KNEE BRACES:
    Net revenues .......................       $49,406        $48,594        $48,310
    Gross profit .......................        35,721         34,460         33,910
    Gross profit margin ................          72.3%          70.9%          70.2%
SOFT GOODS:
    Net revenues .......................       $39,652        $34,233        $31,697
    Gross profit .......................        19,276         16,637         15,541
    Gross profit margin ................          48.6%          48.6%          49.0%
SPECIALTY AND OTHER ORTHOPEDIC PRODUCTS:
    Net revenues .......................       $25,194        $17,958        $12,617
    Gross profit .......................        12,516          8,978          6,132
    Gross profit margin ................          49.7%          50.0%          48.6%
</TABLE>

The Company's total gross profit margin before brand royalties and other cost of
goods sold not allocable to specific product lines was 59.1%, 59.6%, and 60.0%
in 1999, 1998 and 1997, respectively.

The Company's products are marketed globally under the DonJoy and ProCare brand
names through several distribution channels. DonJoy brand product sales
represented approximately 74% of total net revenues in 1999. The Company markets
substantially all of its rigid knee braces, approximately 85% of its specialty
and other orthopedic products and approximately 39% of its soft goods products
under the DonJoy brand name. ProCare brand product sales represented
approximately 26% of total net revenues in 1999. The Company markets
approximately 61% of its soft goods products, approximately 15% of its specialty
and other orthopedic products and a small percentage of its rigid knee braces
under the ProCare brand name.

DOMESTIC SALES. In the United States, DonJoy brand products are marketed to
orthopedic surgeons, orthotic and prosthetic centers, hospitals, surgery
centers, physical therapists and trainers by 26 commissioned agents who employ
approximately 185 sales representatives. After a product order is received by a
sales representative, the Company ships and bills the product directly to the
orthopedic professional and the Company pays a sales commission to the agent.
The gross profit and gross profit margins on DonJoy products sold in the United
States do not include the commissions paid to the agents on sales of such
products, which commissions are reflected in sales and marketing expense in the
consolidated financial statements. Domestic sales of DonJoy brand products
represented approximately 56% of total net revenues in 1999.

ProCare products are sold in the United States to third party distributors,
including large, national distributors, regional specialty dealers and medical
products buying groups who generally purchase such products at a discount from
list prices. These distributors then resell ProCare products to large hospital
chains, hospital buying groups, primary care networks and orthopedic physicians
for use by the patients. Domestic sales of ProCare products represented
approximately 17% of total net revenues in 1999.

INTERNATIONAL SALES. International sales, primarily in Europe and Japan,
accounted for approximately 16%, 18%, and 18% of the Company's net revenues in
1999, 1998 and 1997, respectively. Sales in Germany, the Company's largest
foreign market, accounted for approximately 35% of the Company's 1999
international net revenues, and sales in Canada accounted for approximately 10%
of the Company's 1999 international net revenues, with no other country
accounting for more than approximately 10% of the Company's 1999 international
net revenues. Total sales in Europe accounted for approximately 72% of the
Company's 1999 international net revenues, while sales in Germany, the United
Kingdom, France, Spain and Italy, accounted for approximately 51% of the
Company's 1999 international net revenues. Sales in Japan accounted for
approximately 9% of the Company's 1999 international net revenues. The Company
expects its international net revenues to increase as a percentage of its total
net revenues in the future.

International sales are currently made through two distinct channels:
independent third party distributors (such as in Germany) and Smith & Nephew
sales organizations within each major country (such as the United Kingdom,
France, Italy and Spain. Distributors in both of these channels buy and resell
the Company's products and have the ability to sell DonJoy and ProCare brand
products within their designated countries. DonJoy brand products constituted
approximately 84% of total international sales during 1999. Approximately 40% of
international sales in 1999 were generated through the Smith & Nephew sales
organizations. The Company believes future opportunities for sales growth within
international markets are significant. The Company expects to increase
international sales by reorganizing and expanding its international distribution
network and implementing the marketing and distribution strategies which it has
successfully utilized in the United States and certain international
territories, most notably Germany. In particular, the Company has replaced 19
Smith & Nephew sales organizations with independent distributors who will focus
on building strong relationships with the Company's targeted customers and will
be responsible for achieving specified sales targets. See "Factors Affecting
Future Performance -- Transition to New Independent Distributors in
International Markets" and "Business - Business Strategy -- Increase
International Sales."

                                       34
<PAGE>   35
The Company's international sales are made in United States dollars.
Accordingly, the Company's results of operations are not directly impacted by
foreign currency exchange fluctuations. However, the volume and product mix of
international sales may be impacted by foreign currency exchange fluctuations as
changes in the rate of exchange between the U.S. dollar and the foreign currency
will affect the cost of our products to our customers and thus may impact the
overall level of customer purchases or result in the customer purchasing less
expensive products. See "Factors Affecting Future Performance -- International
Operations."

THIRD PARTY REIMBURSEMENT; HEALTH CARE REFORM; MANAGED CARE. While national
health care reform and the advent of managed care has impacted the orthopedic
recovery products industry, its impact has not been as dramatic as experienced
by other sectors of the health care market, such as long term care, physician
practice management and managed care (capitation) programs. In recent years,
efforts to control medical costs within the U.S. orthopedic recovery products
industry have been directed towards scrutiny of medical device reimbursement
codes, whereby devices are classified to determine the dollar amount eligible
for reimbursement, and their applicability toward certain orthopedic procedures.
Reimbursement codes covering certain of the Company's products have been lowered
or narrowed, thereby reducing the breadth of products for which reimbursement
can be sought. The Company expects that a reduction in the total dollar value
eligible for reimbursement will occur in the future as the reform process
continues.

In international markets, while the movement toward health care reform and the
development of managed care are generally not as advanced as in the United
States, the Company has experienced similar downward pressure on product pricing
and other effects of health care reform as it has experienced in the United
States. The Company expects health care reform and managed care to continue to
develop in its primary international markets, including Europe and Japan, which
the Company expects will result in further downward pressure in product pricing.

In response to the historic and forecasted reductions of reimbursement rates and
the impact of demand matching (where patients are evaluated as to age, need for
mobility and other parameters and are then matched with an orthopedic recovery
product that is cost effective in light of such evaluation), the Company and
many of its competitors are introducing new product offerings at lower prices.
This is particularly evident within the U.S. rigid knee bracing segment of the
orthopedic recovery products industry where the Company and many of its
competitors are offering lower priced, off-the-shelf products. The minimal sales
growth in the Company's rigid knee bracing product lines over the past few years
has in part resulted from these price pressures.

The Company believes that it will not be materially adversely affected by U.S.
or international health care reform. The Company currently does not have any
capitated health care service arrangements. The Company believes that to the
extent it responds to price pressures through lower prices for its products, it
will be able to substantially offset the effect of this price erosion through
reductions in its manufacturing and other costs. In addition, because of the
quality, functionality and reputation of its products, its marketing and sales
programs which emphasize strong relationships with customers and the service it
provides to its customers, the Company believes it will be able to compete even
if reimbursement rates are materially altered. For example, revenues from the
IceMan from 1997 to 1999 increased despite elimination of its eligibility for
reimbursement.

A further result of managed care and the related pressure on costs has been the
advent of buying groups in the United States which enter into preferred supplier
arrangements with one or more manufacturers of orthopedic or other medical
products in return for price discounts. The Company has entered into national
contracts with selected buying groups and expects to enter into additional
national contracts in the future. The Company believes that the high level of
product sales to such groups, to the extent such groups are able to command a
high level of compliance by their members with the preferred supplier
arrangements, and the opportunity for increased market share can offset the
financial impact of the price discounting under such contracts. Accordingly,
although there can be no assurance, the Company believes that such price
discounting will not have a material adverse effect on the Company's operating
results in the future. See "Factors Affecting Future Performance -- Responses by
Health Care Providers to Price Pressures; Formation of Buying Groups" and
"Business -- Sales, Distribution and Marketing -- United States."

OFFICECARE PROGRAM. In 1996, in response to the needs of its customers, the
Company launched OfficeCare, an inventory management and insurance billing
program for its U.S. orthopedic physician customers. Under the OfficeCare
program, the Company provides the orthopedic physician with an inventory of
orthopedic products for immediate disbursement to the physician's patients. The
Company then directly seeks reimbursement from the patient's insurance company,
other third party payor or from the patient where self-pay is applicable.

Since its inception, the OfficeCare program has been promoted specifically to
provide the Company's orthopedic physician customers with a full complement of
soft goods and certain specialty products (including products of competitors)
for immediate patient use. The OfficeCare program is intended to introduce new
orthopedic physicians to the Company's product lines without financial risk to
the potential customer.

The OfficeCare program represented approximately 8% of the Company's net
revenues for 1999 with sales of soft goods and specialty and other orthopedic
products representing the majority of such sales. The OfficeCare program
involves the Company's lower priced soft goods products, but is designed to also
strengthen the Company's relationship with the customer, thereby also increasing
sales of

                                       35
<PAGE>   36
the higher end products. The OfficeCare program has historically experienced a
strong growth rate, with an increase of sales of 80% in 1999 over 1998 and 122%
in 1998 over 1997. As a result of the growth of the program, the Company's
working capital needs have significantly increased due to higher levels of
accounts receivable and inventories necessary to operate the program. In
addition, OfficeCare has expanded the Company's involvement in the third party
reimbursement process, or in certain cases directly with the patient. The
collection period for these receivables as compared to other segments of the
Company's business is significantly longer and has also resulted in a need to
increase the Company's bad debt allowance requirements.

SMITH & NEPHEW ALLOCATIONS AND SALES. Prior to December 29, 1998, the Company's
business was operated as the Bracing & Support Systems Division (the "Division")
of Smith & Nephew. Effective December 29, 1998, Smith & Nephew contributed the
Division's net assets and shares of a Mexican subsidiary to DonJoy, then a newly
formed Delaware limited liability company, the sole member of which was Smith &
Nephew. Accordingly, the contribution has been accounted for on a predecessor
basis for financial reporting purposes.

As a result of the Company formerly being a division of Smith & Nephew, the
Company's historical results of operations reflect certain direct charges from
Smith & Nephew as well as certain allocations of Smith & Nephew's overhead and
other expenses. These amounts were charged or allocated to the Company on the
basis of direct usage where identifiable, with the remainder allocated to the
Company on the basis of its annual sales or the capital employed by Smith &
Nephew in the Company's business. See Note 9 of Notes to Consolidated Financial
Statements.

The following is a summary of such charges and allocations and their
applicability to the Company on a stand-alone basis following the
recapitalization.

(1)    Charges for brand royalties historically included in the Company's cost
       of goods sold resulting from the use by the Company of the Smith & Nephew
       trademarks and trade name. These charges were $1.8 million, $3.2 million,
       and $1.6 million in 1999, 1998 and 1997, respectively. As a result of the
       consummation of the recapitalization on June 30, 1999, the Company no
       longer has the right to use the Smith & Nephew trademarks and trade names
       and, accordingly, these charges are no longer incurred by the Company.

(2)    Foreign sales corporation commissions historically included in the
       Company's general and administrative expense paid by the Company on sales
       to foreign sales corporations established by Smith & Nephew. The use of
       foreign sales corporations was a tax planning strategy for Smith &
       Nephew. These charges were $0, $0.4 million, and $0.7 million in 1999,
       1998 and 1997, respectively. As of January 1999, the Company no longer
       incurred these charges.

(3)    Smith & Nephew allocations for a portion of its corporate managed
       accounts and new business expense and corporate management expense have
       been historically included in the Company's general and administrative
       expense. These allocations ("Eliminated Allocations") were $1.0 million,
       $1.7 million, and $1.7 million in 1999, 1998 and 1997, respectively.
       These allocations were for a portion of Smith & Nephew's overhead
       expenses that the Company has not incurred or replaced upon since the
       consummation of the recapitalization on June 30, 1999.

(4)    Smith & Nephew allocations for research and development and for finance
       (risk management, treasury, audit and taxes), human resources and
       payroll, and legal services have been historically provided by Smith &
       Nephew to the Company which were included in the Company's general and
       administrative expense. These allocations ("Other Corporate Allocations")
       were $0.8 million, $1.7 million, and $1.2 million in 1999, 1998 and 1997,
       respectively. These allocations were for a portion of Smith & Nephew's
       overhead expenses. The Company on a stand-alone basis replaced these
       services provided by Smith & Nephew upon consummation of the
       recapitalization on June 30, 1999, and will incur additional expenses
       associated with external auditing and periodic filings with the
       Securities and Exchange Commission. The Company estimates that the
       aggregate cost of replacing these services and such additional expenses
       will be approximately $0.8 million upon consummation of the
       recapitalization on June 30, 1999.

(5)    Other allocations relating to bonuses, pension and insurance historically
       included in the Company's cost of goods sold, sales and marketing expense
       and general and administrative expense, and charges for payroll taxes and
       benefits and direct legal expenses incurred by Smith & Nephew on the
       Company's behalf have been included in the Company's general and
       administrative expense. These costs and expenses are of a nature the
       Company expects to continue to incur on a stand-alone basis upon
       consummation of the recapitalization on June 30, 1999.

Under a transition services agreement entered into in connection with the
recapitalization, Smith & Nephew continued to provide certain of the
administrative services referred to in paragraph (4) above as required by the
Company through December 31, 1999. The Company has replaced these services
previously provided by Smith & Nephew with internal staff, including the
addition of new employees and through arrangements with third party providers.
As noted above, the Company estimates that the services described in paragraph
(4) above (which will be reflected as general and administrative expense
following the recapitalization) will cost the Company approximately $0.8 million
upon consummation of the recapitalization on June 30, 1999.



                                       36
<PAGE>   37
For the years ended December 31, 1999, 1998 and 1997, the Company's sales to
Smith & Nephew and its affiliates (including Smith & Nephew's sales
organizations) were $8.3 million, $10.7 million, and $11.8 million,
respectively, or 7%, 11%, and 13%, respectively, of total sales for these
periods. International sales represented the vast majority of sales to Smith &
Nephew and its affiliates, accounting for approximately 87%, 91%, and 74% of
total sales to Smith & Nephew and its affiliates in 1999, 1998 and 1997,
respectively. See Note 7 of Notes to Consolidated Financial Statements. Domestic
sales to Smith & Nephew and its affiliates were higher in 1997 as a result of
sales to a Smith & Nephew affiliate, which then resold the Company's products to
a third party. Beginning in 1998, the Company made these sales directly to the
third party. In connection with the recapitalization, Smith & Nephew and its
sales organizations which distribute the Company's products internationally
entered into agreements with the Company regarding the purchase of Company
products following consummation of the recapitalization. However, neither Smith
& Nephew nor such sales organizations have any obligation to purchase any
specific or minimum quantity of products pursuant to such agreements. See
"Certain Relationships and Related Transactions -- Other Agreements between
DonJoy and Smith & Nephew - Supply Agreement" and "-- Distribution Agreement".
Accordingly, while the Company believes that Smith & Nephew and its sales
organizations will continue to purchase Company products following the
recapitalization, there can be no assurance that sales to Smith & Nephew
following the recapitalization will continue at historical levels or that such
sales in the future will not be significantly reduced.

MANUFACTURING COST REDUCTION INITIATIVES. Over the past several years, the
Company has undertaken two initiatives designed to lower its overall
manufacturing cost structure. First, in order to take advantage of the lower
labor costs in Mexico, the Company in 1993 began manufacturing certain of its
labor intensive products, principally soft goods products, subassemblies and
pads used in rigid knee braces and covers, in two facilities in Tijuana, Mexico.
Secondly, in 1998 the Company completed the consolidation of its domestic
operations into one location in Vista, California. As a result, the Company
incurred $2.5 million of restructuring costs in 1998, substantially all of which
related to lease termination costs on the vacated facility. Pursuant to the
recapitalization agreement, the restructuring reserve, which amounted to $0.9
million at June 29, 1999 and consisted of the remaining lease obligations on the
vacated facility, was assumed by Smith & Nephew. In addition, 1998 general and
administrative expense included $0.2 million of costs related to moving costs
resulting from the consolidation of the facilities. Operating results for the
first three quarters of 1998 were adversely affected by the consolidation due to
disruption caused as the Company totally integrated manufacturing operations of
the DonJoy and ProCare brands which were previously separate and distinct, but
returned to prior levels in the fourth quarter of 1998 and sustained these
levels through the balance of 1999.

The Company has identified additional opportunities to reduce manufacturing
costs and improve operating efficiencies. The Company will move as appropriate
greater portions of its labor intensive operations to its facilities in Mexico
to generate further labor cost savings for its more labor intensive products and
utilize the resulting additional capacity in its U.S. facilities to manufacture
its more technologically advanced products. By upgrading its computer systems to
achieve more efficient production, the Company expects to achieve material and
labor cost reductions as well as economies of scale across its manufacturing
operation. In addition, the Company intends to implement Lean Manufacturing
techniques and further automate its manufacturing operations through the use of
more technologically advanced fabrication and equipment systems. The Company
will continue to rationalize raw materials used in the production of its
existing products, thereby enabling the Company to leverage its purchasing
power. Finally, in order to achieve further cost savings, the Company intends to
further reduce its number of stock keeping units (SKUs) without impacting
service or breadth of the Company's product range.

BASIS OF PRESENTATION; TAXES. The Company's Former Parent files a consolidated
federal income tax return which includes all of its eligible subsidiaries and
divisions, which prior to the recapitalization included the Company. The
provision for income taxes has been presented assuming the Company filed a
separate federal income tax return. The recapitalization had no impact on the
historical basis of the Company's assets and liabilities as reflected in the
consolidated financial statements except for the elimination of the remaining
restructuring reserve for rent on subleased facilities and intercompany
accounts. However, as a result of the recapitalization, for federal income tax
purposes, the Company has recorded an increase in the tax basis of its fixed and
intangible assets in an amount approximately equal to the taxable gain
recognized by Smith & Nephew on the sale of its interest in DonJoy. The increase
in tax basis as of December 31, 1999 is as follows (in thousands):

<TABLE>
<S>                                    <C>
Inventory                              $  3,670
Property, plant & equipment               4,145
Goodwill                                130,543
                                       --------
                                       $138,358
                                       ========
</TABLE>

As a result, after the recapitalization, for tax purposes the Company is able to
depreciate assets with a higher tax basis than for financial reporting purposes.
Prior to the recapitalization, the Company's results of operations were included
in the consolidated federal income tax returns which Smith & Nephew filed in the
United States and the historical financial statements reflect a provision for
income taxes assuming that DonJoy had filed a separate federal income tax
return. As limited liability companies, DonJoy and the Company are not subject
to income taxes following the recapitalization. Instead, DonJoy's earnings
following the recapitalization will be allocated to its members and included in
the taxable income of its members. The indenture and the new credit facility
permit the



                                       37
<PAGE>   38
Company to make distributions to DonJoy in certain amounts to allow DonJoy to
make distributions to its members to pay income taxes in respect of their
allocable share of taxable income of DonJoy and its subsidiaries, including the
Company.

RESULTS OF OPERATIONS

The Company operates its business on a manufacturing calendar, with its 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 what day of the week holidays
fall on. The following table sets forth the Company's operating results as a
percentage of net revenues.


<TABLE>
<CAPTION>
                                                                      YEARS ENDED DECEMBER 31,
                                                             -------------------------------------------
                                                                1999            1998              1997
                                                             ---------        ---------        ---------
                                                                        (IN THOUSANDS)
<S>                                                          <C>              <C>              <C>
Net revenues:
    Rigid knee bracing ................................           43.2%            48.2%            52.2%
    Soft goods ........................................           34.7             34.0             34.2
    Specialty and other orthopedic products ...........           22.1             17.8             13.6
                                                             ---------        ---------        ---------
Total consolidated net revenues .......................          100.0            100.0            100.0
Cost of goods sold allocable to product lines .........           40.9             40.4             40.0
                                                             ---------        ---------        ---------
Gross profit exclusive of brand royalties
   and other cost of goods sold .......................           59.1             59.6             60.0
    Brand royalties ...................................            1.6              3.2              1.7
    Other cost of goods sold ..........................            2.2              2.0               .3
                                                             ---------        ---------        ---------
Gross profit ..........................................           55.3             54.4             58.0
    Sales and marketing ...............................           24.0             25.1             24.7
    General and administrative ........................           14.7             16.4             17.1
    Research and development ..........................            1.8              2.2              2.2
    Restructuring costs ...............................             --              2.4               --
                                                             ---------        ---------        ---------
Income from operations ................................           14.8              8.3             14.0
Interest expense ......................................           (6.6)              --             (2.2)
Interest income .......................................            0.1               --               --
                                                             ---------        ---------        ---------
Income before income taxes ............................            8.3              8.3             11.8
Provision for income taxes ............................            2.1              3.4              4.7
                                                             ---------        ---------        ---------
Net income ............................................            6.2%             4.9%             7.1%
                                                             =========        =========        =========
EBITDA(a) data:
Income from operations ................................      $  16,902        $   8,345        $  12,976
Restructuring costs ...................................             --            2,467               --
Depreciation and amortization .........................          4,952            4,853            4,803
                                                             ---------        ---------        ---------
                                                                21,854           15,665           17,779

Brand royalties .......................................          1,817            3,249            1,605
Foreign sales corporation commissions .................             --              439              661
Eliminated Allocations ................................            979            1,726            1,652
Other Corporate Allocations ...........................            832            1,678            1,193
Estimated costs to replace Smith & Nephew services ....           (400)            (800)            (800)
                                                             ---------        ---------        ---------
Adjusted EBITDA(b) ....................................      $  25,082        $  21,957        $  22,090
                                                             =========        =========        =========
</TABLE>


(a)    "EBITDA" is defined as income from operations plus restructuring costs,
       and 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. However, management has
       included EBITDA because it may be used by certain 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. Our
       definition of EBITDA may not be comparable to that of other companies.

(b)    "Adjusted EBITDA" represents EBITDA (as defined above) adjusted to
       eliminate:

       (1)    charges for brand royalties paid by the Company to Smith & Nephew
              for use of the Smith & Nephew trademarks and trade names;

       (2)    foreign sales corporation commissions paid by the Company on sales
              to foreign sales corporations established by Smith & Nephew for
              tax planning purposes;

       (3)    Smith & Nephew overhead allocations for corporate managed accounts
              and new business expense and corporate management expense which
              will not be incurred following consummation of the
              recapitalization (the "Eliminated Allocations");



                                       38
<PAGE>   39
       (4)    Smith & Nephew overhead allocations for research and development
              and for amounts charged by Smith & Nephew for services provided to
              the Company for finance (risk management, treasury, audit and
              taxes), human resources and payroll and legal services
              (collectively, the "Other Corporate Allocations");

And adjusted to include the estimated costs we expect to incur to replace the
services previously provided by Smith & Nephew as part of the Other Corporate
Allocations.

The following table summarizes certain of the Company's operating results by
quarter for 1999 and 1998.

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31, 1999
                                ----------------------------------------------------------------
                                 FIRST         SECOND         THIRD       FOURTH         TOTAL
                                QUARTER        QUARTER       QUARTER      QUARTER         YEAR
                                -------        -------       -------      -------        -------
                                                            (IN THOUSANDS)
<S>                             <C>           <C>           <C>           <C>           <C>
Net revenues ................   $ 28,400      $ 25,858      $ 30,221      $ 29,773      $114,252
Gross profit ................     15,051        13,960        17,370        16,815        63,196
Income from operations ......      3,080         2,739         5,637         5,446        16,902
Number of operating days ....         64            61            66            60           251
</TABLE>

<TABLE>
<CAPTION>
                                                      YEARS ENDED DECEMBER 31, 1998
                                     -----------------------------------------------------------------
                                      FIRST         SECOND        THIRD        FOURTH          TOTAL
                                     QUARTER        QUARTER      QUARTER       QUARTER          YEAR
                                     -------        -------      -------       -------        --------
                                                             (IN THOUSANDS)
<S>                                  <C>           <C>           <C>           <C>           <C>
Net revenues ..................      $ 24,502      $ 23,388      $ 24,678      $ 28,217      $100,785
Gross profit ..................        12,940        13,008        13,272        15,620        54,840
Income from operations ........            79         1,931         2,174         4,161         8,345
Number of operating days ......            60            63            63            65           251
</TABLE>

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

NET REVENUES. Net revenues increased $13.5 million, or 13.4%, to $114.3 million
in 1999 from $100.8 million in 1998. Net revenues for the rigid knee bracing
segment increased $0.8 million over the prior year due to increased sales of
ligament braces, including the introduction of the 4-TITUDE brace and
post-operative braces. Soft goods sales increased by $5.4 million over the prior
year due primarily to increased sales volumes of neoprene bracing products,
wrist splints, ankle braces and other soft good supports, including the
introduction of the On-Track system. These increases primarily reflect the
effect of national contracts entered into in the second half of 1998 as well as
the growth of the OfficeCare program. Specialty and other orthopedic products
sales increased by $7.2 million over the prior year due primarily to the
recently introduced Painbuster(TM) Pain Management Systems, cold therapy units
and to increased sales of lower extremity walkers as well as growth of the
OfficeCare program.

GROSS PROFIT. Gross profit increased $8.4 million, or 15.2%, to $63.2 million in
1999 from $54.8 million in 1998. Gross profit margin, exclusive of brand
royalties and other cost of goods sold not allocable to specific product lines,
decreased to 59.1% in 1999 from 59.6% in 1998. Gross profit for the rigid knee
bracing segment increased $1.3 million, with gross profit margin increasing to
72.3% from 70.9%. These increases reflected the improved product mix. Gross
profit for the soft goods segment increased $2.6 million as a result of
increased sales volume, with gross profit margin consistent at 48.6% between
periods. Gross profit for the specialty and other orthopedic products segment
increased $3.5 million, with gross profit margin decreasing to 49.7% from 50.0%,
reflecting increased sales of lower margin products. As a result of the
consummation of the recapitalization on June 30, 1999, the Company no longer has
the right to use the Smith & Nephew trademarks and trade names and, accordingly,
charges for brand royalties are no longer incurred by the Company. Other cost of
goods sold not allocable to specific product lines increased to $2.5 million in
1999 from $2.0 million in 1998. This increase is primarily due to costs
associated with support of the SKU reduction plan, the OfficeCare program and
the amortization of the Painbuster(TM) Pain Management System distribution
rights.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased $2.1
million, or 8.4%, to $27.4 million in 1999 from $25.3 million in 1998. The
increase primarily reflected an increase in commissions associated with higher
sales of DonJoy products in the United States and increased costs associated
with the OfficeCare program.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.3 million, or 1.6%, to $16.8 million in 1999 from $16.5 million in
1998. The increase was primarily due to an increase in salaries and benefits
offset by a reduction in corporate allocations from Smith & Nephew of $1.9
million. General and administrative expenses declined as a percentage of
revenues to 14.7% from 16.4% primarily due to the reduction in Smith & Nephew
allocations.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately equal over the two periods. Significant resources within the
department were re-deployed to focus primarily on the development of the VISTA
System as well as the development and release of the new 4-TITUDE brace in 1999.

                                       39
<PAGE>   40
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

NET REVENUES. Net revenues increased $8.2 million, or 8.8%, to $100.8 million in
1998 from $92.6 million in 1997. Net revenues in the rigid knee bracing segment
increased marginally between the periods. Lower unit sales of ligament and OA
braces were offset by an increase in unit sales of post-operative braces and an
overall improvement in product mix. Soft goods sales increased by $2.5 million
over the prior year period due to increased sales volumes of wrist splints,
slings and immobilizers and other soft good supports. The increased sales
volumes of these products were primarily the result of growth in the OfficeCare
program. Specialty and other orthopedic products sales increased $5.3 million
over the prior year period primarily due to increased sales volumes of lower
extremity walkers, shoulder products, cold therapy units and other specialty
products. In addition, the introduction of the PainBuster(TM) Pain Management
System during the fourth quarter of 1998 contributed to increased sales within
this segment.

GROSS PROFIT. Gross profit increased $1.1 million, or 2.1%, to $54.8 million in
1998 from $53.7 million in 1997. Gross profit margin, exclusive of brand
royalties and other cost of goods sold not allocable to specific product lines,
decreased to 59.6% in 1998 from 60.0% in 1997. Gross profit for the rigid knee
bracing segment increased $0.6 million, with gross profit margin increasing to
70.9% from 70.2%. These increases reflected the improved product mix. Gross
profit for the soft goods segment increased $1.1 million, with gross profit
margin decreasing to 48.6% from 49.0%, reflecting increased sales of lower
margin products. Gross profit for the specialty and other orthopedic products
segment increased $2.8 million, with gross profit margin increasing to 50.0%
from 48.6%. These changes reflected the change in product mix. Brand royalties
charged by Smith & Nephew which are included within cost of goods sold increased
to 3.2% of revenues from 1.7% over the prior year period. Other cost of goods
sold not allocable to specific product lines increased to $2.0 million in 1998
from $0.3 million in 1997. This increase primarily resulted from the disruption
caused as the Company totally integrated manufacturing operations of the DonJoy
and ProCare brands which were previously separate. By the fourth quarter of
1998, manufacturing operations had returned to previous levels.

SALES AND MARKETING EXPENSES. Sales and marketing expenses increased $2.4
million, or 10.6%, to $25.3 million in 1998 from $22.9 million in 1997. This
increase primarily reflected an increase in commissions associated with higher
sales of DonJoy products in the United States, as well as advertising and
delivery expenses.

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased $0.7 million, or 4.3%, to $16.5 million in 1998 from $15.8 million in
1997. The increase was primarily due to $0.3 million in year 2000 compliance
costs, $0.2 million in moving costs related to the Company's consolidation of
its two U.S. facilities and a $0.2 million increase in corporate allocations
from Smith & Nephew. However, these expenses declined as a percentage of
revenues to 16.4% from 17.1%.

RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately equal over the two periods. As a result of the Company's research
and development efforts, the OPAL OA knee brace, the enhanced Defiance custom
knee brace and the TROM post-operative brace were introduced during 1998.

LIQUIDITY AND CAPITAL RESOURCES

The Company's principal liquidity requirements are to service its debt and meet
its working capital and capital expenditure needs. At December 31, 1998, the
Company had long-term intercompany obligations to Smith & Nephew of $44.0
million. On June 29, 1999, all long-term intercompany obligations and certain
other current liabilities owed to Smith & Nephew were contributed to members
equity in accordance with the recapitalization agreement. The Company's current
and long-term indebtedness at December 31, 1999 was $113.3 million.

Net cash provided by operating activities was $16.1 million, $3.7 million, and
$11.1 million in 1999, 1998, and 1997, respectively. The increase of $12.4
million in 1999 reflects the increase in net income in 1999 as compared to 1998,
a decrease in inventories and intercompany obligations along with a general
increase in working capital. The decrease of $7.3 million in 1998 was primarily
due to the decrease in net income in 1998 as compared to 1997, the increased
levels in accounts receivable and inventories offset in part by an increase in
accounts payable and the effect of the restructuring in 1998.

Cash flows used in investing activities were $4.8 million, $4.0 million, and
$2.3 million in 1999, 1998, and 1997, respectively. Capital expenditures in 1999
primarily reflected payments relating to the purchase of new enterprise resource
planning software and the exclusive North American distribution rights for the
PainBuster(TM) Pain Management System. Capital expenditures in 1998 reflected
leasehold improvements on the expanded Vista, California facility. The increase
of $1.7 million in 1998 as compared to 1997 related to increased capital
expenditures related to leasehold improvements on the expanded Vista facility
and a payment relating to the purchase of intellectual property rights from IZEX
Technologies to design, manufacture and distribute the VISTA System.

Cash flows provided by (used in) financing activities were $(6.2) million, $0.2
million, and $(8.4) million in 1999, 1998, 1997, respectively. The changes are
primarily a result of the change in intercompany obligations. Prior to the
recapitalization, the Company participated in Smith & Nephew's central cash
management program, wherein all of the Company's cash receipts were remitted to


                                       40
<PAGE>   41
Smith & Nephew and all cash disbursements were funded by Smith & Nephew.
Following the recapitalization, the Company no longer participates in Smith &
Nephew's cash management program. See Note 9 of Notes to Consolidated Financial
Statements.

Interest payments on the Notes and on borrowings under the new credit facility
have significantly increased the Company's liquidity requirements. The new
credit facility provides for the term loan of $15.5 million, which was borrowed
in connection with the recapitalization, and up to $25.0 million of revolving
credit borrowings under the new revolving credit facility, which are available
for working capital and general corporate purposes, including financing of
acquisitions, investments and strategic alliances. As of December 31, 1999, the
Company had no borrowings outstanding under the new revolving credit facility.
Borrowings under the term loan and the new revolving credit facility bear
interest at variable rates plus an applicable margin. See Note 3 of Notes to
Consolidated Financial Statements.

The following table sets forth the principal payments on the term loan for the
years 2000 through its maturity in 2005:

<TABLE>
<CAPTION>
                                                      PRINCIPAL
             YEAR                                      PAYMENT
             ----                                     ---------
<S>                                                   <C>
             2000...................................  $  500,000
             2001...................................     500,000
             2002...................................     500,000
             2003...................................     500,000
             2004...................................   6,750,000
             2005...................................   6,500,000
</TABLE>

In addition, commencing with the year ended December 31, 1999, the Company is
required to make annual mandatory prepayments of the term loan under the new
credit facility in an amount equal to 50% of excess cash flow (as defined in the
new credit facility) (75% if the Company's leverage ratio exceeds a certain
level). The Company had no excess cash flow at December 31, 1999. In addition,
the term loan is subject to mandatory prepayments in an amount equal to (a) 100%
of the net cash proceeds of certain equity and debt issuances by DonJoy, the
Company or any of its subsidiaries and (b) 100% of the net cash proceeds of
certain asset sales or other dispositions of property by DonJoy, the Company or
any of its subsidiaries, in each case subject to certain exceptions. No
mandatory prepayments were required by the Company at December 31, 1999. The new
credit facility and the indenture impose certain restrictions on the Company,
including restrictions on its ability to incur indebtedness, pay dividends, make
investments, grant liens, sell its assets and engage in certain other
activities. In addition, the new credit facility requires the Company to
maintain certain financial ratios. Indebtedness under the new credit facility is
secured by substantially all of the assets of the Company, including the
Company's real and personal property, inventory, accounts receivable,
intellectual property and other intangibles.

The Company incurred fees and expenses of $8.8 million in connection with the
recapitalization. Approximately $7.3 million, principally relating to financing
fees and expenses, has been capitalized and will be amortized over the terms of
the related debt instruments.

As part of its strategy the Company intends to pursue acquisitions, investments
and strategic alliances. The Company may require new sources of financing to
consummate any such transactions, including additional debt or equity financing.
There can be no assurance that such additional sources of financing will be
available on acceptable terms if at all. The Company's ability to satisfy its
debt obligations and to pay principal and interest on its indebtedness,
including the notes, fund working capital requirements and make anticipated
capital expenditures will depend on its future performance, which is subject to
general economic, financial and other factors, some of which are beyond its
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 new
revolving credit facility, will be adequate for the foreseeable future to make
required payments of principal and interest on the Company's indebtedness,
including the notes, to fund anticipated capital expenditures and for working
capital requirements. There can be no assurance, however, that the Company's
business will generate sufficient cash flow from operations or that future
borrowings will be available under the new revolving credit facility in an
amount sufficient to enable the Company to service its indebtedness, including
the notes, or to fund its other liquidity needs.

MARKET RISK

The Company is exposed to certain market risks as part of its ongoing business
operations. Primary exposure following consummation of the Transactions includes
changes in interest rates. The Company, as a matter of policy, does not enter
into derivative or other financial investments for trading or speculative
purposes. The Company will manage its interest rate risk by balancing the amount
of fixed and variable debt. 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, 1999, the Company had $100 million
principal amount of fixed rate debt represented by the new notes and $15.3
million of variable rate debt represented by borrowings under the new credit
facility. Up to $25.0 million of variable rate borrowings is available under the
new revolving credit facility. The Company may use derivative financial
instruments, where appropriate, to manage its interest rate risks.



                                       41
<PAGE>   42
SEASONALITY

The Company generally records its highest net revenues in the first and fourth
quarters due to the greater number of orthopedic surgeries and injuries
resulting from increased sports activity, particularly football and skiing. In
addition, during the fourth quarter, a patient has a greater likelihood of
having satisfied his annual insurance deductible than in the first three
quarters of the year, and thus there is an increase in the number of elective
orthopedic surgeries. Conversely, the Company generally has lower net revenues
during its second and third quarters as a result of decreased sports activity
and fewer orthopedic surgeries. The Company's results of operations would be
adversely and disproportionately affected if the Company's sales were
substantially lower than those normally expected during its first and fourth
quarters.

YEAR 2000

During fiscal 1999, the Company continued its company-wide program to prepare
the Company's computer systems for year 2000 compliance. The year 2000 issue
relates to computer systems that use the last two digits rather than all four to
define a year and whether such systems would properly and accurately process
information when the year changed to 2000. At the date of this report, the
Company had not yet experienced any material problems related to the year 2000.
The Company has not become aware of any significant year 2000 issues affecting
the Company's major customers or suppliers. The Company also has not received
any material complaints regarding any year 2000 issues related to its products.
Year 2000 related costs through February 29, 2000 were approximately $360,000
and have been expensed as incurred. These costs included labor expended in
contacting customers and suppliers, testing systems and software, and software
upgrades for year 2000.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on the Company's balance sheet at
fair value. The Financial Accounting Standards Board has subsequently delayed
implementation of the standard for the financial years beginning after June 15,
2000. The Company expects to adopt the new Statement effective January 1, 2000.
The impact on the Company's financial statements is not expected to be material.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to certain market risks as part of its ongoing business
operations. Primary exposure following consummation of the recapitalization
includes changes in interest rates. The Company is exposed to interest rate risk
in connection with the term loan which bears interest at floating rates based on
London Inter-Bank Offered Rate ("LIBOR") or the prime rate plus an applicable
borrowing margin. The Company will manage its interest rate risk by balancing
the amount of fixed and variable debt. 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, 1999, the Company had $100
million principal amount of fixed rate debt represented by the Notes and $15.3
million of variable rate debt represented by borrowings under the new credit
facility (at an interest rate of 9.75% as of December 31, 1999). Based on the
Company's current balance outstanding under the term loan, an immediate increase
of one percentage point in the applicable interest rate would cause an increase
in interest expense of approximately $0.2 million on an annual basis. Up to
$25.0 million of variable rate borrowings is available under the new revolving
credit facility. The Company may use derivative financial instruments, where
appropriate, to manage its interest rate risks. The Company does not attempt to
mitigate this risk through hedging transactions. All of the Company's sales are
denominated in U.S. dollars, thus the Company is not subject to any foreign
currency exchange risks.



                                       42
<PAGE>   43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The following documents are filed as part of this report:

<TABLE>
<CAPTION>
DESCRIPTION                                                                           PAGE
-----------                                                                           ----
<S>                                                                                    <C>
Report of Ernst & Young LLP, Independent Auditors...............................       44
Consolidated Balance Sheets as of December 31, 1999 and 1998....................       45
Consolidated Statements of Income for the years ended December 31,
     1999, 1998 and 1997........................................................       46
Statements of Changes in Consolidated Members' Equity (Deficit) for the
     years ended December 31, 1999, 1998 and 1997...............................       47
Consolidated Statements of Cash Flows for the years ended
     December 31, 1999, 1998 and 1997...........................................       48
Notes to Consolidated Financial Statements......................................       49
</TABLE>



                                       43
<PAGE>   44
                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

To the Board of Managers
DonJoy, L.L.C.

We have audited the accompanying consolidated balance sheets of DonJoy, L.L.C.
as of December 31, 1999 and 1998, and the related consolidated statements of
income, members' equity and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14(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 DonJoy, L.L.C. at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial 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.


                                                  /s/ ERNST & YOUNG LLP

San Diego, California
February 15, 2000



                                       44
<PAGE>   45
                                 DONJOY, L.L.C.
                           CONSOLIDATED BALANCE SHEETS
                        (in thousands, except unit data)

<TABLE>
<CAPTION>
                                                                            December 31,   December 31,
                                                                                1999           1998
                                                                            -----------    ------------
<S>                                                                        <C>             <C>
ASSETS
Current assets:
   Cash and cash equivalents ..........................................      $   5,927       $     809
   Accounts receivable, net of allowance for doubtful
      accounts of $989 and $356 at December 31, 1999 and
       1998, respectively .............................................         20,056          17,543
   Accounts receivable, related parties ...............................          1,350           2,301
   Inventories, net ...................................................         13,664          14,368
   Other current assets ...............................................            917             811
                                                                             ---------       ---------
Total current assets ..................................................         41,914          35,832
Property, plant and equipment, net ....................................          7,297           7,400
Intangible assets, net ................................................         33,195          33,758
Debt issuance costs, net ..............................................          6,875              --
Other assets ..........................................................            135              66
                                                                             ---------       ---------
Total assets ..........................................................      $  89,416       $  77,056
                                                                             =========       =========

LIABILITIES AND MEMBERS' EQUITY (DEFICIT) Current liabilities:
   Accounts payable ...................................................      $   6,242       $   7,167
   Accounts payable, related parties ..................................            169             137
   Accrued compensation ...............................................          2,443           1,385
   Accrued commissions ................................................            954           1,191
   Long-term debt, current portion ....................................            500              --
   Accrued interest ...................................................            526              --
   Intercompany obligations ...........................................             --           6,850
   Restructuring reserve ..............................................             --           1,639
   Other accrued liabilities ..........................................          3,667           1,838
                                                                             ---------       ---------
Total current liabilities .............................................         14,501          20,207
12 5/8% Senior Subordinated Notes ......................................         98,055              --
Intercompany obligations, less current portion ........................             --          44,017
Long-term debt, less current portion ..................................         14,750              --
Redeemable Preferred Units; 100,000 units authorized, 40,184 units
issued and outstanding at December 31, 1999; liquidation
     preference $33,684 at December 31, 1999 ..........................         32,539              --

Commitments and contingencies

Members' equity (deficit):
   Common units; 2,900,000 units authorized, 718,000 units issued
      and outstanding at December 31, 1999 ............................         66,521              --
   Notes receivable from officers .....................................         (1,400)             --
   Retained earnings (deficit) ........................................       (135,550)         12,832
                                                                             ---------       ---------
Total members' equity (deficit) .......................................        (70,429)         12,832
                                                                             ---------       ---------
Total liabilities and members' equity (deficit) .......................      $  89,416       $  77,056
                                                                             =========       =========
</TABLE>



                             See accompanying notes.



                                       45
<PAGE>   46
                                 DONJOY, L.L.C.
                        CONSOLIDATED STATEMENTS OF INCOME
                                 (in thousands)



<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                                       1999            1998           1997
                                                    ---------       ---------      ---------
<S>                                                 <C>             <C>            <C>
Net revenues:
    Third parties ............................      $ 105,904       $  90,083      $  80,817
    Related parties ..........................          8,348          10,702         11,807
                                                    ---------       ---------      ---------
Total net revenues ...........................        114,252         100,785         92,624
Cost of goods sold ...........................         51,056          45,945         38,913
                                                    ---------       ---------      ---------
Gross profit .................................         63,196          54,840         53,711
Operating expenses:
    Sales and marketing ......................         27,424          25,296         22,878
    General and administrative ...............         16,755          16,484         15,802
    Research and development .................          2,115           2,248          2,055
    Restructuring costs ......................             --           2,467             --
                                                    ---------       ---------      ---------
Total operating expenses .....................         46,294          46,495         40,735
                                                    ---------       ---------      ---------
Income from operations .......................         16,902           8,345         12,976
Interest expense .............................         (7,568)             --         (2,072)
Interest income ..............................            181              --             --
                                                    ---------       ---------      ---------
Income before income taxes ...................          9,515           8,345         10,904
Provision for income taxes ...................          2,387           3,394          4,367
                                                    ---------       ---------      ---------
Net income and comprehensive net income ......          7,128           4,951          6,537

Less: Preferred unit dividends and accretion
       of preferred unit fees ................         (2,343)            N/A            N/A
                                                    ---------       ---------      ---------
Net income available to members ..............      $   4,785             N/A            N/A
                                                    =========       =========      =========
</TABLE>



                             See accompanying notes.



                                       46
<PAGE>   47
                                 DONJOY, L.L.C.
         STATEMENTS OF CHANGES IN CONSOLIDATED MEMBERS' EQUITY (DEFICIT)
                     (in thousands, except unit information)



<TABLE>
<CAPTION>
                                                                                                                       TOTAL
                                                                                         NOTES         RETAINED       MEMBERS'
                                                               COMMON UNITS            RECEIVABLE      EARNINGS        EQUITY
                                                            UNITS         AMOUNT      FROM OFFICER     (DEFICIT)     (DEFICIT)
                                                         ----------     ----------     ----------     ----------     ----------
<S>                                                         <C>         <C>            <C>            <C>            <C>
BALANCE AT DECEMBER 31, 1996 ........................            --     $       --             $-     $    1,344     $    1,344
Net income ..........................................            --             --             --          6,537          6,537
                                                         ----------     ----------     ----------     ----------     ----------
BALANCE AT DECEMBER 31, 1997 ........................            --             --             --          7,881          7,881
Net income ..........................................            --             --             --          4,951          4,951
                                                         ----------     ----------     ----------     ----------     ----------
BALANCE AT DECEMBER 31, 1998 ........................            --             --             --         12,832         12,832
Capital contribution by Smith & Nephew, Inc. ........
   in connection with the Recapitalization ..........     2,054,000         64,117             --        (16,264)        47,853
Issuance of common units at $100 per unit,
   net of transaction fees of $1,563 ................       645,500         62,987             --             --         62,987
Purchase of common units from Smith &
   Nephew, Inc ......................................    (2,000,000)       (62,433)            --       (136,707)      (199,140)
Issuance of common units at $100 per unit,
   in exchange for cash and notes receivable ........        18,500          1,850         (1,400)            --            450
Preferred unit dividends and accretion
   of preferred unit fees ...........................            --             --             --         (2,343)        (2,343)
Net income (excluding $196 allocated to preferred
   unit holders) ....................................            --             --             --          6,932          6,932
                                                         ----------     ----------     ----------     ----------     ----------
BALANCE AT DECEMBER 31, 1999 ........................       718,000     $   66,521     $   (1,400)    $ (135,550)    $  (70,429)
                                                         ==========     ==========     ==========     ==========     ==========
</TABLE>


                             See accompanying notes.



                                       47
<PAGE>   48
                                 DONJOY, L.L.C.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                                             Years Ended December 31,
                                                                                      1999            1998            1997
                                                                                    --------        --------        --------
<S>                                                                                 <C>             <C>             <C>
OPERATING ACTIVITIES
Net income ..................................................................       $  7,128        $  4,951        $  6,537
Adjustments to reconcile net income to net cash provided by
        operating activities:
   Depreciation and amortization ............................................          4,952           4,853           4,803
   Amortization of debt issuance costs and discount on Senior
       Subordinated Notes ...................................................            510              --              --
   Restructuring costs ......................................................             --           2,467              --
   Changes in operating assets and liabilities:
     Accounts receivable ....................................................         (2,514)         (4,239)         (1,440)
     Inventories ............................................................            704          (2,760)           (591)
     Other current assets ...................................................           (106)            (97)            444
     Accounts payable .......................................................           (925)            623           2,341
     Accrued interest .......................................................            526              --              --
      Accrued compensation ..................................................          1,057            (174)            422
      Accrued commissions ...................................................           (237)           (377)            110
     Intercompany activity ..................................................          3,498            (449)           (699)
     Restructuring reserve ..................................................           (339)         (1,197)             --
     Other accrued liabilities ..............................................          1,811             147            (851)
                                                                                    --------        --------        --------
Net cash provided by operating activities ...................................         16,065           3,748          11,076

INVESTING ACTIVITIES
Purchases of property, plant and equipment ..................................         (2,502)         (3,189)         (2,273)
Increase in intangible assets ...............................................         (2,204)           (960)             --
Other assets ................................................................            (70)            100             (49)
                                                                                    --------        --------        --------
Net cash used in investing activities .......................................         (4,776)         (4,049)         (2,322)

FINANCING ACTIVITIES
Net proceeds from Senior Subordinated Notes .................................         97,953              --              --
Proceeds from long-term debt ................................................         15,500              --              --
Repayment of long-term debt .................................................           (250)             --              --
Debt issuance costs .........................................................         (7,283)             --              --
Purchase of common units from Former Parent .................................       (199,140)             --              --
Net proceeds from issuance of common units ..................................         63,437              --              --
Net proceeds from issuance of preferred units ...............................         30,000              --              --
Intercompany obligations ....................................................         (6,388)            200          (8,401)
                                                                                    --------        --------        --------
Net cash (used in) provided by financing activities .........................         (6,171)            200          (8,401)
                                                                                    --------        --------        --------
Net increase (decrease) in cash .............................................          5,118            (101)            353
Cash at beginning of period .................................................            809             910             557
                                                                                    --------        --------        --------
Cash at end of period .......................................................       $  5,927        $    809        $    910
                                                                                    ========        ========        ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
   Interest paid ............................................................       $  6,530        $     --        $     --
                                                                                    ========        ========        ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
   Settlement of note payable through intercompany obligations ..............       $     --        $     --        $ 38,000
                                                                                    ========        ========        ========
   Capital contribution in connection with the Recapitalization .............       $ 47,853        $     --        $     --
                                                                                    ========        ========        ========
   Common units issued in exchange for notes receivable ....................        $  1,400        $     --        $     --
                                                                                    ========        ========        ========
   Dividends and accretion of preferred unit fee related to redeemable
        preferred units .....................................................       $  2,343        $     --        $     --
                                                                                    ========        ========        ========
</TABLE>



                             See accompanying notes


                                       48
<PAGE>   49
                                 DONJOY, L.L.C.
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                                 (IN THOUSANDS)


1.      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DonJoy, L.L.C. (the "Company") designs, manufactures and markets various lines
of external recovery products and accessories. The Company was established in
December 1982 as DonJoy, Inc. The Company was acquired by Smith & Nephew, Inc.
(formerly Smith & Nephew Consolidated, Inc., the "Former Parent") effective
September 18, 1987 through a purchase of all the then outstanding shares of the
Company's stock. Smith & Nephew, Inc. is a wholly-owned subsidiary of Smith &
Nephew plc., a United Kingdom company. In November 1996, Smith & Nephew DonJoy,
Inc. was merged into Smith & Nephew, Inc. and began to operate as a division.
Effective December 29, 1998, the Former Parent contributed the Company's net
assets and shares of a Mexican subsidiary into DonJoy, L.L.C. a newly formed
Delaware limited liability company and became the sole member of the new entity.

DonJoy, L.L.C. will be dissolved on December 31, 2030, unless prior to that date
certain events occur as defined in the Second Amended and Restated Operating
Agreement dated as of July 30, 1999. The debts, obligations and liabilities of
the Company, whether arising in contract, tort or otherwise, shall be solely
debts, obligations and liabilities of the Company, and no member or manager of
DonJoy, L.L.C. shall be obligated personally for any such debt, obligation or
liability of the Company solely by reason of being a member or manager.

Recapitalization

On June 30, 1999, the Company consummated a $215.3 million recapitalization (the
"Recapitalization"). Under the Recapitalization, new investors, including Chase
DJ Partners, L.L.C. ("CDP") and affiliates of CDP, invested new capital of $94.6
million in the Company. In addition, certain members of management invested net
equity of $0.5 million, by purchasing $1.8 million in equity which was financed
in part by $1.4 million in interest-bearing, full recourse loans from the
Company. The Company's "Former Parent" retained 54,000 common units, which
represent approximately 7.5% of total units outstanding in the Company. In
connection with the recapitalization transactions, the Company established dj
Orthopedics, LLC ("dj Ortho") and DJ Orthopedics Capital Corporation ("DJ
Capital"). The Company sold all of its net assets to dj Ortho for cash, which
was funded with the net proceeds of $100.0 million of 12 5/8% Senior
Subordinated Notes (the "Notes") issued by dj Ortho and DJ Capital, as
co-issuers, and the remainder by funds borrowed by dj Ortho under a senior
credit facility. The Notes are fully and unconditionally guaranteed by the
Company. dj Ortho is a wholly-owned subsidiary of the Company and represents
substantially all of the revenues and net income of the Company. DJ Capital is a
wholly-owned subsidiary of dj Ortho, has no significant assets or operations and
was formed solely for the purpose of being a co-issuer of the Notes (see Note
3).

The proceeds of the equity investment together with $113.5 million of net
proceeds from debt financing were used for approximately $199.1 million of
consideration paid to redeem a portion of members' equity from the Company's
Former Parent, and approximately $8.8 million of costs and fees paid in
association with the Recapitalization.

The accompanying consolidated financial statements present the historical
consolidated financial position and results of operations of dj Ortho and
include the accounts of dj Ortho and the accounts of its wholly-owned Mexican
subsidiary that manufactures a portion of dj Ortho's products under Mexico's
maquiladora program. The maquiladora program allows foreign manufacturers to
take advantage of Mexico's lower cost production sharing capabilities. The
accompanying results of operations reflect only the operations of the business
involved in the Recapitalization transactions and exclude any operations
remaining in the control of the Former Parent. All intercompany accounts and
transactions have been eliminated in consolidation. Certain expenses reflected
in the accompanying consolidated statements of income are allocations from the
Former Parent and Smith & Nephew plc and therefore differ from the expenses dj
Ortho currently incurs as an autonomous entity (see Note 9).

Use of Estimates in the Preparation of Financial Statements

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

Cash Equivalents

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



                                       49
<PAGE>   50
Fair Value of Financial Instruments

In accordance with requirements of Statement of Financial Accounting Standards
No. 107, Disclosures about Fair Value of Financial Instruments, the following
methods and assumptions were used by dj Ortho in estimating the fair value
disclosures:

-      Cash and Short-Term Receivables. The carrying amounts approximate fair
       values because of short maturities of these instruments and the reserves
       for doubtful accounts which, in the opinion of management, is adequate to
       state short-term receivables at their fair value.

-      Long-Term Debt. Based on the borrowing rates currently available to dj
       Ortho for loans with similar terms and average maturities, management of
       dj Ortho believes the fair value of long-term debt approximates its
       carrying value at December 31, 1999.

Long-Lived Assets

Property, plant and equipment and intangible assets are recorded at cost. dj
Ortho provides for depreciation on property, plant and equipment and intangible
assets using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are amortized over the lesser of their estimated
useful life or the term of the related lease.

dj Ortho periodically reviews its long-lived assets, including intangibles, for
indicators of impairment. If indicators exist, an analysis of future
undiscounted cash flows would be performed. If such future undiscounted cash
flows are less than the net book value of the assets, the carrying value would
be reduced to estimated fair value.

Computer Software Costs

In 1999, dj Ortho adopted the American Institute of Certified Public Accountants
Statement of Position 98-1 "Accounting for Costs of Computer Software Developed
or Obtained for Internal Use" (SOP 98-1). This standard requires companies to
capitalize qualifying computer software costs, which are incurred during the
application development stage and amortize them over the software's estimated
useful life. During 1999, there was minimal impact from the adoption of SOP
98-1. However, in future years, dj Ortho may have significant capitalized
computer software costs.

Inventories

Inventories are stated at the lower of cost or market, with cost determined on a
first-in, first-out (FIFO) basis. In connection with the Recapitalization
transactions described in Note 1, dj Ortho changed its method of valuing its
inventory from the last-in, first-out method (LIFO) to the FIFO method because
management believes the FIFO method is preferable. This change was implemented
during 1998, retroactively for all periods presented. The effect of the change
was an increase (decrease) in net income of $346,000 in 1998 and $(125,000) in
1997.

Revenue Recognition

Revenues and costs are recognized as products are shipped. Revenues from
third-party payors are recorded net of contractual allowances. Estimated returns
are accrued in the period sales are recognized in accordance with the terms of
SFAS No. 48, "Revenue Recognition When Right of Return Exists". Some products
have a limited warranty and estimated warranty costs are accrued in the period
sales are recognized.

Advertising Expense

The cost of advertising is expensed as incurred. dj Ortho incurred $152,000,
$122,000 and $95,000 in advertising costs for the years ended December 31, 1999,
1998 and 1997.

Foreign Currency Translation

dj Ortho has determined that the functional currency of its Mexican operations
is the U.S. dollar. Transaction gains and losses are reported as income or
expense in the periods presented.

Concentration of Credit Risk

dj Ortho sells the majority of its products in the United States through 26
commissioned sale organizations (referred to as agents). Products which are
generic are sold through large distributors, specialty dealers and buying
groups. International sales comprise 16%, 18% and 18% in 1999, 1998 and 1997,
respectively, of total revenues and are primarily sold through independent
distributors. Credit is extended based on an evaluation of the customer's
financial condition and generally collateral is not required. dj Ortho also
provides a reserve for estimated sales returns. Both credit losses and returns
have been within management's estimates.

During the three years ended December 31, 1999, dj Ortho had no individual
customer, supplier or distributor which accounted for 10% or more of total
annual revenues.



                                       50
<PAGE>   51
Stock-Based Compensation

dj Ortho has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25") and related interpretations
in accounting for its employee options because the alternative fair value
accounting provided for under SFAS No. 123, Accounting for Stock-Based
Compensation, requires the use of valuation models that were not developed for
use in valuing employee options. Under APB 25, when the exercise price of dj
Ortho's employee options, is not less than the fair value for the underlying
stock on the date of grant, no compensation expense is recognized.

Income Taxes

dj Ortho's Former Parent files a consolidated federal income tax return which
includes all of its eligible subsidiaries and divisions, which prior to the
recapitalization included dj Ortho. The provision for income taxes has been
presented assuming dj Ortho filed a separate federal income tax return. The
recapitalization had no impact on the historical basis of dj Ortho's assets and
liabilities as reflected in the consolidated financial statements except for the
elimination of the restructuring reserve and intercompany accounts. However, as
a result of the recapitalization, for federal income tax purposes, dj Ortho has
recorded an increase in the tax basis of its inventory, fixed and intangible
assets in an amount approximately equal to the taxable gain recognized by Smith
& Nephew on the sale of its interest in DonJoy. The increase in tax basis as of
December 31, 1999 is as follows (in thousands):

<TABLE>
<S>                                                                     <C>
Inventory                                                               $  3,670
Property, plant and equipment                                              4,145
Goodwill                                                                 130,543
                                                                        --------
                                                                        $138,358
                                                                        ========
</TABLE>

As a result, after the recapitalization, for tax purposes dj Ortho is able to
depreciate assets with a higher tax basis than for financial reporting purposes.
Prior to the recapitalization, dj Ortho's results of operations include a
provision for income taxes assuming that dj Ortho had filed a separate federal
income tax return. As a limited liability company, dj Ortho is not subject to
income taxes. Instead, dj Ortho's earnings will be allocated to its members and
included in the taxable income of its members. The indenture and the new credit
facility permits dj Ortho to make distributions to DonJoy and DonJoy to make
distributions to its members to pay income taxes in respect of their allocable
share of taxable income of DonJoy and its subsidiaries, including dj Ortho.

Comprehensive Income

dj Ortho has adopted SFAS No. 130, Reporting Comprehensive Income, which
requires that all components of comprehensive income, including net income, be
reported in the financial statements in the period in which they are recognized.
Comprehensive income is defined as the change in equity during a period from
transactions and other events and circumstances from non-owner sources. Net
income and other comprehensive income, including foreign currency translation
adjustments, and unrealized gains and losses on investments, shall be reported,
net of their related tax effect, to arrive at comprehensive income.
Comprehensive income for the years ended December 31, 1999, 1998 and 1997 did
not differ from reported net income.

Recently Issued Accounting Standards

In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement will
require the recognition of all derivatives on dj Ortho's balance sheet at fair
value. The Financial Accounting Standards Board has subsequently delayed
implementation of the Statement for the financial years beginning after June 15,
2000. dj Ortho expects to adopt the new Statement effective January 1, 2000. The
impact on dj Ortho's financial statements is not expected to be material.

Reclassifications

Certain amounts in prior periods have been reclassified to conform with current
period presentation.

2. FINANCIAL STATEMENT INFORMATION

Inventories

Inventories consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                December 31,      December 31,
                                                     1999             1998
                                                 --------         --------
<S>                                             <C>               <C>
Raw materials ...........................        $  6,392         $  6,321
Work-in-progress ........................           1,446            1,615
Finished goods ..........................           6,817            6,988
                                                 --------         --------
                                                   14,655           14,924
Less reserve for excess and obsolete ....            (991)            (556)
                                                 --------         --------
                                                 $ 13,664         $ 14,368
                                                 ========         ========
</TABLE>



                                       51
<PAGE>   52
Property, Plant and Equipment

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


<TABLE>
<CAPTION>
                                                                December 31,         December 31,
                                                                   1999                 1998
                                                                 --------             --------
<S>                                                             <C>                  <C>
Buildings and leasehold improvements ................            $  3,577             $  5,285
Office furniture, fixtures, equipment and other .....              15,817               14,488
Construction in progress ............................               1,297                  337
                                                                 --------             --------
                                                                   20,691               20,110
Less accumulated depreciation and amortization ......             (13,394)             (12,710)
                                                                 --------             --------
                                                                 $  7,297             $  7,400
                                                                 ========             ========
</TABLE>

Intangible Assets

Intangible assets arose primarily from the initial acquisition of dj Ortho in
1987 and dj Ortho's acquisition of Professional Care Products, Inc. in 1995. dj
Ortho acquired a license in 1999 related to the I-Flow technology. Intangible
assets consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                Useful
                                                 Life                       December 31,
                                              (in years)              1999                 1998
                                              ---------               ----                 ----
<S>                                           <C>                   <C>                  <C>
Goodwill ..........................                  20             $ 24,742             $ 24,742
Patented technology ...............                5-20               14,437               14,437
Customer base .....................                  20               11,600               11,600
Licensing agreements ..............                   5                2,000                   --
Assembled workforce ...............                   6                  250                  250
Other .............................                5-20                  399                  195
                                                                    --------             --------
                                                                      53,428               51,224
                                                                    --------             --------
Less: accumulated amortization ....                                  (20,233)             (17,466)
                                                                    --------             --------
                                                                    $ 33,195             $ 33,758
                                                                    ========             ========
</TABLE>


3. FINANCING ARRANGEMENTS

Principal balances under dj Ortho's long-term financing arrangements consist of
the following:

<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                               1999
                                                                                            -----------
<S>                                                                                         <C>
12 5/8% Senior Subordinated Notes due 2009, including $1,945
  of unamortized discount at December 31, 1999 .................................            $  98,055
Senior Credit Facility:
  Term loan due 2005, including interest rate of 9.75% at December 31, 1999 ....               15,250
  Revolving credit facility ....................................................                   --
                                                                                            ---------
                                                                                              113,305
Current portion of long-term debt ..............................................                 (500)
                                                                                            ---------
Long-term debt net of current portion ..........................................            $ 112,805
                                                                                            =========
</TABLE>

12 5/8% SENIOR SUBORDINATED NOTES DUE 2009

On June 30, 1999, dj Ortho issued $100.0 million of 12 5/8% 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 will be accreted to the Notes balance and amortized to interest
expense over the life of the Notes. 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 all senior
subordinated indebtedness of dj Ortho and senior in right of payment to all
subordinated indebtedness.

Interest on the Notes is payable in cash semi-annually on each June 15 and
December 15, commencing on December 15, 1999. The aggregate principal amount of
the Notes matures on June 15, 2009.

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



                                       52
<PAGE>   53
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. The Notes are guaranteed by DonJoy and co-issued by dj Ortho and DJ
Capital, but are not and will not be guaranteed by dj Orthopedics, LLC de Mexico
de S.A. de C.V., dj Ortho's only existing subsidiary (other than DJ Capital).

Optional Redemption. 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 and liquidated damages
thereon, if any, to the redemption date if redeemed during the 12-month period
commencing on June 15 of the years set forth below:

<TABLE>
<CAPTION>
                                                                       Redemption
        Year                                                              Price
        ----                                                           ----------
<S>                                                                    <C>
        2004.....................................................       106.313%
        2005.....................................................       104.208%
        2006.....................................................       102.104%
        2007 and thereafter......................................       100.000%
</TABLE>

SENIOR CREDIT FACILITY

In connection with the Recapitalization, dj Ortho entered into a Credit
Agreement with First Union National Bank ("First Union") and the Chase Manhattan
Bank ("Chase") and other lenders, pursuant to which dj Ortho may borrow up to
$40.5 million consisting of a revolving credit facility of up to $25.0 million
(the "Revolving Credit Facility") and a term loan in a principal amount of $15.5
million (the "Term Loan"). The Revolving Credit Facility includes options by dj
Ortho to enter into revolving loans of up to $25.0 million, to enter into
swingline loans and to obtain letters of credit from time to time. The Revolving
Credit Facility provides for letters of credit in an aggregate stated amount at
any time outstanding not in excess of the lesser of $5.0 million and the
difference between $25.0 million and the sum of the outstanding principal amount
of dj Ortho Revolving loans, letter of credit exposure and swingline exposure at
such time. Letters of credit are payable on the date of issuance of such letters
of credit; otherwise, the letters of credit bear interest at the rate per annum
equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Base
Certificate of Deposit Rate in effect on such day plus 1% and (c) the Federal
Funds Effective Rate in effect on such day plus 1/2 of 1%. A commitment fee of
1/2% per annum on the average unused portion of the revolving loan is payable
quarterly. The full amount of the Term Loan was borrowed as part of the
financing from the Recapitalization. Borrowings under the Revolving Credit
Facility and Term Loan bear interest at variable rates plus an applicable margin
(9.75% as of December 31, 1999). As of December 31, 1999, there were no
outstanding borrowings on the dj Ortho's Revolving Credit Facility.

Repayment. The Term Loan will mature on June 30, 2005 and is subject to
mandatory repayments and reductions as defined in the Credit Agreement. The
following table sets forth the principal payments on the Term Loan for the years
2000 through its maturity in 2005 (in thousands):


<TABLE>
<S>                                                                    <C>
        2000.....................................................      $     500
        2001.....................................................            500
        2002.....................................................            500
        2003.....................................................            500
        2004.....................................................          6,750
        2005.....................................................          6,500
                                                                       ---------
        Total....................................................      $  15,250
                                                                       =========
</TABLE>

In addition, commencing with the year ending December 31, 1999, the dj Ortho is
required to make annual mandatory prepayments of the term loan under the new
credit facility in an amount equal to 50% of excess cash flow (as defined in the
new credit facility) (75% if dj Ortho's leverage ratio exceeds a certain level).
dj Ortho had no excess cash flow at December 31, 1999. In addition, the term
loan is subject to mandatory prepayments in an amount equal to (a) 100% of the
net cash proceeds of certain equity and debt issuances by DonJoy, 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 DonJoy, dj Ortho or any of its
subsidiaries, in each case subject to certain exceptions. No mandatory
prepayments were required by dj Ortho at December 31, 1999.

Security; Guarantees. The obligations of dj Ortho under the new credit facility
are irrevocably guaranteed, jointly and severally, by DonJoy, DJ Capital and
future subsidiaries. In addition, the new credit facility and the guarantees
thereunder are secured by substantially all the assets of DonJoy, dj Ortho and
DJ Capital.

Covenants. The new credit facility 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 other indebtedness or amend other debt instruments; (v)
pay dividends or make other distributions (except for certain tax
distributions); (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



                                       53
<PAGE>   54
capital expenditures; (x) or engage in certain transactions with affiliates and
otherwise engage in certain activities. In addition, the new credit facility
requires dj Ortho and its subsidiaries to comply with specified financial ratios
and tests, including a maximum consolidated leverage ratio test and a minimum
consolidated interest coverage ratio test. The new credit facility also contains
provisions that prohibit any modifications of the Notes in any manner adverse to
the lenders under the new credit facility and that limit the dj Ortho's ability
to refinance or otherwise prepay the Notes without the consent of such lenders.

4.      MEMBERS' EQUITY (DEFICIT)

dj Ortho is a limited liability company formed under the Delaware Limited
Liability Company Act (as amended from time to time, the "Limited Liability
Act") and is governed by the Second Amended and Restated Operating Agreement
dated July 30, 1999 (the "LLC Agreement").

Common and Preferred Units

dj Ortho is authorized to issue up to 2,900,000 common units and up to 100,000
preferred units. As of December 31, 1999, 718,000 common units and 40,184
preferred units were issued and outstanding, and 15% of the common units on a
fully diluted basis have been reserved for issuance to employees, directors and
independent consultants and contractors of dj Ortho or any subsidiary thereof
pursuant to the 1999 Option Plan.

The preferred units accrue a cumulative quarterly preferred return at a fixed
rate of 14.0% per annum, subject to increase to 16.0% per annum upon the
occurrence of certain events of non-compliance. Total dividends for the year
ended December 31, 1999 were $2.3 million. Payment of the preferred dividends is
made at the discretion of the Board of Managers. The proceeds received from the
sale of the Redeemable Preferred Units are net of $1.4 million of preferred unit
fees paid to CB Capital and First Union Investors. These preferred unit fees are
being accreted over a period of 114 months, beginning July 1, 1999 and ending on
December 31, 2008. The accretion of these preferred units for the year ended
December 31, 1999 was $0.07 million and are included in dividends. In addition
to the rights with respect to the preferred return (including related tax
distributions and distributions to the holders of preferred units of their
original capital investment), the preferred units will share ratably with the
common units in any distributions (including tax distributions and upon
liquidation) made by dj Ortho in respect of common units (the Redeemable
Preferred Units Participating Interest).

The preferred units are subject to mandatory redemption ten and one-half years
following the closing of the recapitalization and may be redeemed at dj Ortho's
option at any time ("Redeemable Preferred Unit"). Upon a change of control,
holders of Redeemable Preferred Units will have the right, subject to certain
conditions, to require dj Ortho to redeem their Redeemable Preferred Units
(including the Redeemable Preferred Units Participating Interest). In addition,
at any time following the sixth anniversary of the closing of the
recapitalization, holders will have the right, subject to certain conditions, to
require dj Ortho to redeem their Redeemable Preferred Units Participating
Interest. Unless equity proceeds or other funds are available to dj Ortho for
the purpose, the ability of dj Ortho to make any of the foregoing payments will
be subject to receipt of distributions from dj Ortho in amounts sufficient to
make such payments and such distributions will be subject to the restrictions
contained in the new credit facility and the indenture.

Upon the occurrence of any Liquidation Event (as defined in the Second Amended
and Restated Operating Agreement of DonJoy, L.L.C. dated July 30, 1999), the
holders of redeemable preferred units are entitled to receive payment, before
any payments shall be made to the holders of common units, equal to the original
costs of such preferred unit plus any unpaid cumulative dividends. In addition,
dj Ortho has the option to redeem the redeemable preferred units prior to the
redemption date based upon the following percents which would be applied the the
total of the original costs of such preferred unit plus any unpaid cumulative
dividends:

<TABLE>
<S>                                                     <C>
      Prior to June 30, 2000                            105%
      From June 30, 2000 and prior to June 30, 2001     104%
      From June 30, 2001 and prior to June 30, 2002     103%
      From June 30, 2002 and prior to June 30, 2003     102%
      From June 30, 2003 and prior to June 30, 2004     101%
      On or after June 30, 2004                         100%
</TABLE>

Voting. Except as otherwise required by applicable law or as set forth in the
operating agreement or the members' agreement, holders of Common Units and
Redeemable Preferred Units shall vote together as a single class on all matters
to be voted on by the members, with each unit being entitled to one vote.

Tax Distributions. Subject to receipt of distributions from dj Ortho to the
extent permitted by restrictions contained in the new credit facility and the
indenture, dj Ortho will make distributions in agreed upon amounts to its
members to enable them to pay income taxes payable in respect of their allocable
share of the taxable income of dj Ortho and its subsidiaries.



                                       54
<PAGE>   55
Unit Options

On June 29, 1999, under DonJoy, L.L.C.'s 1999 Option Plan, 133,799 common units
were reserved for issuance upon exercise of options granted by dj Ortho. The
plan is administered by the Compensation Committee appointed from time to time
by the Board of Managers. The plan expires on June 30, 2014 unless earlier
terminated by the Board of Managers. The plan provides for the grant of
nonqualified options to officers, directors, and employees of, and consultants
and advisors to, dj Ortho.

Options will be granted in amounts to be agreed upon by the Compensation
Committee. Options will vest either:

       -      25% beginning on June 30, 2000 and thereafter ratably over a 3
              year period (Tier I), or

       -      Tier II and III options which cliff vest on December 31, 2007;
              however, accelerated vesting can be achieved upon completion of
              certain events, or

       -      Time-vested based upon achievement of certain sales targets.

As of December 31, 1999, 13,287 units are available for future grant under the
option plan. The following table summarizes option activity through December 31,
1999:

<TABLE>
<CAPTION>
                                                                                     Weighted
                                                                                     Average
                                                                                     Exercise
                                               Number                               Price per
                                              of Units         Price per Unit          Unit
                                              ---------        --------------       --------
<S>                                           <C>              <C>                  <C>
Outstanding as of December 31, 1998                 --
Granted                                        120,512            $   100            $   100
Exercised                                           --                 --                 --
Cancelled                                           --                 --                 --
                                               -------            -------            -------
Outstanding at December 31, 199                120,512            $   100            $   100
                                               =======            =======            =======
</TABLE>

Following is a further breakdown of the options outstanding as of December 31,
1999:



<TABLE>
<CAPTION>
                                                                                                  Weighted
                                      Weighted        Weighted                      Weighted      Average
      Range of                         Average         Average                      Average       Exercise
      Exercise         Units          Remaining       Exercise        Options       Exercise      Price per
       Prices       Outstanding     Life in Years       Price       Exercisable       Price          Unit
     -----------    -----------     -------------     ---------     -----------     --------      ---------
<S>                 <C>             <C>               <C>           <C>             <C>           <C>
        $100          120,512           14.52           $100            ---            $100          $100
</TABLE>

Adjusted pro forma information regarding net income is required by SFAS 123 and
has been determined as if dj Ortho had accounted for its employee options under
the fair value method of SFAS 123. The fair value of these options was estimated
at the date of grant using the minimum value model for option pricing with the
following assumptions for 1999: a risk-free interest rate of 6.25%; a dividend
yield of zero; and a weighted average life of the option of 4 years for Tier I
options and 8.5 years for Tier II and Tier III options.

Option valuation models require the input of highly subjective assumption.
Because dj Ortho's employee options have characteristics significantly different
for 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. dj Ortho's adjusted pro
forma information is as follows for the year ended December 31, 1999 (in
thousands):

<TABLE>
<S>                                                               <C>
       Adjusted pro forma net income                              $6,569
</TABLE>

The pro forma effect on net income for 1999 is not necessarily indicative of
potential pro forma effects on results for future years.

5.      RECAPITALIZATION COSTS AND FEES

In connection with the Recapitalization, dj Ortho incurred costs and fees of
$8.8 million, $5.9 million for the Notes, $1.4 million for the Revolving Credit
Facility & Term and $1.5 million for transaction fees and expenses related to
equity. Of the $8.8 million, $7.3



                                       55
<PAGE>   56
million has been capitalized in the accompanying balance sheet as of December
31, 1999. The remaining $1.5 million has been recorded as a reduction to
members' equity (deficit) transaction fees and expenses as of December 31, 1999.
The capitalized debt fees are being amortized over the term of the related debt.

6. SEGMENT AND RELATED INFORMATION

dj Ortho has two reportable segments as defined by Financial Accounting
Standards Board SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. dj Ortho's reportable segments are business units that
offer different products that are managed separately because each business
requires different technology and marketing strategies. The rigid knee bracing
segment designs, manufactures and sells rigid framed ligament and osteoarthritis
knee braces and post-operative splints. The soft goods segment designs,
manufactures and sells fabric, neoprene and Drytex based products for the knee,
ankle, shoulder, back and wrist. dj Ortho's other operating segments are
included in specialty and other orthopedic products. None of the other segments
met any of the quantitative thresholds for determining reportable segments.
Information regarding industry segments is as follows (in thousands):


<TABLE>
<CAPTION>
                                                                      Years Ended December 31,
                                                             1999               1998                 1997
                                                          ---------           ---------           ---------
<S>                                                       <C>                 <C>                 <C>
Net revenues:
    Rigid knee bracing .........................          $  49,406           $  48,594           $  48,310
    Soft goods .................................             39,652              34,233              31,697
                                                          ---------           ---------           ---------
    Net revenues for reportable segments .......             89,058              82,827              80,007
    Specialty and other orthopedic products ....             25,194              17,958              12,617
                                                          ---------           ---------           ---------
Total consolidated net revenues ................          $ 114,252           $ 100,785           $  92,624
                                                          =========           =========           =========

Gross profit:
    Rigid knee bracing .........................          $  35,721           $  34,460           $  33,910
    Soft goods .................................             19,276              16,637              15,541
                                                          ---------           ---------           ---------
    Gross profit for reportable segments .......             54,997              51,097              49,451
    Specialty and other orthopedic products ....             12,516               8,978               6,132
    Brand royalties ............................             (1,817)             (3,249)             (1,605)
    Other cost of goods sold ...................             (2,500)             (1,986)               (267)
                                                          ---------           ---------           ---------
Total consolidated gross profit ................          $  63,196           $  54,840           $  53,711
                                                          =========           =========           =========
</TABLE>

The accounting policies of the reportable segments are the same as those
described in the basis of presentation. dj Ortho allocates resources and
evaluates the performance of segments based on gross profit. Intersegment sales
were not significant for any period.

For the years ended December 31, 1999 and 1998, dj Ortho had no individual
customer, supplier or distributor within a segment which accounted for more than
10% or more of total annual revenues.

Assets allocated in foreign countries were not significant. Net revenues to
customers, attributed to countries based on the location of the customer, were
as follows (in thousands):

<TABLE>
<CAPTION>
                                                          Years Ended December 31,
                                                1999              1998              1997
                                              --------          --------          --------
<S>                                           <C>               <C>               <C>
United States:
    Third parties ..................          $ 95,255          $ 82,019          $ 72,976
    Related parties ................             1,115               936             3,048
                                              --------          --------          --------
                                                96,370            82,955            76,024
Europe:
    Third parties ..................             9,294             7,412             7,131
    Related parties ................             3,597             4,964             5,235
                                              --------          --------          --------
                                                12,891            12,376            12,366
Other foreign countries:
    Third parties ..................             1,355               652               710
    Related parties ................             3,636             4,802             3,524
                                              --------          --------          --------
                                                 4,991             5,454             4,234
                                              --------          --------          --------
Total consolidated net revenues ....          $114,252          $100,785          $ 92,624
                                              ========          ========          ========
</TABLE>

dj Ortho does not allocate assets to reportable segments because all property
and equipment are shared by all segments of dj Ortho.



                                       56
<PAGE>   57
7.  CONDENSED FINANCIAL DATA

As discussed in Note 1 above, dj Ortho's obligations under the Notes are
guaranteed by its parent, DonJoy L.L.C. This guarantee and any guarantee by a
future wholly-owned subsidiary guarantor, is full and unconditional. Included in
non-current assets is an intercompany payable to DonJoy, L.L.C. of $45.0
million. The following condensed summarized financial information of dj Ortho
(the only issuer with operations and assets) is presented at December 31, 1999
and for the year then ended, the period since dj Ortho has been in existence (in
thousands):

<TABLE>
<CAPTION>
                                                                    December 31, 1999
                                                                    -----------------
<S>                                                                 <C>
Current assets ......................................                   $ 41,875
Non-current assets ..................................                   $ 92,520
Current liabilities .................................                   $ 14,501
Non-current liabilities:
   Long-term debt ...................................                   $112,805
</TABLE>


<TABLE>
<CAPTION>
                                                                        Year Ended
                                                                    December 31, 1999
                                                                    -----------------
<S>                                                                 <C>
Net revenues .....................................                      $114,252
Gross profit .....................................                      $ 63,196
Net income .......................................                      $  7,089
</TABLE>

dj Ortho and any future subsidiary guarantors comprise all the direct and
indirect subsidiaries of DonJoy (other than inconsequential subsidiaries) and
separate financial statements of dj Ortho and any future wholly-owned subsidiary
guarantors are not included, and dj Ortho and such subsidiary guarantors are not
filing separate reports under the Exchange Act because management has determined
that they would not be material to investors.

8.  RELATED PARTY TRANSACTIONS

The intercompany obligations included in the accompanying balance sheets
represent a net balance as the result of various transactions between dj Ortho,
its Parent and its affiliates. There are no terms of settlement or interest
charges associated with the account balance. The balance results from dj Ortho's
former participation in the Parent's central cash management program, wherein
all dj Ortho's cash receipts were remitted to the Parent and all cash
disbursements were funded by the Parent. Several other transactions were
recorded through the intercompany obligations account as detailed below.



                                       57
<PAGE>   58
An analysis of intercompany transactions are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                  1999               1998               1997
                                                                --------           --------           --------
<S>                                                             <C>                <C>                <C>
Balance at beginning of period .......................          $ 45,227           $ 45,027           $ 53,428
  Net cash remitted to Parent ........................           (17,743)           (18,256)           (27,362)
  Net intercompany sales .............................              (112)            (5,078)            (4,116)
  Net fixation device sales ..........................                --                256                307
  Share of Parent's current income tax liability .....              (134)             4,287              4,192
  Corporate management expense allocations ...........             3,159              5,664              5,418
  Cash owed to Parent ................................             1,002                 --                 --
  I-Flow licensing agreement .........................               800                 --                 --
  Dividend in connection with the merger
     of Smith & Nephew Don Joy, Inc. .................
     Into Smith & Nephew, Inc. .......................                --                 --                 --
  Capital contribution ...............................           (38,865)                --                 --
  Dividends to Smith & Nephew, Inc. ..................                --                 --                 --
  Interest on note payable ...........................                --                 --              2,565
  Direct charges:
     Brand royalties .................................             1,817              3,249              1,605
     Payroll taxes and benefits ......................             4,651              8,635              6,787
     Direct legal expenses ...........................                67                324                735
     Foreign Sales Corporation (FSC)
       commission ....................................                --                439                661
  Miscellaneous other administrative expenses ........               131                680                807
                                                                --------           --------           --------
Balance at end of period .............................                --             45,227             45,027
Less current portion .................................                --             (1,210)            (1,500)
                                                                --------           --------           --------
Long-term intercompany obligations ...................          $     --           $ 44,017           $ 43,527
                                                                ========           ========           ========
Average balance during the period ....................          $ 22,614           $ 45,127           $ 49,227
                                                                ========           ========           ========
</TABLE>

Prior to the Recapitalization, the Parent and Smith & Nephew, plc provided
certain management, financial, administrative and legal services to dj Ortho.
These expenses and all other central operating costs, were charged on the basis
of direct usage when identifiable, with the remainder allocated among the
Parent's subsidiaries and divisions on the basis of their respective annual
sales or percentage of capital employed.

Parent allocations consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                         Years Ended December 31,
                                                   1999            1998            1997
                                                  ------          ------          ------
<S>                                               <C>             <C>             <C>
Corporate managed accounts and
  new business .........................          $  195          $  394          $  368
Finance (risk management, treasury,
  audit, and taxes .....................             177             310             260
Human resources and payroll ............             147             291             130
Legal ..................................             128             223             177
Research and development ...............             380             854             626
Corporate management expense ...........             784           1,332           1,284
Bonus ..................................             467             503             879
Pension ................................             267             514             495
Insurance ..............................             614           1,243           1,199
                                                  ------          ------          ------
                                                  $3,159          $5,664          $5,418
                                                  ======          ======          ======
Amounts included in:
  Cost of goods sold ...................          $  495          $  991          $  977
  Sales and marketing ..................              94             179             174
  General and administrative ...........           2,553           4,439           4,229
  Research and development .............              17              55              38
                                                  ------          ------          ------
                                                  $3,159          $5,664          $5,418
                                                  ======          ======          ======
</TABLE>



                                       58
<PAGE>   59
Also prior to the Recapitalization, dj Ortho participated in the Parent's
corporate insurance programs for workers' compensation, product and general
liability. These charges were settled with the Parent, and thus, accruals for
related liabilities, if any, were maintained by the Parent and are not reflected
in the accompanying consolidated balance sheets.

9. RESTRUCTURING

In March 1998, dj Ortho combined its two operating facilities into one location
in Vista, California and accrued $2.5 million in costs resulting from the
restructuring which had no future economic benefit. These costs relate primarily
to remaining lease obligations on the vacated facility, net of projected
sublease income, and severance costs associated with the termination of twelve
employees. Included in general and administrative costs for 1998 are $0.2
million of costs also related to the combination of the facilities. Pursuant to
the recapitalization agreement, the restructuring reserve, which amounted to
$0.9 million at June 29, 1999 and consisted of the remaining lease obligations
on the vacated facility, was assumed by Smith & Nephew.

10. COMMITMENTS AND CONTINGENCIES

dj Ortho is obligated under various noncancellable operating leases for land,
buildings, equipment, vehicles and office space 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, dj Ortho entered into a
subleasing agreement with Smith & Nephew for its Vista facility. DonJoy has
guaranteed the payment of rent and other amounts owed under the sublease by dj
Ortho.

Minimum annual lease commitments for noncancellable operating leases as of
December 31, 1999 are as follows (in thousands):

<TABLE>
<S>                                                                   <C>
        2000.....................................................     $    2,429
        2001.....................................................          2,058
        2002.....................................................          1,882
        2003.....................................................          1,822
        2004.....................................................          1,808
        2005 and thereafter......................................          5,726
                                                                       ---------
                                                                       $  15,725
                                                                       =========
</TABLE>

Aggregate rent expense was approximately $2.7 million, $3.2 million and $2.3
million for the years ended December 31, 1999, 1998 and 1997.

License Agreements

In August of 1998, dj Ortho entered into an exclusive license agreement with
IZEX Technologies, Incorporated (IZEX) to acquire the intellectual property
rights and to retain IZEX to consult on the design and development of an
advanced rehabilitation bracing system. In consideration for this exclusive
agreement, dj Ortho has agreed to a series of payments tied to the achievement
of specific milestone events (such as the granting of FDA approval), for a total
of $3.5 million. Under the license, dj Ortho also has the worldwide exclusive
rights to manufacture, use and sell developed products. At December 31, 1999, $1
million is included in intangible assets (patented technology) in the
accompanying balance sheet.

In 1999, dj Ortho entered into an agreement, which was subsequently amended,
with I-Flow Corporation ("I-Flow") for the exclusive North American distribution
rights for the PainBuster(TM) Pain Management System manufactured by I-Flow for
use after orthopedic surgical procedures. The license payment has been
capitalized during 1999 and is being amortized over 5 years. In addition, dj
Ortho is required to purchase a minimum of $2.8 million in I-Flow product during
2000 and 90% of prior year purchases of I-Flow product for subsequent years
through 2003.

Contingencies

dj Ortho is subject to legal proceedings and claims that arise in the normal
course of business. While the outcome of the proceedings and claims cannot be
predicted with certainty, management does not believe that the outcome of any of
these matters will have a material adverse effect on dj Ortho's consolidated
financial position or results of operations.

11. RETIREMENT PLANS

Prior to the recapitalization, substantially all of dj Ortho's employees
participated in a defined benefit pension plan sponsored by the Former Parent.
Benefits related to this plan were computed using formulas which were generally
based on age and years of service. Aggregate pension prepayments and liabilities
related to this plan are recorded by the Former Parent. Pension expense
allocated (based on relative participation) to dj Ortho related to this plan was
as follows (in thousands):



                                       59
<PAGE>   60
<TABLE>
<CAPTION>
                                                  Years Ended December 31,
                                              1999          1998          1997
                                              ----          ----          ----
<S>                                           <C>            <C>          <C>
Service costs ......................          $242           466          $449
Interest costs .....................            25            48            46
                                              ----          ----          ----
Total pension expense allocated ....          $267           514          $495
                                              ====          ====          ====
</TABLE>

DonJoy has a qualified 401(k) profit-sharing plan covering substantially all of
its U.S. employees, which is substantially the same as the plan previously
provided by Smith & Nephew. The assets funding the Smith & Nephew plan were
transferred to the DonJoy 401(k) Plan. dj Ortho matches dollar for dollar the
first $500, then matches at a 30 percent rate, employee contributions up to 6
percent of total compensation. dj Ortho's matching contributions related to this
plan were $0.3 million for the years ended December 31, 1999, 1998 and 1997,
respectively. The plan also provides for discretionary dj Ortho contributions
(employee profit sharing) which began on June 30, 1999 as approved by the Board
of Directors. dj Ortho discretionary 401(k) contributions for the year ended
December 31, 1999 were $228,000. dj Ortho's 401(k) plan is administered by
Fidelity Investments Institutional Services Company, Inc.


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

   Not applicable.



                                       60
<PAGE>   61
                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF MANAGERS AND EXECUTIVE OFFICERS

The following table sets forth certain information with respect to persons who
are members of the Board of Managers (each a "Manager") of both DonJoy and dj
Ortho, which share a common Board of Managers, and executive officers of dj
Ortho. One additional Manager will be designated by CDP, however, such an
individual has not yet been identified.


<TABLE>
<CAPTION>
        Name                                                     Age        Position
        ----                                                     ---        --------
<S>                                                              <C>        <C>
        Leslie H. Cross...................................       49         President, Chief Executive
                                                                            Officer and Manager
        Cyril Talbot III..................................       44         Vice President - Finance, Chief
                                                                            Financial Officer and Secretary
        Ken Rolfes........................................       52         Senior Vice President - Global
                                                                            Operations and Customer Care
        Michael R. McBrayer...............................       40         Vice President - Domestic Sales
        Peter Bray........................................       52         Vice President - International Business
        Kent Bachman......................................       37         Vice President - Operations
        Charles T. Orsatti................................       55         Manager
        Mitchell J. Blutt, M.D............................       42         Manager
        Shahan D. Soghikian...............................       40         Manager
        Damion E. Wicker, M.D.............................       38         Manager
        John J. Daileader.................................       34         Manager
        Ivan R. Sabel, CPO................................       54         Manager
        Kirby L. Cramer...................................       62         Manager
</TABLE>

Leslie H. Cross has served as President of dj Ortho since July 1995 and became
the Chief Executive Officer and a Manager of DonJoy and dj Ortho upon
consummation of the recapitalization. From 1990 to 1994, Mr. Cross held the
position of Senior Vice President of Marketing and Business Development. He was
a Managing Director of two different divisions of Smith & Nephew 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.

Cyril Talbot III has served as Vice President -- Finance -- of dj Ortho since
1994 and became the Chief Financial Officer of DonJoy and dj Ortho upon
consummation of the recapitalization. He joined dj Ortho in 1991 as Director of
Finance. From 1981 to 1991, he held several management positions at American
Hospital Supply Corporation and McGaw, Inc. Prior to that time, he was an Audit
Manager at Miller, Cooper & Co. Ltd. Mr. Talbot earned his B.S.
(Accounting/Finance) at Miami University in Oxford, Ohio and is a Certified
Public Accountant.

Ken Rolfes joined dj Ortho as Senior Vice President - Global Operations and
Customer Care -- of dj Ortho in January 2000. Prior to joining dj Ortho, Mr.
Rolfes was Vice President -- Operations at Graphic Controls, a medical device
company serving acute care and alternate care markets. He was with Graphic
Controls from 1986 to 1999 and held management positions with NCR and Control
Data Corporation. He is active in the Association for Manufacturing Excellence
and held national director and regional president positions for the
organization. Ken obtained his B.S. (Industrial Engineering) at the University
of Dayton in Dayton, Ohio and received his M.B.A. (Finance) from Drexol
University in Philadelphia, Pennsylvania.

Michael R. McBrayer has served as Vice President -- Domestic Sales -- of dj
Ortho since 1993. He held several managerial positions after joining dj Ortho 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.

Peter Bray has served as Vice President -- International Business -- of dj Ortho
since 1998. From 1996 to 1998, he was the Vice President -- Anatomical Supports.
Prior to joining dj Ortho, he held several management positions with Baxter
HealthCare Corporation. Mr. Bray earned a Bachelors of Commerce (Accounting and
Marketing) in South Africa and is an active Fellow of the Royal Institute of
Chartered Management Accountants in the United Kingdom.

Kent Bachman has served as Vice President -- Operations -- of dj Ortho since
1998. He held several managerial positions after joining dj Ortho in 1987 as a
manufacturing assembler. Prior to joining dj Ortho, Mr. Bachman was a
professional baseball player for the



                                       61
<PAGE>   62
Montreal Expos and the Milwaukee Brewers from 1984 to 1987. Mr. Bachman earned a
B.S. (Industrial Technology) at California Polytechnic State University at San
Luis Obispo.

Charles T. Orsatti became a Manager of DonJoy upon consummation of the
recapitalization. He has been a partner of Fairfield Chase since 1998. From 1995
to 1998, Mr. Orsatti was a senior consultant to Chase Capital Partners ("CCP").
Prior to that, he was the Chairman and Chief Executive Officer of Fairfield
Medical Products Corporation, a worldwide manufacturer of critical care products
sold to hospitals and alternative care facilities. Mr. Orsatti earned a B.S.
(Management and Marketing) from Pennsylvania State University. He serves as a
Vice Chairman of Vitagen, Inc.

Mitchell J. Blutt, M.D. became a Manager of DonJoy upon consummation of the
recapitalization. He has been an Executive Partner of CCP since 1992 and was a
General Partner of CCP from 1988 to 1992. Dr. Blutt has a B.A. and a M.D. from
the University of Pennsylvania and an M.B.A. from The Wharton School of the
University of Pennsylvania. He serves as a director of FHC, Fisher Scientific
International, Inc., Hanger Orthopedic Group, Inc., La Petite Academy, Inc.,
Medical Arts Press, Inc., Senior Psychology Services Management, Inc., UtiliMED,
Inc., Vista Healthcare Asia Pte. Ltd. and IBC Asia Health Care Ltd.

Shahan D. Soghikian became a Manager of DonJoy upon consummation of the
recapitalization. He has been a General Partner of CCP since 1992. Prior to
joining CCP, Mr. Soghikian was a member of the mergers and acquisitions groups
of Bankers Trust and Prudential Securities, Inc. Mr. Soghikian has a B.A. from
Pitzer College and an M.B.A. from the Anderson Graduate School of Management at
UCLA. He serves as a director of American Floral Services, Inc., Nextec Ltd. and
Link Investment Management.

Damion E. Wicker, M.D. became a Manager of DonJoy upon consummation of the
recapitalization. He has been a General Partner of CCP since 1997. Prior to
joining CCP, Dr. Wicker was President of Adams Scientific and held positions
with MBW Venture Partners and Alexon, Inc. Dr. Wicker received a B.S. with
honors from The Massachusetts Institute of Technology, an M.D. from Johns
Hopkins and an M.B.A. from the Wharton School of the University of Pennsylvania.
He serves as a director of Genomic Solutions, Inc., Landec Corporation, Optiscan
Biomedical Corp., Praecis Pharmaceuticals, Inc., Transurgical, Inc., Vitagen,
Inc. and V.I. Technologies, Inc.

John J. Daileader became a Manager of DonJoy upon consummation of the
recapitalization. He has been a Principal of CCP since 1997. Prior to joining
CCP, Mr. Daileader worked in the Merchant Banking Group at The Chase Manhattan
Bank and held strategic planning positions at Chemical Bank, Manufacturers
Hanover Trust Company and National Westminster Bank USA. Mr. Daileader has a
B.S. from Rensselaer Polytechnic Institute and an M.B.A. from New York
University. He serves as a director of Vinings Industries, Inc., Mackie
Automotive Systems and M2 Automotive, Inc.

Ivan R. Sabel, CPO, became a Manager of DonJoy in August 1999. Mr. Sabel has
been the Chairman of the Board of Directors and Chief Executive Officer of
Hanger Orthopedic Group since August 1995 and was President of Hanger Orthopedic
Group from November 1987 to July 1, 1999. Mr. Sabel also served as the Chief
Operating Officer of Hanger Orthopedic Group from November 1987 until August
1995. Prior to that time, Mr. Sabel had been Vice President - Corporate
Development from September 1986 to November 1987. Mr. Sabel was the founder,
owner and President of Capital Orthopedics, Inc. from 1968 until that company
was acquired by Hanger Orthopedic Group in 1986. Hanger Orthopedic Group is a
portfolio investment of CCP. Mr. Sabel is a Certified Prosthetist and Orthotist
("CPO"), a member of the Board of Directors of the American Orthotic and
Prosthetic Association ("AOPA"), a former Chairman of the National Commission
for Health Certifying Agencies, a former member of the Strategic Planning
Committee and a current member of the Veterans Administration Affairs Committee
of AOPA and a former President of the American Board for Certification in
Orthotics and Prosthetics. Mr. Sabel serves on the Board of Nurse Finders Inc.
and is a member of their compensation and audit committee. Mr. Sabel is also a
current member of the Board of Directors of Mid-Atlantic Medical Services, Inc.,
a company engaged in the health care management services business.

Kirby L. Cramer became a Manager of DonJoy in December 1999. Mr. Cramer is a
professional corporate director, having served as Chairman of five companies. He
is Chairman Emeritus of Hazleton Laboratories Corporation (HLC), the world's
largest contract biological and chemical research laboratory. He is also
Chairman of the Board of Northwestern Trust and Investors Advisory Company
located in Seattle, Washington and president of Keystone Capital Company, a firm
specializing in leveraged buyouts and venture capital in the Pacific Northwest.
Prior to that time, Mr. Cramer served as Chairman of Kirschner Medical
Corporation (KMDC) during its inception as a publicly traded company, and then
as Chairman of the Executive Committee. Biomet acquired KMDC in a stock and cash
exchange in 1994 for approximately $100 million. Additionally, he is a Trustee
Emeritus and Past President of Virginia's Colgate Darden Graduate School of
Business Administration, Chairman of the Major Gifts Committee of the University
of Washington Foundation, and has served as Chairman of the Advisory Board of
the School of Business Administration of the University of Washington. In 1997,
Mr. Cramer received the University of Washington's Business School's Alumni
Service Award. Mr. Cramer is a graduate of Harvard Business School's Advanced
Management Program, where he was class president, received his M.B.A. degree
from the University of Washington and obtained his B.A. degree from Northwestern
University. He is a Chartered Financial Analyst (CFA) and, in 1988, he received
an honorary Doctor of Laws degree from James Madison University.



                                       62
<PAGE>   63
COMMITTEES OF THE BOARD OF MANAGERS

The Board of Managers has an Executive Committee, currently consisting of
Messrs. Blutt, Cross and Orsatti. The Board of Managers has a Compensation
Committee/Stock Option Committee (the "Compensation Committee") that determines
compensation for executive officers of dj Ortho and administers DonJoy's Option
Plan. Currently, Messrs. Kramer, Orsatti, Daileader and Sabel serve on the
Compensation Committee. The Board has an Audit Committee (the "Audit Committee")
that reviews the scope and results of audits and internal accounting controls
and all other tasks performed by the independent public accountants of dj Ortho.
Currently, Messrs. Wicker, Soghikian and Daileader serve on the Audit Committee.


ITEM 11. EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation of the
Chief Executive Officer and each of the other four most highly compensated
executive officers of dj Ortho for the year ended December 31, 1999.


<TABLE>
<CAPTION>
                                                                      Annual Compensation
                                                   -----------------------------------------------------
                                                                                             All Other
Name and Principal Position                        Year        Salary          Bonus     Compensation (1)
---------------------------                        ----        ------          -----     ----------------
<S>                                                <C>        <C>            <C>         <C>
Leslie H. Cross ............................       1999       $234,487       $ 62,944       $238,464
President and Chief Executive Officer              1998        226,825        183,258          2,669
                                                   1997        215,000             NA          1,803

Cyril Talbot III ...........................       1999        151,088         20,352        153,825
Vice President - Finance and Chief                 1998        146,100         48,397          1,888
Financial Officer                                  1997        139,820         11,484          1,817

Charles Bastyr .............................       1999        200,094         43,112        103,970
Former Senior Vice President - Research            1998        193,500         69,946          3,350
& Business Development                             1997        174,838         15,459          3,200

Michael R. McBrayer ........................       1999        154,800         29,119        158,112
Vice President - Domestic Sales                    1998        148,300         47,923          2,363
                                                   1997        141,925         11,271          2,257

Peter Bray .................................       1999        161,976         30,558         84,616
Vice President - International Business            1998        156,750         50,649          3,350
                                                   1997        150,000          3,238          2,883

Kent Bachman ...............................       1999        122,650         22,709         64,637
Vice President - Operations                        1998        117,504         30,000          2,884
                                                   1997        100,000          5,517          2,460
</TABLE>

-------------------------

NA = Not applicable

(1) Includes contributions to dj Ortho's 401(K) Plan and retention bonuses paid
to these executive officers upon consummation of the recapitalization. The
recapitalization constituted a Change of Control or Division Divestiture (as
defined in the retention agreements of these employees). Consequently, each of
these members of management of dj Ortho who remained in his position through the
consummation of the Change of Control or Division Divestiture received a special
retention bonus. Pursuant to the recapitalization agreement, such special bonus
was paid by Smith & Nephew. 1999 retention bonuses were paid out as follows: (a)
Leslie H. Cross received $235,900, (b) Cyril Talbot III received $151,945, (c)
Charles Bastyr received $100,620, (d) Michael R. McBrayer received $155,715, (e)
Peter Bray received $81,510 and (f) Kent Bachman received $61,792.



                                       63
<PAGE>   64
                      OPTION/SAR GRANTS IN LAST FISCAL YEAR


<TABLE>
<CAPTION>
                                                                                        POTENTIAL REALIZABLE   POTENTIAL REALIZABLE
                          NUMBER OF         PERCENT OF                                    VALUE AT ASSUMED       VALUE AT ASSUMED
                          SECURITIES      TOTAL OPTIONS/    EXERCISE                       ANNUAL RATES OF       ANNUAL RATES OF
                          UNDERLYING          SARS          PRICE AT                        STOCK PRICE            STOCK PRICE
                           OPTIONS/         GRANTED TO      THE TIME                      APPRECIATION FOR       APPRECIATION FOR
                            SARS           EMPLOYEES IN     OF GRANT       EXPIRATION      OPTION TERM AT          OPTION TERM AT
NAME                      GRANTED(#)          1999         (PER UNIT)         DATE             5%(1)                  10%(1)
----                      ----------      -------------    ----------      -----------  --------------------   --------------------
                                                                                          (IN THOUSANDS)           (IN THOUSANDS)
<S>                       <C>             <C>              <C>             <C>          <C>                    <C>
Les Cross ...........      26,760              22%          $  100          6/30/14          $2,887                    $8,502
Michael McBrayer ....       8,920               7%             100          6/30/14             962                     2,834
Cy Talbot ...........       8,920               7%             100          6/30/14             962                     2,834
Kent Bachman ........       4,460               4%             100          6/30/14             481                     1,417
Peter Bray ..........       4,460               4%             100          6/30/14             481                     1,417
Chuck Bastyr ........       1,000               1%             100          12/2/14             108                       318
</TABLE>

(1)    The potential realizable value listed in the table represents
       hypothetical gains that could be achieved for the options if exercised at
       the end of the option term assuming that the fair market value of the
       units on the date of grant appreciates at 5% or 10% over the option term,
       and that the option is exercised and sold on the last day of its option
       term for the appreciated unit value. The assumed 5% and 10% rates of unit
       value appreciation are provided in accordance with rules of the
       Securities and Exchange Commission and do not represent our estimate or
       projection of our future unit value. Actual gains, if any, on option
       exercises will depend on the future performance of our unit value.

COMPENSATION OF THE BOARD OF MANAGERS

The members of the Board of Managers affiliated with CDP do not receive
compensation for their service on the Board of Managers but are reimbursed for
their out-of-pocket expenses. Managers who are neither officers of dj Ortho nor
affiliated with CDP receive customary compensation for services on the Board of
Managers of $12,000 per year plus out-of-pocket expenses, an option grant of
2,000 common units in DonJoy, L.L.C. and the right to purchase an additional
2,000 common units in DonJoy, L.L.C. dj Ortho, DonJoy and Charles T. Orsatti
intend to enter into an agreement pursuant to which dj Ortho will agree to pay
Mr. Orsatti up to $250,000 per year if dj Ortho achieves certain performance
objectives to be established by negotiation among such parties, CDP and CCP.

1999 OPTION PLAN

DonJoy has adopted the 1999 Option Plan (the "Plan") pursuant to which options
with respect to 15% of the voting Units of DonJoy on a fully diluted basis are
available for grant to certain members of management (each an "Optionee"). The
Plan is administered by the Compensation Committee appointed from time to time
by the Board of Managers. The Plan expires on June 30, 2014 unless earlier
terminated by the Board of Managers of DonJoy. Options granted under the Plan
will be nonqualified options.

Options will be granted in amounts to be agreed upon by the Compensation
Committee. Options will vest either

       -      ratably at specified annual intervals from the date of grant (the
              "Time- Vesting Options") (provided that the maximum number of such
              Time-Vesting Options granted shall not exceed 6% of the number of
              Common Units of DonJoy outstanding on a fully diluted basis on the
              closing date of the Recapitalization) or

       -      upon the occurrence of a Liquidity Event or Material Transaction
              (each as defined below) and then only to the extent the Common
              Units of DonJoy owned by CDP have provided CDP with specified
              internal rates of return (as set forth in the Plan) since the
              closing date of the recapitalization (the "Event-Vesting Options")
              (provided that the maximum number of such Event-Vesting Options
              vesting based on achievement of specified internal rates of return
              shall not exceed 9% of the number of Common Units outstanding on a
              fully diluted basis on the closing date of the recapitalization),
              provided that if no Liquidity Event has occurred by December 31,
              2007, such options shall become vested and exercisable.

A Liquidity Event means a sale or other disposition of all or substantially all
of the assets of DonJoy or all or substantially all of the outstanding equity
interests in DonJoy or a registered public offering of the common equity
interests in DonJoy resulting in a market capitalization of more than $150
million for a period of at least 20 consecutive trading days. A Material
Transaction means a dissolution or liquidation of DonJoy, a reorganization,
merger or consolidation in which DonJoy is not the surviving corporation, or
sale of all or substantially all of the assets of DonJoy. The exercise price for
the options will be the fair market value of the common units of DonJoy on the
date each such option is granted. The options will expire upon the earliest of
(i) the fifteenth anniversary of the date of grant, (ii) 12 months after the
date an Optionee's employment is terminated due to the Optionee's death or
permanent disability, (iii) immediately upon an Optionee's termination of
employment by the dj Ortho "for cause" (as defined in the Plan), (iv) 90 days
after



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<PAGE>   65
the date an Optionee ceases to be an employee (other than as listed in (ii) and
(iii) above), (v) the effective date of a Material Transaction if provision is
made in connection with such transaction for the assumption of outstanding
options by, or the substitution for such option of new options covering equity
securities of, the surviving, successor or purchasing corporation, or (vi) the
expiration of such other period of time or the occurrence of such other event as
the Compensation Committee, in its discretion, may provide in any option
agreement. Common Units in DonJoy purchased by an Optionee upon exercise of an
option may be repurchased by DonJoy (or its designee) upon terms and at a price
determined in accordance with the provisions of the applicable option agreement.

As of December 31, 1999, DonJoy has granted options to purchase up to 120,512
common units under the Plan, of which 40% are Time-Vesting Options and 60% are
Event-Vesting Options, to members of management. The Time-Vesting Options vest
over a four year period beginning on June 30, 2000; however, some are subject to
the achievement of certain sales targets.

401(k) AND INCENTIVE PLANS

DonJoy has established its own 401(k) Plan, which is substantially the same as
the plan previously provided by Smith & Nephew. The assets funding the Smith &
Nephew plan were transferred to the DonJoy 401(k) Plan.

EMPLOYMENT AGREEMENTS

In connection with the recapitalization, dj Ortho entered into employment
agreements with Leslie H. Cross, Cyril Talbot III and Michael R. McBrayer. The
employment agreements terminate on June 30, 2002. Pursuant to their respective
employment agreement, Mr. Cross serves as President of dj Ortho at an annual
base salary of $235,900, Mr. Talbot serves as Vice President of Finance of dj
Ortho at an annual base salary of $151,945 and Mr. McBrayer serves as Vice
President of Domestic Sales of dj Ortho at an annual base salary of $155,715.
These base salaries are subject to annual review and adjustment by the Board of
Managers of dj Ortho. In addition, each executive is entitled to such annual
bonuses as may be determined by the Board of Managers, four weeks paid vacation
per year, a car allowance and, for 1999 only, club membership dues and tax
preparation fees. Each executive may be terminated at any time during the term
of the applicable employment agreement with or without "cause" (as defined in
the applicable employment agreement). In the event of an executive's termination
without cause, the executive will be entitled to receive his base salary from
the date of termination until the first anniversary of the date of termination.
Pursuant to the applicable employment agreement, each executive has agreed that
until the fourth anniversary of the date of termination or expiration of his
employment with dj Ortho, he will not:

(1) induce or attempt to induce any employee of dj Ortho or any affiliate of the
dj Ortho to leave the employ of dj Ortho or any such affiliate, or in any way
interfere with the relationship between dj Ortho or any such affiliate and any
employee thereof,

(2) hire any person who was an employee of dj Ortho until six months after such
person's employment with dj Ortho or any affiliate thereof was terminated, or

(3) induce or attempt to induce any customer, supplier, licensee or other
business relation of dj Ortho or any affiliate to cease doing business with dj
Ortho or such affiliate, or in any way interfere with the relationship between
any such customer, supplier, licensee or business relation and dj Ortho or any
such affiliate.

Each employment agreement also contains customary non-disclosure provisions. In
addition, each executive has agreed that any inventions or other developments
relating to dj Ortho or its products or services conceived, developed or made by
the executive while employed by dj Ortho belong to dj Ortho.

RETENTION AGREEMENTS

In December 1998, Smith & Nephew entered into retention agreements with certain
members of management of dj Ortho (each, a "Management Employee"), including the
persons listed in the summary compensation table, to induce each Management
Employee to remain an employee of dj Ortho in the event of a Change of Control
or Division Divestiture (as defined in the retention agreement). The
recapitalization constituted a Change of Control or Division Divestiture. Each
such Management Employee who remained in his position through the consummation
of the Change of Control or Division Divestiture received a special retention
bonus. Pursuant to the recapitalization agreement, such special bonus was paid
by Smith & Nephew. In addition, pursuant to the retention agreements with
certain Management Employees, if within one year of a Change of Control or
Division Divestiture, a Management Employee's employment with DonJoy is
terminated for other than Cause (as defined in the retention agreement), then
the Management Employee will be entitled to one year's base salary plus one
year's taxable bonus (calculated as maximum normal bonus, excluding the
retention bonus) and such amounts are payable by DonJoy.



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<PAGE>   66
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

All of dj Ortho's membership units are owned by DonJoy and all of DJ Capital's
equity securities are owned by dj Ortho. The following table sets forth
information with respect to the ownership of the common units of DonJoy as of
December 31, 1999 by

-      each person known to own beneficially more than 5% of the units,

-      each Manager of DonJoy,

-      each executive officer of dj Ortho and DonJoy, and

-      all executive officers and Managers of dj Ortho and DonJoy as a group.

The Redeemable Preferred Units which vote together with the common units as a
single class (see "-- Description of Operating Agreement") are owned
approximately 51% by CB Capital, an affiliate of CDP, approximately 33% by TCW
and approximately 16% by First Union Investors.

The amounts and percentages of units beneficially owned are reported on the
basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is deemed to be a
"beneficial owner" of a security if that person has or shares voting power or
investment power, which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Securities that can be so acquired are deemed to be
outstanding for purposes of computing such person's ownership percentage, but
not for purposes of computing any other person's percentage. Under these rules,
more than one person may be deemed beneficial owner of the same securities and a
person may be deemed to be a beneficial owner of securities as to which such
person has no economic interest.

<TABLE>
<CAPTION>
                                                                      Number of         Percent of
Name and Address of Beneficial Owner                                    Units              Class
------------------------------------                                  ---------         ----------
<S>                                                                   <C>               <C>
Chase DJ Partners, LLC(1) .......................................      645,500              85.1%
CB Capital Investors, L.L.C.(1) .................................      665,927(2)           87.8%
Smith & Nephew Disposal, Inc. (3) ...............................       54,000               7.1%
Charles T. Orsatti(4) ...........................................      645,500              85.1%
Leslie H. Cross(5) ..............................................       12,500               1.7%
Cyril Talbot III(5) .............................................        3,000               0.4%
Michael R. McBrayer(5) ..........................................        3,000               0.4%
Ken Rolfes(5) ...................................................            0                 0%
Peter Bray(5) ...................................................            0                 0%
Mitchell J. Blutt, M.D.(6) ......................................           (7)               (7)
Shahan D. Soghikian(6) ..........................................           (7)               (7)
Damion E. Wicker, M.D.(6) .......................................           (7)               (7)
John J. Daileader(6) ............................................           (7)               (7)
Ivan R. Sabel(8) ................................................            0                 0%
Kirby L. Cramer(9) ..............................................            0                 0%
All directors and executive officers as a group (13 persons) ....      684,427              90.3%
</TABLE>

----------

(1) The address of CDP and CB Capital is c/o Chase Capital Partners, 380 Madison
Avenue, New York, New York 10017. CDP was formed by CB Capital, an affiliate of
CCP, First Union Investors and Fairfield Chase. CB Capital owns approximately
87.0%, First Union Investors owns approximately 9.6%, TCW owns approximately
3.0% and Fairfield Chase owns approximately 0.4% of the membership interests in
CDP. TCW and First Union Investors also own 13,395 and 6,362 Redeemable
Preferred Units, respectively. Fairfield Chase is the managing member of CDP
except that under the circumstances described below, CB Capital will become the
managing member of CDP. CB Capital is a licensed small business investment
company (an "SBIC") and as such is subject to certain restrictions imposed upon
SBICs by the regulations established and enforced by the United States Small
Business Administration. Among these restrictions are certain limitations on the
extent to which an SBIC may exercise control over companies in which it invests.
As a result of these restrictions, CB Capital will only become the managing
member of CDP if certain events described in the constituent documents of CDP
occur. See "Description of Members' Agreement and By-Laws."

(2) Includes (i) 20,427 Redeemable Preferred Units owned by CB Capital and (ii)
the Common Units owned by CDP of which CB



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<PAGE>   67
Capital may be deemed the beneficial owner given its status as a member of CDP
owning approximately 87% of CDP's membership interests.

(3) The address of Smith & Nephew Disposal, Inc. is 1450 Brooks Road, Memphis,
Tennessee 38116.

(4) Includes the Common Units owned by CDP given Mr. Orsatti's status as the
person controlling Fairfield Chase, which is the managing member of CDP. As the
managing member of CDP, Fairfield Chase may also be deemed to be the beneficial
owner of these Units. The address of Mr. Orsatti is c/o Fairfield Chase Medical
Partners, LLC, 600 Cleveland Street, Suite 1100, Clearwater, Florida 33755.

(5) The address of Messrs. Cross, Talbot, McBrayer, Rolfes and Bray is c/o
DonJoy, LLC, 2985 Scott Street, Vista, California 92083.

(6) The address of Messrs. Blutt, Soghikian, Wicker and Daileader is c/o Chase
Capital Partners, 380 Madison Avenue, New York, New York 10017.

(7) Such person may be deemed the beneficial owner of units owned by CDP and CB
Capital due to his status as a Partner (in the cases of Messrs. Blutt, Soghikian
and Wicker) and a Principal (in the case of Mr. Daileader) of Chase Capital
Partners.

(8) The address of Messr. Sabel is c/o Hanger Orthopedic Group, Inc., Two
Bethesda Metro Center, Suite 1200, Bethesda, MD 20814.

(9) The address of Messr. Cramer is c/o Hazleton Laboratories, 77-455 Iroquois
Drive, Indian Wells, CA 92210.

DESCRIPTION OF OPERATING AGREEMENT

dj Ortho and DonJoy are each limited liability companies organized under the
Delaware Limited Liability Company Act. DonJoy is the sole member and managing
member of dj Ortho and controls the dj Ortho's policies and operations. DonJoy's
operations are governed by a Second Amended and Restated Operating Agreement
among DonJoy, CDP, CB Capital, First Union Investors, Smith & Nephew, the
Management Members and TCW (each a "member" and collectively the "members"). The
operating agreement, together with the members' agreement described below,
governs the relative rights and duties of the members.

Units. DonJoy is authorized to issue up to 2,900,000 common units and up to
100,000 Redeemable Preferred Units. As of December 31, 1999, 718,000 common
units and 40,184 Redeemable Preferred Units were issued and outstanding, and 15%
of the Common Units on a fully diluted basis have been duly reserved for
issuance to employees, directors and independent consultants and contractors of
DonJoy or any subsidiary thereof pursuant to the 1999 Option Plan.

The Redeemable Preferred Units accrue a cumulative preferred return at a fixed
rate of 14.0% per annum, subject to increase to 16.0% per annum upon the
occurrence of certain events of non-compliance, including

-      the failure to pay or distribute when required any amounts with respect
       to the Redeemable Preferred Units,

-      breaches of representations and warranties, covenants (which are
       substantially similar to the covenants contained in the indenture) and
       other agreements contained in the documentation relating to the
       Redeemable Preferred Units,

-      an event of default under the new credit facility, the indenture or other
       indebtedness having an outstanding principal amount of $15 million or
       more and

-      certain events of bankruptcy, insolvency or reorganization with respect
       to DonJoy or any of its subsidiaries (an "event of non-compliance").

Distributions with respect to the preferred return (other than tax distributions
as described below) are at the option of DonJoy, but to the extent the preferred
return is not paid, the accrued amount of the preferred return will compound
quarterly. Since the ability of dj Ortho to make distributions to DonJoy (other
than distributions to enable DonJoy to make tax distributions as described
below) will be limited by the terms of the new credit facility and the
indenture, DonJoy expects that the preferred return will accrue and compound. In
addition to the rights with respect to the preferred return (including related
tax distributions and distributions to the holders of Redeemable Preferred Units
of their original capital investment in the Redeemable Preferred Units) the
Redeemable Preferred Units will share ratably with the Common Units in any
distributions (including related tax distributions and upon liquidation) made by
DonJoy in respect of the Common Units (the "Redeemable Preferred Units
Participating Interest").

The Redeemable Preferred Units (other than the Redeemable Preferred Units
Participating Interest) are subject to mandatory redemption 10 and one-half
years following the closing of the recapitalization and may be redeemed at
DonJoy's option at any time. Upon a change of control (which is defined in the
operating agreement to be the same as a change of control under the indenture),
holders of Redeemable Preferred Units will have the right, subject to certain
conditions, to require DonJoy to redeem their Redeemable Preferred Units
(including the Redeemable Preferred Units Participating Interest). In addition,
at any time following the sixth anniversary of the closing of the
recapitalization, holders whose Redeemable Preferred Units have been redeemed as
described above,



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<PAGE>   68
will have the right, subject to certain conditions, to require DonJoy to redeem
their Redeemable Preferred Units Participating Interest. Unless equity proceeds
or other funds are available to DonJoy for the purpose, the ability of DonJoy to
make any of the foregoing payments will be subject to receipt of distributions
from dj Ortho in amounts sufficient to make such payments and such distributions
will be subject to the restrictions contained in the new credit facility and the
indenture.

Voting. Except as otherwise required by applicable law or as set forth in the
operating agreement or the members' agreement, holders of Common Units and
Redeemable Preferred Units shall vote together as a single class on all matters
to be voted on by the members, with each Unit being entitled to one vote.

Management. The Board of Managers consists of at least nine members as
designated pursuant to the members' agreement. Upon the occurrence of an event
of non-compliance, the Board of Managers will be increased to 11 members and the
holders of the Redeemable Preferred Units will have the right to elect as a
separate class two members to the Board of Managers of DonJoy.

Under the members' agreement, any Manager may be removed with or without cause,
except that a Manager shall not be removed without the consent of the Member or
Managers entitled to nominate such Manager. The Member or Managers entitled to
nominate any Manager may remove such Manager and may fill the vacancy created by
such removal.

Tax Distributions. Subject to receipt of distributions from dj Ortho to the
extent permitted by restrictions contained in the new credit facility and the
indenture, DonJoy will make distributions in agreed upon amounts to its members
to enable them to pay income taxes payable in respect of their allocable share
of the taxable income of DonJoy and its subsidiaries, including dj Ortho.

Restrictions on Transfer. Subject to certain exceptions, no member may transfer
its Units without having obtained the prior written consent of members holding
greater than 50% of the number of Units outstanding at the time (excluding
members that are transferring Units), which consent may be withheld in their
sole discretion.

DESCRIPTION OF MEMBERS' AGREEMENT AND BY-LAWS

DonJoy, CDP, CB Capital, First Union Investors, Smith & Nephew, the Management
Members and TCW are parties to a members' agreement. The members' agreement
contains provisions with respect to the transferability and registration of the
Units. The members' agreement also contains provisions regarding the designation
of the members of the Board of Managers and other voting arrangements. The
members' agreement terminates on a sale of dj Ortho, whether by merger,
consolidation, sale of Units, a sale of assets or otherwise (a "sale of the
company").

The members' agreement

-      restricts transfers of Units subject to certain exceptions,

-      grants the members (other than CDP and the Management Members) (the
       "Non-CDP Members") the right to tag along on certain sales of Common
       Units by CDP to unaffiliated third parties,

-      grants the Non-CDP Members certain preemptive rights,

-      grants certain rights of first refusal to DonJoy and CDP with respect to
       transfers of Common Units by Non-CDP Members and the Management Members,

-      grants DonJoy or its designee the right to repurchase a Management
       Member's Units if such Management Member's employment is terminated, and

-      requires the members to participate in and cooperate in consummating a
       sale of the company approved by CDP.

Under the members' agreement, subject to certain limitations, the members have
been granted piggyback registration rights with respect to registrable Units
held by them and CDP and holders of Redeemable Preferred Units have been granted
certain demand registration rights, to which all members may piggyback. The
members' agreement contains customary terms and provisions with respect to the
registration rights contained therein.

The members' agreement provides that the Board of Managers of DonJoy is to
consist of nine Managers:



                                       68
<PAGE>   69

-      one Management Member (initially Leslie H. Cross) designated by
       Management Members holding at least a majority of all Units then held by
       all Management Members, provided that such Management Member shall be a
       member of the Board for only so long as he is both an employee and a
       holder of Units,

-      five individuals nominated by CDP,

-      an additional individual (initially Charles T. Orsatti) nominated by CDP
       and having special voting power as described below, and

-      two individuals with industry expertise designated by mutual agreement of
       the other Managers. Mr. Sabel and Mr. Cramer were appointed to the Board
       of Managers in August 1999 and December 1999, respectively, pursuant to
       this provision.

The constituent documents of CDP provide that the five individuals nominated by
CDP shall be designated by CB Capital and that the additional individual
nominated by CDP and having special voting power shall be designated by the
managing member of CDP. The managing member of CDP is initially Fairfield Chase,
except that upon the occurrence of certain events (including where CB Capital
has determined that it is reasonably necessary for it to assume control of CDP
for the protection of its investment or that any other event has occurred which
would permit CB Capital to assume control of CDP under applicable law), CB
Capital will become the managing member of CDP. The managing member of CDP
controls CDP, including the exercise of its rights under the operating agreement
and the members' agreement. Upon becoming the managing member of CDP, CB Capital
will have the ability, through CDP, to designate Managers having a majority of
the voting power of all Managers.

The By-laws of DonJoy also provide that each Manager is entitled to one vote on
each matter on which the Managers are entitled to vote, except that one
individual appointed by the managing member of CDP (initially Charles T.
Orsatti) has six votes on each matter on which the Managers are entitled to
vote.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RECAPITALIZATION AGREEMENT

In addition to providing for the sale of the Common Units of DonJoy to CDP and
the Management Members, and the repurchase of a portion of Smith & Nephew's
interests in DonJoy, the recapitalization agreement provides for certain other
matters in furtherance of the recapitalization transactions, including those set
forth below. The description below of certain provisions of the recapitalization
agreement is subject to, and is qualified in its entirety by reference to, the
definitive recapitalization agreement, a copy of which has been filed as an
exhibit.

Covenants Not to Compete. Smith & Nephew has agreed that until June 30, 2004,
neither it nor any of its affiliates will, subject to certain exceptions, engage
anywhere in the world in a Non-Compete Business (as defined below) in
competition with the business of dj Ortho as it existed on June 30, 1999.
"Non-Compete Business" means the developing, manufacturing or marketing of
lower-leg walkers, post-operative hinged knee braces, functional hinged knee
braces, osteoarthritic hinged knee braces, cold therapy and pain management
systems, certain high-tech hinged knee braces, including high-tech hinged knee
braces that incorporate technology covered by the Victoria Patents referred to
below, and computer-assisted rehabilitation systems using the aforementioned
hinged knee braces together with other electronic devices such as sensors and
transducers.

In connection with certain products and proprietary information relating to a
rounded cannulated interference ("RCI") screw system (the "Proprietary RCI Screw
Products"), a tissue fixation product developed by dj Ortho but transferred to
and retained by Smith & Nephew prior to the consummation of the
recapitalization, CDP has agreed that neither it nor DonJoy or any of its
subsidiaries, including dj Ortho, will, subject to certain exceptions, develop
or market with the cooperation of certain physicians who developed such
Proprietary RCI Screw Products, any product which competes with the Proprietary
RCI Screw Products.

Smith & Nephew Name. Subject to certain limited exceptions, dj Ortho has agreed
that following the recapitalization, it shall not, and shall not permit any of
its subsidiaries to, use any of Smith & Nephew's trademarks or trade names
(including, without limitation, "Smith & Nephew").

Victoria Patents. Smith & Nephew has agreed to assist dj Ortho in obtaining from
Victoria University of Manchester, England an exclusive worldwide license for
the development, manufacturing and marketing of products within the Non-Compete
Business employing technology covered by certain patents and patent applications
owned by Victoria University relating to the use of electrostimulation products
for skeletal muscle rehabilitation (the "Victoria Patents"). In the event dj
Ortho is not able to obtain such a license, Smith & Nephew has agreed to use
commercially reasonable efforts to enter into an exclusive license with Victoria
University relating to the Victoria Patents and, subject to approval of Victoria
University, to enter into an exclusive worldwide sublicense with dj Ortho for
the right to manufacture, use and sell products within the Non-Compete Business
employing the Victoria Patents. No



                                       69
<PAGE>   70
assurance can be given that dj Ortho will enter into any such license or
sublicense agreement, or, if any such agreement is entered into, that dj Ortho
will be able to develop and/or successfully market products using such
technology.

Indemnification. Smith & Nephew has agreed to indemnify CDP and its affiliates,
including dj Ortho and its subsidiaries, for all losses and expenses incurred by
them as a result of

-      any breach by Smith & Nephew of its representations and warranties,
       covenants and agreements in the recapitalization agreement,

-      any tax liabilities for which Smith & Nephew is liable pursuant to the
       recapitalization agreement and

-      certain excluded liabilities.

However, the recapitalization agreement provides that with respect to breaches
of its representations and warranties, Smith & Nephew shall not be required to
make indemnification payments with respect to any such breach unless the
aggregate amount of the losses and expenses with respect thereto exceeds $3
million ($0.8 million in the case of environmental matters) and that the
aggregate amount of such payments shall not exceed $75 million ($7.5 million in
the case of environmental matters). Smith & Nephew's indemnification obligations
with respect to breaches of its representations, warranties, covenants and
agreements in the recapitalization agreement terminate 15 months after the
closing date of the recapitalization except as otherwise set forth in the
recapitalization agreement.

OTHER AGREEMENTS BETWEEN DONJOY AND SMITH & NEPHEW

In connection with the recapitalization, DonJoy and Smith & Nephew entered into
several additional agreements providing for the continuation or transfer and
transition of certain aspects of the business operations. Such agreements were
assigned to dj Ortho in connection with the consummation of the
Recapitalization. The description below of these agreements is subject to, and
is qualified in its entirety by reference to, the definitive agreements, copies
of which have been filed as exhibits.

SUPPLY AGREEMENT

Pursuant to a supply agreement between DonJoy and Smith & Nephew entered into in
connection with the Recapitalization, dj Ortho has agreed to supply to Smith &
Nephew to the extent ordered by Smith & Nephew:

(1)    all ProCare line products,

(2)    all DonJoy products currently listed in Smith & Nephew's 1999
       Rehabilitation Division catalog for the United States and any
       replacements, substitutions and improvements to such products and

(3)    such other products as may be mutually agreed (collectively, the "Supply
       Agreement Products").

So as not to interfere with dj Ortho's international business plans (see
Business -- Business Strategy -- Increase International Sales) Smith & Nephew
has agreed not to export any products listed in clause (2) above from the United
States after March 31, 2000. Through December 31, 1999, dj Ortho will sell
Supply Agreement Products to Smith & Nephew at the same prices at which such
products were sold to Smith & Nephew prior to the recapitalization, which prices
were consistent with prices at which products were sold to third party
international distributors. Commencing January 1, 2000 and for each year
thereafter until termination of the supply agreement, dj Ortho will sell the
Supply Agreement Products to Smith & Nephew at its best distributor prices
(including discounts and rebates offered to distributors) if and to the extent
agreed to by Smith & Nephew and pursuant to purchase orders for dj Ortho's
products.

Smith & Nephew has no obligation to purchase any specific or minimum quantity of
products pursuant to the supply agreement. However, Smith & Nephew has agreed
not to purchase from anyone other than dj Ortho's Supply Agreement Products
which are included within the Non-Compete Business subject to certain limited
exceptions including the failure of dj Ortho to supply such products. The supply
agreement provides that Smith & Nephew may manufacture or purchase from third
party suppliers Supply Agreement Products which are not included within the
Non-Compete Business.

Pursuant to the supply agreement, DonJoy and dj Ortho have agreed to indemnify
Smith & Nephew and its officers and affiliates with respect to

-      any injury, death or property damage arising out of DonJoy's, dj Ortho's
       or any of their employees or agents negligence or willful misconduct,



                                       70
<PAGE>   71

-      DonJoy's or dj Ortho's negligent acts or omissions,

-      DonJoy's or dj Ortho's misstatements or false claims with respect to the
       Supply Agreement Products,

-      any product liability claims relating to the Supply Agreement Products
       (other than those claims ("Non-Indemnifiable Claims") resulting from
       Smith & Nephew's or a third party's fault which do not give rise to an
       indemnifiable claim against DonJoy by Smith & Nephew under the
       Recapitalization Agreement),

-      any governmentally-required recall of the Supply Agreement Products
       (other than Non-Indemnifiable Claims),

-      its failure to comply with its obligations under the Supply Agreement,
       and

-      any claim of infringement by any third party of any patents or any
       claimed violation of any other intellectual property right of any third
       party arising in connection with the sale or distribution of Supply
       Agreement Products.

In order to ensure performance of its indemnity obligations, DonJoy has agreed
to maintain at least $3 million of product liability and general public
liability insurance with a deductible or self-insurance of no more than $100,000
and shall name Smith & Nephew as an additional insured. In addition, Smith &
Nephew has agreed to indemnify DonJoy, dj Ortho and its officers, managers,
equity holders and affiliates with respect to

-      any injury, death or property damage arising out of Smith & Nephew's or
       its employees or agents negligence or willful misconduct,

-      Smith & Nephew's negligent act or omission,

-      Smith & Nephew's misstatements or false claims with respect to the Supply
       Agreement Products,

-      Smith & Nephew's misuse of Supply Agreement Product literature, or

-      Smith & Nephew's failure to comply with its obligations under the supply
       agreement.

The supply agreement terminates in June 2004 unless extended by mutual agreement
of DonJoy and Smith & Nephew.

DISTRIBUTION AGREEMENT

Pursuant to a distribution agreement entered into in connection with the
recapitalization among DonJoy, Smith & Nephew and the affiliates of Smith &
Nephew which distributed dj Ortho's products outside the United States as of the
closing date of the recapitalization (each an "S&N Group Company"), each S&N
Group Company will continue to distribute dj Ortho's products in the specific
international market (the "Territories") in which such S&N Group Company
distributed such products prior to the recapitalization. Through December 31,
1999, dj Ortho will sell products to the S&N Group Companies at the same prices
at which such products were sold to the S&N Group Companies prior to the
recapitalization. Thereafter, dj Ortho and S&N will negotiate the sale price of
any product in good faith. During the term of the distribution agreement with
respect to a Territory, each S&N Group Company has a royalty-free right to use
dj Ortho's trademarks in connection with its distribution of the dj Ortho's
products.

The S&N Group Companies have no obligation to purchase any minimum quantity of
products pursuant to the distribution agreement. However, Smith & Nephew has
agreed to use its commercially reasonable efforts to have the S&N Group
Companies purchase from dj Ortho the same quantity of products reflected in
DonJoy's 1999 budgets (the "1999 Purchase Level") and dj Ortho has agreed to
sell to the S&N Group Companies pursuant to applicable purchase orders
quantities of products at least equal to the 1999 Purchase Level. Smith & Nephew
has also agreed to use its commercially reasonable efforts to have each S&N
Group Company distribute and resell products in the same geographical markets
within the Territories as such S&N Group Company distributed and sold dj Ortho
products prior to the recapitalization, and Smith & Nephew and each S&N Group
Company agrees to employ efforts and methods to sell and promote the sale of the
products in its Territory that are substantially the same as the efforts and
methods employed prior to the consummation of the recapitalization. The S&N
Group Companies may not, subject to certain limited exceptions, sell or supply
dj Ortho products or other similar products to anyone outside the Territories.
During the time any Territory is subject to the distribution agreement, no S&N
Group Company may import, sell or promote the sale of any products which are
included within the Non-Compete Business other than products purchased from dj
Ortho. Pursuant to the distribution agreement, DonJoy and dj Ortho have agreed
to indemnify Smith & Nephew and the S&N Group Companies and their officers and
affiliates, and Smith & Nephew have agreed to indemnify DonJoy and its officers,
managers, equity holders and affiliates to the same extent that DonJoy and Smith
& Nephew indemnify each other under the supply agreement.



                                       71
<PAGE>   72
Smith & Nephew has the right to terminate the distribution agreement

(1)    on 60 days notice, with respect to Austria, Denmark, Finland, France,
       Germany and Eastern Europe, Holland, Japan, Norway, New Zealand,
       Portugal, Sweden, Switzerland and the United Kingdom, and

(2)    on 60 days notice, which notice may not be given prior to November 1,
       1999, with respect to Australia, Belgium, Canada, Dubai, Hong Kong,
       India, Ireland, Italy, Korea, Malaysia, Mexico, Philippines, Puerto Rico,
       Singapore, South Africa, Spain, Taiwan and Thailand.

DonJoy has the right to terminate the distribution agreement

(1)    on 30 days notice with respect to the Territories listed in clause (1)
       above,

(2)    on 60 days notice, which notice may not be given prior to August 1, 1999,
       with respect to the Territories listed in clause (2) above other than
       Australia and Canada, and

(3)    on 60 days notice, which notice may not be given prior to November 1,
       1999, with respect to Australia and Canada.

Upon termination of the distribution agreement with respect to a Territory, the
applicable S&N Group Company has agreed to assist dj Ortho in the transition to
any new third party distributor designated by dj Ortho. Subject to certain
limited exceptions, any products remaining in the inventory of any terminated
S&N Group Company (the "Repurchased Inventory") upon termination of the
distribution agreement with respect to a Territory, will be repurchased by dj
Ortho, or any new third party distributor designated by dj Ortho with respect to
the Territory for an amount equal to

(1)    the original purchase price of such Repurchased Inventory plus any duty
       and tax paid by such S&N Group Company and the cost paid by such S&N
       Group Company in shipping the Repurchased Inventory to such S&N Group
       Company plus

(2)    any sales tax, VAT, duty or fee incurred by such S&N Group Company with
       respect to the delivery of such Repurchased Inventory to dj Ortho or such
       new distributor.

If a dispute arises concerning the applicable repurchase price of the
Repurchased Inventory and the parties are not able to resolve such dispute with
ten business days, the applicable S&N Group Company has the right to sell and
distribute the products that are the subject of the dispute within or outside
the Territories. The Distribution Agreement continues until the termination of
the last Territory.

TRANSITION SERVICES AGREEMENT

Pursuant to a transition services agreement among DonJoy and Smith & Nephew,
Smith & Nephew has agreed to assist in the transfer and transition of certain
services provided by Smith & Nephew prior to the recapitalization as required by
dj Ortho, including human resources, payroll, sales tax reporting, insurance
coverage, legal and treasury and cash management. Smith & Nephew will also act
as authorized European Agent/representative/distributor for DonJoy for purposes
of CE regulation. DonJoy will not pay any additional consideration to Smith &
Nephew for such services, but will reimburse Smith & Nephew for all payments to
third parties in connection with any of the foregoing services. Based on prior
practice, such amounts are not expected to be material.

In addition, Smith & Nephew will continue to employ two individuals as employees
of Smith & Nephew's affiliates in the United Kingdom and Belgium (the
"International Employees") until the earlier of 15 days following receipt of
notice from DonJoy requesting termination of the services of such employees or
December 31, 1999. DonJoy will reimburse Smith & Nephew for all compensation,
expenses and benefits paid or provided to or on behalf of the International
Employees.

Smith & Nephew has also agreed to assist in the transition of master group
buying contracts relating to ProCare products with NovaCare, Inc., Premier
Purchasing Partners, L.P. and AmeriNet Inc. (the "Group Buying Contracts") to
separate agreements or arrangements between such companies and dj Ortho. Pending
the execution of such separate agreements or arrangements, Smith & Nephew will
permit dj Ortho to continue to sell products under the Group Buying Contracts.
Through December 31, 1999, dj Ortho will not be required to pay Smith & Nephew
any fee for products sold under the Group Buying Contracts. If dj Ortho decides
to continue selling under the Group Buying Contracts, dj Ortho will be required
to pay Smith & Nephew a fee equal to 1.5% of dj Ortho's gross sales for products
sold under the Group Buying Contracts.

Smith & Nephew agreed to indemnify DonJoy, dj Ortho and its officers, managers,
equity holders and affiliates with respect to

-      any injury, death or property damage arising out of Smith & Nephew or its
       employees or agents negligence or willful misconduct,



                                       72
<PAGE>   73

-      Smith & Nephew's negligent act or omission or

-      Smith & Nephew's failure to comply with its obligations under the
       transition services agreement. DonJoy has agreed to indemnify Smith &
       Nephew to the same extent as the foregoing and also with respect to any
       claim made in respect of the International Employees for actions or
       omissions after the consummation of the recapitalization and any claim
       made in respect of any product sold by dj Ortho under any Group Buying
       Contract. Each party agrees to maintain insurance in the amount of at
       least $3 million per occurrence for bodily injury or death and $3 million
       per occurrence with respect to property damage with a deductible of no
       more than $250,000.

DonJoy has the right to terminate any service provided under the transition
services agreement on thirty days notice to Smith & Nephew. Except as it relates
to Group Buying Contracts, the transition services agreement terminates on
December 31, 1999. The transition services agreement was extended for certain
services through November 30, 2000.

GROUP RESEARCH CENTRE TECHNOLOGY AGREEMENT

Pursuant to a Group Research Centre Technology Agreement (the "GRC Agreement")
between DonJoy and Smith & Nephew entered into in connection with the
recapitalization, Smith & Nephew conveyed and assigned to DonJoy an undivided
50% interest in and to the GRC Technology (as defined below). In addition, Smith
& Nephew has agreed to, among other things, grant to dj Ortho exclusive or
non-exclusive worldwide, royalty-free rights to manufacture, use, import and
sell products included within the Non-Compete Business which products are based
on certain specified technology and other proprietary information developed as
of the closing date of the recapitalization by Group Research Centre, an
affiliate of Smith & Nephew (the "GRC Technology"). The licenses granted under
the GRC Agreement continue with respect to any particular patent incorporating
any such technology until such patent expires, is cancelled or is declared
invalid or unenforceable. No assurance can be given that dj Ortho will be able
to develop and/or successfully market products based on the technology and
proprietary information licensed to dj Ortho pursuant to the GRC Agreement. Any
restriction contained in the GRC Agreement with respect to non-patented GRC
Technology expires on June 30, 2009.

SUBLEASE

Pursuant to a sublease between dj Ortho and Smith & Nephew entered into in
connection with the recapitalization, dj Ortho is subleasing the premises
occupied by the Vista facility from Smith & Nephew. dj Ortho will pay rent
during the term of the sublease in an amount equal to the amount required to be
paid by Smith & Nephew as tenant under the master lease for the Vista facility
together with all taxes and other amounts which are the responsibility of Smith
& Nephew under the master lease. The initial minimum rent payable by dj Ortho
under the sublease is $145,694 per month. DonJoy has guaranteed the payment of
rent and other amounts owing under the sublease by dj Ortho. The sublease
expires on February 19, 2008 unless sooner terminated as provided in the master
lease or the sublease.

CERF LABORATORIES AGREEMENT

Pursuant to a CERF Laboratories Agreement (the "CERF Agreement") between DonJoy
and Smith & Nephew, dj Ortho will allow Smith & Nephew and its employees,
agents, representatives and invitees to use dj Ortho's Clinical Education
Research Facility ("CERF") laboratory, the equipment and supplies in the CERF
laboratory and services offered at the CERF laboratory. Smith & Nephew will pay
dj Ortho a quarterly fee calculated in the same manner as it was calculated
prior to the recapitalization. For 1998 and 1999, Smith & Nephew paid DonJoy
$63,516 and $85,649, respectively, for use of the CERF laboratory. DonJoy and
Smith & Nephew have agreed to indemnify each other and their respective
officers, managers, equity holders and affiliates with respect to

-      any injury, death or property damage arising out of its or its employees
       or agents negligence or willful misconduct,

-      its negligent act or omission, or

-      its failure to comply with its obligations under the CERF Agreement.

In addition, each party has agreed to maintain insurance in the amount of at
least $3 million per occurrence for bodily injury or death and $3 million per
occurrence with respect to property damage with a deductible of no more than
$250,000. The CERF Agreement expires on June 30, 2001 unless renewed upon mutual
agreement or unless sooner terminated by Smith & Nephew upon 30 days notice.



                                       73
<PAGE>   74
OTHER ARRANGEMENTS WITH AFFILIATES OF CDP

In connection with the recapitalization, the Issuers entered into the new credit
facility with Chase Securities Inc. ("CSI"), as arranger and book manager, and
The Chase Manhattan Bank ("Chase"), as syndication agent and a lender, both of
which are affiliates of CDP. In connection with the new credit facility, Chase
receives customary fees for acting in such capacities. CSI also acted as
financial advisor to Smith & Nephew in connection with the recapitalization and
was paid a fee of $2.0 million by Smith & Nephew upon consummation of the
recapitalization.



                                       74
<PAGE>   75
PART IV


ITEM 14. 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 consolidated financial statements of dj Ortho listed below and the
   report thereon are included in Item 8 hereof:

         Report of Ernst & Young, Independent Auditors
         Consolidated Balance Sheets as of December 31, 1999 and 1998
         Consolidated Statements of Income for the years ended
           December 31, 1999, 1998 and 1997
         Consolidated Statements of Changes in Member's Equity for the years
           ended December 31, 1999, 1998 and 1997
         Consolidated Statements of Cash Flows for the years ended
           December 31, 1999, 1998 and 1997
         Notes to Consolidated Financial Statements

       2. Financial Statement Schedules:

          All other schedules are omitted because they are not applicable or not
          required or because the required information is shown in the
          Consolidated Financial Statements or notes thereto.

   (b) Reports on Form 8-K:
         None.

       3. Exhibits:

<TABLE>
<CAPTION>
      EXHIBIT
       NUMBER                           DESCRIPTION
       ------                           -----------
<S>               <C>
         3.1      Amended and Restated Operating Agreement of dj Orthopedics,
                  LLC(1)

         3.2      Second Amended and Restated Operating Agreement of DonJoy,
                  LLC(1)

         3.3      Certificate of Amendment to Certificate of Incorporation of DJ
                  Orthopedics Capital Corporation(1)

         3.4      By-laws of dj Orthopedics, LLC(1)

         3.5      By-laws of DonJoy, LLC(1)

         3.6      By-laws of DJ Orthopedics Capital Corporation(1)

         4.1      Indenture dated as of June 30, 1999 among the Issuers, DonJoy
                  and The Bank of New York, as Trustee(1)

         4.2      Form of New Note (included as Exhibit B to Exhibit 4.1)(1)

         4.3      Exchange and Registration Rights Agreement dated as of June
                  30, 1999 among the Issuers, DonJoy and Smith & Nephew(1)

         10.1     Recapitalization Agreement dated as of April 29, 1999 among
                  CDP, DonJoy and Smith & Nephew(1)

         10.2     Group Research Centre Technology Agreement dated as of June
                  30, 1999 between DonJoy and Smith & Nephew(1)

         10.3     Supply Agreement dated as of June 30, 1999 between DonJoy and
                  Smith & Nephew(1)

         10.4     Transition Services Agreement dated as of June 30, 1999
                  between DonJoy and Smith & Nephew(1)

         10.5     Distribution Agreement dated as of June 30, 1999 between
                  DonJoy, Smith & Nephew and the affiliates of Smith & Nephew
                  listed on Schedule I thereto(1)

         10.6     CERF Laboratories Agreement dated as of June 30, 1999 between
                  DonJoy and Smith & Nephew(1)

         10.7     Subleases dated as of June 30, 1999 between the dj Ortho and
                  Smith & Nephew(1)

         10.8     Guaranties dated as of June 30, 1999 executed by DonJoy(1)

         10.9     Preferred Unit Purchase Agreement dated as of June 30, 1999
                  among DonJoy, CB Capital and First Union Investors(1)

         10.10    Members' Agreement dated as of June 30, 1999 among DonJoy,
                  CDP, CB Capital, First Union Investors, Smith & Nephew and the
                  Management Members(1)

         10.11    Credit Agreement dated as of June 30, 1999 among the Issuers,
                  DonJoy, the Lenders party thereto and First Union National
                  Bank, as Administrative Agent(1)
</TABLE>



                                       75
<PAGE>   76
<TABLE>
<S>               <C>
         10.12    Indemnity, Subrogation and Contribution Agreement dated as of
                  June 30, 1999 among dj Ortho, DJ Capital and First Union
                  National Bank, as Collateral Agent(1)

         10.13    Parent Guarantee Agreement dated as of June 30, 1999 between
                  DonJoy and First Union National Bank, as Collateral Agent(1)

         10.14    Subsidiary Guarantee Agreement dated as of June 30, 1999
                  between DJ Capital and First Union National Bank, as
                  Collateral Agent(1)

         10.15    Pledge Agreement dated as of June 30, 1999 among dj Ortho,
                  DonJoy and First Union National Bank, as Collateral Agent(1)

         10.16    Security Agreement dated as of June 30, 1999 among dj Ortho,
                  DonJoy, DJ Capital and First Union National Bank, as
                  Collateral Agent(1)

         10.17    Leasehold Deed of Trust, Security Agreement and Assignment of
                  Leases and Rents dated as of June 30, 1999 by dj Ortho, as
                  grantor, to First American Title Insurance Company, as
                  trustee(1)

         10.18    Employment Agreement dated as of June 30, 1999 between dj
                  Ortho and Leslie H. Cross(1)

         10.19    Employment Agreement dated as of June 30, 1999 between dj
                  Ortho and Cyril Talbot III(1)

         10.20    Employment Agreement dated as of June 30, 1999 between dj
                  Ortho and Michael R. McBrayer(1)

         10.21    1999 Option Plan of DonJoy(1)

         10.22    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Les Cross(1)

         10.23    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Cy Talbot(1)

         10.24    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Michael McBrayer(1)

         10.25    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Chuck Bastyr(1)

         10.26    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Peter Bray(1)

         10.27    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Kent Bachman

         10.28    Employment and Separation Agreement dated as of October 25,
                  1999 between Chuck Bastyr and dj Orthopedics, LLC

         10.29    First Amendment to Transition Services Agreement dated as of
                  December 21, 1999 between DonJoy and Smith & Nephew

         10.30    Amended and Restated 1999 Option Plan of DonJoy dated January
                  20, 2000

         12.1     Statement re: computation of ratios of earning to fixed
                  charges

         21.1     Subsidiaries of the Registrants(1)

         24.1     Powers of Attorney (included on the signature page)(1)

         25.1     Statement of Eligibility and Qualifications under the Trust
                  Indenture Act of 1939 of The Bank of New York as Trustee(1)

         27.1     Financial Data Schedule
</TABLE>

------------

(1)  Incorporated herein by reference to the same numbered exhibit to dj Ortho's
     registration statement on Form S-4 (Registration No. 333-86835), originally
     filed with the SEC on November 4, 1999.

     (d)

                               DJ ORTHOPEDICS, LLC
          SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                   FOR THE THREE YEARS ENDED DECEMBER 31, 1999

<TABLE>
<CAPTION>
                                               ALLOWANCE FOR
                                                  DOUBTFUL            RESERVE FOR
                                                  ACCOUNTS            EXCESS AND
                                                  AND SALES            OBSOLETE
                                                  RETURNS             INVENTORY
                                               -------------          ------------
<S>                                            <C>                   <C>
Balance at December 31, 1996 ........          $   229,000           $   472,000
  Provision .........................              823,000               495,000
  Write-offs and recoveries, net ....             (640,000)             (217,000)
                                               -----------           -----------
Balance at December 31, 1997 ........              412,000               750,000
  Provision .........................            1,407,000               172,000
  Write-offs and recoveries, net ....           (1,463,000)             (366,000)
                                               -----------           -----------
Balance at December 31, 1998 ........              356,000               556,000
  Provision .........................            2,678,000             1,052,000
  Write-offs and recoveries, net ....           (2,045,000)             (617,000)
                                               -----------           -----------
Balance at December 31, 1999 ........          $   989,000           $   991,000
                                               ===========           ===========
</TABLE>




                                       76
<PAGE>   77
                                   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 17, 2000                     DJ ORTHOPEDICS, LLC

                                         By:  /s/       LESLIE H. CROSS
                                            ------------------------------------
                                                        Leslie H. Cross
                                           President 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.

<TABLE>
<CAPTION>
                  SIGNATURE                                     TITLE                            DATE
                  ---------                                     -----                            ----
<S>                                            <C>                                            <C>
           /s/   LESLIE H. CROSS               President, Chief Executive Officer and         March 17, 2000
-------------------------------------------    Manager
                Leslie H. Cross                (Principal Executive Officer)


           /s/   CYRIL TALBOT III              Vice President, Chief Financial Officer        March 17, 2000
--------------------------------------------   and Secretary (Principal Financial and
              Cyril Talbot III                 Accounting Officer)


          /s/   CHARLES T. ORSATTI             Manager                                        March 17, 2000
-------------------------------------------
             Charles T. Orsatti

        /s/   MITCHELL J. BLUTT, M.D.          Manager                                        March 17, 2000
-------------------------------------------
           Mitchell J. Blutt, M.D.

          /s/   SHAHAN D. SOGHIKIAN            Manager                                        March 17, 2000
-------------------------------------------
             Shahan D. Soghikian

        /s/   DAMION E. WICKER, M.D.           Manager                                        March 17, 2000
-------------------------------------------
            Damion E. Wicker, M.D.

           /s/   JOHN J. DAILEADER             Manager                                        March 17, 2000
-------------------------------------------
               John J. Daileader

             /s/ IVAN R. SABEL                 Manager                                        March 17, 2000
--------------------------------------------
                 Ivan R. Sabel

            /s/   KIRBY L. CRAMER              Manager                                        March 17, 2000
--------------------------------------------
               Kirby L. Cramer
</TABLE>



                                       77
<PAGE>   78

                                   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 17, 2000                DJ ORTHOPEDICS CAPITAL CORPORATION

                                    By:    /s/     LESLIE H. CROSS
                                       -----------------------------------------
                                                   Leslie H. Cross
                                          President 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.

<TABLE>
<CAPTION>
                  SIGNATURE                                       TITLE                            DATE
                  ---------                                       -----                            ----
<S>                                            <C>                                            <C>
           /s/   LESLIE H. CROSS               President, Chief Executive Officer and         March 17, 2000
--------------------------------------------   Director
                                               (Principal Executive Officer)
               Leslie H. Cross

           /s/   CYRIL TALBOT III              Vice President, Chief Financial Officer        March 17, 2000
--------------------------------------------   and Secretary (Principal Financial
              Cyril Talbot III                 and Accounting Officer)


          /s/   CHARLES T. ORSATTI             Director                                       March 17, 2000
--------------------------------------------
             Charles T. Orsatti

        /s/   MITCHELL J. BLUTT, M.D.          Director                                       March 17, 2000
--------------------------------------------
           Mitchell J. Blutt, M.D.

          /s/   SHAHAN D. SOGHIKIAN            Director                                       March 17, 2000
--------------------------------------------
             Shahan D. Soghikian

        /s/   DAMION E. WICKER, M.D.           Director                                       March 17, 2000
--------------------------------------------
            Damion E. Wicker, M.D.

           /s/   JOHN J. DAILEADER             Director                                       March 17, 2000
--------------------------------------------
              John J. Daileader

          /s/   IVAN R. SABEL                  Director                                       March 17, 2000
--------------------------------------------
                Ivan R. Sabel

           /s/ KIRBY L. CRAMER                 Director                                       March 17, 2000
--------------------------------------------
               Kirby L. Cramer
</TABLE>



                                       78
<PAGE>   79
                                   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 17, 2000                   DONJOY, L.L.C.

                                       By:  /s/     LESLIE H. CROSS
                                            ------------------------------------
                                                    Leslie H. Cross
                                           President 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.

<TABLE>
<CAPTION>
                  SIGNATURE                                       TITLE                            DATE
                  ---------                                       -----                            ----
<S>                                            <C>                                            <C>
           /s/   LESLIE H. CROSS               President, Chief Executive Officer and         March 17, 2000
--------------------------------------------   Manager
                 Leslie H. Cross               (Principal Executive Officer)


           /s/   CYRIL TALBOT III              Vice President, Chief Financial Officer        March 17, 2000
--------------------------------------------   Secretary (Principal Financial and
              Cyril Talbot III                 and Accounting Officer)


          /s/   CHARLES T. ORSATTI             Manager                                        March 17, 2000
--------------------------------------------
             Charles T. Orsatti

        /s/   MITCHELL J. BLUTT, M.D.          Manager                                        March 17, 2000
--------------------------------------------
           Mitchell J. Blutt, M.D.

          /s/   SHAHAN D. SOGHIKIAN            Manager                                        March 17, 2000
--------------------------------------------
             Shahan D. Soghikian

        /s/   DAMION E. WICKER, M.D.           Manager                                        March 17, 2000
--------------------------------------------
            Damion E. Wicker, M.D.

           /s/   JOHN J. DAILEADER             Manager                                        March 17, 2000
--------------------------------------------
                 John J. Daileader

             /s/ IVAN R. SABEL                 Manager                                        March 17, 2000
--------------------------------------------
                 Ivan R. Sabel

            /s/   KIRBY L. CRAMER              Manager                                        March 17, 2000
--------------------------------------------
                  Kirby L. Cramer
</TABLE>




                                       79
<PAGE>   80
                                INDEX TO EXHIBITS

         <TABLE>
<CAPTION>
      EXHIBIT NUMBER                            DESCRIPTION ------
                  ----------- <S>               <C>
         3.1      Amended and Restated Operating Agreement of dj Orthopedics,
                  LLC(1)

         3.2      Second Amended and Restated Operating Agreement of DonJoy,
                  LLC(1)

         3.3      Certificate of Amendment to Certificate of Incorporation of DJ
                  Orthopedics Capital Corporation(1)

         3.4      By-laws of dj Orthopedics, LLC(1)

         3.5      By-laws of DonJoy, LLC(1)

         3.6      By-laws of DJ Orthopedics Capital Corporation(1)

         4.1      Indenture dated as of June 30, 1999 among the Issuers, DonJoy
                  and The Bank of New York, as Trustee(1)

         4.2      Form of New Note (included as Exhibit B to Exhibit 4.1)(1)

         4.3      Exchange and Registration Rights Agreement dated as of June
                  30, 1999 among the Issuers, DonJoy and Smith & Nephew(1)

         10.1     Recapitalization Agreement dated as of April 29, 1999 among
                  CDP, DonJoy and Smith & Nephew(1)

         10.2     Group Research Centre Technology Agreement dated as of June
                  30, 1999 between DonJoy and Smith & Nephew(1)

         10.3     Supply Agreement dated as of June 30, 1999 between DonJoy and
                  Smith & Nephew(1)

         10.4     Transition Services Agreement dated as of June 30, 1999
                  between DonJoy and Smith & Nephew(1)

         10.5     Distribution Agreement dated as of June 30, 1999 between
                  DonJoy, Smith & Nephew and the affiliates of Smith & Nephew
                  listed on Schedule I thereto(1)

         10.6     CERF Laboratories Agreement dated as of June 30, 1999 between
                  DonJoy and Smith & Nephew(1)

         10.7     Subleases dated as of June 30, 1999 between dj Ortho and Smith
                  & Nephew(1)

         10.8     Guaranties dated as of June 30, 1999 executed by DonJoy(1)

         10.9     Preferred Unit Purchase Agreement dated as of June 30, 1999
                  among DonJoy, CB Capital and First Union Investors(1)

         10.10    Members' Agreement dated as of June 30, 1999 among DonJoy,
                  CDP, CB Capital, First Union Investors, Smith & Nephew and the
                  Management Members(1)

         10.11    Credit Agreement dated as of June 30, 1999 among the Issuers,
                  DonJoy, the Lenders party thereto and First Union National
                  Bank, as Administrative Agent(1)

         10.12    Indemnity, Subrogation and Contribution Agreement dated as of
                  June 30, 1999 among dj Ortho, DJ Capital and First Union
                  National Bank, as Collateral Agent(1)

         10.13    Parent Guarantee Agreement dated as of June 30, 1999 between
                  DonJoy and First Union National Bank, as Collateral Agent(1)

         10.14    Subsidiary Guarantee Agreement dated as of June 30, 1999
                  between DJ Capital and First Union National Bank, as
                  Collateral Agent(1)

         10.15    Pledge Agreement dated as of June 30, 1999 among dj Ortho,
                  DonJoy and First Union National Bank, as Collateral Agent(1)

         10.16    Security Agreement dated as of June 30, 1999 among dj Ortho,
                  DonJoy, DJ Capital and First Union National Bank, as
                  Collateral Agent(1)

         10.17    Leasehold Deed of Trust, Security Agreement and Assignment of
                  Leases and Rents dated as of June 30, 1999 by dj Ortho, as
                  grantor, to First American Title Insurance Company, as
                  trustee(1)

         10.18    Employment Agreement dated as of June 30, 1999 between dj
                  Ortho and Leslie H. Cross(1)

         10.19    Employment Agreement dated as of June 30, 1999 between dj
                  Ortho and Cyril Talbot III(1)

         10.20    Employment Agreement dated as of June 30, 1999 between dj
                  Ortho and Michael R. McBrayer(1)

         10.21    1999 Option Plan of DonJoy(1)

         10.22    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Les Cross(1)

         10.23    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Cy Talbot(1)

         10.24    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Michael McBrayer(1)

         10.25    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Chuck Bastyr(1)

         10.26    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Peter Bray(1)

         10.27    Retention Agreement dated December 14, 1998 between Smith &
                  Nephew and Kent Bachman

         10.28    Employment and Separation Agreement dated as of October 25,
                  1999 between Chuck Bastyr and dj Orthopedics, LLC

         10.29    First Amendment to Transition Services Agreement dated as of
                  December 21, 1999 between DonJoy and Smith & Nephew
</TABLE>



                                       80
<PAGE>   81
<TABLE>
<CAPTION>
      EXHIBIT
       NUMBER                            DESCRIPTION
       ------                            -----------
<S>               <C>
         10.30    Amended and Restated 1999 Option Plan of DonJoy dated January
                  20, 2000

         12.1     Statement re: computation of ratios of earning to fixed
                  charges

         21.1     Subsidiaries of the Registrants(1)

         24.1     Powers of Attorney (included on the signature page)(1)

         25.1     Statement of Eligibility and Qualifications under the Trust
                  Indenture Act of 1939 of The Bank of New York as Trustee(1)

         27.1     Financial Data Schedule
</TABLE>

----------

(1)  Incorporated herein by reference to the same numbered exhibit to dj Ortho's
     registration statement on Form S-4 (Registration No. 333-86835), originally
     filed with the SEC on November 4, 1999.





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