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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, 2001
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 001-16757
DJ ORTHOPEDICS, INC.
(Exact name of Registrant as specified in its charter)

|                                                                        |  |                                                               |  |                                                   
|----------------------------------------------------------------------- |  | ------------------------------------------------------------- |  | --------------------------------------------------
|Delaware
(State or other jurisdiction of
Incorporation or organization) |  | 3842
(Primary Standard Industrial
Classification Code Number) |  | 33-0978270
(I.R.S. Employer
Identification Number)

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:Title of Each Class
Common Stock, $0.01 Par ValueName  of Each Exchange on
Which Registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None

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

|                    |  |                   
|------------------- |  | ------------------
|DJ ORTHOPEDICS, INC |  | 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.    [   ]

The aggregate market value of the voting stock
held by non-affiliates of the Registrant, based on the closing price as reported on the New York Stock
Exchange at February 28, 2002, was approximately $180.3 million. The number of
shares of  the Registrants Common Stock outstanding at February 28, 2002 was
17,855,566 shares.

Documents Incorporated by Reference

Portions of the Proxy Statement for  the Registrants 2002 Annual Meeting of
Stockholders to be filed with the Commission on or before April 30, 2002 are
incorporated by reference in Part III of this Annual Report on Form 10-K. With
the exception of those portions that are specifically incorporated by reference
in this Annual Report on Form 10-K, such Proxy Statement shall not be deemed
filed as part of this Report or incorporated by reference herein.



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TABLE OF CONTENTS



|                  |                                                                                               |  |  |  |  |  |  | 
|----------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I           
|                  | Item 1. Business                                                                             
|                  | Item 2. Properties                                                                           
|                  | Item 3. Legal Proceedings                                                                    
|                  | Item 4. Submission of Matters to a Vote of Security Holders                                  
|PART II          
|                  | Item 5. Market for the Registrants Common Equity and Related Stockholder Matters            
|                  | Item 6. Selected Financial Data                                                              
|                  | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                  | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                  | Item 8. Financial Statements and Supplementary Data                                          
|                  | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 
|PART III         
|                  | Item 10. Directors and Executive Officers of the Registrant                                  
|                  | Item 11. Executive Compensation                                                              
|                  | Item 12. Security Ownership of Certain Beneficial Owners and Management                      
|                  | Item 13. Certain Relationships and Related Transactions                                      
|PART IV          
|                  | Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|SIGNATURES       
|INDEX TO EXHIBITS
|EXHIBIT 12.1     
|EXHIBIT 23.1     
|EXHIBIT 99.1     



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DJ ORTHOPEDICS, INC.

FORM 10-K
TABLE OF CONTENTS

|           |  |                                                                                               |  |          | 
|---------- |  | --------------------------------------------------------------------------------------------- |  | -------- | 
|           |  |                                                                                               |  | Page No.
|           |  |                                                                                               |  |         
|PART I    
|Item 1.    |  | Business                                                                                      |  | 3        | 
|Item 2.    |  | Properties                                                                                    |  | 33       | 
|Item 3.    |  | Legal Proceedings                                                                             |  | 34       | 
|Item 4.    |  | Submission of Matters to a
        Vote of Security Holders                                   |  | 35       | 
|          
|PART II   
|Item 5.    |  | Market for the Registrants
        Common Equity and Related Stockholder Matters             |  | 36       | 
|Item 6.    |  | Selected Financial Data                                                                       |  | 36       | 
|Item 7.    |  | Managements Discussion
        and Analysis of Financial Condition and Results of Operations |  | 39       | 
|Item 7A.   |  | Quantitative and Qualitative
        Disclosures About Market Risk                            |  | 52       | 
|Item 8.    |  | Financial Statements and Supplementary
        Data                                           |  | 53       | 
|Item 9.    |  | Changes in and Disagreements
        with Accountants on Accounting and Financial Disclosure  |  | 79       | 
|          
|PART III  
|Item 10.   |  | Directors and Executive Officers
        of the Registrant                                    |  | 80       | 
|Item 11.   |  | Executive Compensation                                                                        |  | 80       | 
|Item 12.   |  | Security Ownership of Certain
        Beneficial Owners and Management                        |  | 80       | 
|Item 13.   |  | Certain Relationships and
        Related Transactions                                        |  | 80       | 
|          
|PART IV   
|Item 14.   |  | Exhibits, Financial Statement
        Schedules and Reports On Form 8-K                       |  | 80       | 
|SIGNATURES |  | 86                                                                                            | 

EXPLANATORY NOTE

This Form 10-K is filed pursuant to the Securities Exchange Act
of 1934, as amended, for dj Orthopedics, Inc. (dj Orthopedics), a
Delaware corporation. dj Orthopedics, LLC (dj Ortho), a Delaware limited
liability company, is a wholly-owned subsidiary of dj Orthopedics, and DJ
Orthopedics Capital Corporation (DJ Capital), a Delaware
corporation, is a
wholly-owned subsidiary of dj Ortho. DJ Capital was formed solely to act as a
co-issuer (and as a joint and several obligor) with dj Ortho with respect to
our 12 5/8% Senior Subordinated Notes (the Notes) due 2009 issued in 1999 in an original
aggregate principal amount at maturity of $100,000,000. 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, accordingly, there is no separate information regarding DJ
Capital to report herein. dj Orthopedics is a guarantor of the Notes and of dj
Orthos bank borrowings and has no material assets or operations other than its
ownership of 100% of dj Orthos equity interests. dj Ortho represents
substantially all of the revenues and net income of dj Orthopedics. As a
result, the consolidated financial position and results of operations of dj
Orthopedics are substantially the same as dj Orthos.

BACKGROUND AND REORGANIZATION

dj Orthopedics, Inc. was incorporated in Delaware in August 2001. In
November 2001, concurrent with its initial public offering, a reorganization
occurred whereby a wholly-owned merger subsidiary of dj Orthopedics, Inc. was
merged with and into DonJoy, L.L.C. (DonJoy). In the reorganization, the
holders of the common and preferred membership units of DonJoy received shares
of common stock of dj Orthopedics, Inc. on the basis of 10.812 shares of common
stock for each outstanding unit and, in the case of a preferred unit, an amount
in cash equal to approximately $1,082, representing the liquidation preference
of the preferred unit, plus accrued and unpaid distributions thereon to but
excluding the date that the reorganization was effective. Immediately
following the foregoing merger, DonJoy merged with and into dj Orthopedics,
Inc. As a result of the forgoing transactions, dj Orthopedics, LLC became a
wholly-owned subsidiary of dj Orthopedics, Inc.

We are the successor to a corporation established in December 1982 as
DonJoy, Inc. which was acquired in 1987 by Smith & Nephew, Inc. (Smith &
Nephew), a wholly-owned subsidiary of Smith & Nephew plc., a United Kingdom
company. Effective December 29, 1998, Smith & Nephew contributed our net
assets and shares of our Mexican subsidiary to DonJoy, L.L.C. and became its
sole member. On June 30, 1999, DonJoy, L.L.C. consummated a recapitalization
pursuant to which J.P. Morgan DJ Partners, LLC, formerly Chase DJ Partners, LLC
(JPMDJ Partners), obtained a controlling interest in DonJoy, L.L.C.

In this annual report, the terms we, our, and us refer to dj Orthopedics,
Inc. and its subsidiaries, or, where the context requires, either DonJoy,
L.L.C. and its subsidiaries or the operations of the predecessor of DonJoy,
L.L.C., which was a division of Smith & Nephew. dj Ortho refers to dj
Orthopedics, LLC, our wholly-owned operating company subsidiary. Our principal
executive offices are located at 2985 Scott Street, Vista, California 92083,
and our telephone number is (800) 336-5690. Our website is located at
www.djortho.com.

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PART I




Item 1.Business

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

All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements
included in this annual report.

Industry Data

Information contained in this annual report concerning the orthopedic
products industry, including the orthopedic sports medicine market, our general
expectations concerning that industry and market, the historic growth rate of
the orthopedic sports medicine market, and our market position and market share
within the orthopedic sports medicine market and with respect to certain
product lines in that market, both domestically and internationally, are based
on estimates that we prepared using data from various sources (primarily Frost
& Sullivan, an international market consulting firm, and Knowledge Enterprises,
Inc., a market research consulting firm focusing on the orthopedic industry, as
well as data from our internal research) and on assumptions made by us, based
on that data and other similar reliable sources and our knowledge of the
orthopedic products industry and its segments, which we believe to be
reasonable. We believe data regarding the orthopedic products industry and the
orthopedic sports medicine market and our market position and market share
within that market and with respect to certain of the product lines in that
market is inherently imprecise, but is generally indicative of their size and
our market position and market share within that industry or its segments. Our
estimates, in particular as they relate to our general expectations concerning
the orthopedic products industry, involve risks and uncertainties and are
subject to change based on various factors, including those discussed under the
caption Risk Factors in this annual report.

The information in this annual report relating to our estimated U.S.
market share and market position for certain of our core rehabilitation
products comes from an October 2001 Frost & Sullivan study commissioned by us
and Frost & Sullivan has consented to our use of that information in this
annual report on Form 10-K. This study is not otherwise available to the
investing public. The data that we have relied upon regarding 2000 global
sales in the orthopedic products market, the last year for which data is
available, was contained in a general industry report prepared by Knowledge
Enterprises, Inc. We did not commission Knowledge Enterprises, Inc. to prepare the
report, and it was not required to, and did not, consent to our use of this
data in this annual report.

Overview

We are a global orthopedic sports medicine company specializing in the
design, manufacture and marketing of surgical and non-surgical products and
services that repair, regenerate and rehabilitate soft tissue and bone, help
protect against injury, and treat osteoarthritis of the knee. Osteoarthritis is
a form of damage to or degeneration of the articular surface of a joint. Our
broad range of over 600 existing products, many of which are based on
proprietary technologies, includes rigid knee braces, soft goods, specialty and
other complementary orthopedic products and our recently introduced line of
surgical products. These products provide solutions for patients and orthopedic
sports medicine professionals throughout the patients continuum of care.

We sell our products in over 44 countries, primarily under the DonJoy®
and ProCare® brand names, each of which has achieved a high level of brand
name recognition within the orthopedic sports medicine market. Our surgical
products are marketed primarily under the Alaron Surgical brand name.
Numerous professional and amateur athletes, including participants in the NFL,
NBA and NCAA, and members of the U.S. Ski and Snowboard Teams of which we are a
sponsor, choose to use our products. We believe that our strong relationships
with orthopedic sports medicine professionals, leading market positions, strong
brand names, reputation for quality, broad product lines, established
distribution networks and commitment to
research and development provide

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significant opportunities to grow revenues and
earnings. For 2001 and 2000, our net revenues were $169.2 million and $143.6
million, respectively, and net income before the effect in 2001 of our income
tax provision of $0.1 million, deferred tax benefit of $54.2 million and net
extraordinary items of $2.8 million, was $5.2 million for both years.

Our product lines provide a range of treatment during the orthopedic
recovery process, from rigid knee braces and other specialty products which are
generally prescribed for use after surgery and during and after rehabilitation
to soft goods which are generally used after injury, whether or not surgery is
contemplated. These products are also used to reduce the risk of new and repeat
injuries. In addition, we now offer products for the repair stage of the
patients continuum of care with our Alaron Surgical products. In the
future, we plan to pursue the development of an additional line of products for
the regeneration of bone and soft tissue, including a bone growth stimulator
and a cartilage regeneration product.

Rehabilitation



| |  |  | Rigid Knee Braces.Our rigid knee braces include ligament
braces, which provide support for knee ligament instabilities,
post-operative braces, which provide both knee immobilization and a
protected range of motion, and osteoarthritic braces, which provide
relief of knee pain due to osteoarthritis. These technologically
advanced products are generally prescribed by orthopedic sports
medicine surgeons. Our rigid knee braces are either customized
braces, utilizing basic frames which are then custom-manufactured to
fit a patients particular measurements, or are standard braces which
are available off-the-shelf in various sizes and can be easily
adjusted to fit the patient in the orthopedic professionals office.
We also offer a complete rehabilitation system that facilitates the
progression of patient rehabilitation in a home or clinical setting
by motivating and improving patient compliance through continuous
feedback and recorded home exercise sessions. Substantially all of
our rigid knee braces are marketed under the DonJoy® brand name.
These products represented approximately 39% and 42% of our net
revenues, excluding freight revenue, for the years ended December 31,
2001 and 2000, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Soft Goods.Our soft goods products, most of which are
constructed from fabric or neoprene materials, provide support and/or
heat retention and compression of the knee, ankle, back and upper
extremities, including the shoulder, elbow, neck and wrist. For the
years ended December 31, 2001 and 2000, approximately 61% and 59%,
respectively, of our revenues from soft goods products, excluding
freight revenue, were derived from products marketed under the
ProCare® brand name, with the remainder marketed primarily under
the DonJoy® brand name. Soft goods represented approximately 38%
and 37% of our net revenues, excluding freight revenue, for the years
ended December 31, 2001 and 2000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | Specialty and Other Complementary Orthopedic Products.Our
portfolio of specialty and other complementary orthopedic products
includes two post-surgery systems: a continuous cold therapy system
to assist in the reduction of pain and swelling and a pain management
delivery system that employs ambulatory infusion pumps for the
delivery of local anesthetic to the surgical site. Also included
within this product category are lower extremity walkers, which are
an alternative to lower extremity casting, and upper extremity
shoulder and arm braces and slings. For each of the years ended
December 31, 2001 and 2000, approximately 84% of our revenues from
specialty and other complementary orthopedic products, excluding
freight revenue, were derived from products marketed primarily under
the DonJoy® brand name, with the remainder marketed primarily under
the ProCare® brand name. Specialty and other complementary products
represented approximately 23% and 21% of our net revenues, excluding
freight revenue, for the years ended December 31, 2001 and 2000,
respectively.                                                                                                                                                   

Repair



| |  |  | Surgical Products.Our recently introduced Alaron Surgical
products are used to repair soft tissue and cartilage. Products used
during ACL reconstruction include surgical screws made from a
next-generation composite bioabsorbable material, titanium surgical
screws, hamstring graft anchors designed to reduce surgical procedure
time and a suture fixation device that allows the surgeon to adjust
the tension of the graft. We have also introduced a cartilage repair
system used for transplanting the patients own healthy knee
cartilage into damaged areas of the knee joint. We recently received
FDA clearance to market an adjustable high tibial osteotomy plate
used to surgically realign, and reduce pain in, the osteoarthritic
knee.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Regeneration



| |  |  | Bone and Cartilage Growth Stimulation.Our bone growth
stimulator is undergoing the regulatory approval process. The bone
growth stimulator utilizes electromagnetic field technology to aid in
healing fractures and, unlike competitors products, is intended to
be worn by patients continuously as part of a bracing or cast system.
Based on the status of the regulatory review, we do not expect
a final regulatory decision regarding approval of the product until at least the fourth quarter
of 2002. Our cartilage regeneration product is in an early stage of
development.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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We sell our DonJoy® products primarily to orthopedic sports medicine
surgeons, orthotic and prosthetic centers, hospitals, surgery centers, physical
therapists and trainers to meet the specific needs of their patients. We sell
our ProCare® products under private label brand names primarily to third
party distributors who generally resell our products to large hospital chains,
hospital buying groups, primary care networks and orthopedic physicians. Our
recently introduced Alaron Surgical brand of products is being marketed to
orthopedic sports medicine surgeons, hospitals and surgery centers.

The Orthopedic Sports Medicine Market

The orthopedic products industry generated estimated worldwide sales of
$13.1 billion in 2000. We estimate that the segments of the orthopedic sports
medicine market that we are targeting accounted for over $3 billion of these
sales. The market is served by over 5,000 orthopedic surgeons in the United
States who cite sports medicine as an area of concentration and practice focus.
In addition, we believe that outside the United States another approximately
5,000 orthopedic surgeons are actively engaged in orthopedic sports medicine.
The orthopedic sports medicine market encompasses a broad range of product
segments addressing the repair, regeneration and rehabilitation of soft tissue
and bone and the treatment of osteoarthritis, as described below:

Repair.The repair segment is comprised of products and services used
during a surgical procedure to repair bone or soft tissue or to reconstruct
joints in the treatment of osteoarthritis. Major product categories in the
repair segment include:



| |  |  | suture anchors, tissue anchors, interference screws, and other soft tissue repair devices;
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | arthroscopy equipment and surgical instruments;                                           
|
| |  |  | bone pins, screws, bone graft materials and other fracture fixation devices; and          
|
| |  |  | total joint implants.                                                                     

Regeneration.Products in this segment are used to stimulate the body to
regenerate bone or cartilage. For example, bone growth stimulators apply an
electromagnetic field to facilitate the healing of fractures. Similar
technology may assist the body in forming new cartilage for the treatment of
osteoarthritis.

Rehabilitation.These products are used to assist the patient in the
recovery from an injury or a surgical procedure and/or to protect against
re-injury or damage to the surgical repair site. Rehabilitation products
include:



| |  |  | knee, shoulder, ankle and wrist braces;
| | - |  | ---------------------------------------
|
| |  |  | neoprene supports; and                 
|
| |  |  | physical therapy equipment.            

We estimate that the portions of the repair, regeneration and
rehabilitation segments that we are targeting represent approximately 60%, 10%
and 30% of the orthopedic sports medicine market, based on worldwide sales in
2000. We believe revenues in the U.S. orthopedic sports medicine market grew
at a rate of 7% to 9% in 1999, 2000 and 2001 and that they will continue to
grow at a similar rate for the next several years.

The growth of the orthopedic sports medicine market is being driven by:



| |  |  | increased participation in exercise, sports and other physical activity by all age groups;                                                                        
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the aging baby boomer population, including adults suffering from osteoarthritis;                                                                               
|
| |  |  | the heightened expectations for less intrusive therapies and
more rapid and complete recoveries to highly active lifestyles and
high quality of life expectations;
|
| |  |  | a growing awareness of the importance of prevention and
rehabilitation of orthopedic injuries; and                                                                
|
| |  |  | growth in the number of orthopedic surgery fellowship programs
specializing in sports medicine from 10% in 1991 to 21% in 2001.                                   

According to the American Association of Orthopedic Surgeons,
approximately 11% of all injuries in the United States, or 6.6 million
annually, are sports injuries and nearly three out of four orthopedic patients
are under the age of 65.

Competitive Strengths

We believe that our competitive strengths will enable us to grow our
revenues and profitability. Our competitive strengths are:

Broad Product Offering in the Orthopedic Sports Medicine Market with
Leading U.S. Market Positions for a Number of Our Core Rehabilitation Products.
We offer a broad range of over 600 products to orthopedic sports medicine
surgeons and

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their allied health care professionals. Our existing and planned future
products provide solutions to patients and orthopedic professionals in
addressing the various stages of the orthopedic repair, regeneration and
rehabilitation process. Over 95% of our 2001 revenues were derived from our
concentrated focus on the orthopedic sports medicine market.

Our dedication to quality has contributed to achievement of a leading
market position within the United States in a number of our core rehabilitation
products. The following table sets forth our leading U.S. market positions for
certain of our core rehabilitation products based on 2000 U.S. non-retail
sales.

|                        |  |             |    |          |  |  |   | 
|----------------------- |  | ----------- | -- | -------- |  |  | - | 
|                        |  | Estimated   |    |          |  | 
|                        |  | U.S. Market |    | Market  
|Product                 |  | Share       |    | Position
|                        |  |             |    |         
|Ligament braces         |  |             | 38 | %        |  |  | 1 | 
|Post-operative braces   |  |             | 24 | %        |  |  | 1 | 
|Fracture boots          |  |             | 27 | %        |  |  | 2 | 
|Pain management systems |  |             | 26 | %        |  |  | 2 | 
|Osteoarthritic braces   |  |             | 21 | %        |  |  | 2 | 
|Soft goods              |  |             | 18 | %        |  |  | 2 | 
|Rigid ankle supports    |  |             | 9  | %        |  |  | 2 | 

Long Standing, Loyal Relationships with Orthopedic Sports Medicine
Surgeons and Their Allied Health Care Professionals.Our company is focused
exclusively on serving orthopedic sports medicine surgeons and their allied
health care professionals. We have established long-standing and loyal
relationships with our orthopedic sports medicine customers by expanding and
enhancing our product lines, as well as through our focused sales, customer
service and research and development efforts. These relationships have
contributed to the revenue growth we have achieved in each of the last five
years and our current leading U.S. market position in a number of our core
rehabilitation products. We host numerous orthopedic sports medicine surgeons
at our biomechanical laboratory and our surgical techniques laboratory, which
allows us to further enhance our relationships with our primary customers. Our
OfficeCare® program further allows us to continue to build our relationships
with orthopedic sports medicine surgeons.

The strength of our relationships with orthopedic sports medicine surgeons
is also evident in the use of our products by 39 accredited sports medicine
fellowship programs in North America. We maintain close relationships with 34
of these programs and supply all or a significant portion of the bracing and
soft goods products to these programs, including four through the OfficeCare®
program. These centers are important in setting standards of care in the field
of sports medicine, because the fellowships they sponsor enable new orthopedic
surgeons to learn the latest techniques, treatments, products and tools. On
average, these centers have been our customers for at least five years.

Established Global Marketing and Distribution Networks.In the United
States, our DonJoy® and Alaron Surgical product lines and services are
marketed by approximately 38 commissioned sales organizations (referred to in
this annual report as agents) which employ approximately 225 sales
representatives who are primarily dedicated to the sale of our products to the
orthopedic sports medicine market. We believe these sales representatives
undergo the most focused sales training program specializing in the orthopedic
sports medicine market. Our sales representatives use their technical expertise
to market our products to orthopedic sport medicine surgeons, orthotic and
prosthetic centers, hospitals, surgery centers, physical therapists and
trainers. We sell our ProCare® products to some of the largest national third
party distributors, including Owens & Minor Inc., McKesson/HBOC, Allegiance
Healthcare, a subsidiary of Cardinal Health Inc., and PSS World Medical Inc.,
as well as to regional medical surgical dealers and medical products buying
groups. We have also entered into national contracts for DonJoy® and
ProCare® products to large healthcare providers and buying groups. We
believe that our strong distribution networks in the United States, along with
our OfficeCare® program, provide us with an established base from which to
introduce new or enhanced products and expand sales of existing product lines.
Our products are currently sold through wholly or partially owned foreign
subsidiaries in Germany, the United Kingdom and Australia which employ 21 sales
representatives and a global network of 50 independent distributors which
employ more than 100 sales representatives who focus on building strong
relationships with our target customers. These independent distributors include
eight remaining Smith & Nephew sales organizations which distribute our
products in some smaller foreign markets and in Canada in which we expect to
commence direct distribution during the second quarter of 2002.
Internationally, we expect to distribute our products through a network of
partially or wholly-owned distributors in key countries.

Strong Brand Name Recognition and Reputation for Quality.We believe
DonJoy® is the most recognized brand name of knee braces in the orthopedic
sports medicine market. In addition, our ProCare® brand name is well
recognized by third party distributors of soft goods in the orthopedic sports
medicine market. Our other trademarks include product names that are well known
among sports medicine professionals which we believe provide us with a
significant competitive advantage. Our products
are known for their design, quality construction and durability. Our braces are
used by a number of high profile professional and

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amateur athletes and NCAA
athletic programs. We are also the official and exclusive supplier of braces
and supports to the U.S. Ski and Snowboard Teams and we believe we are the
leading supplier of knee braces to players in the NFL.

Successful Record of New Product Innovation and Development.We have
developed a reputation as an innovator of orthopedic sports medicine products.
During 2001, 30% of our net revenues, excluding freight revenues, in the
rigid knee segment,
and a small percentage of net revenues in the soft goods product and specialty and
other complementary product segments, were
comprised of products introduced since 1999. Our recently introduced line of
Alaron Surgical products reflects our continuing commitment to the
orthopedic sports medicine surgeon. We own or have licensing rights to more
than 60 U.S. and foreign patents, including a U.S. patent covering the Four
Points of Leverage system, which is a unique element in the design of our
ligament braces. In addition, we maintain close relationships with a number of
widely recognized orthopedic sports medicine surgeons and sports medicine
specialists who assist in product research and development. 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 the products and providing us with feedback on the industrys
acceptance of the new products.

Scalable, Efficient Infrastructure to Support Our Growth.Through
implementation of an advanced enterprise resource planning system, continuing
implementation of lean manufacturing techniques designed to reduce lead times
and work-in-process inventory, and expansions of our facilities in Vista,
California and Tijuana, Mexico, we have developed a manufacturing and
operational infrastructure that is scalable to meet our expected growth. Our
investments in our infrastructure have allowed us to become a high-volume, low
cost producer for a number of our core rehabilitation products in which we have
achieved substantial market share. This infrastructure will also allow us to
continue to move portions of our manufacturing operations to our facilities in
Mexico to generate additional labor cost savings and utilize the resulting
additional capacity in our U.S. facility to manufacture our more
technologically advanced products.

Senior Management Team Experienced in the Core Elements of our Strategy.
Our three management investors, Messrs. Cross, Talbot and McBrayer, have an
average of 15 years of experience with our company and, together with the two
other members of our senior management team, have an average of over 22 years
of experience within the medical device industry. In particular, Mr. Cross, our
Chief Executive Officer, has 20 years of experience in the design, manufacture
and marketing of surgical and non-surgical orthopedic products. While at Smith
& Nephew, he developed and successfully commercialized products, including a
market-leading soft tissue fixation device currently sold by Smith & Nephew.

Business Strategy

Our strategic objectives are to strengthen our leadership position in the
orthopedic sports medicine market and to increase our revenues and
profitability. We intend to pursue the following strategic initiatives:



| |  |  | broaden our market penetration and reach;
| | - |  | -----------------------------------------
|
| |  |  | enhance and grow our core business; and  
|
| |  |  | expand our business platform.            

The key elements of our business strategy include:

Expanding Existing and Developing New Relationships with Orthopedic Sports
Medicine Surgeons and Their Allied Health Care Professionals.Our continuum of
care strategy provides a broad product offering to meet the complete product
needs of orthopedic sports medicine surgeons and their allied health care
professionals. We expect to increase our revenues and profitability by
leveraging our relationships with our existing orthopedic sports medicine
surgeon customers and by developing relationships with additional orthopedic
sports medicine surgeons. We believe that our new Alaron Surgical products
will allow us to expand our relationships with our existing orthopedic sports
medicine surgeon customers and will give us a new point of entry with
orthopedic sports medicine surgeons who are not currently our customers.

Applying Our Research and Development Expertise to Introduce New Products
and Product Enhancements.We intend to remain an innovator of orthopedic
sports medicine products through our commitment to research and development and
our close working relationships with orthopedic professionals by designing,
developing and introducing products in each of the repair, regeneration and
rehabilitation segments of the orthopedic sports medicine market. Using our
materials, process and design expertise in bracing and supports, we will
continue to enhance our current range of products to address changing customer
needs, emphasizing high quality product designs that will reduce labor and
material costs. In addition, we intend to add complementary products through
our own research and development efforts and arrangements with third parties.
For example, we have introduced two pain management systems, the IceMan®
device, a cold therapy system, which we developed, and, more recently, the
PainBuster® Pain Management System, a range of ambulatory infusion pumps,
which we distribute under a licensing arrangement and which represented our
initial entry into the surgical market. We have recently expanded our efforts
in this market by introducing new surgical products all of which we distribute
under licensing arrangements and have plans to introduce
additional surgical products, subject to receipt of necessary FDA approval,
over the next several years. In 2001, we released the DonJoy

7



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##### Table of Contents



Vista
Rehabilitation System, a computerized, post-surgical brace designed to optimize
a patients rehabilitation in the treatment of knee injuries, and the Alaron
Surgical line of products that we believe offer improved graft healing over
existing bioabsorbable technology.

Capitalizing on Our Extensive U.S. Distribution Networks.We intend to
capitalize on the breadth and market focus of our U.S. distribution networks
and their experience in selling our DonJoy® and ProCare® products to sell
our higher margin products and product enhancements, including our new Alaron
Surgical line of products. In addition, our OfficeCare® program provides
an extensive platform for the introduction of our products to the sports
medicine surgeons.

Growing International Revenues and Profits through the Selective
Replacement of Our Third-Party Distributors with Direct Representation in Key
Countries.We intend to increase our international revenues and profits by
selectively replacing our third-party independent distributors with wholly or
partially-owned distributorships or joint ventures in key countries where we
believe the opportunity for growth is significant due to high per capita health
care spending. We believe that more direct control of the distribution networks
in these countries will allow us to accelerate the launch of new products and
product enhancements, to benefit from the sale of our higher margin, value
added products and to capture the distributors margin. Our possible
acquisitions, if completed, the establishment of our Australian subsidiary and
our transition to direct distribution in Germany, the United Kingdom and
Austria effective January 1, 2002, represent our initial steps in pursuing this
strategy. We market products in over 44 countries, primarily in Europe, Canada
and Japan, under the DonJoy® and ProCare® brand names. International sales
accounted for approximately 11% and 13% of our net revenues, excluding freight
revenue, in 2001 and 2000, respectively. In addition to our three foreign
subsidiaries, we sell and distribute our products in foreign markets through 50
independent distributors. These independent distributors include eight
remaining Smith & Nephew sales organizations which distribute our products in
some smaller foreign markets and in Canada where we plan to commence direct
distribution through a wholly owned subsidiary in the second quarter of 2002.

Increasing Margins by Capitalizing on the Recent Investments in Our
Infrastructure and Operating Efficiencies.We intend to capitalize on the
recent investments in our infrastructure and build upon improved operating
efficiencies to enhance gross margins. By upgrading our computer systems to
achieve more efficient business processes, we expect to achieve more efficient
customer order fulfillment and reduced overhead and working capital
requirements. We have recently completed the process of converting our
manufacturing into product focused work teams, which we describe as lean
manufacturing, which will reduce direct labor and overhead costs. We are also
in the process of further vertical integration and are automating our
manufacturing operations through the use of more technologically advanced
fabrication and assembly equipment. In addition, we will continue to move
portions of our labor intensive operations to our facilities in Mexico to
generate labor cost savings, thereby allowing us to use the resulting
additional capacity in our U.S. facility to manufacture our more
technologically advanced products. We have converted our manufacturing
scheduling to produce finished goods based on customer demand and are in the
process of converting our procurement process to enable us to replenish our
supply of raw materials upon usage. Both processes will allow us to decrease
the level of inventory necessary to operate the business as well as reduce the
risk of excess and obsolete inventory. We will continue to rationalize the raw
materials used in the production of our existing products, thereby enabling us
to leverage our purchasing power. We also plan to achieve cost savings by
further reducing the number of stock keeping units (SKUs) without impacting
service or breadth of our product range.

Pursuing Strategic Growth Opportunities by Acquiring or Licensing
Complementary Products and Technologies.We intend to continue to acquire or
license complementary products and technologies applicable to the orthopedic
sports medicine market that will allow us to broaden our product lines and
leverage our existing infrastructure, distribution networks, brand name
recognition and expertise in research and development. We believe our
acquisitions of Alaron Surgical and certain assets and liabilities (the
Orthotech Acquisition) of DePuy Orthopaedic Technology, Inc. (DePuy
Orthotech), a subsidiary of Johnson & Johnson, demonstrate our ability to
identify, evaluate and rapidly integrate acquisitions. We will seek growth
opportunities through acquisitions, investments or strategic alliances that
will:



| |  |  | expand our core rehabilitation business;                                                                                                            
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | enable us to offer complementary products; and                                                                                                      
|
| |  |  | further diversify into the repair and expand research and
development efforts in the regeneration segments of the orthopedic
sports medicine market.

Products

We currently offer products in the repair and rehabilitation segments of
the orthopedic sports medicine market and intend to offer, subject to necessary
FDA approvals, products in the regeneration segment of the orthopedic sports
medicine market. Our broad offering of over 600 products provides a range of
solutions for patients and orthopedic professionals during various stages of
the orthopedic treatment and rehabilitation. Our reportable segments are rigid
knee braces and soft goods rehabilitation products. In addition, we offer a
growing number of specialty and other complementary orthopedic products. Our
product lines provide a range
of treatment during the orthopedic recovery process, from rigid knee
braces and other specialty products which are generally

8



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##### Table of Contents



prescribed for use
after surgery and during and after rehabilitation to soft goods which are
generally used after injury, whether or not surgery is contemplated. In
addition, our recently introduced Alaron Surgical line of products now
allows us to offer products for the repair stage of the patients continuum of
care. We also offer surgical products through our TiMax brand
which is a product line that consists of plates and screws for
maxilofacial reconstruction. TiMax products are sold exclusively in
Australia through our 60% owned Australian subsidiary.

We market our products primarily under the DonJoy®, ProCare® and,
since August 1, 2001, Alaron Surgical brand names. Based on net revenues,
excluding freight revenue, we marketed substantially all of our rigid knee
braces, 84% of our specialty and other complementary orthopedic products and
39% of our soft goods products under the DonJoy® brand name during the year
ended December 31, 2001. We believe DonJoy® is the most recognized brand name
of knee braces in the orthopedic sports medicine market. Based on net revenues,
excluding freight revenue, we marketed approximately 61% of our soft goods
products, 16% of our specialty and other complementary orthopedic products and
a nominal percentage of our rigid knee braces under the ProCare® brand name
during the year ended December 31, 2001. The ProCare® brand name is well
recognized by third party distributors of soft goods in the orthopedic sports
medicine market. Revenues from products marketed under our Alaron Surgical
brand name were minimal in 2001. In addition, we market competitor products
through our OfficeCare® program and the TiMax brand in Australia which is
sold exclusively through our 60% owned Australian subsidiary.

Rehabilitation

Rigid Knee Bracing

We design, manufacture and market a broad range of rigid knee bracing
products, including ligament braces, post-operative braces and osteoarthritis
braces. These technologically advanced products are generally prescribed to a
patient by an orthopedic sports medicine surgeon. Our rigid knee braces are
either customized braces, utilizing basic frames which are then
custom-manufactured to fit a patients particular measurements, or are standard
braces which are available off-the-shelf in various sizes and can be easily
adjusted to fit the patient in the orthopedic professionals office. Rigid knee
bracing products represented approximately 39% and 42% of our net revenues,
excluding freight revenue, for the years ended December 31, 2001 and 2000,
respectively.

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. Our ligament braces can also be used to
support the normal functioning of the knee. Our ligament bracing product line
includes premium customized braces generally designed for strenuous athletic
activity and off-the-shelf braces generally designed for use in less rigorous
activity. All of our ligament braces are designed using our patented Four
Points of Leverage system. This system exerts a force on the upper portion of
the tibia, which, in turn, reduces strain on the damaged, reconstructed or torn
ligament. Our U.S. patent covering the Four Points of Leverage system expires
in January 2005.

Post-Operative Braces.Post-operative braces limit a patients range of
motion after knee surgery and protect the repaired ligaments/joints from stress
and strain which would slow or prevent a healthy healing process. The products
within this line provide both immobilization and a protected range of motion,
depending on the rehabilitation protocol prescribed by the orthopedic sports
medicine surgeon. Our post-operative bracing product line includes a range of
premium to lower-priced off-the-shelf braces and accessory products.

Osteoarthritic Braces.Osteoarthritic braces are used to treat patients
suffering from osteoarthritis. Our line of customized and off-the-shelf
osteoarthritic braces is designed to shift the 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.

DonJoy Vista Rehabilitation System.The patented DonJoy Vista
Rehabilitation System facilitates patient rehabilitation in a home or clinical
setting by motivating and improving compliance of patients through continuous
feedback and recorded home exercise sessions. It is the first and only system
using a unique hand-held patient device to monitor home rehabilitation exercise
programs and assist clinicians and patients in assessing individual
rehabilitation. The DonJoy Vista Rehabilitation System is comprised of
three main components: customized clinician software, a hand-held patient
device and an instrumental telescoping post-operative brace. The customized
clinician software allows surgeons or physical therapists to create individual
exercise programs that are transferred to the patient device. The hand-held
device guides patients through a prescribed exercise with visual cues and
feedback. The instrumental telescoping device is equipped to measure the range
of motion and load while reporting data to the hand-held patient device during
exercises.

9



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##### Table of Contents





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



|                                                    |  |                                                                                         |  |                 |      |                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | --------------- | ---- | -------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                                             |  | Category                                                                                |  | Year Introduced |      | Function/Description
|                                                    |  |                                                                                         |  |                 |      |                     
|Defiance®                                           |  | Ligament Instability
Osteoarthritis                                                     |  |                 | 1992 |                      |  | Our flagship knee
brace, custom
fitted to patient
measurements.
Available in a
broad range of
colors and
patterns. Designed
for strenuous
athletic and work
activity.                                                                                                                                                                                                                                                                                                                                                 
|                                                   
|Legend                                             |  | Ligament Instability                                                                    |  |                 | 1995 |                      |  | Sturdy, patient
ready brace
available in seven
sizes with a rugged
rubberized coating.
Designed for both
athletic and work
activity.                                                                                                                                                                                                                                                                                                                                                                                  
|                                                   
|4TITUDE®                                            |  | Ligament Instability                                                                    |  |                 | 1999 |                      |  | Our premium patient
ready knee brace
available in seven
sizes and two
length options to
suit a wider
variety of patient
requirements.
The brace includes
low profile, light
weight, and high
durability features.                                                                                                                                                                                                                                                                                                     
|                                                   
|Enhanced Playmaker®                                 |  | Ligament Instability                                                                    |  |                 | 2000 |                      |  | Multi-purpose
non-rigid brace
widely used to
address mild to
moderate
instabilities.                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                   
|SE 4-point                                         |  | Ligament Instability                                                                    |  |                 | 2001 |                      |  | Lower cost, patient
ready brace
addressing targeted
market needs while
still delivering
DonJoy®
performance and
support.                                                                                                                                                                                                                                                                                                                                                                                              
|                                                   
|DonJoy CE                                          |  | Ligament Instability                                                                    |  |                 | 2001 |                      |  | Low cost custom
knee product
targeted for
specialty markets
and managed care.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|                                                   
|DonJoy eXtreme                                     |  | Ligament Instability                                                                    |  |                 | 2001 |                      |  | Our newest
functional brace in
the DonJoy® line,
designed by extreme
users for extreme
users. The DonJoy
eXtreme brace
features a medial
thigh cut-away,
swiveling strap
tabs, extra strong
1/8 inch thick
frame and sport
specific
accessories.                                                                                                                                                                                                                                                                     
|                                                   
|IROM Brace
(Improved Range Of
Motion)              |  | Post-operative
Motion Control and
Stability                                             |  |                 | 1992 |                      |  | Used for
post-operative
management of
various knee
procedures. Allows
for immobilization
and/or protected
range of motion.                                                                                                                                                                                                                                                                                                                                                                                            
|                                                   
|DonJoy ELS
(Extension Lock Splint)                 |  | Post-operative knee
support with
selective
immobilization                               |  |                 | 1996 |                      |  | Designed to
accommodate
aggressive
rehabilitation, the
ELS features a
simple slide lock
mechanism that can
be easily
manipulated by the
patient.                                                                                                                                                                                                                                                                                                                                                                      
|                                                   
|TROM Brace
(Total Range Of
Motion)                 |  | Post-operative
Motion Control and
Stability                                             |  |                 | 1998 |                      |  | Allows for both
immobilization and
for protected range
of motion after
surgery. Features a
patented hinge
adjustment system
for ease of use and
patient
convenience.                                                                                                                                                                                                                                                                                                                                                  
|                                                   
|IROM, ELS, and
TROM
Braces with Telescoping
Bars |  | Post-operative
Motion Control and
Stability                                             |  |                 | 2001 |                      |  | Adjustable length
post-op braces in
all hinge designs
introduced to
reduce customer
inventory
requirements and
offer improved fit
and performance
features.                                                                                                                                                                                                                                                                                                                                                           
|                                                   
|OPAL                                               |  | Osteoarthritis                                                                          |  |                 | 1998 |                      |  | Comfortable,
lightweight, low
profile slip-on
brace using DonJoy
Drytex® material,
yet delivering
substantial
support. Designed
for patients with
mild to moderate
osteoarthritis, or
those who are not
sure they need a
brace.                                                                                                                                                                                                                                                                                       
|                                                   
|OAdjuster®                                          |  | Osteoarthritis                                                                          |  |                 | 2000 |                      |  | The unique
OAdjuster® brace
is designed to be
patient ready, easy
to fit and
comfortable to
wear. The
OAdjuster® brace
features a bi-axial
hinge that provides
ability to shift
pressures and load
in the knee.                                                                                                                                                                                                                                                                                                       
|                                                   
|Montana®                                            |  | Osteoarthritis                                                                          |  |                 | 2000 |                      |  | Custom cast molded
brace acquired from
Orthotech provides
pain relief for
osteoarthritis
patients with large
cuffs for
hard-to-fit
patients, a
multi-vector hinge
and diagonal
loading straps for
patient adjustment
to address pain.                                                                                                                                                                                                                                                                                 
|                                                   
|Adjustable OA Defiance®                             |  | Osteoarthritis                                                                          |  |                 | 2002 |                      |  | Custom double
upright OA brace
positioned for
active aging baby
boomer. A custom
correction is built
into the frame with
an adjustable
telescoping condyle
pad that allows the
patient to
fine-tune the
load to the demand
of the activity.
The brace features
multiple color
schemes and varying
lengths.                                                                                                                                                                                                        
|                                                   
|DonJoy
Vista Rehabilitation System                 |  | Rehabilitation
System for patient
education, brace,
coaching, and real
time biofeedback |  |                 | 2001 |                      |  | Features a TROM
post-op brace, a
hand-held patient
data device similar
in look and feel to
a personal digital
device, and custom
clinician computer
software used to
design
rehabilitation
protocols. Using
the system for
ligament
reconstruction
procedures, total
joint replacements,
and other knee
procedures can help
the patient,
therapist and
physician better
monitor and measure
rehabilitation
progress. This
system allows for
daily
rehabilitation
sessions for
patients with
limited medical
insurance.

10



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##### Table of Contents



Soft Goods

Our soft goods products, most of which are fabric or neoprene-based,
provide support and/or heat retention and compression for afflictions of the
knee, ankle, back and upper extremities, including the shoulder, elbow, neck
and wrist. We currently offer products ranging from simple neoprene knee
sleeves to complex products that incorporate advanced materials and features
such as air-inflated cushions and metal alloy hinge components. Our 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 38% and 37% of our net revenues,
excluding freight revenue, for the years ended December 31, 2001 and 2000,
respectively.

|                          |  |                                                         |  |            |      |                      |  |                                                                                                                                                                                                                                                                                               
|------------------------- |  | ------------------------------------------------------- |  | ---------- | ---- | -------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                          |  |                                                         |  | Year       |      |                     
|Product                   |  | Category                                                |  | Introduced |      | Function/Description
|                          |  |                                                         |  |            |      |                     
|Walker                    |  | Post-trauma and
post-casting
applications for
lower leg |  |            | 1993 |                      |  | Low profile
orthotic device
designed to provide
comfortable
stability for acute
ankle sprains, soft
tissue and stress
fractures to the
lower leg and
ankle, and stable
fractures of the
ankle. Low profile
design allows for
proper, natural
stride.                                          
|                         
|ProSTEP                  |  | Post-trauma and
post-casting
applications for
lower leg |  |            | 1996 |                      |  | Low cost orthotic
device is a
one-piece design
with open heel to
meet specific
market needs.
Provides stability
for acute ankle
sprains, soft
tissue and stress
fractures to the
lower leg and
ankle, and stable
fractures of the
ankle.                                                      
|                         
|Playmaker®                |  | Ligament instabilities                                  |  |            | 1992 |                      |  | Low profile
neoprene brace with
extended hinge bars
is an
intermediate-level
product that can be
used for mild to
moderate ACL and/or
PCL, MCL and LCL
instabilities.                                                                                                                         
|                         
|Air DonJoy®               |  | Medial/lateral
instabilities                            |  |            | 1995 |                      |  | Low cost knee
sleeve with air
inflatable cushions
designed to treat
and ease the pain
of patellofemoral
malalignment,
including lateral
subluxation and
dislocations.
Adjustable straps
allow for
correction of
patellar tilt,
glide and rotation.                                            
|                         
|RocketSoc®                |  | Chronic ankle
instabilities                             |  |            | 1992 |                      |  | Lightweight, low
profile device
designed to control
abnormal plantar
flexion and
inversion without
restricting range
of motion.
Peroneal forefoot
and calcaneal heel
lock straps provide
unsurpassed support
to the anterior
talofibular,
calcaneofibular and
posterior
talofibular
ligaments.
|                         
|Stabilizing Ankle Support |  | Chronic ankle
instabilities                             |  |            | 1997 |                      |  | Low profile,
lace-up design with
figure eight
strapping locks in
heel and provides
compressive support
to help prevent
injury during
athletic or daily
activities.                                                                                                                            
|                         
|COMFORTFORM Wrist        |  | Ligament and
cumulative trauma
applications             |  |            | 1997 |                      |  | Provides
comfortable support
for the wrist to
help reduce pain
and inflammation
from conditions
such as sprains,
strains, arthritis
and cumulative
trauma injuries
such as carpal
tunnel.                                                                                                     
|                         
|Air-Gel Ankle            |  | Post-trauma and
chronic ankle
instabilities             |  |            | 1999 |                      |  | Functional ankle
stirrup design
provides rigid
ankle support with
cold therapy.
Removable
pre-inflated air
and gel liner
provides support
and cold therapy as
needed.                                                                                                                         
|                         
|Surround® w/Air Ankle     |  | Post-trauma and
chronic ankle
instabilities             |  |            | 2001 |                      |  | Rigid ankle stirrup
design with
pre-inflated air
bladder lined with
compressive foam to
provide support and
compression to
swollen tissue.
While walking, air
bladder compresses
the joint to reduce
swelling.                                                                                

Specialty and Other Complementary Orthopedic Products

We have a portfolio of specialty and other complementary orthopedic
products designed to facilitate orthopedic rehabilitation, including cold
therapy systems, pain management systems, lower extremity walkers, upper
extremity braces, and other related products and accessories. These products
represented approximately 23% and 21% of our net revenues, excluding freight
revenue, for the years ended December 31, 2001 and 2000, respectively.

Cold Therapy Systems.We manufacture, market and sell the IceMan®
device, a cold therapy product, which was introduced in 1996, as well as other
cold therapy products such as ice packs and wraps. The IceMan® product is a
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 injured area, such as the ankle, knee or shoulder. The IceMan®
product uses a patented circulation system to provide constant fluid flow
rates, thereby minimizing temperature fluctuations which can reduce device
effectiveness and create the potential for tissue or nerve damage.

Pain Management Systems.We are a North American orthopedic distributor
of the PainBuster® Pain Management Systems, which are used after surgical
procedures. These pain management and relief systems provide a continuous
infusion of local anesthetic dispensed by the physician directly into the
surgical site following surgical procedures. The portable PainBuster® Pain
Management Systems consist of a range of introducer needles, catheters for easy
insertion and connection during surgery and pumps for continuous infusion for
up to 72 hours. The PainBuster® Pain Management Systems are intended to
provide direct pain relief, reduce hospital stays and allow earlier and greater
ambulation. Our distribution rights for these products terminate at the end of
2005, unless extended.

11



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##### Table of Contents



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 bathing or therapy, our walkers are used as an
alternative to traditional casts. Sales of walkers represented approximately
61% and 56% of the net revenues, excluding freight revenue, of specialty and
other complementary orthopedic products for the years ended December 31, 2001
and 2000, respectively.

Upper Extremity Braces.We offer 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.

Repair

Surgical Products

On August 1, 2001 we introduced a line of surgical products for ligament
and cartilage repair. These products are sold primarily through our DonJoy®
salesforce, supported by the procedure specific kit program system obtained in
the Alaron acquisition. Additionally, in March 2001, we introduced the
TiMax line of surgical products for maxillofacial reconstruction. These
products are sold exclusively in Australia through our 60% owned Australian
subsidiary.

Soft Tissue Repair.We have exclusive U.S. distribution rights until
April 2006, unless extended, for knee ligament fixation screws manufactured
from a next-generation bioabsorbable material offering improved graft healing
over existing bioabsorbable technology. On August 1, 2001 we introduced two
graft fixation screws under the BiLok name for ACL repair. We also
introduced a line of titanium graft fixation screws for surgeons who prefer a
metallic device, as well as a suture anchor that allows for post-fixation
tensioning of the graft. These fixation devices are supported with a high
quality set of surgical instruments for performing ACL repair that we purchase
from a German manufacturer. Other graft fixation devices are planned for
introduction in the near future.

Cartilage Repair.On August 1, 2001, we also introduced the ProCart
system for transplanting healthy knee cartilage to repair a cartilage defect in
the knee. The ProCart system consists of the surgical instruments needed to
perform the procedure and single use devices used in the transplantation
process. We market the ProCart system in the United States from a German
surgical products manufacturer.

|                                |  |                                            |  |                 |      |                      |  |                                                                                                                                                         
|------------------------------- |  | ------------------------------------------ |  | --------------- | ---- | -------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|Product                         |  | Category                                   |  | Year Introduced |      | Function/Description
|                                |  |                                            |  |                 |      |                     
|BiLok                          |  | Interference Screw- Bioabsorbable          |  |                 | 2001 |                      |  | Composite
absorbable
interference screw
for ACL/PCL repair.
Offered in femoral
(tapered/headed)
and tibial (non-
tapered/parallel-sided) configurations.
|                               
|EndoLok                        |  | Interference Screw-Titanium                |  |                 | 2001 |                      |  | Titanium
interference screw
for ACL/PCL repair.
Tubular, tapered,
with rounded head
and thread design.                                                  
|                               
|DuraFix                        |  | Graft Anchor for ACL Reconstruction        |  |                 | 2001 |                      |  | Anchoring system
for fixation of
hamstring grafts in
ACL repair.                                                                                        
|                               
|EndoLok TPS                    |  | Graft Anchor for ACL Reconstruction        |  |                 | 2001 |                      |  | Post screw for
graft fixation in
ACL repair.                                                                                                            
|                               
|Twister Suture Disk            |  | Suture/Graft Anchor for ACL
Reconstruction |  |                 | 2001 |                      |  | Suture disk for
fixation of ACL
repair. Tensioning
device allows for
adjustment of graft
tension.                                                       
|                               
|Cruciate Ligament Repair System |  | ACL Repair Support System                  |  |                 | 2001 |                      |  | Flexible instrument
and accessory
system for ACL
repair.                                                                                                
|                               
|ProCart System                 |  | Cartilage Transplantation System           |  |                 | 2001 |                      |  | Instruments and
single use devices
for cartilage
repair.                                                                                                

Research and Development

Our internal research and development program is aimed at developing and
enhancing products, processes and technologies in order to remain an innovator
in the orthopedic sports medicine market. Our research and development
expenditures were $2.2 million, $2.5 million and $2.1 million in 2001, 2000 and
1999, respectively.

Our research and development activities are conducted in our Vista
facility by a group of 10 product engineers and designers who have an average
of 11 years experience in developing and designing products using advanced
technologies, processes and materials. The research and development team uses
computational tools and computer aided design (CAD) systems

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during the development process which allow a design to be directly
produced on computer- based fabrication equipment, reducing both production
time and costs.

Our current research and development activities are focused on using new
materials, innovative designs and state of the art manufacturing processes to
develop new products and to enhance our existing products. We are also pursuing
strategic initiatives to identify areas for technological innovation and to
develop products that improve rehabilitation by utilizing advanced
technologies. We have engineers focused on the development of products for the
repair and regeneration segments. Our bone growth stimulator, OrthoPulse,
will be licensed from I.M.D., b.v. (IMD). This product is currently
undergoing the FDA regulatory approval process. Based on the status of FDA
review, we do not expect a final FDA decision on the OrthoPulse PMA until
at least the fourth quarter of 2002 and anticipate that any revenues from this
product will be minimal in 2002.

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

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

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

Sales, Marketing And Distribution

We distribute our products in the United States and international markets
primarily through networks of agents and distributors who market and sell to
orthopedic sports medicine surgeons, orthotic and prosthetic centers, third
party distributors, hospitals, surgery centers, physical therapists and
trainers within the orthopedic sports medicine community. Our products are used
by people who have sustained an orthopedic injury. In addition, our products
are used by people who have recently completed an orthopedic surgical procedure
and/or suffer from osteoarthritis and to help protect against injury. In
addition, a number of high profile professional and amateur athletes who
participate in sports such as football, basketball and skiing, choose to use
our products. We are the official and exclusive supplier of braces and supports
to the U.S. Ski and Snowboard Teams. In addition, we believe we are the leading
supplier of knee braces to players in the NFL. No individual agent or
distributor accounted for 10% or more of our net revenues for the year ended
December 31, 2001.

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

Third party reimbursement;
health care reform; managed care. While
national health care reform and the advent of managed care has impacted the
orthopedic sports medicine market, 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 United States have
been directed towards scrutiny of medical device reimbursement codes, whereby
devices are classified to determine the reimbursement levels including
reimbursement for products packaged with related orthopedic procedures.
Reimbursement codes covering certain of our products have been redefined,
thereby reducing the breadth of products for which reimbursement can be sought
under recognized codes. We expect that reduction in the total dollar value
eligible for reimbursement will occur in the future.

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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, we have experienced some downward pressure on the pricing of certain of
our products and other effects of health care reform similar to those we have
experienced in the United States. We expect health care reform and managed
care to continue to develop in primary international markets, including Europe
and Japan, which will result in further downward pressure on product pricing.

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. Price discounting with
buying groups is an integral aspect of the competitive bid process in the
marketplace. The impact on our operating results is expected to be offset by
increased volume commitments offered by such buying groups and the opportunity
to market products not included in the request for bids. We have entered into
national contracts with selected buying groups and expect to enter into
additional national contracts in the future. We believe 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. Revenues from
group buying organizations accounted for approximately 20% and 21% of our net
revenues for 2001 and 2000, respectively, with the largest organization
accounting for less than 5% of our net revenues. Accordingly, although we
cannot assure you, we believe that such price discounting will not have a
material adverse effect on our operating results in the future. See Risk
factors Healthcare reform, managed care and buying groups have put downward
pressure on the prices of our products and Business Sales, distribution and
marketing United States.

United States

We market products in the United States primarily under the DonJoy®,
ProCare® and, since August 1, 2001, Alaron Surgical brands through two
distinct sales and distribution channels as well as under national contracts
and through the OfficeCare® program. Sales in the United States accounted for
approximately 89% and 87% of our net revenues, excluding freight revenue, for
the years ended December 31, 2001 and 2000, respectively.

DonJoy® and Alaron Surgical.These products are marketed by
approximately 38 commissioned sales agents which employ approximately 225 sales
representatives who are primarily dedicated to the sale of our products to the
orthopedic sports medicine market. These sales representatives market to
orthopedic sports medicine surgeons, orthotic and prosthetic centers,
hospitals, surgery centers, physical therapists and athletic trainers. Because
the DonJoy® and Alaron Surgical product lines generally require customer
education on the application and use of the product, the sales representatives
are technical specialists who receive extensive training both from us and the
agent and use their technical expertise to help fit the patient with our
product and assist the orthopedic professional in choosing the appropriate
product to meet the patients needs. After a product order is received by a
sales representative, we ship and bill the product directly to the orthopedic
professional and we pay a sales commission to the agent.

We enjoy long-standing relationships with most of our 38 agents and 225
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 our products and is not permitted
to market products, or represent competitors who sell or distribute products,
that compete with our existing products. The agents receive a commission which
varies based on the type of product being sold. If an agent fails to achieve
specified sales quotas during any quarter, we may terminate the agent, as we
have done in the past.

We also provide supply chain management services to orthopedic sports
medicine surgeons, hospitals and surgery centers by providing
procedure-specific orthopedic surgery kits to the surgeon, hospital or surgery
with as little as 24 hours notice before a scheduled surgery. This service
allows the surgeon, hospital or surgery center to eliminate inventory
requirements and administrative costs.

ProCare®.These 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/HBOC, Allegiance Healthcare and PSS World Medical Inc.; regional
medical surgical dealers; and medical products buying groups which consist of a
number of dealers who make purchases through the buying group. These
distributors generally resell the 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, we have entered into
national contracts for DonJoy® and ProCare® products with large health care
providers and buying groups, such as AmeriNet Inc., US Government/Military
hospitals, National Purchasing Alliance, Magnet, Managed Healthcare
Association, HealthSouth Corp. and
we are also currently selling our products to Hanger Orthopedic Group pending
renegotiation of a contract with them. Under these

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contracts, we provide
discounted pricing to the buying group and are generally designated as one of
several preferred purchasing sources for the members of the buying group for
specified products, although the members are not obligated to purchase our
products. We are also the premier supplier for HealthTrust Purchasing Group,
Magnet, Managed Healthcare Association and Novation. We expect that in the
future we will enter into additional national contracts with other health care
providers and buying groups. See Risk Factors-Healthcare
reform, managed healthcare and buying groups have exerted downward pressure on
the prices of our products.

OfficeCare®.In 1996, in response to the needs of our customers, we
launched the OfficeCare® program, an inventory management and insurance
billing program for our U.S. orthopedic sports medicine surgeons. Under the
OfficeCare® program, we provide the orthopedic sports medicine surgeon with
an inventory of orthopedic products for immediate disbursement to the patient.
We then seek reimbursement directly from the patients insurance company or
other third party payor or from the patient where self-pay is applicable. The
majority of these billings are performed by an independent third-party
contractor.

Since its inception, the OfficeCare® program has been promoted
specifically to provide our orthopedic sports medicine surgeons with a broad
array of soft goods and certain other specialty products for immediate patient
use. The OfficeCare® program is also intended to facilitate the introduction
of our products to the orthopedic sports medicine surgeons who had not
previously been our customers. As of December 31, 2001, the OfficeCare®
program was located at over 600 physicians offices throughout the United
States.

The OfficeCare® program represented approximately 13% and 10% of our net
revenues, excluding freight revenue, for 2001 and 2000, respectively, with
sales of soft goods and specialty and other complementary orthopedic products
representing the majority of such sales. The OfficeCare® program involves
our lower margin soft goods products, but is designed to also strengthen our
relationship with the surgeon, and serves to provide a pull-through effect for
both existing and planned sales of our higher margin products. The
OfficeCare® program has historically experienced a strong growth rate, with
an increase of sales, of 52% in 2001 over 2000 and 99% in 2000 over 1999. The
increases in 2001 and 2000 are primarily due to our 1999 Orthotech acquisition
which had an inventory management and billing program that complemented our
OfficeCare® program.

International

We market products in over 44 countries, primarily in Europe, Canada and
Japan, under the DonJoy® and ProCare® brand names. Excluding freight
revenue, international sales accounted for approximately 11% and 13% of our net
revenues for the years ended December 31, 2001 and 2000, respectively. The
following table sets forth the percentage of our international net revenues,
excluding freight revenue, by country:

|                |  |              |    |              |  |  |    |  
|--------------- |  | ------------ | -- | ------------ |  |  | -- | -
|                |  | Years Ended 
|                |  |             
|                |  | December 31, |    | December 31,
|                |  | 2001         |    | 2000        
|                |  |              |    |             
|Germany/Austria |  |              | 36 | %            |  |  | 31 | %
|Canada          |  |              | 12 | %            |  |  | 11 | %
|Japan           |  |              | 10 | %            |  |  | 9  | %
|Other countries |  |              | 42 | %            |  |  | 49 | %

The Other countries category includes sales in Italy, Belgium, the
United Kingdom and Spain, with no one country accounting for 10% or more of our
international net revenues, excluding freight revenue, during such periods.

Our products are currently sold through wholly or majority owned foreign
subsidiaries in Germany, the United Kingdom and Australia which employ 21 sales
representatives and a global network of 50 independent distributors which
employ more than 100 sales representatives who focus on building strong
relationships with our target customers. These independent distributors
include eight remaining Smith & Nephew sales organizations which distribute our
products in some smaller foreign markets and in Canada in which we expect to
commence direct distribution during the second quarter of 2002. Since our June
1999 recapitalization, we have reorganized our international distribution
efforts by successfully replacing 22 Smith & Nephew sales organizations with
independent distributors who focus on building strong relationships with our
target customers and who are responsible for achieving specified sales targets
and implementing the marketing and distribution strategies which we
successfully utilize in the United States and in most major international
territories. International sales made through Smith & Nephew sales
organizations were 15% and 20% of our international sales, exclusive of freight
revenue, in 2001 and 2000, respectively. We plan to implement a direct
distribution capability in selected foreign countries where we believe the
opportunity for growth is significant due to higher per capita health care
spending. We believe that directly owned and operated distributors in these
countries will allow us to accelerate the launch of new products and product
enhancements, and to benefit from the sale of higher margin products and to
capture the distributors margin. We have begun to implement this strategy in
April 2001 through the establishment in
Australia of our 60% owned subsidiary which replaced a Smith & Nephew
distributor in Australia. In addition, effective January 1,

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2002, we replaced
our former distributors in Germany/Austria and the United Kingdom with
wholly-owned subsidiaries located in Germany and the United Kingdom. During
2002, we expect to commence direct distribution of our products in Canada
through a wholly-owned subsidiary, replacing the existing Smith & Nephew sales
organization. We are continuing to negotiate the acquisition of Ro+Ten SRL, a
manufacturer of soft goods and our current distributor in Italy, and
Orthoservice AG, a Swiss company. Additionally, we have also executed a letter
of intent to acquire a European manufacturer of rigid knee braces that is also
one of our current European distributors. Consummation of all of these
acquisitions is subject, among other conditions, to satisfactory completion of
our due diligence, execution of definitive agreements, receipt of necessary
financing, regulatory and other approvals and, accordingly, we cannot assure
you that any of these acquisitions will be consummated. If consummated, we
anticipate that these transactions would close during the second and third
quarters of 2002. See Risk Factors-Our transition to direct distribution of
our products in selected foreign markets could adversely affect our revenues
and income in these countries, Managements Discussion and Analysis of
Financial Condition and Results of Operations-International Sales, and
-Business Strategy.

Manufacturing

We manufacture substantially all of our products at two locations in the
United States and Mexico. See Item 2. Properties. We operate a vertically
integrated manufacturing and cleanroom packaging operation at the Vista,
California facilities and are capable of producing a majority of our
subassemblies and components in-house. These include metal stamped parts,
injection molding components and fabric-strapping materials. We also have
extensive in-house tool and die fabrication capabilities which provide savings
in the development of typically expensive tools and molds as well as
flexibility to respond to and capitalize on market opportunities as they are
identified. Utilizing a variety of computational tools and CAD systems during
the development process, we can produce a design directly on computer-based
fabrication equipment, reducing both tool production time and costs.

We have achieved ISO 9001 certification, EN46001 certification and
Certification to the European Medical Device Directive at the Vista facility
and are preparing to have our Mexico facilities certified in 2002. These
certifications are internationally recognized quality standards for
manufacturing and assist us in marketing our products in certain foreign
markets.

Utilizing the latest production technologies at our Vista and Mexico
facilities, we are able to reduce the labor content of many of our products.
For labor intensive operations, primarily sewing, final assembly and packaging,
we utilize our operation in Mexico. In 2001, we consolidated our two separate
Mexican operations into one campus location. Consolidation of these facilities
will enable us to continue to take advantage of the lower labor costs in Mexico
and utilize the resulting additional capacity in our U.S. facilities to
manufacture our more technologically advanced, high value products. In the
fourth quarter of 2001, we completed the migration of a majority of our sewing
operations previously performed at our Vista facilities to Mexico. We continue
to look at opportunities to move our more labor intensive products to our
Mexico facility to generate labor cost savings and utilize the resulting
additional capacity at the Vista facility to manufacture our more
technologically advanced products.

Our 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. We also use Velcro
and neoprene, as well as Drytex®, a wrap-knit nylon and polyester composite,
in the manufacture of our products. Most of the raw materials that we use in
the manufacture of our products are available from more than one source and are
generally readily available on the open market.

We outsource some of
our finished products to manufacturers in China as
well as other products manufactured by third parties. Products we distribute
which are manufactured by third parties include the PainBuster® Pain
Management Systems, manufactured by I-Flow Corporation, BiLok, manufactured
by BioComposites, Ltd., OnTrack®, manufactured by Ortho-Rx, Inc.,
OrthoPulse, manufactured by I.M.D., b.v., and Air-Gel Ankle,
manufactured by Northeast EMS. We market our surgical products in Australia
exclusively under the TiMax brand name. In addition, we provide a variety
of competitor products through our OfficeCare® program as requested by the
surgeon.

Competition

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

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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, a division of Biomet, is our primary competitor for this type
of program. Competition in specialty and other complementary orthopedic
products is based on a variety of factors, depending on the type of product.
Competition in the surgical products segment is primarily based on product
technology, quality and reputation, sales representative access to orthopedic
sports medicine surgeons and relationships with research institutions.

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

Intellectual Property

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

We own or have licensing rights to over 60 U.S. and foreign patents and
have over 20 pending patent applications for our products. We anticipate that
we will apply for additional patents in the future as we develop new products
and product enhancements. Our most significant patent, which is registered only
in the United States, involves the bracing technology and design called the
Four Points of Leverage system. A majority of our ligament bracing products
have been designed using the Four Points of Leverage system which exerts a
force on the upper portion of the tibia, which, in turn, reduces strain on the
damaged, reconstructed or torn ligament. Our patent covering the Four Points
of Leverage system expires in January 2005. Excluding freight revenue,
revenues generated from products using our Four Points of Leverage system
accounted for approximately 26% and 27% of our net revenues for the years ended
December 31, 2001 and 2000, respectively. Our other significant patents include
the Custom Contour Measuring Instrument, which serves as an integral part of
the measurement process for patients ordering our customized ligament and
osteoarthritic braces. In addition, we own patents covering a series of hinges
for our post-operative braces, as well as pneumatic pad design and production
technologies (which utilize air inflatable cushions that allow the patient to
vary the location and degree of support) used in braces such as the
Defiance®. We also have patents relating to our osteoarthritic braces and
specific mechanisms in a number of our products. In addition to these patents,
we rely on non-patented know-how, trade secrets, and other proprietary
information, which we protect through a variety of methods, including
confidentiality agreements with vendors, employees, consultants and others who
have access to our proprietary information.

DonJoy®, ProCare®, Alaron Surgical, Orthotech, Defiance®,
GoldPoint®, Monarch®, RocketSoc®, IceMan®, Air DonJoy®, Air Gel,
Quadrant®, Legend, TROM, OPAL, 4TITUDE®, OAdjuster®,
OfficeCare®, Playmaker®, Enhanced Playmaker, Knee Guarantee, DonJoy
Vista, DonJoy CE, DonJoy ELS, DonJoy eXtreme, Drytex®, Never
Stop Getting Better, IROM, ELS, dj Ortho®, MC Walker®,
Montana®, Nextep, OPAL, ProCart, ProSTEP, Rehab 3®,
Ultra-4, Ultrasling®, COMFORTFORM, Surround®, SE 4-point,
EndoLok, DuraFix, EndoLok TPS, Twister and Walkabout are
certain of our registered trademarks and trademarks for which we have
applications pending or common law rights. PainBuster® is a registered
trademark of I-Flow Corporation. OnTrack® is a registered trademark of Ortho
Rx, Inc. OrthoPulse is a trademark of I.M.D., b.v. Air-Gel Ankle is a
trademark of Northeast EMS. BiLok is a trademark of Biocomposites, Ltd.
TiMax is a trademark of TiMax Surgical Pty Ltd.

In 1998, Smith & Nephew entered into an exclusive license arrangement with
IZEX Technologies (IZEX) for the design, manufacture and distribution of the DonJoy Vista
Rehabilitation System, a computerized post-operative brace designed to optimize
a patients rehabilitation in the treatment of knee injuries. In connection
with the recapitalization, Smith & Nephew assigned this license to us. This
arrangement requires us to make specified royalty payments to IZEX based on sales of the DonJoy Vista Rehabilitation System in order to
maintain the license exclusivity.

In 1999, we entered into a five year distribution and purchase agreement,
which was subsequently amended, with I-Flow Corporation (I-Flow) for the
exclusive North American distribution rights for the PainBuster® Pain
Management System manufactured by I-Flow for use after orthopedic surgical
procedures.

In 2001, we entered into a distribution and purchase agreement with
I.M.D., b.v. (IMD) to distribute a bone growth stimulator, OrthoPulse.
The bone growth stimulator will represent our entrance into the regeneration
market and is currently undergoing FDA regulatory approval.

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

Employees

As of December 31, 2001, we had approximately 1,160 employees. Our
workforce is not unionized. We have not experienced any strikes or work
stoppages, and management considers its relationships with our employees to be
good.

Government Regulation

Medical Device Regulation

United States.Our products and operations are subject to extensive and
rigorous regulation 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 addition, the FDA regulates the export of medical devices
manufactured in the United States to international markets.

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

Class I devices are those for which safety and effectiveness can be
assured by adherence to a set of guidelines, which include compliance with the
applicable portions of the FDAs Quality System Regulation (QSR), facility
registration and product listing, reporting of adverse medical events, and
appropriate, truthful and non-misleading labeling, advertising, and promotional
materials (the General Controls). Some Class I devices also require premarket
clearance by the FDA through the 510(k) premarket notification process
described below.

Class II devices are subject to the General Controls described above.
Most also 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 Class II devices
is accomplished through the 510(k) premarket notification process. For most
Class II devices, the manufacturer must submit to the FDA a premarket
notification application, demonstrating that the device is substantially
equivalent, as defined in the statute, to either:



| |  |  | a device that was legally marketed prior to May 28, 1976, the
date upon which the Medical Device Amendments of 1976 were enacted,
or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to another 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, our 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 efficacy 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 efficacy. One of our proposed new
products, OrthoPulse is a Class III device that is currently undergoing the
premarket review process described below.

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 is intended to demonstrate that the device is safe and effective.
The PMA application must be supported by extensive data, including data from
pre-clinical 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, the FDA must
determine that the application is sufficiently complete to permit a
substantive review. Once the FDA determines that the application is
complete, it will then accept the application for review. The FDA, by statute
and by regulation, has 180 days to review a filed PMA application, although the
FDA can request additional information to support the application and the
review of an application may occur over a significantly longer period of time,
up to

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several years. Following its review, the FDA may either grant or deny the
application. 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. The OrthoPulse PMA is currently being
reviewed by the FDA. Based on the status of FDA review, we do not expect a
final FDA decision on the OrthoPulse PMA until at least the fourth quarter
of 2002.

When FDA clearance 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 our Class I, Class II or Class III Orthopulse products
have required human clinical trials for approval.

In addition, our manufacturing processes are required to comply with the
applicable portions of the QSR, which covers the methods and documentation of
the design, testing, production, processes, controls, quality assurance,
labeling, packaging, and shipping of our products. The QSR also, among other
things, requires maintenance of a device master record, device history record,
and complaint files. Our domestic facility, records, and manufacturing
processes are subject to periodic unscheduled inspections by the FDA. Our
Mexican facilities, which export products to the United States, may also be
inspected by the FDA. Our U.S. and Mexico facilities have recently been
inspected by the FDA and found to be in 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 and civil
prosecution. There are currently no adverse regulatory compliance issues or
actions pending with the FDA at any of our facilities or relating to our
products and none of the recent FDA audits of the Vista, California facility
has resulted in any enforcement actions by the FDA.

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 our 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
FFDCA) are not required by the FDA for export of Class I and Class II devices.
However, they are often required by the foreign country importing the product.
For Class III devices, the manufacturer must notify the FDA via the export
certification process.

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

We are implementing policies and procedures intended to position us for
the expected international harmonization of regulatory requirements. The 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

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for manufacturing operations that
do not include product design. Our Vista facility has received ISO 9001
certification. In 2002, we expect that our Mexican subsidiary and Alaron
Surgical facility will undergo the ISO 9001 certification process, and that
in 2003, our Mexican subsidiary will undergo the ISO 9002 certification
process. 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 Conformité Européenne (CE) mark. All of our products
currently distributed in Europe have received the CE mark. A CE mark is an
international symbol indicating that the device meets common European standards
of performance and safety.

Fraud and Abuse

We are subject to various federal and state laws pertaining to health care
fraud and abuse, including anti-kickback laws and physician self-referral laws.
Violations of these laws are punishable by criminal and/or civil sanctions,
including, in some instances, imprisonment and exclusion from participation in
federal and state 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, there can be no assurance that we would not be required to alter one or
more of our practices to be in compliance with these laws. In addition, there
can be no assurance that the occurrence of one or more violations of these laws
would not result in a material adverse effect on our financial condition and
results of operations.

Anti-Kickback Laws.Our operations are subject to federal and state
anti-kickback laws. Certain provisions of the Social Security Act, that are
commonly known collectively as the Medicare Fraud and Abuse Statute, prohibit
entities, such as us, from offering, paying, soliciting or receiving any form
of remuneration in return for the referral of Medicare or other federal 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 other federal 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 remuneration offered
and exclude violators from participation in Medicare or other federal or state
health programs. Many states have adopted similar prohibitions against payments
intended to induce referrals to Medicaid and other third party payor patients.

We operate a stock and bill program, known as the OfficeCare® program,
through which we make our products and services available in the offices of
physicians or other providers. In conjunction with the OfficeCare® program,
we may pay participating physicians a fee for rental space and support services
provided by such physicians to us. In a Special Fraud Alert issued by the
Office of Inspector General of the Department of Health and Human Services
(OIG) in February 2000, the OIG indicated that it may scrutinize stock and bill
programs involving excessive rental payments for possible violation of the
Medicare Fraud and Abuse Statute, but notes that legitimate arrangements,
including fair market value rental arrangements that meet the requirements of
applicable safe harbors, will be immune from prosecution under the statute. We
believe we have structured the OfficeCare® Program to comply with these laws.

Physician Self-Referral Laws.We are 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 causing greater numbers
of health care companies to have to defend a false claim action, pay fines or
be excluded from the Medicare, Medicaid or other federal or state health care
programs as a result of an investigation arising out of such action.

Environmental and Other Matters

Our facilities and operations are subject to federal, state and local
environmental and occupational health and safety requirements of the United
States and foreign countries, including those relating to discharges of
substances to the air, water and

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land, the handling, storage and disposal of
wastes and the cleanup of properties affected by pollutants. We believe we are
currently in compliance with such requirements and do not currently anticipate
any material adverse effect on our business or financial condition as a result
of our efforts to comply with these 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
our operations. Also, in the future, contamination may be found to exist at our
current or former facilities or off-site locations where we have sent wastes.
We could be held liable for such newly discovered contamination which could
have a material adverse effect on our 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
our business or financial condition.

Governmental Audits

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

Other Federal and State Regulations

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

Risk Factors

Risks Related to our Business

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

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

We have limited experience in designing, manufacturing and marketing products
for the repair and regeneration segments of the orthopedic sports medicine
market and the failure of our products for these segments to achieve acceptance
by orthopedic sports medicine surgeons would adversely affect our ability to
enter these new markets and grow our business.

Historically, our principal focus has been the market for orthopedic
rehabilitation products. Prior to commencing sales of the first six of our
Alaron Surgical products on August 1, 2001, we had limited experience in
the market for orthopedic repair products. We have never sold any products for
the regeneration segment of the orthopedic sports medicine market, although we
are currently undergoing FDA review of the OrthoPulse bone growth
stimulator for which we will have exclusive North American distribution rights.
We cannot assure you that our existing Alaron Surgical products or,
if a final FDA
decision is obtained, the OrthoPulse bone growth stimulator or any
additional repair or regeneration products that we may introduce in
the future will achieve wide acceptance by orthopedic sports medicine surgeons.
In addition, the repair and regeneration segments of the orthopedic sports
medicine market may have different competitive characteristics from those we
have experienced in the market for our rehabilitation products. If our repair
and regeneration products do not receive market acceptance by orthopedic sports
medicine surgeons, our ability to successfully grow our business will be
materially and adversely affected. In addition, our quarterly

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operating results
could be adversely affected if we are not able to introduce new products for
these markets in a timely manner due to delays in receiving FDA approval or
otherwise.

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

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



| |  |  | continue to develop successful new products and enhance existing products;
| | - |  | --------------------------------------------------------------------------
|
| |  |  | obtain required regulatory clearances and approvals for such products;    
|
| |  |  | market such products in a commercially viable manner; or                  
|
| |  |  | gain market acceptance for such products.                                 

Our failure to
develop or license and timely introduce and market new products and
product enhancements could have a material adverse effect on our
business, financial condition and results of operations. In addition,
if any of our new or enhanced products contain undetected errors or
design defects, especially when first introduced, our ability to
market these products could be substantially delayed, resulting in
lost revenue, potential damage to our reputation and/or delays in
obtaining acceptance of the product by orthopedic sports medicine
surgeons and other professionals. In this connection, certain
recently discovered design problems, which we are currently
addressing, in instruments shipped from suppliers and used in our
primary Alaron product have delayed the release of the Alaron product
line across our full distribution network.

Our competitors also 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 development and use of joint
lubricants to treat osteoarthritis in the knee may prove to be an effective
alternative to the use of our osteoarthritic braces. Additionally, we expect
the development of surgical products to be more costly and entail greater
development time than we have experienced with rehabilitation products, such as
knee braces, and soft goods.

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

Our strategy to selectively replace our third party international
distributors with wholly or partially owned distributorships may adversely
affect our revenue and net income in those countries. Prior to January 1, 2002,
we sold products in Germany, our largest foreign market, the United Kingdom and
Austria, which together aggregated $7.2 million of revenue in 2001, or 40% of
our 2001 international sales and 4% of total sales, excluding freight revenue,
through an independent third party distributor. We did not renew the
distributor arrangement at the end of its then current term on December 31,
2001, and, accordingly, commencing January 1, 2002, we began to directly
distribute our products in these countries through wholly owned subsidiaries.
During the fourth quarter of 2001, we did not record any sales to this
distributor and, in addition, we were required to reverse an additional $0.9
million of prior sales to this distributor for inventory returned by the
distributor upon termination of the contract in excess of our estimated return
allowance. The terminated distributor also remains in those markets as an
experienced competitor and we believe has taken actions designed to limit or
undercut our ability to sell our products or otherwise restrict our ability to
successfully operate in those countries. Such actions could include discounting
sales of our products in those countries prior to December 31, 2001 and
replacement products since January 1, 2002, the effect of which could make it
harder for us to sell our products in those countries beginning January 1, 2002
for a period of time. Accordingly, our transition to direct distribution in
Germany, the United Kingdom and Austria had a material adverse effect on our
revenues and earnings in those countries during the fourth quarter of 2001 and
is expected to continue to have an adverse effect on our revenues and earnings
at least through the first six months of 2002. Similarly, sales to our Italian
distributor have been adversely affected while we are negotiating the possible
acquisition of that distributor. To the extent that we decide to replace our
independent distributors in other countries, we may experience similar
disruptions to our business in those countries. Moreover, we have no experience
in managing a large international operation and the creation of direct
distribution capabilities in Germany, the United Kingdom and Austria and other
selected foreign countries will require changes in our organization and the
implementation of additional financial and operational controls.

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

The sales of our rigid knee braces and our recently introduced line of
surgical products depend to a significant extent on the prescription and/or
recommendation of such products by orthopedic sports medicine surgeons and
other sports medicine professionals. Sales of our rigid knee braces represented
approximately 39% of our net revenues and approximately 49% of our gross profit
in 2001 excluding freight revenue and other cost of goods sold not allocable to
segments. We have developed and
maintain close relationships with a number of widely recognized orthopedic
sports medicine surgeons and sports medicine specialists who assist in product
research, development and marketing. These professionals often become product
champions, speaking about our products at medical seminars, assisting in the
training of other professionals in the use and/or fitting of our products and
providing us with feedback on the industrys acceptance of our new products.
The failure of our existing rigid knee

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braces and surgical products to retain
the support of those surgeons and specialists, or the failure of our new rigid
knee braces, new bone growth stimulator product, OrthoPulse, and new
surgical products to secure and retain similar support from leading surgeons
and specialists, could have a material adverse effect on our business,
financial condition and results of operations.

Our marketing success 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
their relationships with the customers in the marketplace. Our failure to
maintain relationships with agents and distributors could have a material
adverse effect on our business, financial condition and results of operations.

If the technology license and distribution agreements relating to some of our
key products, including our new surgical products, were terminated, we would
not be able to sell those products, which would adversely affect our business,
results of operations and prospects for future growth.

We have distribution rights to certain of our products that are
manufactured by others and hold licenses from third parties to utilize selected
patents, patents pending and technology utilized in the design of some of our
existing products and products under development, including the IceMan®
device, the DonJoy Vista Rehabilitation System, the PainBuster® Pain
Management Systems and our new ACL surgical screws. The revenues from these
distribution agreements and licenses represented less than 7% of our net
revenues for each of the years ended December 31, 2001 and 2000, respectively.
We also license OrthoPulse, which is currently undergoing the FDA PMA
review process. Based on the status of FDA review, we do not expect a final FDA
decision on the OrthoPulse PMA until at least the fourth quarter of 2002
and anticipate that any revenues from this product will be minimal in 2002. If
any of the distribution agreements were terminated or if we lost any of these
licenses, we would not be able to manufacture and/or sell the related products,
which could have an adverse effect on our future business, financial condition
and results of operations. In particular, the loss of the licenses relating to
our new ACL surgical screws would significantly limit our ability to grow our
Alaron Surgical division. Similarly, the loss of our license for
OrthoPulse would significantly impair our ability to enter the regeneration
market and to grow our revenues in this area in the future.

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, such as our
Orthotech and Alaron acquisitions in 2000 and 2001, respectively, as well as
investments and strategic alliances that either expand or complement our
business. We may not be able to identify acceptable opportunities, complete any
additional acquisitions, investments or strategic alliances, or license
products or technologies on favorable terms or in a timely manner. Acquisitions
and, to a lesser extent, investments and strategic alliances involve a number
of risks, several of which impacted our business in connection with our
Orthotech acquisition, including:



| |  |  | the diversion of our managements attention from our existing
business while evaluating acquisitions, and thereafter while
assimilating the operations and personnel of the new business;               
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | adverse short-term effects on our operating results;                                                                                                                                                    
|
| |  |  | the inability to successfully and rapidly integrate the new
businesses, personnel and products with our existing business,
including financial reporting, management and information technology
systems;
|
| |  |  | higher than anticipated costs of integration;                                                                                                                                                           
|
| |  |  | unforeseen operating difficulties and expenditures;                                                                                                                                                     
|
| |  |  | the need to manage a significantly larger business;                                                                                                                                                     
|
| |  |  | the lack of prior experience in new markets or countries we may enter;                                                                                                                                  
|
| |  |  | loss of employees of an acquired business, including employees
who may have been instrumental to the success or growth of that
business; and                                                            
|
| |  |  | the use of a substantial amount of our available cash to
consummate the acquisition.                                                                                                                    

In addition, as was required in connection with the Orthotech acquisition,
we may require additional debt or equity financing for future acquisitions,
investments or strategic alliances. Such financing 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.

Finally, in the event we decide to discontinue
pursuit of a potential acquisition, we would be required to
immediately expense all costs incurred in pursuit of the possible
acquisition which could have an adverse effect on our results of
operations in the period in which the expense is recognized.

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

Excluding freight revenue, sales in foreign markets, primarily Europe,
Canada and Japan, represented approximately 11% and 13% of our net revenues for
the years ended December 31, 2001 and 2000, respectively, with Germany and
Austria together representing approximately 36% and 31% of international net
revenues in 2001 and 2000, respectively. Since our international sales have
historically been denominated in U.S. dollars, our operating results have not
been directly impacted by foreign currency exchange fluctuations. However, the
volume and product mix of our international sales has been and may continue to
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 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. In March 2001, we began
selling products through our Australian subsidiary in Australian
dollars and,
commencing January 1, 2002, we began selling products through our subsidiaries
in Germany and the United Kingdom in Euros and Pounds Sterling, respectively.
As we begin to further directly distribute our products in other selected
foreign countries such as Canada, we expect that future sales of our products
in these markets will be denominated in the applicable foreign currencies which
would cause currency fluctuations to more directly impact our operating
results.

We are also subject to other risks inherent in international operations,
including foreign regulatory requirements relating to healthcare reimbursement,
exposure to different legal requirements and standards governing the
introduction or distribution of medical devices, potential difficulties in
protecting our intellectual property in foreign jurisdictions where
intellectual property protection laws may not be as developed as in the United
States, import and export restrictions, increased costs of transportation or
shipping, difficulties in staffing and managing international operations, labor
disputes, difficulties in collecting accounts receivable, 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 risks. These factors may have a
material adverse effect on our international operations or on our business,
financial condition and results of operations.

We operate in a very competitive business environment.

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

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

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



| |  |  | demand for our products, which historically has been higher in
the first and fourth quarters when scholastic sports and ski injuries
are more frequent;                                                    
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | our ability to meet the demand for our products;                                                                                                                                                           
|
| |  |  | our transition to direct distribution of our products in
foreign countries such as Germany and the United Kingdom;                                                                                         
|
| |  |  | the number, timing and significance of new products and product
introductions and enhancements by us and our competitors, including
delays in obtaining government review and clearance of medical
devices;
|
| |  |  | our ability to develop, introduce and market new and enhanced
versions of our products on a timely basis;                                                                                                  
|
| |  |  | changes in pricing policies by us and our competitors and
reimbursement rates by third party payors, including government
health care agencies;                                                            

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| |  |  | changes in the treatment practices of orthopedic sports
medicine surgeons and their allied health care professionals; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the timing of significant orders and shipments.                                                                          

Accordingly, we believe that our quarterly sales and operating results may
vary significantly in the future and that period-to-period comparisons of our
results of operations may not be meaningful and should not be relied upon as
indications of future performance. We cannot assure you that our sales will
increase or be sustained in future periods or that we will be profitable in any
future period. Furthermore, any shortfalls in sales or earnings from levels
expected by securities or industry analysts could have an immediate and
significant adverse effect on the trading price of our common stock in any
given period.

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

Some of our important suppliers are in China and other parts of Asia. We
obtain approximately 10% of our total purchased materials from a supplier in
China providing us predominately finished soft goods products. Political and
economic instability and changes in government regulations in these areas could
affect our ability to continue to receive materials from our suppliers there.
The loss of our supplier in China or any other interruption or delay in the
supply of our required materials or our inability to obtain these materials at
acceptable prices and within a reasonable amount of time could impair our
ability to meet scheduled product deliveries to our customers and could hurt
our reputation and cause customers to cancel orders.

Our results of operations and financial condition could be adversely affected
if a product liability claim is brought against us and we do not 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. In the future, we may be subject to additional product liability
claims, which may have a negative impact on our business. Our existing product
liability insurance coverage may be inadequate to protect us from any
liabilities we might incur. If a product liability claim or series of claims is
brought against us for uninsured liabilities or in excess of our insurance
coverage, our business could suffer. In addition, as a result of a product
liability claim, we may have to recall some of our products, which could result
in significant costs to us. In addition, our entry into the surgical products
market may increase our exposure to product liability claims in the future.

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 country other
than Mexico. The cost of transporting our products to foreign countries is
currently borne by our customers, with the exception of Australia, 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 that country. In
addition, foreign manufacturers of competitive products often receive various
local tax concessions which lower their overall manufacturing costs. In order
to compete successfully in international markets, we may be required to open or
acquire manufacturing operations abroad, which would be costly to implement and
would increase our exposure to the risks of doing business in international
countries. 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.

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 Senior Vice President, Finance and Chief Financial Officer,
Michael R. McBrayer, our Senior Vice President, Professional Relations and
Business Development, and Paul K. Nichols, our Senior Vice President, Global
Sales and Marketing. These executives have substantial experience and expertise
in our business and have made significant contributions to our growth and
success. Mr. Cross, Mr. Talbot and Mr. McBrayer are the key management
personnel who led our 1999 recapitalization and transition from ownership by
Smith & Nephew to a stand-alone company. Mr. Nichols, who became the
principal executive of our new surgical products division when we acquired
Alaron Technologies, has significant experience in the orthopedic surgical
industry. The loss of one or more of these key personnel could have a material
adverse effect on us.

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

We have relied to date solely on our manufacturing facilities in Vista,
California and Tijuana, Mexico. These facilities and the manufacturing
equipment we use to produce our products would be difficult to replace and
could require substantial lead-time to repair or replace. Our facilities may be
affected by natural or man-made disasters. If one of our facilities were
affected by a disaster, we would be forced to rely on third-party manufacturers
or shift production to another manufacturing facility. Although we believe we
possess adequate insurance for damage to our property and the disruption of our
business from casualties, such insurance may not be sufficient to cover all of
our potential losses and may not continue to be available to us on acceptable
terms, or at all.

Risks Related to Government Regulation

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

Our products and operations are subject to extensive regulation in the
United States by the Food and Drug Administration. 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 selected
products for clinical use in the United States, we generally must first obtain
clearance from the FDA, pursuant to Section 510(k) of the Federal Food, Drug
and Cosmetic Act (FFDCA). 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 premarket approval
application (PMA). All of our currently manufactured products hold the relevant
exemption or premarket clearance under the FFDCA. However, the PMA submission
for OrthoPulse, a bone growth stimulation product under development, is
currently under review by the FDA. Failure to obtain FDA clearance or approvals
of new products we develop in the future, any limitations imposed by the FDA on
new product development or use, or the costs of obtaining FDA clearance or
approvals could have a material adverse effect on our business, financial
condition and results of operations.

In addition to clearance or approval requirements, our medical device
products are subject to other rigorous FDA regulatory requirements, including
the Quality System Regulation (QSR) recordkeeping regulations, labeling
requirements and adverse event reporting regulations. 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. Due to the
movement towards harmonization of standards in the European Union, we expect a
changing regulatory environment in Europe characterized by a shift from a
country-by-country regulatory system to a European Union wide single regulatory
system. The timing of this harmonization and its effect on us cannot currently
be predicted. Any such developments could have a material adverse effect on our
business, financial condition and results of operations.

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

The ability of orthopedic sports medicine surgeons and their allied health
care professionals (or persons to whom they sell our products) to receive
reimbursement for the cost of our products from private third party payors and,
to a lesser extent, Medicare, Medicaid and other governmental programs, is
important to our business.

Congress and certain state legislatures periodically consider reforms in
the health care industry that may modify reimbursement practices, including
controls on health care spending through limitations on the growth of Medicare
and Medicaid spending. In addition to extensive existing government healthcare
regulation, there are numerous initiatives at the federal and state levels for
comprehensive reforms affecting the payment for and availability of healthcare
products and services, including some

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proposals that would significantly limit reimbursement under Medicare and
Medicaid. It is not clear at this time what proposals, if any, will be adopted
or, if adopted, what effect these proposals would have on our business.

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

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

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

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

Within the United States, health care reform and managed care are changing
the dynamics of the health care industry in response to the need 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 put
pressure on, and is expected to continue to lead, 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 product that is cost
effective in light of such evaluation. One result of demand matching has been,
and is expected to continue to be, a shift toward lower priced products, and
any such shift in our product mix to lower margin, off-the-shelf products could
have an adverse impact on our operating results. For example, in our rigid knee
bracing segment, we and many of our competitors are offering lower priced,
off-the-shelf products in response to managed care.

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

In international markets, where the movement toward health care reform and
the development of managed care are generally not as advanced as in the United
States, we have experienced downward pressure on product pricing and other
effects of health care reform similar to that which 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

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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.

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

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

We may need to change our business practices to comply with 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, Veterans
Administration health programs and TRICARE. We have not been challenged by a
governmental authority under any of these laws and believe that our operations
are in 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. Health care fraud and abuse regulations are
complex and even minor, inadvertent irregularities in submissions can
potentially give rise to claims that the statute has been violated. Any
violations of these laws could result in a material adverse effect on our
business, financial condition and results of operations. If there is a change
in law, regulation or administrative or judicial interpretations, we may have
to change our business practices or our existing business practices could be
challenged as unlawful, which could have a material adverse effect on our
business, financial condition and results of operations.

We could become subject to false claims litigation under federal statutes,
which can lead to civil money penalties, criminal fines and imprisonment,
and/or exclusion from participation in Medicare, Medicaid and other federal and
state health care programs. These false claims statutes include the 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 program,
Medicaid programs or other federal and state health care programs as a result
of an investigation arising out of such action. We cannot assure you that we
will not become subject to such litigation or, if we are not successful in
defending against such actions, that such actions will not have a material
adverse effect on our business, financial condition and results of operations.

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

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

Risks Related to Our Debt Level

Our significant debt level may limit our ability to operate our business,
obtain additional financing and pursue other business opportunities.

As of December 31, 2001, our long-term debt was $110.9 million, while our
total capitalization was $115.2 million. We may incur additional indebtedness
from time to time to finance acquisitions, as we did in connection with our
2000 Orthotech acquisition, investments or strategic alliances or capital
expenditures or for other purposes subject to the restrictions contained in our
credit agreement and the indenture governing our senior subordinated notes.

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



| |  |  | our ability to obtain additional financing, if necessary, for
working capital, capital expenditures, acquisitions or other purposes
may be impaired, or financing may not be available to us on favorable
terms;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | we will need a substantial portion of our cash flow to pay the
principal and interest on our indebtedness, including indebtedness
that we may incur in the future;      
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | payments on our indebtedness will reduce the funds that would
otherwise be available for our operations and future business
opportunities;                              
|
| |  |  | a substantial decrease in our net operating cash flows could
make it difficult for us to meet our debt service requirements and
force us to modify our operations;      
|
| |  |  | we may be more highly leveraged than our competitors, which may
place us at a competitive disadvantage;                                                                 
|
| |  |  | our debt level may make us more vulnerable than our competitors
to a downturn in our business or the economy generally;                                                 
|
| |  |  | our debt level reduces our flexibility in responding to changing business and economic conditions;                                                                      
|
| |  |  | some of our debt has a variable rate of interest, which exposes us to the risk of increased interest rates; and                                                         
|
| |  |  | there would be a material adverse effect on our business and
financial condition if we are unable to service our indebtedness or
obtain additional financing, as needed.

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

The operating and financial restrictions and covenants in our credit
agreement, the indenture governing our senior subordinated notes and any future
financing agreements may adversely affect our ability to finance future
operations, meet our capital needs or engage in other business activities.
Currently, our existing debt agreements restrict our ability to:



| |  |  | incur additional indebtedness;                                                                     
| | - |  | ---------------------------------------------------------------------------------------------------
|
| |  |  | issue redeemable equity interests and preferred equity interests;                                  
|
| |  |  | pay dividends or make distributions, repurchase equity interests or make other restricted payments;
|
| |  |  | make capital expenditures;                                                                         
|
| |  |  | create liens;                                                                                      
|
| |  |  | enter into transactions with our affiliates;                                                       
|
| |  |  | make investments;                                                                                  
|
| |  |  | sell assets; or                                                                                    
|
| |  |  | enter into mergers or consolidations.                                                              

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



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

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

Our credit facility also requires us to satisfy specified financial ratios
and prohibits us from prepaying our other indebtedness while indebtedness under
the credit facility is outstanding. Our ability to comply with such provisions
may be affected by events beyond our control.

Restrictions contained in the indenture and the credit agreement 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, 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 these agreements. A significant
portion of our indebtedness then may become immediately due and payable. We
might not have, or be able to obtain, sufficient funds to make these
accelerated payments. In addition, our obligations under our credit agreement
are secured by a security interest in substantially all of our assets, and in
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.

We may not have sufficient cash to service our indebtedness.

Our ability to service our indebtedness and to satisfy our other
obligations will depend upon, among other things:



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

Based on our current and expected levels of operations, we expect that our
operating cash flow and borrowings under the 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 for at
least the next twelve months. However, our operating results and borrowings
under the revolving credit facility may not be sufficient to service our
current and future indebtedness. 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, or seeking additional equity capital or bankruptcy protection. We
cannot assure you that any of these remedies can be effected on satisfactory
terms, if at all. In addition, the terms of existing or future debt agreements,
may restrict us from adopting any of these alternatives.

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

We are required to make annual mandatory payments of the term loans under
the credit agreement in an amount equal to 50% of our excess cash flow (75% if
our ratio of total debt to EBITDA exceeds 4 to 1). Excess cash flow represents
our net income adjusted for extraordinary gains or losses, depreciation,
amortization and other non-cash charges, changes in working capital, changes in
deferred revenues, payments for capital expenditures, and repayment of
indebtedness. In addition, the term loans are subject to mandatory prepayments
in an amount equal to:



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

in each case subject to certain exceptions. If we have to use cash to make our
annual prepayments, we may not have sufficient funds to grow our business, to
make acquisitions, enter into joint ventures or make capital expenditures.

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Risks Related to Our Intellectual Property

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

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



| |  |  | Four Points of Leverage system, the critical element in the
design of all of our ligament braces;                                                                                                     
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Custom Contour Measuring System, which serves as an integral
part of the measurement process for patients ordering our customized
ligament and osteoarthritic braces;                                   
|
| |  |  | series of hinges for our post-operative braces;                                                                                                                                                         
|
| |  |  | pneumatic pad design and production technologies which utilize
air inflatable cushions that allow the patient to vary the location
and degree of support provided by braces such as the Defiance®
brace;
|
| |  |  | osteoarthritis bracing concepts;                                                                                                                                                                        
|
| |  |  | ankle bracing, both rigid and soft; and                                                                                                                                                                 
|
| |  |  | rigid shoulder bracing.                                                                                                                                                                                 

However, we cannot assure you that:



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

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

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

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

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



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

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| |  |  | require us to cease using such technology.
| | - |  | ------------------------------------------

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

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

Other Risks

We have a single stockholder who can substantially influence the outcome of all
matters voted upon by our stockholders and prevent actions that other
stockholders may view favorably.

JPMDJ Partners beneficially owned approximately 45.7% of our outstanding
common stock. As a result, JPMDJ Partners is able to substantially influence
all matters requiring stockholder approval, including the election of directors
and the approval of significant corporate transactions, such as acquisitions,
and to block an unsolicited tender offer and any other matter requiring a
supermajority vote of stockholders. This concentration of ownership could
delay, defer or prevent a change in control of our company or impede a merger,
consolidation, takeover or other business combination which a stockholder, may
otherwise view favorably.

The managing member of JPMDJ Partners is J.P. Morgan Fairfield Partners,
LLC (formerly Fairfield Chase Medical Partners, LLC), which is controlled by
Charles T. Orsatti, our chairman of the board of directors. Accordingly, JPMDJ
Partners and JPM Fairfield Partners, which as the managing member initially
controls JPMDJ Partners, and their members have the power, subject to certain
exceptions, to control us. The interests of JPMDJ Partners, JPM Fairfield
Partners and their members may not in all cases be aligned with other
stockholders.

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

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



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

In addition, Section 203 of the Delaware General Corporation Law prohibits
a publicly held Delaware corporation from engaging in a business combination
with an interested stockholder, generally a person which together with its
affiliates owns or

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within the last three years has owned 15% of our voting stock, for a period of
three years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a
change in control of our company.

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

We are exposed to various legal proceedings

Several class action complaints alleging violations of the federal
securities laws in connection with our November 15, 2001 initial public
offering were filed in the United States District Courts for the Southern
District of New York and for the Southern District of California on behalf of
purchasers of our common stock. We are named as a defendant along with Leslie
H. Cross, our President and Chief Executive Officer, Cyril Talbot III, our
Senior Vice President, Finance, Chief Financial Officer, and Secretary, Charles
T. Orsatti, Chairman of our Board of Directors, and the Underwriters of our
initial public offering. The complaints seek unspecified damages and allege
that defendants violated Sections 11, 12, and 15 of the Securities Act of 1933
by, among other things, misrepresenting and/or failing to disclose material
facts in connection with our registration statement and prospectus for the
initial public offering. On February 25, 2002, plaintiffs agreed to dismiss the
New York actions without prejudice. On February 28, 2002, a federal district
court judge consolidated the Southern District of California actions into a
single action, In re DJ Orthopedics, Inc., Securities LitigationCase No. 01-CV-2238-K (LSP) (S.D.
Cal.), and appointed Oracle Partners, L.P. as lead plaintiff. We believe the
claims are without merit and intend to defend the action vigorously. However,
there can be no assurance that we will succeed in defending or settling this
action. Additionally, we cannot assure you that the action will not have a
material adverse effect on our business.

On February 13, 2002, we filed a complaint in the United States District
Court, Southern District of California, Case No. 02-CV-0279-K (LAB) against
medi Bayreuth and medi UK, Ltd, our former distributors in Germany
and the United Kingdom, respectively, alleging breach of contract, unfair
competition and patent infringement resulting from the termination of
our distributorship arrangements with them. The lawsuit presently is
in the discovery phase. We anticipate defendants medi Bayreuth
and medi UK will soon file counterclaims against us. We intend to
vigorously prosecute this litigation and to vigorously defend any
counterclaims which these entities might bring against us. We cannot assure you that
we will be successful in this litigation.

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




Item 2.Properties

We are headquartered in Vista, California and operate two manufacturing
locations. Manufacturing operations in the United States were consolidated in
1998 into the Vista campus which consists of three campus buildings. The Vista
facilities are subleased from Smith & Nephew, with the exception of a nearby
parcel of vacant land upon which we plan future expansion. See Related Party
Transactions-Other Agreements with Smith & Nephew-Sublease. In addition, we
lease a facility in Vista for our surgical product line. The other
manufacturing location consists of two facilities located in Tijuana, Mexico,
within 100 miles of Vista, and are managed from the Vista facility. We also
lease warehouse and office space in Germany, Australia and the United Kingdom.

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|                        |  |                                                                            |  |              |  |                            |  |                    |               | 
|----------------------- |  | -------------------------------------------------------------------------- |  | ------------ |  | -------------------------- |  | ------------------ | ------------- | 
|Location                |  | Use                                                                        |  | Owned/Leased |  | Lease Termination Date     |  | Size (Square Feet)
|                        |  |                                                                            |  |              |  |                            |  |                   
|Vista, California       |  | Corporate
Headquarters
Research &
Development
Manufacturing &
Distribution |  | Subleased    |  | February 2008              |  |                    | 266,041       | 
|                       
|Vista, California       |  | Parking Lot/Future
Expansion                                               |  | Leased       |  | July 2006                  |  |                    | 285,000       | 
|                       
|Vista, California       |  | Alaron Surgical
Distribution
Facility                                      |  | Leased       |  | May 2002(1)                |  |                    | 6,992         | 
|                       
|Tijuana, Mexico         |  | 2 Manufacturing
Facilities                                                 |  | Leased       |  | December 2003
June 2003(2) |  |                    | 48,600
30,000 | 
|                       
|Tijuana, Mexico         |  | Manufacturing                                                              |  | Owned        |  | Held for sale(3)           |  |                    | 8,980         | 
|                       
|Neudrossenfeld,
Germany |  | Office & Distribution                                                      |  | Leased       |  | August 2004                |  |                    | 7,700         | 
|                       
|Surrey, UK              |  | Office & Distribution                                                      |  | Leased       |  | November 2011              |  |                    | 3,111         | 
|                       
|Melbourne, Australia    |  | Office & Distribution                                                      |  | Leased       |  | October 2003               |  |                    | 2,500         | 



---

|(1) |  | The lease may be renewed, upon 120 days
notice prior to the expiration of the current term, for two additional
one-year periods.          
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The lease for the Tijuana facility may be renewed at the option of the
lessee for 5 additional one-year periods.                          
|   
|   
|   
|   
|(3) |  | The Tijuana facility that is held for sale is currently vacant. The net
book value of this facility at December 31, 2001 was $0.3 million.




Item 3.Legal Proceedings

Several class action complaints alleging violations of the federal securities
laws in connection with our November 15, 2001 initial public offering were
filed in the United States District Courts for the Southern District of New
York and for the Southern District of California on behalf of purchasers of our
common stock. We are named as a defendant along with Leslie H. Cross, our
President and Chief Executive Officer, Cyril Talbot III, our Senior Vice
President, Finance, Chief Financial Officer, and Secretary, Charles T. Orsatti,
Chairman of our Board of Directors, and the Underwriters of our initial public
offering. The complaints seek unspecified damages and allege that defendants
violated Sections 11, 12, and 15 of the Securities Act of 1933 by, among other
things, misrepresenting and/or failing to disclose material facts in connection
with our registration statement and prospectus for the initial public offering.
On February 25, 2002, plaintiffs agreed to dismiss the New York actions without
prejudice. On February 28, 2002, a federal district court judge consolidated
the Southern District of California actions into a single action, In re DJ
Orthopedics, Inc. Securities Litigation, Case No. 01-CV-2238-K (LSP) (S.D. Cal.), and appointed
Oracle Partners, L.P. as lead plaintiff. We believe the claims are without
merit and intend to defend the action vigorously. However, there can be no
assurance that we will succeed in defending or settling this action.
Additionally, we cannot assure you that the action will not have a material
adverse effect on our business.

On February 13, 2002, we filed a complaint in the United States District
Court, Southern District of California, Case No. 02-CV-0279-K (LAB) against
medi Bayreuth and medi UK, Ltd, our former distributors in Germany
and the United Kingdom, respectively, alleging breach of contract, unfair
competition and patent infringement resulting from the termination of
our distributorship arrangements with them. The lawsuit presently is
in the discovery phase. We anticipate defendants medi Bayreuth
and medi UK will soon file counterclaims against us. We intend to
vigorously prosecute this litigation and to vigorously defend any
counterclaims which these entities might bring against us. We cannot assure you that
we will be successful in this litigation.

34



---



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




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

No matters were submitted to a vote of security holders during the quarter
ended December 31, 2001.

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PART II




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

Our common stock has been traded on the New York Stock Exchange since
November 15, 2001 under the symbol DJO. The high closing sales price was
$15.25 and the low closing sales price was $12.41 for the quarter ended
December 31, 2001. Prior to November 15, 2001, there was no established public
trading market for the common stock. As of February 28, 2002, there were 14
holders of record of the common stock. We have never declared or paid any cash
dividends on our capital stock. We are effectively prohibited from paying cash
dividends on our common stock for the foreseeable future under the terms of our
credit agreement. Moreover, we plan to retain all earnings for investment in
our business and do not plan to pay cash dividends at any time in the
foreseeable future.

In connection with our reorganization into corporate form in the fourth
quarter of 2001, 885,633 common units and 44,405 redeemable preferred units of
DonJoy, L.L.C. were converted into an aggregate of 10,055,566 shares of common
stock based on an exchange ratio of 10.812 shares of common stock for each such
unit. The issuance of the common stock in the reorganization was made in
reliance upon Section 4(2) of the Securities Act of 1933 and/or Rule 506
thereunder as a transaction not involving a public offering. Appropriate
transfer restriction legends were affixed to the certificates. At December 31,
2001, we had a total of 17,855,566 shares of common stock outstanding.

We issued 7,800,000 shares of common stock in our November 2001 initial
public offering for which we received total proceeds of $132.6 million. We
incurred $13.8 million in related costs of the offering, including underwriting
discounts and commissions. The remaining $118.8 million in net proceeds from
our initial public offering have been used as follows as of December 31, 2001:



| |  |  | $13.7 million to repay outstanding borrowings under our
revolving credit facility and interest accrued on those borrowings
through the repayment date;                                                                                                                                                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | $47.3 million to redeem all of the outstanding redeemable
preferred units of DonJoy, L.L.C. at a redemption price equal to
their liquidation value plus accrued and unpaid distributions thereon
through the repayment date; and                                                                        
|
| |  |  | $28.3 million to redeem $25.0 million principal amount of our
12 5/8% senior subordinated notes due 2009 at a redemption price of
112.625% of their principal amount as permitted by the terms of the
indenture for the notes plus accrued interest on the notes so
redeemed through the repayment date.

We did not receive any proceeds from the sale of 1,200,000 shares of our
common stock in the initial public offering by certain of our stockholders.

We intend to use the remaining net proceeds from our initial public
offering to fund working capital and for other general corporate purposes,
including, if consummated, the possible acquisitions of European manufacturers
and distributors as discussed under Managements Discussion and Analysis of
Financial Condition and Results of Operations-Overview-Possible Acquisitions.




Item 6.Selected Financial Data

The selected financial data set forth below with respect to dj
Orthopedics, Inc.s 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:

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|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |        |     |        |        |  
|-------------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ------- | ------------------------------- | ----------------------------- | ------ | ------------------------------------ | ------ | ------- | --- | ------ | - | ------- | --- | ------ | ------ | ------- | --- | ------ | ------ | ------ | --- | ------ | ------ | -
|                                       |                                                                                                                   |         |                                 |                               |        | Years Ended December 31,            
|                                       |                                                                                                                   |         |                                 |                               |        |                                     
|                                       |                                                                                                                   |         |                                 |                               |        | 2001                                 |        | 2000    |     | 1999   |   | 1998    |     | 1997  
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |       
|                                       |                                                                                                                   |         |                                 |                               |        | (in thousands except per share data)
|Statement of Income Data:              |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Net revenues                                                                                                      |         | $                               | 169,170                       |        |                                      | $      | 143,586 |     |        | $ | 116,418 |     |        | $      | 103,643 |     |        | $      | 94,855 |    
|                                       | Cost of goods sold(a)                                                                                             |         |                                 | 71,888                        |        |                                      |        | 60,178  |     |        |   | 51,744  |     |        |        | 46,466  |     |        |        | 39,393 |    
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Gross profit                                                                                                      |         |                                 | 97,282                        |        |                                      |        | 83,408  |     |        |   | 64,674  |     |        |        | 57,177  |     |        |        | 55,462 |    
|                                       | Operating expenses(a):                                                                                            |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |        |    
|                                       |                                                                                                                   |         | Sales and marketing             |                               |        | 48,339                               |        |         |     | 38,653 |   |         |     | 28,902 |        |         |     | 27,633 |        |        |     | 24,629 |       
|                                       |                                                                                                                   |         | General and administrative      |                               |        | 24,165                               |        |         |     | 19,761 |   |         |     | 16,755 |        |         |     | 16,484 |        |        |     | 15,802 |       
|                                       |                                                                                                                   |         | Research and development        |                               |        | 2,189                                |        |         |     | 2,465  |   |         |     | 2,115  |        |         |     | 2,248  |        |        |     | 2,055  |       
|                                       |                                                                                                                   |         | Merger and integration costs(b) |                               |        |                                     |        |         |     | 400    |   |         |     |       |        |         |     |       |        |        |     |       |       
|                                       |                                                                                                                   |         | Restructuring costs(c)          |                               |        |                                     |        |         |     |       |   |         |     |       |        |         |     | 2,467  |        |        |     |       |       
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Total operating expenses                                                                                          |         |                                 | 74,693                        |        |                                      |        | 61,279  |     |        |   | 47,772  |     |        |        | 48,832  |     |        |        | 42,486 |    
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Income from operations                                                                                            |         |                                 | 22,589                        |        |                                      |        | 22,129  |     |        |   | 16,902  |     |        |        | 8,345   |     |        |        | 12,976 |    
|                                       | Interest expense                                                                                                  |         |                                 | (17,796                       | )      |                                      |        | (16,958 | )   |        |   | (7,568  | )   |        |        |        |     |        |        | (2,072 | )  
|                                       | Interest income                                                                                                   |         |                                 | 408                           |        |                                      |        | 437     |     |        |   | 181     |     |        |        |        |     |        |        |       |    
|                                       | Discontinued acquisition costs                                                                                    |         |                                 |                              |        |                                      |        | (449    | )   |        |   |        |     |        |        |        |     |        |        |       |    
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Income before income taxes                                                                                        |         |                                 | 5,201                         |        |                                      |        | 5,159   |     |        |   | 9,515   |     |        |        | 8,345   |     |        |        | 10,904 |    
|                                       | Provision for income taxes:                                                                                       |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |        |    
|                                       |                                                                                                                   |         |                                 | Provision for income taxes(d) |        |                                      | (79    | )       |     |        |  |         |     |        | (2,387 | )       |     |        | (3,394 | )      |     |        | (4,367 | )
|                                       |                                                                                                                   |         |                                 | Deferred tax benefit          |        |                                      | 54,169 |         |     |        |  |         |     |        |       |         |     |        |       |        |     |        |       |  
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Total income taxes                                                                                                |         |                                 | 54,090                        |        |                                      |        |        |     |        |   | (2,387  | )   |        |        | (3,394  | )   |        |        | (4,367 | )  
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Income before extraordinary items                                                                                 |         |                                 | 59,291                        |        |                                      |        | 5,159   |     |        |   | 7,128   |     |        |        | 4,951   |     |        |        | 6,537  |    
|                                       | Extraordinary items, net of tax(e)                                                                                |         |                                 | (2,801                        | )      |                                      |        |        |     |        |   |        |     |        |        |        |     |        |        |       |    
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Net income                                                                                                        |         | $                               | 56,490                        |        |                                      | $      | 5,159   |     |        | $ | 7,128   |     |        | $      | 4,951   |     |        | $      | 6,537  |    
|                                       | Less:
Preferred unit dividends and accretion of
preferred unit fees                                               |         |                                 | (5,667                        | )      |                                      |        | (5,415  | )   |        |   | (2,343  | )   |        |        | N/A     |     |        |        | N/A    |    
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Net income (loss) available to stockholders/members                                                               |         | $                               | 50,823                        |        |                                      | $      | (256    | )   |        | $ | 4,785   |     |        |        | N/A     |     |        |        | N/A    |    
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Income
per share before extraordinary items (less preferred unit dividends
and accretion of preferred unit fees): |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |        |    
|                                       |                                                                                                                   | Basic   |                                 | $                             | 5.06   |                                      |        |         | N/A |        |   |         | N/A |        |        |         | N/A |        |        |        | N/A |       
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       |                                                                                                                   | Diluted |                                 | $                             | 4.94   |                                      |        |         | N/A |        |   |         | N/A |        |        |         | N/A |        |        |        | N/A |       
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Net
income per share available to common stockholders:                                                            |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |        |    
|                                       |                                                                                                                   | Basic   |                                 | $                             | 4.80   |                                      |        |         | N/A |        |   |         | N/A |        |        |         | N/A |        |        |        | N/A |       
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       |                                                                                                                   | Diluted |                                 | $                             | 4.68   |                                      |        |         | N/A |        |   |         | N/A |        |        |         | N/A |        |        |        | N/A |       
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Weighted average shares outstanding:                                                                              |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |        |    
|                                       |                                                                                                                   | Basic   |                                 |                               | 10,593 |                                      |        |         | N/A |        |   |         | N/A |        |        |         | N/A |        |        |        | N/A |       
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       |                                                                                                                   | Diluted |                                 |                               | 10,858 |                                      |        |         | N/A |        |   |         | N/A |        |        |         | N/A |        |        |        | N/A |       
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|_________________________              |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Income per share before deferred tax benefit
and extraordinary items(f):                                          |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |        |    
|                                       |                                                                                                                   | Basic   |                                 | $                             | 0.48   |                                      |        |         | N/A |        |   |         | N/A |        |        |         | N/A |        |        |        | N/A |       
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       |                                                                                                                   | Diluted |                                 | $                             | 0.47   |                                      |        |         | N/A |        |   |         | N/A |        |        |         | N/A |        |        |        | N/A |       
|                                       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|Other Data:                            |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | EBITDA(g)                                                                                                         |         | $                               | 32,033                        |        |                                      | $      | 28,894  |     |        | $ | 21,854  |     |        | $      | 15,665  |     |        | $      | 17,779 |    
|                                       | Adjusted EBITDA(h)                                                                                                |         |                                 | 32,033                        |        |                                      |        | 29,162  |     |        |   | 25,082  |     |        |        | 21,957  |     |        |        | 22,090 |    
|                                       | Depreciation and amortization                                                                                     |         |                                 | 9,444                         |        |                                      |        | 6,365   |     |        |   | 4,952   |     |        |        | 4,853   |     |        |        | 4,803  |    
|                                       | Capital expenditures and acquired intangibles                                                                     |         |                                 | 7,104                         |        |                                      |        | 7,722   |     |        |   | 4,706   |     |        |        | 4,149   |     |        |        | 2,273  |    
|                                       | Ratio of earnings to fixed charges(i)                                                                             |         |                                 | 1.27x                         |        |                                      |        | 1.29x   |     |        |   | 2.12x   |     |        |        | 8.84x   |     |        |        | 4.83x  |    
|Cash flows provided by (used in)       |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Operating activities                                                                                              |         | $                               | (4,066                        | )      |                                      | $      | 1,229   |     |        | $ | 16,065  |     |        | $      | 3,748   |     |        | $      | 11,076 |    
|                                       | Investing activities                                                                                              |         |                                 | (8,109                        | )      |                                      |        | (57,015 | )   |        |   | (4,776  | )   |        |        | (4,049  | )   |        |        | (2,322 | )  
|                                       | Financing activities                                                                                              |         |                                 | 33,993                        |        |                                      |        | 53,965  |     |        |   | (6,171  | )   |        |        | 200     |     |        |        | (8,401 | )  
|Balance Sheet Data (at end of period): |                                                                                                                   |         |                                 |                               |        |                                      |        |         |     |        |   |         |     |        |        |         |     |        |        |       
|                                       | Cash                                                                                                              |         | $                               | 25,814                        |        |                                      | $      | 4,106   |     |        | $ | 5,927   |     |        | $      | 809     |     |        | $      | 910    |    
|                                       | Working capital                                                                                                   |         |                                 | 83,896                        |        |                                      |        | 38,695  |     |        |   | 27,413  |     |        |        | 15,625  |     |        |        | 9,749  |    
|                                       | Total assets                                                                                                      |         |                                 | 247,922                       |        |                                      |        | 155,672 |     |        |   | 89,416  |     |        |        | 77,056  |     |        |        | 71,288 |    
|                                       | Long-term obligations                                                                                             |         |                                 | 110,934                       |        |                                      |        | 157,222 |     |        |   | 113,305 |     |        |        |        |     |        |        |       |    
|                                       | Redeemable preferred units                                                                                        |         |                                 |                              |        |                                      |        | 41,660  |     |        |   | 32,539  |     |        |        |        |     |        |        |       |    
|                                       | Obligations to Smith & Nephew (including current portion)                                                         |         |                                 |                              |        |                                      |        |        |     |        |   |        |     |        |        | 45,227  |     |        |        | 45,027 |    
|                                       | Total stockholders/members equity (deficit)                                                                     |         |                                 | 115,240                       |        |                                      |        | (63,625 | )   |        |   | (70,429 | )   |        |        | 12,832  |     |        |        | 7,881  |    



---

N/A Not applicable.




|(a) |  | Amounts in 1999 and prior years include various charges and overhead
allocations from Smith & Nephew. See note (g) below.                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | We recorded merger and integration costs in 2000 associated with the
consolidation of the Orthotech operations into our existing facilities
including merger and integration and information systems consulting.

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|(c) |  | We recorded restructuring costs in 1998 relating to the consolidation of
our operations at our Vista, California facility. See Managements
Discussion and Analysis of Financial Condition and Results of Operations
 Overview  Manufacturing Cost Reduction Initiatives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(d) |  | Because we have operated as a limited liability company from our
recapitalization in June 1999 to our reorganization in November 2001, in
accordance with federal, state and local income tax regulations which
provide that no income taxes are levied on U.S. limited liability
companies and each member of the company was individually responsible for
reporting the members share of our net income or loss, we did not provide
for income taxes in our consolidated financial statements. We have
recorded a tax provision at an effective tax rate of 40% on our income
before taxes for the period from November 19, 2001, the date of our
reorganization, to December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(e) |  | We incurred an extraordinary charge, net of $1.9 million tax benefit, of
approximately $2.8 million for the write-off of unamortized deferred debt
issuance costs, debt discount and a prepayment premium as a result of the
redemption of a portion of our senior subordinated notes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(f) |  | Income per share before deferred tax benefit and extraordinary items is
not considered to be a calculation required by generally accepted
accounting principles. However, management has included this calculation
because, for comparative purposes on a year over year basis,
management believes it is a more
meaningful representation of our operations, excluding these one-time
items.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|(g) |  | EBITDA is defined as income from operations plus restructuring costs,
merger and integration costs and depreciation and amortization.
Discontinued acquisition costs are excluded from income from operations
since the charge is not considered a direct cost of operating the
business. 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 differs from the
definition of EBITDA under our credit agreement in that our definition of
EBITDA excludes discontinued acquisition costs. Under both the credit
agreement definition and our definition of EBITDA, we were in compliance
with all debt covenants under the credit agreement at December 31, 2001.
Our definition of EBITDA may not be comparable to that of other companies.
|   
|(h) |  | Adjusted EBITDA represents EBITDA, as defined above, adjusted to
eliminate those direct charges from Smith & Nephew as well as those
allocations of Smith & Nephews overhead and other expenses that we have
not incurred on a stand-alone basis. These amounts were charged or
allocated to us on the basis of direct usage where identifiable, with the
remainder allocated to us on the basis of its annual sales or the capital
employed by Smith & Nephew in our business. See note 9 of the notes to
our consolidated financial statements. These charges and allocations
include:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              



| | (1) |  | charges for brand royalties that we paid to Smith & Nephew for use of
the Smith & Nephew trademarks and trade names which amounts are no
longer paid following the recapitalization since we no longer have the
right to use Smith & Nephew trademarks and trade names;
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | foreign sales corporation commissions that we paid on sales to
foreign sales corporations established by Smith & Nephew for tax
planning purposes which amounts are no longer paid following the
recapitalization;                                                     
|
| | (3) |  | Smith & Nephew overhead allocations for corporate managed accounts
and new business expense and corporate management expense which were not
incurred following consummation of the recapitalization;                                                                   
|
| | (4) |  | Smith & Nephew overhead allocations for research and development and
for amounts charged by Smith & Nephew for services provided to us for
finance (risk management, treasury, audit and taxes), human resources
and payroll and legal services;                       
|
| | (5) |  | the incremental adjustment to the carrying value of acquired
inventories associated with the Orthotech acquisition to state them at
fair value;                                                                                                                        



| |  | and adjusted to include the estimated costs we expected to incur to replace the
services described in note (4) above previously provided by Smith & Nephew. On
a stand-alone basis, we have replaced these services provided by Smith & Nephew
following the recapitalization and we have incurred additional expenses
associated with professional fees and other costs related to being a SEC
registrant and public company.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|                                                   |  |                         |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|-------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                   |  | Years Ended December 31
|                                                   |  |                        
|                                                   |  | 2001                    |        | 2000 |  | 1999 |        | 1998 |  | 1997
|                                                   |  |                         |        |      |  |      |        |      |  |     
|                                                   |  | (in thousands)         
|EBITDA (a) data:                                   |  |                         |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|Income from operations                             |  | $                       | 22,589 |      |  | $    | 22,129 |      |  | $    | 16,902 |   |  | $ | 8,345  |   |  | $ | 12,976 |  
|Restructuring costs                                |  |                         |       |      |  |      |       |      |  |      |       |   |  |   | 2,467  |   |  |   |       |  
|Merger and integration costs                       |  |                         |       |      |  |      | 400    |      |  |      |       |   |  |   |       |   |  |   |       |  
|Depreciation and amortization                      |  |                         | 9,444  |      |  |      | 6,365  |      |  |      | 4,952  |   |  |   | 4,853  |   |  |   | 4,803  |  
|                                                   |  |                         |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|EBITDA (as defined)                                |  |                         | 32,033 |      |  |      | 28,894 |      |  |      | 21,854 |   |  |   | 15,665 |   |  |   | 17,779 |  
|Brand royalties                                    |  |                         |       |      |  |      |       |      |  |      | 1,817  |   |  |   | 3,249  |   |  |   | 1,605  |  
|Foreign sales corporation commissions              |  |                         |       |      |  |      |       |      |  |      |       |   |  |   | 439    |   |  |   | 661    |  
|Amounts eliminated as set forth in note (3) above  |  |                         |       |      |  |      |       |      |  |      | 979    |   |  |   | 1,726  |   |  |   | 1,652  |  
|Amounts eliminated as set forth in note (4) above  |  |                         |       |      |  |      |       |      |  |      | 832    |   |  |   | 1,678  |   |  |   | 1,193  |  
|Step-up in inventory                               |  |                         |       |      |  |      | 268    |      |  |      |       |   |  |   |       |   |  |   |       |  
|Estimated costs to replace Smith & Nephew services |  |                         |       |      |  |      |       |      |  |      | (400   | ) |  |   | (800   | ) |  |   | (800   | )
|                                                   |  |                         |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|Adjusted EBITDA                                    |  | $                       | 32,033 |      |  | $    | 29,162 |      |  | $    | 25,082 |   |  | $ | 21,957 |   |  | $ | 22,090 |  
|                                                   |  |                         |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  



|    |  | 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 our behalf, which costs
and expenses we believe we would have incurred in approximately the same
amounts on a stand-alone basis, and are of a nature we have continued 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 our ability to replace such services, see note 5 of the
notes to our consolidated financial statements, Managements Discussion and
Analysis of Financial Condition and Results of Operations  Overview 
Smith & Nephew Allocations and Sales and Related Party Transactions 
Other Agreements with Smith & Nephew  Transition Services Agreement.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(i) |  | 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 of rental expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          




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

Overview

dj Orthopedics, Inc. is, and prior to the reorganization, DonJoy, L.L.C.
was, a guarantor of the senior subordinated notes and of the credit facility.
Neither DonJoy, L.L.C. had, nor dj Orthopedics, Inc. has, any material assets
or operations other than its ownership of all of the equity interests of dj
Orthopedics, LLC. As a result, the discussion of the historical consolidated
financial position and results of operations of dj Orthopedics, Inc. is
substantially the same as dj Orthopedics, LLCs. No financial information of DJ
Capital, the co-issuer of the senior subordinated notes, is included herein
because management believes such information would not be material given DJ
Capitals lack of assets and liabilities.

2001 Reorganization and Initial Public Offering

dj Orthopedics, Inc. was capitalized with a nominal amount and
incorporated in Delaware on August 16, 2001 and had nominal assets, no
liabilities and no operations or revenues through November 20, 2001, the date
of the reorganization and the closing of our initial public offering.
Immediately prior to the consummation of our initial public offering on
November 20, 2001, a newly-formed, wholly-owned subsidiary of dj Orthopedics,
Inc. was merged with and into DonJoy, L.L.C. with DonJoy, L.L.C. being the
surviving entity of the merger. In the merger, the holders of the common and
preferred units of DonJoy, L.L.C. received shares of dj Orthopedics, Incs
common stock on the basis of 10.812 shares of common stock for each outstanding
unit and, in the case of a preferred unit, an amount in cash equal to
approximately $1,082, representing the liquidation preference of the preferred
unit, plus accrued and unpaid distributions thereon to but excluding the date
that the reorganization was effective. In addition, immediately following the
foregoing merger, DonJoy, L.L.C. merged with and into dj Orthopedics, Inc.
which was the surviving entity of the merger. Prior to these merger
transactions, the operating results of DonJoy, L.L.C. were allocated to its
members. At the time of these mergers, members equity was reclassified into
common stock and additional paid-in capital. Deferred income taxes in the
balance sheet at December 31, 2001 represent the deferred income taxes related
to the difference between the book and tax basis of the assets of DonJoy,
L.L.C. at November 20, 2001 of $54.2 million. As of November 20, 2001 and
giving effect to these merger transactions, 10,055,566 shares of common stock
were issued and outstanding and an additional 7,800,000 shares of common stock
were issued as part of the initial public offering.

39



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##### Table of Contents



1999 Recapitalization

On June 30, 1999, we consummated a $215.3 million recapitalization. In
connection with the recapitalization transactions, we established dj
Orthopedics, LLC and DJ Orthopedics Capital Corporation, a co-issuer of our
senior subordinated notes with no material assets or operations. DonJoy, L.L.C.
sold all of its net assets to dj Orthopedics, LLC for cash which was funded
with the net proceeds of $100.0 million principal amount of 12 5/8% senior
subordinated notes issued by dj Orthopedics, LLC and DJ Capital, as co-issuers,
and the remainder by funds borrowed by dj Orthopedics, LLC under a senior
credit facility. In addition, new investors, including three members of our
senior management, invested new capital of $94.6 million in equity in DonJoy,
L.L.C. The proceeds of the equity investment together with debt financings were
used as follows:



| |  |  | approximately $199.1 million as consideration paid to redeem a
portion of members equity from our Former Parent, and
| | - |  | ---------------------------------------------------------------------------------------------------------------------
|
| |  |  | approximately $8.8 million to pay costs and fees in connection with
the recapitalization.                            

As part of the recapitalization agreement, immediately prior to the
recapitalization, our Former Parent made a capital contribution in an amount
equal to our then existing cash balance. In addition, it canceled current and
deferred liabilities due to our Former Parent and assumed a then existing
restructuring reserve which resulted in an additional capital contribution in
those amounts. These amounts aggregated $47.9 million and were treated as a
capital contribution by our Former Parent to our members equity.

Acquisitions and Other Recent Transactions

On July 7, 2000, we completed the purchase of specified assets and assumed
specified liabilities related to the rehabilitation business, referred to in
this annual report as Orthotech or the Orthotech business, of DePuy Orthopaedic
Technology, Inc., a subsidiary of Johnson & Johnson. We acquired Orthotech for
a purchase price of $46.4 million in cash, exclusive of transaction fees and
expenses. Orthotech developed, manufactured, and marketed an array of
orthopedic products for the orthopedic sports medicine market including braces,
soft goods and specialty products which were similar to the products offered by
us. Orthotech also had an inventory management and billing program that
complemented our OfficeCare® program. We purchased primarily inventory,
equipment and certain intellectual property. We were not required to assume
any liabilities existing prior to the closing date. The Orthotech acquisition
has been accounted for using the purchase method of accounting whereby the
total purchase price has been allocated to tangible and intangible assets
acquired and liabilities assumed based on their estimated fair market values.

Effective March 5, 2001, we invested $0.9 million in an Australian joint
venture, dj Orthopaedics Pty Ltd (dj Australia) which is 60% owned by dj
Orthopedics, LLC. dj Australia has replaced our Smith & Nephew distributor in
Australia and also sells the TiMax product line. As a majority owned
subsidiary, dj Australias financial results are included in our consolidated
financial statements.

On June 1, 2001, we completed the acquisition of substantially all of the
assets and liabilities of Alaron Technologies, L.L.C. for an aggregate cash
purchase price of $500,000. Alaron provided product development, manufacturing
and supply chain management services related to medical and surgical devices.
We purchased primarily equipment and acquired technology. The Alaron
acquisition has been accounted for using the purchase method of accounting
whereby the total purchase price has been allocated to tangible and intangible
assets acquired and liabilities assumed based on their estimated fair market
values. The acquisition also provided order fulfillment and supply chain
management systems and software for our new Alaron Surgical division. These
systems will allow us to better serve the overall sports medicine market by
offering our surgical products in procedure-specific kits. In connection with
the Alaron acquisition, we entered into an employment agreement with Paul K.
Nichols, a principal owner of Alaron Technologies, L.L.C., who serves as a
Senior Vice President and head of the Alaron Surgical division.

Possible Acquisitions

We are continuing to negotiate the acquisition of Ro+Ten SRL, a
manufacturer of soft goods and our current distributor in Italy, and Orthoservice
AG, a Swiss company.
Additionally, we have also executed a letter of intent to acquire a European
manufacturer of rigid knee braces that is also one of our current European
distributors. Consummation of all of these acquisitions is subject, among
other conditions, to satisfactory completion of our due diligence, execution of
definitive agreements, receipt of necessary financing, regulatory and other
approvals and, accordingly, we cannot assure you that any of these acquisitions
will be consummated. If consummated, we anticipate that these transactions
would close during the second or third quarter of 2002. Our acquisition of
these companies, if consummated, is part of our strategy to expand our direct
distribution capability in selected international markets where we believe that
there is significant potential to increase sales due to high per capita health
care expenditures.

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##### Table of Contents



Critical Accounting Policies and Estimates

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

We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
consolidated financial statements:

Reserve for
Discounts and Allowances. We maintain a reserve for discounts and allowances for: i)
contractual allowances for reimbursement amounts from our third-party
payors based on negotiated contracts; and, ii) for doubtful accounts
for estimated losses resulting from the inability of our customers to
make required payments. We have contracts with third-party payors
for our third party reimbursement billings which call for specified
reductions in reimbursement of billed amounts based upon contractual
and/or product reimbursement rates. We reserve and reduce revenues
between 7% and 23% for these contractual allowances. Our reserve for
doubtful accounts is based upon estimated losses from customers who
are billed directly and amounts disallowed under the third-party
payors, primarily for various reasons which we categorize as billing
exceptions. Direct billed customers represent approximately 53% of
our net receivables at December 31, 2001 and have historically had write-offs of less
than 1%. Our third-party reimbursement customers represent 47% of
our net receivables at December 31, 2001 and we estimate the bad debt expense to be
approximately 7-8% of amounts due from non third-party payors. If
the financial condition of our customers were to deteriorate
resulting in an impairment of their ability to make payments or if
third-party payors were to deny claims for late filings, incomplete
information or other reasons, additional allowances may be required.
In addition to the above, we have an additional reserve for discounts
and allowances for third party reimbursement receivables which were
originally billed through a third party insurance billing company
whose contract was canceled in 2001 due to lack of timely and
thorough filings with third party payors. We have transferred and
consolidated these receivables to our single, more experienced third
party billing company and expect to collect approximately 40% to 50%
on these receivables, which represent approximately 28% of our net
receivable balance at December 31, 2001. If claims are denied in
excess of our estimates, our estimates of the recoverability of
amounts due us could be reduced by a material amount.

Reserve for
Inventory. We write-down our inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of
inventory on hand plus future purchase commitments and the estimated
market value based upon an assumption about future demand. If future
demand is less than favorable than those projected by management,
additional inventory write-downs may be required. In addition,
inventory placed in our OfficeCare® locations is reserved for based
on historical shrinkage rates. If actual shrinkage rates were to
differ from our estimated shrinkage rates, revisions to the reserve
would be required.

Rebates. We record estimated reductions to revenue for customer rebate
programs. We follow this method since reasonable dependable
estimates of the revenue and the costs applicable to the rebate
programs can be made.

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

Valuation
Allowance. As of December 31, 2001, we have approximately $56.0 million of
net deferred tax assets related principally to tax deductible
goodwill not recognized for book purposes, for which no valuation
realization allowance has been recorded. Realization of our deferred
tax assets is dependent on our ability to generate approximately $140.0 million of future taxable income over the next
13 years. Management believes that it is more likely than not that
the assets will be realized based on forecasted taxable income.
However, there can be no assurance that we will meet our expectations
of future taxable income. Management will evaluate the realizability
of the deferred tax assets on a quarterly basis and assess the need
for valuation allowances.

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Goodwill and Other Intangibles. In assessing the recoverability of the dj Orthopedics gross
goodwill and other intangibles which total $100.8 million at December
31, 2001, we must make assumptions regarding the estimated future
cash flows and other factors to
determine the fair value of the respective assets. If these estimates
or their related assumptions change in the future, we may be required
to record impairment charges for those assets not previously recorded.

Segments

We are a global designer, manufacturer and marketer of products for the
orthopedic sports medicine market. Our product lines include rigid knee braces,
soft goods, a portfolio of specialty and other complementary orthopedic
products and our recently introduced line of surgical products. Our 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 braces, which provide
relief of knee pain due to osteoarthritis. Our soft goods products, most of
which are fabric or neoprene-based, provide support and/or heat retention and
compression for injuries to the knee, ankle, back and upper extremities,
including the shoulder, elbow, neck and wrist. Our portfolio of specialty and
other complementary orthopedic products, which are designed to facilitate
orthopedic rehabilitation, include lower extremity walkers, upper extremity
braces, cold therapy systems and pain management delivery systems. Our recently
introduced surgical products include fixation devices for soft tissue repair in
the knee as well as to address cartilage damage due to trauma or
osteoarthritis. These products are reported in the specialty and other
complementary products segment. The rigid knee brace product lines and the soft
goods product lines constitute reportable segments under generally accepted
accounting principles. See note 7 of the notes to our consolidated financial
statements. We began selling our Alaron Surgical products in the third
quarter of 2001.

Set forth below is revenue and gross profit information for our product
lines for the years ended December 31, 2001, 2000 and 1999. Gross profit
information is presented before brand royalties charged by Smith & Nephew for
use of Smith & Nephew trademarks and trade names for periods prior to the June
1999 recapitalization (which charges are no longer incurred by us following the
recapitalization), certain other cost of goods sold, primarily manufacturing
variances and royalty expenses, which have not been directly allocated to any
of the product lines, and freight revenue. See note 9 of the notes to our
consolidated financial statements.

|                                                       |                     |  |                          |        |      |  |      |        |   |  |   |        |  
|------------------------------------------------------ | ------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                       |                     |  | Years Ended December 31,
|                                                       |                     |  |                         
|                                                       |                     |  | 2001                     |        | 2000 |  | 1999
|                                                       |                     |  |                          |        |      |  |     
|                                                       |                     |  | (in thousands)          
|Rigid knee braces:                                     |                     |  |                          |        |      |  |      |        |   |  |   |       
|                                                       | Net revenues        |  | $                        | 64,636 |      |  | $    | 58,115 |   |  | $ | 52,953 |  
|                                                       | Gross profit        |  |                          | 46,079 |      |  |      | 41,189 |   |  |   | 37,994 |  
|                                                       | Gross profit margin |  |                          | 71.3   | %    |  |      | 70.9   | % |  |   | 71.8   | %
|Soft goods:                                            |                     |  |                          |        |      |  |      |        |   |  |   |       
|                                                       | Net revenues        |  | $                        | 62,327 |      |  | $    | 51,412 |   |  | $ | 38,606 |  
|                                                       | Gross profit        |  |                          | 27,001 |      |  |      | 24,662 |   |  |   | 18,723 |  
|                                                       | Gross profit margin |  |                          | 43.3   | %    |  |      | 48.0   | % |  |   | 48.5   | %
|Specialty and other complementary orthopedic products: |                     |  |                          |        |      |  |      |        |   |  |   |       
|                                                       | Net revenues        |  | $                        | 37,349 |      |  | $    | 29,647 |   |  | $ | 21,344 |  
|                                                       | Gross profit        |  |                          | 20,866 |      |  |      | 16,635 |   |  |   | 9,447  |  
|                                                       | Gross profit margin |  |                          | 55.9   | %    |  |      | 56.1   | % |  |   | 44.3   | %

The change in mix between rigid knee braces, soft goods and specialty and
other complementary orthopedic products is a direct result of the Orthotech
acquisition, which business historically sold primarily soft goods and
specialty and other complementary products. In our rigid knee braces product
line, our gross profit margin has been relatively consistent. Our soft goods
gross profit margin showed a decline in 2001 of approximately 4.7%. The
decrease is primarily related to lower gross profit margins on our soft knee
braces, ankle products, arm slings, back braces and bandage product lines due
to an increase in the cost of raw materials used in these products. Our products
within specialty and other complementary orthopedic products reflected an
increase in gross profit margins beginning in 2000 due to increased sales of
walkers and crutches, including those sold through our OfficeCare® channel,
which carry higher gross profits. Our total gross profit margin was 57.5%,
58.1%, 55.6%, for the years ended December 31, 2001, 2000 and 1999,
respectively. Total gross profit margins for 1999 are lower due to charges for
brand royalties charged by Smith & Nephew which charges are no longer incurred
by us following the recapitalization. Excluding these charges, the gross
profit margin for 1999 was 57.1%.

Our products are marketed globally under primarily the DonJoy®,
ProCare® and Alaron Surgical brand names through several distribution
channels. DonJoy® brand product sales represented approximately 72% and 75%
of total net revenues, excluding freight revenue, in 2001 and 2000. Excluding
freight revenue, we marketed substantially all of our rigid knee braces,
approximately 84% of our specialty and other complementary orthopedic products
and approximately 39% of our soft goods products under the DonJoy® brand name
in 2001. ProCare® brand product sales represented approximately 28% and 25%
of total net revenues, excluding freight revenue, in 2001 and 2000. Excluding
freight revenue, we sold approximately 61% of our soft goods products,
approximately 16% of our specialty and other complementary orthopedic products
and a nominal percentage of our rigid knee braces under the ProCare® brand
name in 2001. Following the Orthotech acquisition, we sold products under the

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Orthotech brand; however, in 2000 we integrated the Orthotech products into the
DonJoy® and ProCare® brands. Our recently introduced surgical products are
marketed under the Alaron Surgical brand name. Our Alaron Surgical
brand name, TiMax brand name, which is marketed exclusively in Australia
through our Australian subsidiary,
competitor brands marketed through our OfficeCare® program and some of
our smaller brands represent less than 5% of our total net revenues, excluding
freight revenue, and have been allocated to the DonJoy® and ProCare® brand
names in our various segments above.

Domestic sales

Excluding freight revenue, domestic sales accounted for approximately 89%,
87% and 84% of our net revenues in 2001, 2000 and 1999, respectively. The
increase in domestic net revenues as a percentage of total revenues in 2001 and
2000 as compared to prior years is a direct result of the Orthotech business
which historically consisted primarily of domestic sales.

In the United States, DonJoy® brand products are marketed to orthopedic
sports medicine surgeons, orthotic and prosthetic centers, hospitals, surgery
centers, physical therapists and athletic trainers. Our surgical products,
which are sold primarily under the Alaron Surgical brand name, are marketed
to orthopedic sports medicine surgeons, hospitals and surgery centers. Both
DonJoy® and Alaron Surgical products are sold by 38 commissioned sales
agents who employ approximately 225 sales representatives. After a product
order is received by a sales representative, we generally ship the product
directly to the orthopedic professional and we pay a sales commission to the
agent on sales of such products, which commissions are reflected in sales and
marketing expense in our consolidated financial statements. Excluding freight
revenue, domestic sales of DonJoy® brand products represented approximately
63% and 64% of total net revenues in 2001 and 2000, respectively.

Our 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. Excluding freight
revenue, domestic sales of ProCare® products represented approximately 26%
and 24% of total net revenues in 2001 and 2000, respectively.

The change in the mix of domestic sales between the DonJoy® and
ProCare® brands has been a direct result of the Orthotech acquisition. A
majority of the Orthotech products were soft goods and have been integrated
into the ProCare® brands, thus increasing the percent of domestic sales sold
under the ProCare® brand while decreasing the percent of domestic sales sold
under the DonJoy® brand.

International sales

Excluding freight revenue, international sales accounted for approximately
11%, 13% and 16% of our net revenues, in 2001, 2000 and 1999, respectively. The
decrease in international net revenues as a percentage of total revenues in
2001 and 2000 as compared to prior years is a direct result of the Orthotech
business, which historically consisted primarily of domestic sales. The
following table sets forth the percentage of our international net revenues,
excluding freight revenue, by country:

|                |  |              |    |              |  |  |    |  
|--------------- |  | ------------ | -- | ------------ |  |  | -- | -
|                |  | Years Ended 
|                |  |             
|                |  | December 31, |    | December 31,
|                |  | 2001         |    | 2000        
|                |  |              |    |             
|Germany/Austria |  |              | 36 | %            |  |  | 31 | %
|Canada          |  |              | 12 | %            |  |  | 11 | %
|Japan           |  |              | 10 | %            |  |  | 9  | %
|Other countries |  |              | 42 | %            |  |  | 49 | %

The Other countries category consists primarily of sales in Italy,
Belgium, the United Kingdom and Spain with no one country accounting for 10% or
more of our international net revenues, excluding freight revenue, during such
periods.

International sales are currently made primarily through two distinct
channels: independent third party distributors (such as in Italy), including
through the remaining Smith & Nephew sales organizations, and through wholly or
majority owned foreign subsidiaries in Germany/Austria and the United Kingdom
(since January 1, 2002) and in Australia (since March 2001). Distributors in
these channels buy and resell the DonJoy® and ProCare® brand products
within their designated countries. Excluding freight revenue, DonJoy® brand
products constituted approximately 86%, 85% and 86% of international net
revenues in 2001, 2000, 1999, respectively. A significant amount of 2000 sales
were transferred from Smith & Nephew sales organizations to independent
distributors. International sales made through Smith & Nephew sales
organizations were 15%, 20% and 40% of our international sales, exclusive of
freight revenue, in 2001, 2000 and 1999, respectively. We believe future
opportunities for sales growth within international markets are significant. We
intend to continue to selectively replace our third-party independent
distributors with wholly or partially owned distributors in key countries where
we believe the opportunity for growth is significant due to higher per

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capita
health care spending. We believe that more direct control of the distribution
network in these countries will allow us to accelerate the launch of new
products and product enhancements, to benefit from the sale of our higher
margin products
and to capture the distributors margin. The establishment of our
Australian subsidiary and our wholly owned subsidiary distributorships in
Germany and the United Kingdom represented our initial steps in pursuing this
strategy. During 2002, we expect to commence direct distribution of our
products in Canada through a wholly-owned subsidiary, replacing the existing
Smith & Nephew sales organization. Our possible acquisitions, if consummated,
would continue this strategy. Our transition to direct distribution in Germany
and the United Kingdom adversely affected our sales in these countries during
the fourth quarter of 2001 and may continue to adversely affect our sales in
these countries at least for the first six months of 2002. Similarly, sales in
Italy have been adversely affected while we are negotiating the possible
acquisition of our Italian distributor. See Risk Factors-Our transition to
direct distribution of our products in related foreign countries could
adversely affect our revenues and income in these countries.

Since our international sales have historically been made in U.S. dollars,
our results of operations have not been directly impacted by foreign currency
exchange fluctuations. However, as was the case in 2000 and 2001, the volume
and product mix of international sales has been and may continue to 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 customers and thus may impact the
overall level of customer purchases. International sales in 2000 and 2001 were
adversely impacted by foreign currency exchange fluctuations as the
strengthening of the U.S. dollar against the Euro effectively increased the
cost of our products to our European customers. In March 2001, we began selling
products through our Australian subsidiary in Australian dollars and, commencing
January 1, 2002, we began selling products through our subsidiaries in Germany
and the United Kingdom in Euros and Pounds Sterling, respectively. As we begin
to further directly distribute our products in other selected foreign countries
such as Canada, we expect that future sales of our products in these markets will
be denominated in the applicable foreign currencies which would cause currency
fluctuations to more directly impact our operating results. We may seek to
reduce the potential impact of currency fluctuations on our business through
hedging transactions.

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.

OfficeCare® program

In 1996, in response to the needs of our customers, we launched the
OfficeCare® program, an inventory management and insurance billing program
for our U.S. orthopedic sports medicine surgeons. Under the OfficeCare®
program, we provide the orthopedic sports medicine surgeon with an inventory of
orthopedic products for immediate disbursement to the patient. We then seek
reimbursement directly from the patients insurance company or other third
party payor or from the patient where self-pay is applicable. The majority of
these billings are performed by an independent third-party contractor.

Since its inception, the OfficeCare® program has been promoted
specifically to provide our orthopedic sports medicine surgeons with a broad
array of soft goods and certain other specialty products for immediate patient
use. The OfficeCare® program is also intended to facilitate the introduction
of our products to the orthopedic sports medicine surgeons who had not
previously been our customers. As of December 31, 2001, the OfficeCare®
program was located at over 600 physician offices throughout the United States.

The OfficeCare® program represented approximately 13% and 10% of our net
revenues, excluding freight revenue, for 2001 and 2000, respectively, with
sales of soft goods and specialty and other complementary orthopedic products
representing the majority of such sales. The OfficeCare® program involves our
lower margin soft goods products, but is designed to also strengthen our
relationship with the surgeon, and serves to provide a pull-through effect for
both existing and planned sales of our higher margin products. The
OfficeCare® program has historically experienced a strong growth rate, with
an increase of sales of 52% in 2001 over 2000 and 99% in 2000 over 1999. The
increases in 2001 and 2000 are primarily due to our 2000 Orthotech acquisition
which had an inventory management and billing program that complemented our
OfficeCare® program.

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

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December 31, 2001 and 2000. Through December 31, 2000, we
reflected allowances and discounts applicable to the
OfficeCare® program as selling and marketing expense. With the growth in
the program, management believes that these charges are more appropriately
presented as adjustments to revenues, rather than as operating expense. As a
result, we reclassified $3.9 million and $1.3 million of charges for the years
ended December 31, 2000 and 1999, respectively, which were previously included
in selling and marketing expenses, against revenues related to our
OfficeCare® program.

Smith & Nephew allocations and sales

Prior to December 29, 1998, our business was operated as the Bracing &
Support Systems Division of Smith & Nephew. Effective December 29, 1998, Smith
& Nephew contributed the Divisions net assets and shares of a Mexican
subsidiary to our predecessor DonJoy, L.L.C., 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 formerly being a division of Smith & Nephew, our historical
results of operations prior to the June 1999 recapitalization 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 us on the basis of direct usage where identifiable, with the remainder
allocated to us on the basis of its annual sales or the capital employed by
Smith & Nephew in our business. See note 9 of the notes to our consolidated
financial statements.

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



| | (1) |  | Charges for brand royalties historically included in cost of
goods sold resulting from our use of the Smith & Nephew trademarks
and trade name. These charges were $1.8 million in 1999. As a result
of the recapitalization on June 30, 1999, we no longer have the right
to use the Smith & Nephew trademarks and trade names and,
accordingly, these charges are no longer incurred by us.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Foreign sales corporation commissions historically included in
general and administrative expense paid by us on sales to foreign
sales corporations established by Smith & Nephew. The use of sales
corporations was a tax planning strategy for Smith & Nephew. As of
January 1999, we 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 historically were included in general and administrative
expense. These allocations were $1.0 million in 1999. These
allocations were for a portion of Smith & Nephews overhead expenses
that we have not incurred or replaced following the recapitalization.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (4) |  | Smith & Nephew allocations for research and development and for
finance (risk management, treasury, audit and taxes), human resources
and payroll, and legal services historically provided by Smith &
Nephew to us were included in general and administrative expense.
These allocations were $0.8 million in 1999. These allocations were
for a portion of Smith & Nephews overhead expenses. On a stand-alone
basis, we have replaced these services provided by Smith & Nephew
following the recapitalization and we have incurred additional
expenses associated with professional fees and other costs related to
being a SEC registrant and public company. We estimate that the
aggregate annual cost of replacing these services and such additional
expenses that we replaced after the recapitalization was
approximately $0.8 million.
|
| | (5) |  | Other allocations relating to bonuses, pension and insurance
historically included in 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 our behalf were included in general and
administrative expense. These costs and expenses are of a nature we
continue to incur on a stand-alone basis following the
recapitalization.                                                                                                                                                                                                                                                                                                                                                                               

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 us
through November 30, 2000. We have replaced the services provided by Smith &
Nephew with internal staff, including the addition of new employees and through
arrangements with third party providers.

For the years ended December 31, 2001, 2000 and 1999, sales to Smith &
Nephew and its affiliates (including Smith & Nephews sales organizations) were
$2.7 million, $4.6 million and $7.2 million, respectively, or 2%, 3% and 6%,
respectively, of total sales, excluding freight revenue, for these periods.
International sales made through Smith & Nephew sales organizations were 15%,
20% and 40%, excluding freight revenue, in 2001, 2000 and 1999, respectively.
In connection with the recapitalization, Smith & Nephew and its sales
organizations, which distribute our products internationally, entered into
agreements with us

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regarding the purchase of our 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 Related Party
Transactions-Other Agreements with Smith & Nephew-Supply Agreement and
-Distribution Agreement.

Manufacturing Cost Reduction Initiatives

Over the past several years, we have undertaken initiatives designed to
further strengthen our overall manufacturing cost structure and improve
operating efficiency. In order to take advantage of the lower labor costs in
Mexico, in 1993 we began manufacturing certain of our labor intensive
operations, principally sewing, final assembly and packaging, in Tijuana,
Mexico. In 1998, we completed the consolidation of our domestic operations into
one location in Vista, California. In 2000, we completed the consolidation of
the Orthotech operations into our Vista, California location. Operating results
for the last two quarters of 2000 were adversely affected by the consolidation
and integration of the manufacturing operations of the Orthotech brands which
were previously separate and distinct.

We have identified additional opportunities to reduce manufacturing costs
and improve operating efficiency. In 2001 we consolidated our two separate
Mexican operations into one campus location and have listed the vacated
facility for sale. We have recently leased additional space in Mexico, directly
within the current campus. Consolidation of these facilities will enable us to
continue to take advantage of the lower labor costs in Mexico and utilize the
resulting additional capacity in our U.S. facilities to manufacture our more
technologically advanced, high value products. We have begun to take advantage
of our operating efficiencies by moving our post operative and walker lines to
Mexico. In the fourth quarter of 2001, we completed the migration of a majority
of our sewing operations previously performed at our Vista facilities to
Mexico. By upgrading our computer systems to achieve more efficient
production, we expect to achieve material and labor cost reductions as well as
economies of scale across our entire manufacturing operation. We have converted
our manufacturing scheduling to produce finished goods upon customer demand. We
will further convert our procurement process to enable us to replenish our
supply of raw materials upon usage. Both processes will allow us to decrease
the level of inventory necessary to operate the business and reduce the risk of
excess and obsolete inventory. We have also reorganized our manufacturing
facility into product focused groups. The reorganization and streamlining of
the manufacturing facility is expected to reduce the total manufacturing costs,
principally overhead costs. In addition, we intend to further automate our
manufacturing operations in the rigid knee brace product line through the use
of more technologically advanced fabrication and equipment systems. We will
continue to rationalize raw materials used in the production of our existing
products, thereby enabling us to leverage our purchasing power. Finally, in
order to achieve further cost savings, we intend to further reduce the number
of stock keeping units (SKUs) without impacting service or breadth of our
product range.

Basis of Presentation; Taxes.

Upon the consummation of the initial public offering and our
reorganization into corporate form in 2001, we became subject to the payment of
federal income taxes and are required to file a separate federal tax return.
In addition, we have recorded a deferred tax asset of approximately $54.2
million, representing future tax benefits related to the difference at November
20, 2001, the date of the reorganization, between the book basis and tax basis
of the assets of DonJoy, L.L.C. We also incurred an extraordinary charge, net
of $1.9 million tax benefit, of approximately $2.8 million for the write-off of
unamortized deferred debt issuance costs, debt discount and prepayment premiums
as a result of the redemption of a portion of our senior subordinated notes.
These amounts were reflected in dj Orthopedics, Inc.s financial statements in
the fourth quarter of 2001, the quarter in which the reorganization, the
repayment of the revolving credit facility and the redemption of the redeemable
preferred units and a portion of the 12 5/8% senior subordinated notes
occurred. The indenture governing our senior subordinated notes and the credit
facility currently permit dj Orthopedics, LLC to make distributions to dj
Orthopedics, Inc. in amounts required for dj Orthopedics, Inc. to pay federal,
state and local income taxes to the extent such income taxes are attributable
to the income of dj Orthopedics, LLC and its subsidiaries.

Prior to our June 30, 1999 recapitalization, our results of operations
were included in the consolidated federal income tax returns that Smith &
Nephew filed in the United States and our historical financial statements for
1999 reflect a provision for income taxes assuming that DonJoy had filed a
separate federal income tax return. As limited liability companies, DonJoy,
L.L.C. and dj Ortho were not subject to income taxes following the
recapitalization. Instead, DonJoy, L.L.C.s earnings following the
recapitalization were allocated to its members and included in the taxable
income of its members. The indenture governing our senior subordinated notes
and the credit facility permitted dj Ortho to make distributions to DonJoy,
L.L.C. in certain amounts to allow DonJoy, L.L.C. to make distributions to its
members to pay income taxes in respect of their allocable share of taxable
income.

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Results of Operations

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

In the fourth quarter of 2000, we adopted Emerging Issues Task Force
(EITF) Issue 00-10 Accounting for Shipping and Handling Fees and Costs. As a
result, we have reclassified $4.4 million and $3.5 million in 2000 and 1999,
respectively, of freight revenue from sales and marketing expenses into net
revenues. We continue to include freight expenses in sales and marketing
expense.

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

|                                                           |                                         |  |                          |      |      |  |       |      |   |  |       |      |  
|---------------------------------------------------------- | --------------------------------------- |  | ------------------------ | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                                                           |                                         |  | Years Ended December 31,
|                                                           |                                         |  |                         
|                                                           |                                         |  | 2001                     |      | 2000 |  | 1999 
|                                                           |                                         |  |                          |      |      |  |      
|Net revenues:                                              |                                         |  |                          |      |      |  |       |      |   |  |       |     
|                                                           | Rigid knee bracing                      |  |                          | 38.2 | %    |  |       | 40.5 | % |  |       | 45.5 | %
|                                                           | Soft goods                              |  |                          | 36.8 |      |  |       | 35.8 |   |  |       | 33.2 |  
|                                                           | Specialty and other orthopedic products |  |                          | 22.1 |      |  |       | 20.6 |   |  |       | 18.3 |  
|                                                           |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Revenues from product lines                                |                                         |  | 97.1                     |      |      |  | 96.9  |      |   |  | 97.0  |     
|                                                           | Freight revenue                         |  |                          | 2.9  |      |  |       | 3.1  |   |  |       | 3.0  |  
|                                                           |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Total consolidated net revenues                            |                                         |  | 100.0                    |      |      |  | 100.0 |      |   |  | 100.0 |     
|Cost of goods sold                                         |                                         |  | 42.5                     |      |      |  | 41.9  |      |   |  | 44.4  |     
|                                                           |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Gross profit                                               |                                         |  | 57.5                     |      |      |  | 58.1  |      |   |  | 55.6  |     
|                                                           | Sales and marketing                     |  |                          | 28.6 |      |  |       | 26.9 |   |  |       | 24.9 |  
|                                                           | General and administrative              |  |                          | 14.3 |      |  |       | 13.8 |   |  |       | 14.4 |  
|                                                           | Research and development                |  |                          | 1.3  |      |  |       | 1.7  |   |  |       | 1.8  |  
|                                                           | Merger and integration costs            |  |                          |     |      |  |       | 0.3  |   |  |       |     |  
|                                                           | Restructuring costs                     |  |                          |     |      |  |       |     |   |  |       |     |  
|                                                           |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Income from operations                                     |                                         |  | 13.3                     |      |      |  | 15.4  |      |   |  | 14.5  |     
|Interest expense                                           |                                         |  | (10.5                    | )    |      |  | (11.8 | )    |   |  | (6.5  | )   
|Interest income                                            |                                         |  | 0.3                      |      |      |  | 0.3   |      |   |  | 0.2   |     
|Discontinued acquisition costs                             |                                         |  |                         |      |      |  | (0.3  | )    |   |  |      |     
|                                                           |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Income before income taxes                                 |                                         |  | 3.1                      |      |      |  | 3.6   |      |   |  | 8.2   |     
|Provision for income taxes                                 |                                         |  | (0.1                     | )    |      |  |      |      |   |  | (2.1  | )   
|                                                           |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Income before deferred tax benefit and extraordinary items |                                         |  | 3.0                      |      |      |  | 3.6   |      |   |  | 6.1   |     
|Deferred tax benefit                                       |                                         |  | 32.0                     |      |      |  |      |      |   |  |      |     
|                                                           |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Income before extraordinary items                          |                                         |  | 35.0                     |      |      |  | 3.6   |      |   |  | 6.1   |     
|Extraordinary items, net of tax                            |                                         |  | (1.6                     | )    |      |  |      |      |   |  |      |     
|                                                           |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Net income                                                 |                                         |  | 33.4                     | %    |      |  | 3.6   | %    |   |  | 6.1   | %   
|                                                           |                                         |  |                          |      |      |  |       |      |   |  |       |     

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

Net Revenues.Net revenues increased $25.6 million, or 17.8%, to $169.2
million in 2001 from $143.6 million in 2000. Our 2001 net revenues reflected a
sales reversal of $0.9 million in the fourth quarter of 2001 for inventory
returned in excess of our estimated return allowance resulting from termination
of our agreement with our former distributor in Germany and the United Kingdom.
Net revenues, excluding freight revenue, for the rigid knee bracing segment
increased $6.5 million over the prior period due to growth in the domestic
sales of the ligament, post-operative and OA product lines. We introduced the
DonJoy Vista Rehabilitation System in April 2001, the DonJoy SE 4-Point
brace in March 2001, the DonJoy eXtreme brace in September 2001 and a new
post-operative brace line with telescoping bars in February 2001. Soft goods
sales, excluding freight revenue, increased by $10.9 million over the prior
period due primarily to the Orthotech acquisition, a $2.7 million growth of
soft goods sales through the OfficeCare® program, a substantial portion of
which was due to the Orthotech acquisition, and $6.2 million from increased
sales volumes of wrist splints, ankle braces, knee braces, shoulder braces, and
bandages, including those sold through the OfficeCare program. Specialty and
other complementary orthopedic products sales, excluding freight revenue,
increased by $7.7 million over the prior period due primarily to a $3.7 million
increase in sales of lower extremity walkers and cold therapy units, along with
a $3.7 million growth of specialty and other complementary orthopedic products
sales through the OfficeCare® program. Speciality and other complementary
product sales in 2001 included less than $0.3 million from sales of our Alaron
Surgical products, which were introduced in August 2001.

Gross Profit.Gross profit increased $13.9 million, or 16.6%, to $97.3 million
in 2001 from $83.4 million in 2000. Gross profit margin decreased from 58.1% in
2000 to 57.5% in 2001 primarily as a result of increased soft goods sales which
carry a lower gross profit margin. The decrease in gross profit margin
primarily reflects the effects of the Orthotech acquisition, which occurred in
July 2000, and the related increase in soft goods in the mix of products sold.
Our gross profit margin subsequent to the Orthotech acquisition has remained
relatively constant. Gross profit for the rigid knee bracing segment increased
$4.9 million, with gross profit margins remaining relatively constant at 71.3%
in 2001 versus 70.9% in 2000. Gross profit for the soft goods segment

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increased $2.3 million, with gross profit margin decreasing to 43.3% in 2001
from 48.0% in 2000. The decrease is primarily related to lower gross profit
margins on our soft knee braces, ankle products, arm slings, back braces and
bandage product lines due to an increase in the cost of raw materials used in
these products. Gross profit for the specialty and other complementary
orthopedic products segment increased $4.2 million, with gross profit margin
remaining relatively constant at 55.9% in 2001 versus 56.1% in 2000.

Sales and Marketing Expenses.Sales and marketing expenses increased $9.7
million, or 25.1%, to $48.3 million in 2001 from $38.6 million in 2000. The
increase primarily reflects increased commissions ($1.9 million) due to higher
sales of domestic products, increased costs ($2.7 million) related to increased
volume in the OfficeCare® program and an increase in salaries and benefits
($4.0 million) due to increased headcount, primarily as a result of growth in
the OfficeCare® program. Overall, sales and marketing expenses increased as
a percentage of revenues to 28.6% in 2001 from 26.9% in 2000.

General and Administrative Expenses.General and administrative expenses
increased $4.4 million, or 22.3%, to $24.2 million in 2001 from $19.8 million
in 2000. The increase was primarily due to our investment in a new enterprise
software system ($1.4 million), the establishment of our direct distributor
subsidiaries in Germany and the United Kingdom ($0.6 million), amortization
associated with the intangible assets acquired as part of the July 2000
acquisition of Orthotech ($0.6 million), costs related to the new Alaron
Surgical business ($0.3 million) and costs related to dj Australia ($0.3
million). Overall, general and administrative expenses increased as a
percentage of revenues to 14.3% in 2001 compared to 13.8% in 2000.

Research and Development Expenses.Research and development expenses decreased
$0.3 million, or 11.2%, from $2.5 million in 2000 to $2.2 million in 2001
primarily due to lower consulting fees. During the second quarter of 2001, we
introduced the DonJoy VISTA Rehabilitation System. In addition, we
developed the DonJoy eXtreme brace, a new post operative brace line with
telescoping bars along with other competitive products, and the SE Brace II. We
have also continued to focus on the development of our new bone growth
stimulation product, Orthopulse.

Merger and Integration Costs.In the 2000 period, we incurred $0.4 million in
one-time merger and integration costs associated with the consolidation of the
Orthotech operations into our existing facilities including merger and
integration and information systems consulting costs. Other integration costs
are included in the operating expenses above.

Interest Expense.Interest expense increased approximately $0.8 million, or
4.9% to $17.8 million in 2001 from $17.0 million in 2000. The 2001 interest
expense reflects the additional interest expense on the $24.0 million term loan
and the $12.6 million borrowing under the revolving credit facility, both of
which were incurred in July 2000 to partially finance the Orthotech
acquisition. There were additional borrowings of $8.0 million under the
revolving credit facility in December 2000 which also contributed to the
increase in interest expense, offset in part by our $5.0 million, $2.0 million,
$10.6 million and $3.0 million repayments under the revolving credit facility
in June 2001, July 2001, November 2001 and December 2001, respectively.

Deferred Tax Benefit.In connection with the reorganization, we have recorded
a deferred tax benefit of $54.2 million related to the difference between the
book and the tax basis of certain assets and liabilities of DonJoy, L.L.C. at
November 19, 2001, the reorganization date, as the related amortization is
deductible for tax purposes. The tax basis differences arose at the time of
the recapitalization when, for income tax purposes, we elected to increase the
basis of certain assets in an amount equal to the gain recognized by our former
parent.

Extraordinary Items.In connection with the reorganization, we prepaid $25.0
million principal amount of our senior subordinated notes and recorded
extraordinary items of $2.8 million. This amount reflects our write-off of
$1.1 million of unamortized debt issuance costs, $0.4 million of debt discount
for the portion of the senior subordinated notes redeemed and a prepayment
premium of $3.2 million for the redeemed portion of the senior subordinated
notes, net of a $1.9 million tax benefit.

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Net Revenues.Net revenues increased $27.2 million, or 23.3%, to $143.6
million in 2000 from $116.4 million in 1999. Net revenues, excluding freight
revenue, for the rigid knee-bracing segment increased $5.2 million over the
prior year due to growth in the domestic sales for the OA and post-operative
product lines including the introduction of the OAdjuster® brace in March
2000. Soft goods sales, excluding freight revenue, increased by $12.8 million
over the prior year due primarily to the Orthotech acquisition, including $10.5
million from increased sales volumes of wrist splints, ankle braces and knee
braces. The increases also reflected a $3.2 million growth in the OfficeCare®
program. Specialty and other complementary orthopedic product sales, excluding
freight revenue, increased by $8.3 million over the prior year due primarily to
the PainBuster® Pain Management system, cold therapy units, shoulder bracing
and to increased sales of lower extremity walkers, as well as the growth in the
OfficeCare® program.

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Gross Profit.Gross profit increased $18.7 million, or 29.0%, to $83.4 million
in 2000 from $64.7 million in 1999 primarily as a result of the Orthotech
acquisition. Gross profit margin increased to 58.1% in 2000 from 55.6% in 1999,
primarily as a result of the elimination of Smith & Nephew charges for brand
royalties which totalled $1.8 million in 1999 and were not incurred in 2000. As
a result of the consummation of the recapitalization on June 30, 1999, we no
longer have the right to use the Smith & Nephew trademarks and trade names and,
accordingly, charges for brand royalties are no longer incurred by us. In
addition, gross profit margin increased as a result of increased walker sales
combined with the implementation of efficient manufacturing techniques in the
United States and Mexico. Gross profit, excluding freight revenue, for the
rigid knee bracing segment increased $3.2 million, with gross profit margin
decreasing to 70.9% from 71.7%. The margin decrease reflects the change in
product mix. Gross profit, excluding freight revenue, for the soft goods
segment increased $5.9 million as a result of increased sales volume, with
gross profit decreasing to 48.0% from 48.5% in 1999. Gross profit, excluding
freight revenue, for the specialty and other complementary orthopedic products
segment increased $7.2 million, with gross profit margin increasing to 56.1%
from 44.3%. The increase in gross profit margin reflects lower costs associated
with the production of walkers, which resulted from the production of these
walkers moving to our facilities in Mexico in the first quarter of 2000 to take
advantage of labor cost savings. Other cost of goods sold not allocable to
specific product lines increased $0.3 million from 1999 primarily due to the
step-up in inventory acquired in the Orthotech acquisition to fair market
value, and various facility costs incurred as part of the Orthotech
acquisition.

Sales and Marketing Expenses.Sales and marketing expenses increased $9.8
million, or 33.7%, to $38.7 million in 2000 from $28.9 million in 1999. The
increase primarily reflected a $2.7 million increase in commissions associated
with higher sales of DonJoy® products in the United States and increased
costs of $1.6 million associated with the OfficeCare® program. In addition,
as a result of the Orthotech acquisition, we incurred higher than anticipated
freight expenses along with amortization expense related to the acquired
intangibles.

General and Administrative Expenses.General and administrative expenses
increased $3.0 million, or 17.9%, to $19.8 million in 2000 from $16.8 million
in 1999. In 2000, we completed the consolidation of the Orthotech operations
into our Vista, California location. As a result, we incurred $0.5 million in
consolidation costs consisting primarily of consulting, information systems,
travel and moving expenses. The increase was also due to a $1.6 million
increase in salaries and benefits, $0.5 million in consulting expenses related
to the implementation of a new enterprise resource planning system in the 2000
period with minimal expense in the 1999 period and human resources support
combined with a $0.9 million increase in amortization associated with the
intangible assets acquired as part of the Orthotech acquisition.

Research and Development Expenses.Research and development expenses increased
$0.4 million, or 16.5%, to $2.5 million in 2000 from $2.1 million in 1999. The
increase was primarily due to investment in clinical trials associated with new
product development, licensed products, as well as continued studies in core
product efficacy.

Merger and Integration Costs.We incurred $0.4 million in one-time merger and
integration costs associated with the consolidation of the Orthotech operations
into our existing facilities including merger and integration and information
systems consulting. Other integration costs are included in the operating
expenses above.

Interest Expense.Interest expense increased $9.4 million, or 124.1% to $17.0
million in 2000 from $7.6 million in 1999. The recapitalization occurred in
June 1999 and thus 1999 includes only six months of interest expense on the
$100.0 million principal amount of senior subordinated notes and the $15.5
million term loan borrowed under the credit agreement to partially finance the
recapitalization. Additionally, 2000 includes additional interest expense on
the $24.0 million term loan and the $12.6 million borrowing under the revolving
credit facility, both of which were incurred to partially finance the Orthotech
acquisition.

Liquidity and Capital Resources

Our principal liquidity requirements are to service our debt and meet our
working capital and capital expenditure needs. Total long-term indebtedness at
December 31, 2001 was $110.9 million.

Net cash provided by (used in) operating activities was $(4.1) million,
$1.2 million and $16.1 million in 2001, 2000 and 1999, respectively. The
decrease of $5.3 million in 2001 primarily reflects increased accounts
receivable levels associated with the OfficeCare® program and increased
inventory levels in conjunction with the working capital needs associated with
the Orthotech acquisition. The decrease of $14.9 million in 2000 primarily
reflects the increased levels in accounts receivable and inventories during
2000 as compared to 1999, primarily as a result of the working capital needs
associated with the Orthotech acquisition (which did not include the purchase
of the Orthotech historical accounts receivables) including an increase in
accounts receivable levels associated with the OfficeCare® program.

Cash flows used in investing activities were $8.1 million, $57.0 million
and $4.8 million for 2001, 2000 and 1999, respectively. Capital expenditures in
2001 primarily reflected an increase in the capitalization of costs directly
associated with our acquisition and implementation of an enterprise resource
planning system that was completed in March 2001, investments in manufacturing
equipment, the purchase of the equity in a licensor of one of our products for
an aggregate purchase price of $0.5

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million, and the Alaron acquisition in July 2001. Included in investing
activities in 2000 is the $49.0 million investment in Orthotech, including
transaction fees and costs of $3.0 million. Capital expenditures in 2000
primarily reflect an increase in construction in progress related to the
capitalization of costs directly associated with our acquisition and
implementation of an enterprise resource planning system and investments in
manufacturing equipment.

Capital expenditures for 2002 are estimated at $7.9 million and primarily
constitute maintenance capital expenditures. Our credit facility limits our
ability to make capital expenditures. In the event that the amount of capital
expenditures permitted to be made by us under our credit facility in any fiscal
year is greater than the actual amount of capital expenditures during such
fiscal year, then 75% of such excess may be carried forward and utilized in the
immediately succeeding fiscal year, subject to certain restrictions.

Cash flows provided by (used in) financing activities were $34.0 million,
$54.0 million and $(6.2) million in 2001, 2000, and 1999, respectively. The
sources of funds in 2001 is primarily the result of the $118.8 million in net
proceeds from our initial public offering in November 2001 and the $9.6 million
in net proceeds from the issuance of common units in June 2001, net of $21.9
million repaid under our credit facility, $25.0 million to redeem a portion of
our senior subordinated notes and $47.3 million paid to redeem all of the
outstanding redeemable preferred units of DonJoy, L.L.C. in connection with the
reorganization. The sources of funds in 2000 primarily reflect the $24.0
million term loan and $12.6 million of borrowings under the revolving credit
facility during the third quarter of 2000 and the net proceeds from the
issuance by DonJoy, L.L.C. of common and preferred units in the third quarter
of 2000, all related to the Orthotech acquisition. We borrowed an additional
$8.0 million at the end of 2000 as a result of the increase in working capital
associated with the Orthotech acquisition. Prior to the recapitalization, we
participated in Smith & Nephews central cash management program, wherein all
of our cash receipts were remitted to Smith & Nephew and all cash disbursements
were funded by Smith & Nephew. Following the recapitalization, we no longer
participate in Smith & Nephews cash management program.

Contractual Obligations and Commercial Commitments

Interest payments on our senior subordinated notes and on borrowings under
the credit facility have significantly increased our liquidity requirements.
The $75.0 million of outstanding senior subordinated notes, due 2009, bear
interest at 12 5/8%, payable semi-annually on June 15 and December 15. The
credit facility provides for two term loans totaling $39.5 million, of which
$37.1 million was outstanding at December 31, 2001. The first term loan, in the
amount of $15.5 million, was borrowed in connection with the recapitalization
and the second term loan, in the amount of $24.0 million, was borrowed to
finance the Orthotech acquisition. We also have available up to $25.0 million
under the revolving credit facility, which is available for working capital and
general corporate purposes, including financing of acquisitions, investments
and strategic alliances. As of December 31, 2001, we did not have any amount
outstanding under that facility. Borrowings under the term loans and on the
revolving credit facility bear interest at variable rates plus an applicable
margin. At December 31, 2001, the effective interest rate on the term loans
was 4.94%, respectively.

We are required to make annual mandatory prepayments of the term loans
under the credit facility in an amount equal to 50% of excess cash flow (as
defined in the credit facility) (75% if our leverage ratio exceeds a certain
level). We had no excess cash flow at December 31, 2001 or December 31, 2000.
In addition, the term loans are subject to mandatory prepayments in an amount
equal to (a) 100% of the net cash proceeds of certain equity and debt issuances
by us, dj Orthopedics, LLC or any of our other subsidiaries and (b) 100% of the
net cash proceeds of certain asset sales or other dispositions of property by
us, dj Orthopedics, LLC or any of our other subsidiaries, in each case subject
to certain exceptions. No mandatory prepayments were required at December 31,
2001 or December 31, 2000. In August 2001, we obtained a waiver from our bank
lenders with respect to our obligation to prepay the term loans with the
proceeds of the $10.0 million equity investment.

The credit facility and the indenture impose certain restrictions on us,
including restrictions on our ability to incur indebtedness, pay dividends,
make investments, grant liens, sell our assets and engage in certain other
activities. In addition, the credit facility requires us to maintain certain
financial ratios. At December 31, 2001, we were in compliance with all of these
covenants. Indebtedness under the credit facility is secured by substantially
all of our assets, including our real and personal property, inventory,
accounts receivable, intellectual property and other intangibles.

We incurred fees and costs of $8.8 million in connection with the
recapitalization. Approximately $6.6 million, principally relating to financing
fees and expenses, has been capitalized and are being amortized over the terms
of the related debt instruments.

In addition to our obligations
under our credit facility and indenture, we
have various contractual obligations with suppliers and are required to pay
certain minimum royalty payments related to the sale of specified products.
IMD b.v. (IMD) will be the future supplier of our bone growth stimulator
product, Orthopulse. If final FDA approval of this product is
obtained, which is
not expected until at least the fourth quarter of 2002, we will be required to
make a $2.0 million payment to IMD for the exclusive U.S. distribution rights
of this product. The contract also calls for
minimum purchases of inventory over 2002 and 2003, which is not dependent on
the final FDA decision on the PMA for OrthoPulse. We recorded $0.5 million and $0.8 million in inventory
payments in 2001 and 2000, respectively, as advances on our inventory
commitments to IMD and we made a $0.5 million investment in IMD (which

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represents a 5% ownership in the company) in 2001. Australian Surgical
Design and Manufacture Pty Limited (ASDM) is a supplier of our surgical knee
products in Australia. Our arrangement with ASDM also requires minimum
purchase requirements of approximately 7.0 million and 8.3 million Australian
dollars in 2002 and 2003, respectively, along with the minimum purchase of 50
instrument sets of the ASDM Knee for each respective year, with minimum
purchase obligations to be mutually agreed upon in 2004 through 2006. We are
also required to make specified minimum royalty payments of $0.2 million per
year related to our OnTrack® product for 2002 through 2005. All other
required minimum royalty payments on our products are negligible. We
expect to make certain payments in connection with
a terminated distribution agreement in amounts of
$1.2 million in 2002 and $0.8 million in 2003, for the
reacquisition of the distribution rights.

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

|                                      |  |                        |         |        |  |           |       |           |  |               |        |       |  |   |       |  |  |   |        | 
|------------------------------------- |  | ---------------------- | ------- | ------ |  | --------- | ----- | --------- |  | ------------- | ------ | ----- |  | - | ----- |  |  | - | ------ | 
|                                      |  | Payments Due by Period
|                                      |  |                       
|                                      |  |                        |         |        |  | 2002      |       | 2003-2005 |  | 2006-2007     |        | 2008+
|                                      |  |                        |         |        |  |           |       |           |  |               |        |      
|Contractual                           |  |                        |         |        |  | Less than |       |           |  |               |        |       |  |   |       |  |  |  
|Obligations                           |  | Total                  |         | 1 Year |  | 1-3 Years |       | 4-5 Years |  | After 5 years
|                                      |  |                        |         |        |  |           |       |           |  |              
|Long-Term Debt(1)                     |  | $                      | 110,934 |        |  | $         | 1,274 |           |  | $             | 35,812 |       |  | $ |      |  |  | $ | 73,848 | 
|Operating Leases                      |  |                        | 14,002  |        |  |           | 2,739 |           |  |               | 7,204  |       |  |   | 4,059 |  |  |   |       | 
|Unconditional
Purchase
Obligations(2) |  |                        | 6,495   |        |  |           | 2,267 |           |  |               | 4,228  |       |  |   |      |  |  |   |       | 
|Other Long-Term
Obligations(3)        |  |                        | 3,000   |        |  |           | 1,750 |           |  |               | 1,250  |       |  |   |      |  |  |   |       | 
|Total Contractual
Cash Obligations    |  | $                      | 134,431 |        |  | $         | 8,030 |           |  | $             | 48,494 |       |  | $ | 4,059 |  |  | $ | 73,848 | 



---

|(1) |  | Represents scheduled principal payments for 2002 through 2005 under
the term loan portion of our credit facility and the senior subordinated
note repayment, net of unamortized discount, after 2008.                                                                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Represents minimum purchase obligations under the IMD and ASDM contracts
(see note 10 of the notes to our consolidated financial statements).                                                                                                                                                                                                               
|   
|   
|   
|   
|(3) |  | Represents remaining payments
and expected payments in connection with terminated domestic
distribution agreements ($0.1 million on January 1,
April 1, July 1 and October 1, 2002, respectively,
$1.2 million on or before March 31, 2002 and $0.8 million on or
before March 31, 2003) and minimum royalty payments of $0.2
million for 2002 through 2005.

As part of our strategy, we intend to pursue acquisitions, such as the
Orthotech and Alaron acquisitions, investments and strategic alliances. We may
require new sources of financing to consummate any such transactions, including
additional debt or equity financing. We cannot assure you that such additional
sources of financing will be available on acceptable terms, if at all.

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

Obligations under joint venture agreement

Under the shareholders agreement dated April 5, 2001, executed in
connection with the establishment of our 60% owned Australian subsidiary, we
are required to fund additional working capital needs by way of equity and/or
loans in an amount proportionate to our ownership of dj Australia. Upon the
third anniversary of this agreement and upon each anniversary thereafter, we
may become obligated under certain circumstances to acquire all the remaining
shares of dj Australia for a purchase price provided in the shareholders
agreement.

Seasonality

We generally record our 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

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thus there is an increase in the number of elective orthopedic surgeries.
Conversely, we generally have lower net revenues during its second and third
quarters as a result of decreased sports activity and fewer orthopedic
surgeries. Our results of operations would be adversely and disproportionately
affected if our sales were substantially lower than those normally expected
during the first and fourth quarters. Increases in our net revenues beginning
in the third quarter of 2000 reflect the Orthotech Acquisition.

Recent Accounting Pronouncements

We adopted Statement of Financial Accounting Standards (SFAS) No. 133,
Accounting for Derivative Instruments and Hedging Activities, of the
Financial Accounting Standards Board (FASB) in the first quarter of 2001. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments and hedging activities and requires the recognition of all
derivatives on our balance sheet at fair market value. The adoption of SFAS No.
133 on our financial statements for the first nine months of 2001 was not
material.

In June 2001, the FASB issued SFAS No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 141 also includes guidance on the initial recognition and
measurement of goodwill and other intangible assets acquired in a business
combination that is completed after June 30, 2001. SFAS No.142 no longer
permits the amortization of goodwill and indefinite-lived intangible assets.
Instead, these assets must be reviewed annually, or more frequently in some
circumstances, for impairment in accordance with this statement. This
impairment test uses a fair value approach rather than the undiscounted cash
flows approach previously required by SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
Intangible assets that do not have indefinite lives will continue to be
amortized over their useful lives and reviewed for impairment in accordance
with SFAS No. 121. We are required to adopt SFAS No. 142 effective January 1,
2002 at which time we will be required to reassess the intangible assets,
including goodwill, previously recorded in connection with previous purchase
acquisitions, as well as the useful lives of such intangible assets. Upon
adoption of SFAS 142, we will stop amortizing goodwill and certain other
intangibles resulting from acquisitions prior to July 1, 2001, which will
reduce annual amortization expense by approximately $3.5 million. Goodwill and
intangibles with indefinite lives will be assigned to reporting units as
determined by us for purposes of impairment testing and tested using a two-step
approach for impairment annually or whenever there is an impairment indicator.
The impact of stopping goodwill amortization will increase our annual net
income by approximately $2.2 million.




Item 7A.Quantitative and Qualitative Disclosures About Market Risk

We are exposed to certain market risks as part of our ongoing business
operations. Primary exposure includes changes in interest rates. We are
exposed to interest rate risk in connection with the term loans and borrowings
under the revolving credit facility which bear interest at floating rates based
on London Inter-Bank Offered Rate (LIBOR) or the prime rate plus an applicable
borrowing margin. We manage our 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, 2001, we had $75.0 million
principal amount of fixed rate debt represented by our senior subordinated
notes and $37.1 million of variable rate debt represented by borrowings under
the credit facility (at an interest rate of 4.94% at December 31, 2001). Based
on our current balance outstanding under the credit facility, an immediate
change of one percentage point in the applicable interest rate would cause an
increase or decrease in interest expense of approximately $0.4 million on an
annual basis. At December 31, 2001, up to $25.0 million of variable rate
borrowings was available under the revolving credit facility. We may use
derivative financial instruments, where appropriate, to manage our interest
rate risks. However, as a matter of policy, we do not enter into derivative or
other financial investments for trading or speculative purposes. As all of our
sales have historically been denominated in U.S. dollars, we have not been
subject to foreign currency exchange risk. However, as was the case in 2000
and 2001, the volume and product mix of international sales has been and may
continue to 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 customers and thus
may impact the overall level of customer purchases. International sales in 2000
and 2001 were adversely impacted by foreign currency exchange fluctuations as
the strengthening of the U.S. dollar against the Euro effectively increased the
cost of our products to our European customers. In March 2001, we began selling
products through our Australian subsidiary in Australian dollars and, commencing
January 1, 2002, we began selling products through our subsidiaries in Germany
and the United Kingdom in Euros and Pounds Sterling, respectively. As we begin
to further directly distribute our products in other selected foreign countries
such as Canada, we expect that future sales of our products in these markets
will be denominated in the applicable foreign currencies which would cause
currency fluctuations to more directly impact our operating results. We may
seek to reduce the potential impact of currency fluctuations on our business
through hedging transactions.

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Our distribution and purchase agreement with IMD has provisions tied to
the fluctuation of the Euro. In the event the value of the Euro in U.S.
dollars on the date of payment of the $2.0 million licensing fee changes from a
specified rate, the licensing fee shall be adjusted to reflect the then current
exchange rate. After giving effect to these currency fluctuations, the
difference between the adjusted licensing fee and the original $2.0 million
licensing fee will be recovered by us through the purchase of additional
products from IMD. We anticipate mitigating these risks by entering into
hedging transactions in 2002.




Item 8.Financial Statements and Supplementary Data

The following documents are filed as part of this report:

|                                                                                                                                   |  |      |    | 
|---------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|                                                                                                                                   |  | Page
|                                                                                                                                   |  |     
|Report of Ernst & Young LLP, Independent Auditors                                                                                  |  |      | 54 | 
|Consolidated Balance Sheets as of December 31, 2001 and 2000                                                                       |  |      | 55 | 
|Consolidated Statements of Income for the years ended December 31,
2001, 2000 and 1999                                             |  |      | 56 | 
|Consolidated Statements of Changes in Stockholders/Members Equity (Deficit) for the
years ended December 31, 2001, 2000 and 1999 |  |      | 57 | 
|Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999                                         |  |      | 58 | 
|Notes to Consolidated Financial Statements                                                                                         |  |      | 59 | 

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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of dj Orthopedics,
Inc. as of December 31, 2001 and 2000, and the related consolidated statements
of income, equity and cash flows for each of the three years in the period
ended December 31, 2001. 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 dj Orthopedics,
Inc. at December 31, 2001 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.



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

San Diego, California
January 30, 2002

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dj Orthopedics, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit/share data)

|                                                                                                                                                                    |                                                                                                                             |   |              |        |              |   |         |          |   |  |  |  | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | - | ------------ | ------ | ------------ | - | ------- | -------- | - |  |  |  | 
|                                                                                                                                                                    |                                                                                                                             |   | December 31, |        | December 31, |   |         |          |  
|                                                                                                                                                                    |                                                                                                                             |   | 2001         |        | 2000         |   |         |          |  
|                                                                                                                                                                    |                                                                                                                             |   |              |        |              |   |         |          |  
|Assets                                                                                                                                                              |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|Current assets:                                                                                                                                                     |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|                                                                                                                                                                    | Cash and cash equivalents                                                                                                   |   | $            | 25,814 |              |   | $       | 4,106    |   |  |  |  | 
|                                                                                                                                                                    | Accounts receivable, net of discounts and allowances
of $8,741 and $4,278 at December 31, 2001 and
2000, respectively       |   |              | 45,176 |              |   |         | 34,498   |   |  |  |  | 
|                                                                                                                                                                    | Inventories, net                                                                                                            |   |              | 25,139 |              |   |         | 18,510   |   |  |  |  | 
|                                                                                                                                                                    | Deferred tax asset, current portion                                                                                         |   |              | 6,350  |              |   |         |         |   |  |  |  | 
|                                                                                                                                                                    | Other current assets                                                                                                        |   |              | 4,285  |              |   |         | 3,270    |   |  |  |  | 
|                                                                                                                                                                    |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|Total current assets                                                                                                                                                |                                                                                                                             |   | 106,764      |        |              |   | 60,384  |          |   |  |  | 
|Property, plant and equipment, net                                                                                                                                  |                                                                                                                             |   | 15,343       |        |              |   | 12,785  |          |   |  |  | 
|Intangible assets, net                                                                                                                                              |                                                                                                                             |   | 70,588       |        |              |   | 75,419  |          |   |  |  | 
|Debt issuance costs, net                                                                                                                                            |                                                                                                                             |   | 4,501        |        |              |   | 6,549   |          |   |  |  | 
|Deferred tax asset                                                                                                                                                  |                                                                                                                             |   | 49,686       |        |              |   |        |          |   |  |  | 
|Other assets                                                                                                                                                        |                                                                                                                             |   | 1,040        |        |              |   | 535     |          |   |  |  | 
|                                                                                                                                                                    |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|Total assets                                                                                                                                                        |                                                                                                                             | $ | 247,922      |        |              | $ | 155,672 |          |   |  |  | 
|                                                                                                                                                                    |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|Liabilities and stockholders equity/members deficit                                                                                                               |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|Current liabilities:                                                                                                                                                |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|                                                                                                                                                                    | Accounts payable                                                                                                            |   | $            | 9,825  |              |   | $       | 8,982    |   |  |  |  | 
|                                                                                                                                                                    | Accrued compensation                                                                                                        |   |              | 2,090  |              |   |         | 2,937    |   |  |  |  | 
|                                                                                                                                                                    | Accrued commissions                                                                                                         |   |              | 1,218  |              |   |         | 1,444    |   |  |  |  | 
|                                                                                                                                                                    | Long-term debt, current portion                                                                                             |   |              | 1,274  |              |   |         | 1,274    |   |  |  |  | 
|                                                                                                                                                                    | Accrued interest                                                                                                            |   |              | 386    |              |   |         | 686      |   |  |  |  | 
|                                                                                                                                                                    | Other accrued liabilities                                                                                                   |   |              | 8,075  |              |   |         | 6,366    |   |  |  |  | 
|                                                                                                                                                                    |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|Total current liabilities                                                                                                                                           |                                                                                                                             |   | 22,868       |        |              |   | 21,689  |          |   |  |  | 
|12 5/8% Senior Subordinated Notes                                                                                                                                   |                                                                                                                             |   | 73,848       |        |              |   | 98,260  |          |   |  |  | 
|Long-term debt, less current portion                                                                                                                                |                                                                                                                             |   | 35,812       |        |              |   | 57,688  |          |   |  |  | 
|Redeemable Preferred Units; 100,000 units authorized, 44,405 units
issued and outstanding at December 31, 2000; liquidation
preference $43,688 at December 31, 2000 |                                                                                                                             |   |             |        |              |   | 41,660  |          |   |  |  | 
|Minority interest                                                                                                                                                   |                                                                                                                             |   | 154          |        |              |   |        |          |   |  |  | 
|Commitments and contingencies (Note 10)                                                                                                                             |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|Stockholders equity/members deficit:                                                                                                                              |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|                                                                                                                                                                    | Common units; 2,900,000 units authorized, 793,890 units issued
and outstanding at December 31, 2000                         |   |              |       |              |   |         | 74,754   |   |  |  |  | 
|                                                                                                                                                                    | Preferred stock, $0.01 par value; 25,000,000 shares authorized, none issued
and outstanding at December 31, 2001            |   |              |       |              |   |         |         |   |  |  |  | 
|                                                                                                                                                                    | Common stock, $0.01 par value; 100,000,000 shares authorized,
17,855,566 shares issued and outstanding at December 31, 2001 |   |              | 179    |              |   |         |         |   |  |  |  | 
|                                                                                                                                                                    | Additional
paid-in-capital                                                                                                  |   |              | 65,642 |              |   |         |         |   |  |  |  | 
|                                                                                                                                                                    | Notes receivable from officers                                                                                              |   |              | (2,082 | )            |   |         | (1,772   | ) |  |  |  | 
|                                                                                                                                                                    | Retained earnings (deficit)                                                                                                 |   |              | 51,501 |              |   |         | (136,607 | ) |  |  |  | 
|                                                                                                                                                                    |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|Total stockholders equity/members deficit                                                                                                                         |                                                                                                                             |   | 115,240      |        |              |   | (63,625 | )        |   |  |  | 
|                                                                                                                                                                    |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 
|Total liabilities and stockholders equity/members deficit                                                                                                         |                                                                                                                             | $ | 247,922      |        |              | $ | 155,672 |          |   |  |  | 
|                                                                                                                                                                    |                                                                                                                             |   |              |        |              |   |         |          |   |  |  | 

See accompanying notes.

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dj Orthopedics, Inc.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)

|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |        |  
|----------------------------------------------------------------------------------------------------------------- | ----------------------------------- | - | ------------------------ | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | -
|                                                                                                                  |                                     |   | Years Ended December 31,
|                                                                                                                  |                                     |   |                         
|                                                                                                                  |                                     |   | 2001                     |        | 2000 |   | 1999   
|                                                                                                                  |                                     |   |                          |        |      |   |        
|Net revenues                                                                                                      |                                     | $ | 169,170                  |        |      | $ | 143,586 |        |  | $ | 116,418 |       
|Cost of goods sold                                                                                                |                                     |   | 71,888                   |        |      |   | 60,178  |        |  |   | 51,744  |       
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|Gross profit                                                                                                      |                                     |   | 97,282                   |        |      |   | 83,408  |        |  |   | 64,674  |       
|Operating expenses:                                                                                               |                                     |   |                          |        |      |   |         |        |  |   |         |       
|                                                                                                                  | Sales and marketing                 |   |                          | 48,339 |      |   |         | 38,653 |  |   |         | 28,902 |  
|                                                                                                                  | General and administrative          |   |                          | 24,165 |      |   |         | 19,761 |  |   |         | 16,755 |  
|                                                                                                                  | Research and development            |   |                          | 2,189  |      |   |         | 2,465  |  |   |         | 2,115  |  
|                                                                                                                  | Merger and integration costs        |   |                          |       |      |   |         | 400    |  |   |         |       |  
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|Total operating expenses                                                                                          |                                     |   | 74,693                   |        |      |   | 61,279  |        |  |   | 47,772  |       
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|Income from operations                                                                                            |                                     |   | 22,589                   |        |      |   | 22,129  |        |  |   | 16,902  |       
|Interest expense                                                                                                  |                                     |   | (17,796                  | )      |      |   | (16,958 | )      |  |   | (7,568  | )     
|Interest income                                                                                                   |                                     |   | 408                      |        |      |   | 437     |        |  |   | 181     |       
|Discontinued acquisition costs                                                                                    |                                     |   |                         |        |      |   | (449    | )      |  |   |        |       
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|Income before income taxes                                                                                        |                                     |   | 5,201                    |        |      |   | 5,159   |        |  |   | 9,515   |       
|Provision for taxes:                                                                                              |                                     |   |                          |        |      |   |         |        |  |   |         |       
|                                                                                                                  | Provision
for income taxes (Note 7) |   |                          | (79    | )    |   |         |       |  |   |         | (2,387 | )
|                                                                                                                  | Deferred tax benefit                |   |                          | 54,169 |      |   |         |       |  |   |         |       |  
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|Total income taxes                                                                                                |                                     |   | 54,090                   |        |      |   |        |        |  |   | (2,387  | )     
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|Income before extraordinary items                                                                                 |                                     |   | 59,291                   |        |      |   | 5,159   |        |  |   | 7,128   |       
|Extraordinary items, net of tax                                                                                   |                                     |   | (2,801                   | )      |      |   |        |        |  |   |        |       
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|Net income                                                                                                        |                                     |   | 56,490                   |        |      |   | 5,159   |        |  |   | 7,128   |       
|Less: Preferred unit dividends and accretion
of preferred unit fees                                               |                                     |   | (5,667                   | )      |      |   | (5,415  | )      |  |   | (2,343  | )     
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|Net income (loss) available to common
stockholders/members                                                        |                                     | $ | 50,823                   |        |      | $ | (256    | )      |  | $ | 4,785   |       
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|Income per share before
extraordinary items (less preferred unit dividends and accretion of
preferred unit fees): |                                     |   |                          |        |      |   |         |        |  |   |         |       
|                                                                                                                  | Basic                               |   | $                        | 5.06   |      |   |         | N/A    |  |   |         | N/A    |  
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|                                                                                                                  | Diluted                             |   | $                        | 4.94   |      |   |         | N/A    |  |   |         | N/A    |  
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|Net
income per share available to common stockholders:                                                            |                                     |   |                          |        |      |   |         |        |  |   |         |       
|                                                                                                                  | Basic                               |   | $                        | 4.80   |      |   |         | N/A    |  |   |         | N/A    |  
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|                                                                                                                  | Diluted                             |   | $                        | 4.68   |      |   |         | N/A    |  |   |         | N/A    |  
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|Weighted
average shares outstanding used to calculate per share information:                                      |                                     |   |                          |        |      |   |         |        |  |   |         |       
|                                                                                                                  | Basic                               |   |                          | 10,593 |      |   |         | N/A    |  |   |         | N/A    |  
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       
|                                                                                                                  | Diluted                             |   |                          | 10,858 |      |   |         | N/A    |  |   |         | N/A    |  
|                                                                                                                  |                                     |   |                          |        |      |   |         |        |  |   |         |       

For information related to the required pro forma
impact of income taxes on income per share before extraordinary items
and net income per share, see Note 1.

See accompanying notes.

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

|                                                                                                                                                              |  |              |            |              |  |            |         |            |  |                 |            |                 |  |                    |     |                     |  |        |          |   |  |   |        |   |  |   |          |   |  |   |          |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ------------ |  | ---------- | ------- | ---------- |  | --------------- | ---------- | --------------- |  | ------------------ | --- | ------------------- |  | ------ | -------- | - |  | - | ------ | - |  | - | -------- | - |  | - | -------- | - |  | - | ------ | -
|                                                                                                                                                              |  | Common Units |            | Common Stock |  |            |         |            |  |                 |            |                 |  | Notes              |     | Total Stockholders' |  |        |          |  
|                                                                                                                                                              |  |              |            |              |  | Additional |         | Receivable |  | Retained        |            | Equity/Members' |  | Comprehensive     
|                                                                                                                                                              |  | Units        |            | Amount       |  | Shares     |         | Amount     |  | Paid-in Capital |            | from Officers   |  | Earnings (Deficit) |     | (Deficit)           |  | Income
|                                                                                                                                                              |  |              |            |              |  |            |         |            |  |                 |            |                 |  |                    |     |                     |  |       
|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 $9.25 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 $9.25 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  | ) |  |   |        |  
|                                                                                                                                                              |  |              |            |              |  |            |         |            |  |                 |            |                 |  |                    |     |                     |  |        |          |   |  |   |        |   |  |   |          |   |  |   |          |   |  |   |        |  
|Issuance of common units at $10.08 per unit,
in exchange for cash and notes receivable                                                                        |  |              | 75,890     |              |  |            | 8,272   |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   | (174   | ) |  |   |         |   |  |   | 8,098    |   |  |   |        |  
|Note receivable issued to Management for
purchase of common units                                                                                             |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   | (124   | ) |  |   |         |   |  |   | (124     | ) |  |   |        |  
|Transfer of interest receivable to
note receivable                                                                                                            |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   | (74    | ) |  |   |         |   |  |   | (74      | ) |  |   |        |  
|Transaction fees in connection with
the Recapitalization                                                                                                      |  |              |           |              |  |            | (39     | )          |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   |       |   |  |   |         |   |  |   | (39      | ) |  |   |        |  
|Stock options granted for services                                                                                                                            |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   |       |   |  |   | 36       |   |  |   | 36       |   |  |   |        |  
|Tax distributions to preferred unit holders                                                                                                                   |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   |       |   |  |   | (563     | ) |  |   | (563     | ) |  |   |        |  
|Preferred unit dividends and accretion
of preferred unit fees                                                                                                 |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   |       |   |  |   | (5,415   | ) |  |   | (5,415   | ) |  |   |        |  
|Net income (excluding $274 allocated to preferred
unit holders)                                                                                               |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   |       |   |  |   | 4,885    |   |  |   | 4,885    |   |  | $ | 4,885  |  
|                                                                                                                                                              |  |              |            |              |  |            |         |            |  |                 |            |                 |  |                    |     |                     |  |        |          |   |  |   |        |   |  |   |          |   |  |   |          |   |  |   |        |  
|Balance at December 31, 2000                                                                                                                                  |  |              | 793,890    |              |  |            | 74,754  |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   | (1,772 | ) |  |   | (136,607 | ) |  |   | (63,625  | ) |  |   | 4,885  |  
|                                                                                                                                                              |  |              |            |              |  |            |         |            |  |                 |            |                 |  |                    |     |                     |  |        |          |   |  |   |        |   |  |   |          |   |  |   |          |   |  |   |        |  
|Issuance of common units at $10.08 per unit,
in exchange for cash and notes receivable,
net of transaction fees of $234                                       |  |              | 91,743     |              |  |            | 9,763   |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   | (211   | ) |  |   |         |   |  |   | 9,552    |   |  |   |        |  
|Exchange of 885,633 common units and 44,405
preferred units at the exchange ratio of 10.812
shares of our common stock in conjunction
with the Reorganization |  |              | (885,633   | )            |  |            | (84,517 | )          |  |                 | 10,055,566 |                 |  |                    | 101 |                     |  |        | 84,416   |   |  |   |       |   |  |   |         |   |  |   |         |   |  |   |        |  
|Issuance of common stock at par value in
conjunction with Reorganization at $17.00
per share, net of transaction fees of $13,793                              |  |              |           |              |  |            |        |            |  |                 | 7,800,000  |                 |  |                    | 78  |                     |  |        | 118,729  |   |  |   |       |   |  |   |         |   |  |   | 118,807  |   |  |   |        |  
|Reclassification of accumulated deficit to additional
paid-in capital at the Reorganization date                                                              |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        | (137,503 | ) |  |   |       |   |  |   | 137,503  |   |  |   |         |   |  |   |        |  
|Transfer of interest receivable to note
receivable                                                                                                            |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   | (99    | ) |  |   |         |   |  |   | (99      | ) |  |   |        |  
|Stock options granted for services                                                                                                                            |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   |       |   |  |   | 92       |   |  |   | 92       |   |  |   |        |  
|Tax distributions to preferred unit holders                                                                                                                   |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   |       |   |  |   | (200     | ) |  |   | (200     | ) |  |   |        |  
|Preferred unit dividends and accretion
of preferred unit fees                                                                                                 |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   |       |   |  |   | (5,667   | ) |  |   | (5,667   | ) |  |   |        |  
|Foreign currency translation adjustment                                                                                                                       |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   |       |   |  |   | (110     | ) |  |   | (110     | ) |  |   | (110   | )
|Net income                                                                                                                                                    |  |              |           |              |  |            |        |            |  |                 |           |                 |  |                    |    |                     |  |        |         |   |  |   |       |   |  |   | 56,490   |   |  |   | 56,490   |   |  |   | 56,490 |  
|                                                                                                                                                              |  |              |            |              |  |            |         |            |  |                 |            |                 |  |                    |     |                     |  |        |          |   |  |   |        |   |  |   |          |   |  |   |          |   |  |   |        |  
|Balance at December 31, 2001                                                                                                                                  |  |              |           |              |  | $          |        |            |  |                 | 17,855,566 |                 |  | $                  | 179 |                     |  | $      | 65,642   |   |  | $ | (2,082 | ) |  | $ | 51,501   |   |  | $ | 115,240  |   |  | $ | 56,380 |  
|                                                                                                                                                              |  |              |            |              |  |            |         |            |  |                 |            |                 |  |                    |     |                     |  |        |          |   |  |   |        |   |  |   |          |   |  |   |          |   |  |   |        |  

See accompanying notes.

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

|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |        |        |  
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------- | ------- | ------------------------ | ------- | ---- | ------- | ------ | ------- | - | -------- | ------ | ------ | -
|                                                                                            |                                                                                                              |                           |         | Years Ended December 31,
|                                                                                            |                                                                                                              |                           |         |                         
|                                                                                            |                                                                                                              |                           |         | 2001                     |         | 2000 |         | 1999  
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |       
|Operating activities                                                                        |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|Net income                                                                                  |                                                                                                              | $                         | 56,490  |                          |         | $    | 5,159   |        |         | $ | 7,128    |       
|Adjustments to reconcile net income to net cash (used in) provided by
operating activities: |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|                                                                                            | Depreciation and amortization                                                                                |                           |         | 9,444                    |         |      |         | 6,365  |         |   |          | 4,952  |       
|                                                                                            | Amortization of debt issuance costs and discount on Senior
Subordinated Notes                                |                           |         | 2,636                    |         |      |         | 1,082  |         |   |          | 510    |       
|                                                                                            | Step-up to fair value of acquired inventory                                                                  |                           |         |                         |         |      |         | 268    |         |   |          |       |       
|                                                                                            | Stock-based compensation                                                                                     |                           |         | 92                       |         |      |         | 36     |         |   |          |       |       
|                                                                                            | Merger and integration costs                                                                                 |                           |         |                         |         |      |         | 400    |         |   |          |       |       
|                                                                                            | Minority interest                                                                                            |                           |         | 154                      |         |      |         |       |         |   |          |       |       
|                                                                                            | Changes in operating assets and liabilities:                                                                 |                           |         |                          |         |      |         |        |         |   |          |        |       
|                                                                                            |                                                                                                              | Accounts receivable       |         |                          | (10,678 | )    |         |        | (13,092 | ) |          |        | (1,564 | )
|                                                                                            |                                                                                                              | Inventories               |         |                          | (6,629  | )    |         |        | (2,576  | ) |          |        | 704    |  
|                                                                                            |                                                                                                              | Other current assets      |         |                          | (1,114  | )    |         |        | (2,427  | ) |          |        | (106   | )
|                                                                                            |                                                                                                              | Accounts payable          |         |                          | 843     |      |         |        | 2,571   |   |          |        | (893   | )
|                                                                                            |                                                                                                              | Accrued interest          |         |                          | (300    | )    |         |        | 160     |   |          |        | 526    |  
|                                                                                            |                                                                                                              | Accrued compensation      |         |                          | (847    | )    |         |        | 494     |   |          |        | 1,057  |  
|                                                                                            |                                                                                                              | Accrued commissions       |         |                          | (226    | )    |         |        | 490     |   |          |        | (237   | )
|                                                                                            |                                                                                                              | Deferred income taxes     |         |                          | (56,036 | )    |         |        |        |   |          |        |       |  
|                                                                                            |                                                                                                              | Income taxes              |         |                          |        |      |         |        |        |   |          |        | 2,516  |  
|                                                                                            |                                                                                                              | Restructuring reserve     |         |                          |        |      |         |        |        |   |          |        | (339   | )
|                                                                                            |                                                                                                              | Other accrued liabilities |         |                          | 2,105   |      |         |        | 2,299   |   |          |        | 1,811  |  
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|Net cash (used in) provided by operating activities                                         |                                                                                                              |                           | (4,066  | )                        |         |      | 1,229   |        |         |   | 16,065   |       
|Investing activities                                                                        |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|Purchases of property, plant and equipment                                                  |                                                                                                              |                           | (5,964  | )                        |         |      | (6,522  | )      |         |   | (2,502   | )     
|Purchase of intangible assets                                                               |                                                                                                              |                           | (1,140  | )                        |         |      | (1,200  | )      |         |   | (2,204   | )     
|Proceeds from assets held for sale                                                          |                                                                                                              |                           |        |                          |         |      | 126     |        |         |   |         |       
|Orthotech acquisition                                                                       |                                                                                                              |                           |        |                          |         |      | (49,019 | )      |         |   |         |       
|Alaron acquisition                                                                          |                                                                                                              |                           | (500    | )                        |         |      |        |        |         |   |         |       
|Other assets                                                                                |                                                                                                              |                           | (505    | )                        |         |      | (400    | )      |         |   | (70      | )     
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|Net cash used in investing activities                                                       |                                                                                                              |                           | (8,109  | )                        |         |      | (57,015 | )      |         |   | (4,776   | )     
|Financing activities                                                                        |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|Net proceeds from Senior Subordinated Notes                                                 |                                                                                                              |                           |        |                          |         |      |        |        |         |   | 97,953   |       
|Repayment of Senior Subordinated Notes                                                      |                                                                                                              |                           | (25,000 | )                        |         |      |        |        |         |   |         |       
|Proceeds from long-term debt                                                                |                                                                                                              |                           |        |                          |         |      | 44,600  |        |         |   | 15,500   |       
|Repayment of long-term debt                                                                 |                                                                                                              |                           | (21,876 | )                        |         |      | (888    | )      |         |   | (250     | )     
|Distributions to preferred unit holders                                                     |                                                                                                              |                           | (200    | )                        |         |      | (563    | )      |         |   |         |       
|Debt issuance costs                                                                         |                                                                                                              |                           |        |                          |         |      | (551    | )      |         |   | (7,283   | )     
|Purchase of common units from Smith & Nephew (the Former Parent)                          |                                                                                                              |                           |        |                          |         |      |        |        |         |   | (199,140 | )     
|Net proceeds from issuance of common stock in connection with Reorganization                |                                                                                                              |                           | 118,807 |                          |         |      |        |        |         |   |         |       
|Net proceeds from issuance of common units                                                  |                                                                                                              |                           | 9,552   |                          |         |      | 8,059   |        |         |   | 63,437   |       
|Repurchase of preferred units in connection with Reorganization                             |                                                                                                              |                           | (47,290 | )                        |         |      |        |        |         |   |         |       
|Net proceeds from issuance of preferred units                                               |                                                                                                              |                           |        |                          |         |      | 3,432   |        |         |   | 30,000   |       
|Note receivable issued for purchase of common units                                         |                                                                                                              |                           |        |                          |         |      | (124    | )      |         |   |         |       
|Intercompany obligations                                                                    |                                                                                                              |                           |        |                          |         |      |        |        |         |   | (6,388   | )     
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|Net cash provided by (used in) financing activities                                         |                                                                                                              |                           | 33,993  |                          |         |      | 53,965  |        |         |   | (6,171   | )     
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|Effect of exchange rate changes on cash                                                     |                                                                                                              |                           | (110    | )                        |         |      |        |        |         |   |         |       
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|Net increase (decrease) in cash                                                             |                                                                                                              |                           | 21,708  |                          |         |      | (1,821  | )      |         |   | 5,118    |       
|Cash at beginning of period                                                                 |                                                                                                              |                           | 4,106   |                          |         |      | 5,927   |        |         |   | 809      |       
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|Cash at end of period                                                                       |                                                                                                              | $                         | 25,814  |                          |         | $    | 4,106   |        |         | $ | 5,927    |       
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|Supplemental disclosure of cash flow information:                                           |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|                                                                                            | Interest paid                                                                                                |                           | $       | 16,974                   |         |      | $       | 15,716 |         |   | $        | 6,530  |       
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|Supplemental disclosure of non-cash transactions:                                           |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|                                                                                            | Capital contribution in connection with the Recapitalization                                                 |                           | $       |                         |         |      | $       |       |         |   | $        | 47,853 |       
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|                                                                                            | Dividends and accretion of preferred unit fee related to redeemable
preferred units                          |                           | $       | 5,667                    |         |      | $       | 5,415  |         |   | $        | 2,343  |       
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       
|                                                                                            | Common units issued in exchange for notes receivable and transfer
of interest receivable to notes receivable |                           | $       | 310                      |         |      | $       | 248    |         |   | $        | 1,400  |       
|                                                                                            |                                                                                                              |                           |         |                          |         |      |         |        |         |   |          |       

See accompanying notes.

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

1. Organization and Summary of Significant Accounting Policies

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

2001 Reorganization and Initial Public Offering

dj Orthopedics, Inc. was capitalized with a nominal amount and
incorporated in Delaware on August 16, 2001 and had nominal assets, no
liabilities and no operations or revenues until November 20, 2001. Concurrently
with the completion of its initial public offering on November 20, 2001, a
newly-formed, wholly-owned subsidiary of dj Orthopedics, Inc. was merged with
and into DonJoy with DonJoy being the surviving entity of the merger. In the
merger, holders of the common and preferred units of DonJoy received shares of
dj Orthopedics, Incs common stock on the basis of 10.812 shares of common
stock for each outstanding unit and, in the case of a preferred unit, an amount
in cash equal to approximately $1,082, representing the liquidation preference
of the preferred unit, plus accrued and unpaid distributions thereon to but
excluding the date that the Reorganization was effective. A total of
10,055,566 shares of common stock were issued in the merger. In addition,
immediately following the foregoing merger, DonJoy merged with and into dj
Orthopedics, Inc. which was the surviving entity of the second merger. Both of
these mergers are referred to herein as the Reorganization. Prior to the
Reorganization, the operating results of DonJoy were allocated to the members.
At the time of the Reorganization, members equity was reclassified into common
stock and additional paid-in capital. Deferred income taxes of $54.2 million
represent the deferred income taxes related to the difference in the book and
tax basis of the assets of DonJoy at November 20, 2001 and which were recorded
at the time of the Reorganization. Immediately following the Reorganization, dj
Orthopedics, Inc. sold 7,800,000 shares of common stock in an initial public
offering at $17.00 per share.

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

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements present the historical
consolidated financial position and results of operations of dj Orthopedics and
include the accounts of dj Ortho, the accounts of its wholly-owned Mexican
subsidiary that manufactures a portion of dj Orthos products under Mexicos
maquiladora program, and the accounts of its majority owned subsidiary, dj
Australia. The maquiladora program allows foreign manufacturers to take
advantage of Mexicos lower cost production sharing capabilities. All
intercompany accounts and transactions have been eliminated in consolidation.
Minority interest at December 31, 2001, represents the minority stockholders
proportionate share of the net assets of dj Australia.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions about the future that affect the amounts reported in
the consolidated financial statements. These estimates include assessing the
collectibility of accounts receivable, usage and recoverability of inventory
and long-lived assets and incurrence of contractual allowances, returns and
warranty and rebate costs. 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.

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Fair Value of Financial Instruments

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



| |  |  | Cash and Cash Equivalents and Accounts 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, are adequate to state accounts receivable
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 believes the fair value of long-term debt
approximates its carrying value at December 31, 2001.                                                

Discounts and Allowances

Accounts receivable is presented on the consolidated balance sheets net of
payment discounts, contractual allowances related to third-party payors, and
allowances for doubtful accounts.

Long-Lived Assets

Property, plant and equipment and intangible assets are recorded at cost.
The Company provides for depreciation on property, plant and equipment and
intangible assets using the straight-line method over the estimated useful
lives of the assets, which range from three to five years. Leasehold
improvements are amortized over the lesser of their estimated useful life or
the term of the related lease.

In accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, whenever events
or changes in circumstances indicate that the carrying amount of its assets
might not be recoverable, the Company, using its best estimates based upon
reasonable and supportable assumptions and projections, reviews the carrying
value of long-lived assets to determine whether the carrying value can be
recovered through undiscounted future operating cash flow. Impairment for
long-lived assets to be held is measured by comparing the carrying amount of
the asset to its fair value. Impairment is reviewed at the lowest levels for
which there are identifiable cash flows that are independent of the cash flows
of other groups of assets. The Company performs such analysis on an individual
asset basis and estimates fair values based on sales prices for comparable
assets. The Company measures impairment for long-lived assets to be disposed of
at the lower of the carrying amount or net realizable value (fair market value
less costs to dispose).

Computer Software Costs

In 1999, the Company 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. 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 2001 and 2000, the Company capitalized $1.2
million and $3.9 million, respectively, related to the acquisition and
implementation of its new enterprise resource planning system. The Company is
amortizing these costs over seven years.

Debt Issuance Costs

As of December 31, 2001 and 2000, debt issuance costs associated with the
issuance of the senior subordinated notes and the credit facility were $6.6
million and $7.8 million, respectively (which are reflected on the balance
sheets net of accumulated amortization of $2.1 million and $1.3 million,
respectively). The Company is amortizing these costs over the life of the debt
which ranges from six to ten years and classifies the amortization as
additional interest expense. In December 2001, the Company recorded an
extraordinary charge of $1.2 million for the write-off of unamortized debt
issuance costs following the redemption of a portion of the senior subordinated
notes.

Inventories

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

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Revenue Recognition

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

The Company recognizes revenue pursuant to Staff Accounting Bulletin No.
101 Revenue Recognition in Financial Statements. Accordingly, revenue is
recognized when all four of the following criteria are met: (i) persuasive
evidence that an arrangement exists; (ii) shipment of goods and passage of
title; (iii) the selling price is fixed or determinable; and (iv)
collectibility is reasonably assured. Revenues from third-party payors are
recorded net of contractual allowances. Contractual allowances are accrued as a
percent of revenues based on historical percentages. Revenues are also reduced
by return rates and rebates. For the Companys international sales and certain
of its sales in the United States that are transacted through distribution
agreements, sales are recorded upon shipment and the agreements provide the
distributors with a right of return as it relates to excess and obsolete
inventory. Estimated returns are accrued based on historical returns in the
period sales are recognized in accordance with the provisions of SFAS No. 48,
Revenue Recognition When Right of Return Exists. Some products have a limited
warranty and estimated costs are accrued based on historical experience in the
period sales are recognized. In addition, rebates are accrued at the time of
sale based upon agreed upon terms with customers. Other than contractual
allowances, returns and warranties and rebates, there are no additional
obligations after shipment. Historically, the percentage of reductions to
revenues has been less than 10%.

Shipping and Handling Costs

During 2000, the Emerging Issues Task Force (EITF) reached a consensus
on Issue 00-10, Accounting for Shipping and Handling Fees and Costs. The
Company implemented Issue 00-10 in the fourth quarter of 2000 and as a result,
revenues in 2000 and 1999 include amounts billed to customers for freight of
$4.4 million and $3.5 million, respectively. Shipping and handling costs
included as part of sales and marketing expenses were $7.6 million and $5.6
million for the years ended December 31, 2000 and 1999, respectively.

Advertising Expense

The cost of advertising is expensed as incurred. The Company incurred
$209,000, $252,000 and $152,000 in advertising costs for the years ended
December 31, 2001, 2000 and 1999, respectively.

Foreign Currency Translation

The financial statements of the Companys international operations where
the local currency is the functional currency are translated into U.S. dollars
using period-end exchange rates for assets and liabilities and average exchange
rates during the period for revenues and expenses. Cumulative translation gains
and losses are excluded from results of operations and recorded as a separate
component of the consolidated statements of changes in stockholders/members
equity (deficit).

Concentration of Credit Risk

dj Ortho sells the majority of its products in the United States through
commissioned sale organizations (referred to as agents). Products which are
generic are sold through large distributors, specialty dealers and buying
groups. Excluding freight revenue, international sales comprised 11%, 13% and
16% of the Companys net revenues for the years ended December 31, 2001, 2000
and 1999, respectively, 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. The Company 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, 2001, the Company had no
individual customer or distributor which accounted for 10% or more of total
annual revenues.

Stock-Based Compensation

As permitted under Financial Accounting Standards Board (FASB) Statement
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), the
Company has elected to follow Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, in accounting for outstanding
stock options and warrants issued to employees. Under APB Opinion No. 25,
compensation expense relating to employee stock options is determined based on
the excess of the market price of the stock over the exercise price on the date
of grant and does not require the recognition of compensation expense for stock
issued under plans defined as non-compensatory. The amount of expense for these
types of arrangements is not material.

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Adoption of SFAS No. 123 for options issued to employees would require
recognition of employee compensation expense based on their computed fair
value on the date of grant. In accordance with SFAS No. 123 and EITF 96-18,
stock options and warrants issued to consultants and other non-employees as
compensation for services provided to the Company are accounted for based upon
the fair value of the services provided or the estimated fair market value of
the option or warrant, whichever can be more clearly determined. The Company
recognizes this expense over the period the services are provided. During the
years ended December 31, 2001 and 2000, the amount of expense related to these
types of arrangements was not significant.

Per Share Information

Shares used in basic
and diluted per share information are computed using the
weighted-average number of common shares outstanding during each period.
Shares used in diluted per share information also include the dilutive effect of
common stock equivalents for common shares potentially issuable upon the
exercise of stock options. The shares used to calculate
basic and diluted per share information consist of the following (in thousands):

|                                                                                                         |  |                              |        | 
|-------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------ | 
|                                                                                                         |  | Year Ended December 31, 2001
|                                                                                                         |  |                             
|Shares used in basic per share calculations 
Weighted average common shares outstanding                 |  |                              | 10,593 | 
|Net effect of dilutive common share equivalents based
on treasury stock method                           |  |                              | 265    | 
|                                                                                                         |  |                              |        | 
|Shares used in diluted net income per share and
income per share before extraordinary items computations |  |                              | 10,858 | 
|                                                                                                         |  |                              |        | 

Pro forma income taxes and pro forma per share
information

The pro forma income tax expense and the calculations for pro forma income per
share information reflect the Companys
operations for the years ended December 31, 2001, 2000 and 1999 as if the
Reorganization occurred as of the beginning of 2001, 2000, and 1999,
respectively. Pro forma income tax expense represents the charge based on the
Companys operating results for the years ended December 31, 2001, 2000 and
1999 as if the Company were a corporation from the beginning of the respective
years, using an estimated combined federal and state tax rate of 40.0%. The pro forma basic and
diluted per share information is
computed based on the weighted average number of shares of common stock
outstanding for each year. The computation of diluted pro forma per
share information includes the dilutive
effect of common stock equivalents for outstanding common stock options using
the treasury stock method. The following table presents the information
referenced above and reconciles the denominators used in computing basic and
diluted earnings per share (in thousands, except per share amounts):

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|                                                                                                                                   |         |   |                          |      |      |   |        |       |   |   |        |      | 
|---------------------------------------------------------------------------------------------------------------------------------- | ------- | - | ------------------------ | ---- | ---- | - | ------ | ----- | - | - | ------ | ---- | 
|                                                                                                                                   |         |   | Years Ended December 31,
|                                                                                                                                   |         |   |                         
|                                                                                                                                   |         |   | 2001                     |      | 2000 |   | 1999  
|                                                                                                                                   |         |   |                          |      |      |   |       
|Income before income taxes                                                                                                         |         | $ | 5,201                    |      |      | $ | 5,159  |       |   | $ | 9,515  |     
|Provision for income taxes:                                                                                                        |         |   |                          |      |      |   |        |       |   |   |        |     
|Historical
provision for income taxes                                                                                              |         |   | (79                      | )    |      |   |       |       |   |   | (2,387 | )   
|Historical
deferred tax benefit                                                                                                    |         |   | 54,169                   |      |      |   |       |       |   |   |       |     
|Pro forma adjustment                                                                                                               |         |   | (2,001                   | )    |      |   | (2,064 | )     |   |   | (1,419 | )   
|                                                                                                                                   |         |   |                          |      |      |   |        |       |   |   |        |     
|Total
income taxes                                                                                                                 |         |   | 52,089                   |      |      |   | (2,064 | )     |   |   | (3,806 | )   
|                                                                                                                                   |         |   |                          |      |      |   |        |       |   |   |        |     
|Pro forma income before extraordinary items                                                                                        |         |   | 57,290                   |      |      |   | 3,095  |       |   |   | 5,709  |     
|Extraordinary items, net of tax                                                                                                    |         |   | (2,801                   | )    |      |   |       |       |   |   |       |     
|                                                                                                                                   |         |   |                          |      |      |   |        |       |   |   |        |     
|Pro forma net income                                                                                                               |         | $ | 54,489                   |      |      | $ | 3,095  |       |   | $ | 5,709  |     
|Less:
Preferred unit dividends and accretion of preferred unit fees                                                                |         |   | (5,667                   | )    |      |   | (5,415 | )     |   |   | (2,343 | )   
|                                                                                                                                   |         |   |                          |      |      |   |        |       |   |   |        |     
|Net
income (loss) available to stockholders/members                                                                                |         | $ | 48,822                   |      |      | $ | (2,320 | )     |   | $ | 3,366  |     
|                                                                                                                                   |         |   |                          |      |      |   |        |       |   |   |        |     
|Pro
forma income (loss) per share before
extraordinary items (less preferred unit dividends and accretion of
preferred unit fees): |         |   |                          |      |      |   |        |       |   |   |        |     
|                                                                                                                                   | Basic   |   | $                        | 4.87 |      |   | $      | (0.27 | ) |   | $      | 0.82 | 
|                                                                                                                                   |         |   |                          |      |      |   |        |       |   |   |        |     
|                                                                                                                                   | Diluted |   | $                        | 4.75 |      |   | $      | (0.27 | ) |   | $      | 0.77 | 
|                                                                                                                                   |         |   |                          |      |      |   |        |       |   |   |        |     
|Pro
forma net income (loss) per share available to common stockholders:                                                            |         |   |                          |      |      |   |        |       |   |   |        |     
|                                                                                                                                   | Basic   |   | $                        | 4.61 |      |   | $      | (0.27 | ) |   | $      | 0.82 | 
|                                                                                                                                   |         |   |                          |      |      |   |        |       |   |   |        |     
|                                                                                                                                   | Diluted |   | $                        | 4.50 |      |   | $      | (0.27 | ) |   | $      | 0.77 | 
|                                                                                                                                   |         |   |                          |      |      |   |        |       |   |   |        |     

|                                                                                                                                                                        |  |                          |        |      |  |      |       |  |  |  |       | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ----- |  |  |  | ----- | 
|                                                                                                                                                                        |  | Years ended December 31,
|                                                                                                                                                                        |  |                         
|                                                                                                                                                                        |  | 2001                     |        | 2000 |  | 1999
|                                                                                                                                                                        |  |                          |        |      |  |     
|Shares used in pro forma basic net income per share and
pro forma income per share before extraordinary items
computations  weighted average common shares
outstanding |  |                          | 10,593 |      |  |      | 8,631 |  |  |  | 4,099 | 
|Net effect of dilutive common share equivalents
based on treasury stock method                                                                                          |  |                          | 265    |      |  |      |      |  |  |  | 255   | 
|                                                                                                                                                                        |  |                          |        |      |  |      |       |  |  |  |       | 
|Shares used in pro forma diluted net income per share
and pro forma income per share before extraordinary
items computations  weighted average                         |  |                          | 10,858 |      |  |      | 8,631 |  |  |  | 4,354 | 
|                                                                                                                                                                        |  |                          |        |      |  |      |       |  |  |  |       | 

Income Taxes

In connection with the Reorganization on November 20, 2001, the Company
became a corporation and is subject to U.S., state, and foreign income taxes on
it earnings after that date. The Company's income tax expense is the
amount of income taxes on 2001 income from the date of the
Reorganization. A deferred tax asset or liability is computed
for the expected future impact of differences between the financial reporting
and tax bases of assets and liabilities as well as the expected future tax
benefit to be derived from tax loss carryforwards. From the
date of the Reorganization, the Companys estimated effective tax rate for
fiscal 2001 was 40.0%. As limited liability companies, DonJoy, L.L.C. and dj
Ortho were not subject to income taxes following the recapitalization
(see note 6). Instead,
DonJoy, L.L.C.s earnings following the 1999 recapitalization (see note 6) were
allocated to its members and included in the taxable income of its members.

Comprehensive Income

The Company 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.

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, (SFAS No.
133), which establishes accounting and reporting standards for derivative
instruments and

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hedging activities. The statement requires the recognition of all derivatives
on the Companys balance sheet at fair value. In July 1999, the FASB issued
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of SFAS No. 133 which deferred the
adoption requirement to the first quarter of 2001. The impact of adoption on
the Companys financial statements was not material.

In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, Business Combinations, and No.
142, Goodwill and Other Intangible Assets.

SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.

SFAS No.142 no longer permits the amortization of goodwill and
indefinite-lived intangible assets. Instead, these assets must be reviewed
annually (or more frequently under certain conditions) for impairment in
accordance with this statement. This impairment test uses a fair value approach
rather than the undiscounted cash flows approach previously required by SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. Intangible assets that do not have indefinite lives
will continue to be amortized over their useful lives and reviewed for
impairment in accordance with SFAS No. 121. We are required to adopt SFAS No.
142 effective January 1, 2002, at which time we will be required to reassess
the intangible assets, including goodwill, previously recorded in connection
with previous purchase acquisitions, as well as the useful lives of such
intangible assets.

Upon adoption of SFAS No. 142, the Company will stop amortizing goodwill
and certain other intangibles resulting from acquisitions prior to July 1,
2001, which will reduce annual amortization expense by approximately $3.5
million. Goodwill and intangibles with indefinite lives will be assigned to
reporting units as determined by the Company for purposes of impairment testing
and tested using a two-step approach for impairment annually or whenever there
is an impairment indicator. The impact of stopping goodwill amortization will
increase the Companys annual net income by approximately $2.2 million.

Reclassifications

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

2. Acquisitions

Orthotech Acquisition

On July 7, 2000, the Company completed the purchase of certain assets and
assumed certain liabilities (the Orthotech Acquisition) of DePuy Orthopaedic
Technology, Inc. (DePuy Orthotech), a subsidiary of Johnson & Johnson,
related to DePuy Orthotechs bracing and soft goods business (Orthotech).
Orthotech developed, manufactured, and marketed an array of orthopedic products
for the sports medicine market, including braces, soft goods and specialty
products which were similar to the products offered by the Company.

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



| |  |  | The sale of common units to J.P. Morgan DJ Partners, LLC (formerly
Chase DJ Partners, L.L.C.) (JPMDJ Partners) and certain members of
management for $8.3 million, of which $0.2 million was for management
notes receivable.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The sale of Redeemable Preferred Units for net proceeds of $3.4
million (excluding preferred unit fees of $0.2 million) to existing
holders of the Redeemable Preferred Units,                                                 
|
| |  |  | Borrowing under our amended credit agreement of approximately $36.6 million, and                                                                                                                                               
|
| |  |  | $1.3 million from available cash.                                                                                                                                                                                              

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The sources of funds for the Orthotech Acquisition are presented in the following table (dollars in millions):

|                                         |  |        |      | 
|---------------------------------------- |  | ------ | ---- | 
|                                         |  | Amount
|                                         |  |       
|Sources                                  | 
|Cash                                     |  | $      | 1.3  | 
|Revolving credit facility                |  |        | 12.6 | 
|Term loan                                |  |        | 24.0 | 
|Redeemable Preferred Units               |  |        | 3.4  | 
|Common unit investment by JPMDJ Partners |  |        | 8.1  | 
|                                         |  |        |      | 
|                                         |  | $      | 49.4 | 
|                                         |  |        |      | 

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

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

The net assets acquired do not include the $0.4 million relating to debt
issuance costs incurred.

As a result of the Orthotech Acquisition, the Company incurred $0.4
million in post-closing merger and integration costs. These costs relate
primarily to consulting and information systems expenses that did not qualify
for capitalizations under EITF 95-3, Recognition of Liabilities in Connection
with a Purchase Business Combination.

The accompanying consolidated statements of income reflect the operating
results of Orthotech since July 7, 2000. Assuming the purchase of Orthotech
had occurred on January 1 of the respective years, the pro forma unaudited
results of operations would have been as follows (in thousands):

|             |  |              |         |              |  |   |         | 
|------------ |  | ------------ | ------- | ------------ |  | - | ------- | 
|             |  | Years Ended 
|             |  |             
|             |  | December 31, |         | December 31,
|             |  | 2000         |         | 1999        
|             |  |              |         |             
|Net revenues |  | $            | 165,858 |              |  | $ | 161,159 | 
|Net income   |  | $            | 5,386   |              |  | $ | 6,770   | 

Australian Joint Venture

Effective March 5, 2001, the Company invested $0.9 million in an
Australian joint venture, dj Orthopaedics Pty Ltd (dj Australia) which is 60%
owned by dj Ortho and is included in the consolidated financial statements of
the Company from the date of the investment. dj Australia replaced the Smith &
Nephew distributor in Australia and also sells two new product lines.

Alaron Acquisition

On June 1, 2001, the Company acquired Alaron Technologies, L.L.C.
(Alaron) under an asset purchase agreement (the Alaron Acquisition). Alaron
provided product development, manufacturing and supply chain management
services related to medical and surgical devices.

The asset purchase agreement provided for the purchase of certain assets and
the assumption of certain liabilities of Alaron, comprising the Alaron
business, for a cash purchase price of $0.5 million. The Company purchased
primarily equipment and acquired technology. The Alaron Acquisition has been
accounted for using the purchase method of accounting whereby the total
purchase price has been allocated to tangible and intangible assets acquired
and liabilities based on their estimated fair values.

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3. Financial Statement Information

Inventories

Inventories consist of the following (in thousands):

|                                     |  |              |        |              |  |   |        |  
|------------------------------------ |  | ------------ | ------ | ------------ |  | - | ------ | -
|                                     |  | December 31, |        | December 31,
|                                     |  | 2001         |        | 2000        
|                                     |  |              |        |             
|Raw materials                        |  | $            | 12,852 |              |  | $ | 9,074  |  
|Work-in-progress                     |  |              | 1,049  |              |  |   | 1,572  |  
|Finished goods                       |  |              | 14,238 |              |  |   | 11,638 |  
|                                     |  |              |        |              |  |   |        |  
|                                     |  |              | 28,139 |              |  |   | 22,284 |  
|Less reserve for excess and obsolete |  |              | (3,000 | )            |  |   | (3,774 | )
|                                     |  |              |        |              |  |   |        |  
|                                     |  | $            | 25,139 |              |  | $ | 18,510 |  
|                                     |  |              |        |              |  |   |        |  

The reserves are primarily for excess and obsolete inventories as of
December 31, 2001 and 2000 and include $1.0 million and $2.2 million,
respectively, relating to the inventory acquired in the Orthotech Acquisition.
The reserve recorded upon the acquisition totaled $5.1 million of which $1.2
million and $2.9 million was utilized during the twelve months ended December
31, 2001 and 2000, respectively.

Property, Plant and Equipment

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

|                                                |  |              |         |              |  |   |         |  
|----------------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------- | -
|                                                |  | December 31, |         | December 31,
|                                                |  | 2001         |         | 2000        
|                                                |  |              |         |             
|Buildings and leasehold improvements            |  | $            | 4,232   |              |  | $ | 3,676   |  
|Office furniture, fixtures, equipment and other |  |              | 28,323  |              |  |   | 19,025  |  
|Construction in progress                        |  |              | 1,992   |              |  |   | 5,804   |  
|                                                |  |              |         |              |  |   |         |  
|                                                |  |              | 34,547  |              |  |   | 28,505  |  
|Less accumulated depreciation and amortization  |  |              | (19,204 | )            |  |   | (15,720 | )
|                                                |  |              |         |              |  |   |         |  
|                                                |  | $            | 15,343  |              |  | $ | 12,785  |  
|                                                |  |              |         |              |  |   |         |  

Intangible Assets

Intangible assets arose primarily from the initial acquisition of DonJoy
in 1987 by the Former Parent, the Companys acquisition of Professional Care
Products, Inc. in 1995, the Companys acquisition of Orthotech in 2000 and the
Companys acquisition of Alaron in 2001. The licensing agreements pertain to
the acquisition of the distribution rights of the PainBuster® products. In
addition, the Company acquired certain distribution rights in 2000. Intangible
assets consist of the following (in thousands):

|                               |  |             |       |      |  |              |         |   |  |   |         |  
|------------------------------ |  | ----------- | ----- | ---- |  | ------------ | ------- | - |  | - | ------- | -
|                               |  |             |       |      |  | December 31,
|                               |  | Useful Life |       |     
|                               |  | (in years)  |       | 2001 |  | 2000        
|                               |  |             |       |      |  |             
|Goodwill                       |  |             | 20    |      |  | $            | 69,153  |   |  | $ | 69,165  |  
|Patented technology            |  |             | 5-20  |      |  |              | 13,651  |   |  |   | 13,621  |  
|Customer base                  |  |             | 15-20 |      |  |              | 12,200  |   |  |   | 12,200  |  
|Licensing agreements           |  |             | 5     |      |  |              | 3,915   |   |  |   | 3,165   |  
|Other                          |  |             | 3-20  |      |  |              | 1,886   |   |  |   | 1,537   |  
|                               |  |             |       |      |  |              |         |   |  |   |         |  
|                               |  |             |       |      |  |              | 100,805 |   |  |   | 99,688  |  
|Less: accumulated amortization |  |             |       |      |  |              | (30,217 | ) |  |   | (24,269 | )
|                               |  |             |       |      |  |              |         |   |  |   |         |  
|                               |  |             |       |      |  | $            | 70,588  |   |  | $ | 75,419  |  
|                               |  |             |       |      |  |              |         |   |  |   |         |  

With the adoption of SFAS 141 and 142 effective January 1, 2002, in
addition to goodwill, $0.3 million of gross intangibles are considered to have
indefinite lives and will no longer be amortized.

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Other Accrued Liabilities

Other accrued liabilities consist of (in thousands):

|                                    |  |              |       |              |  |   |       | 
|----------------------------------- |  | ------------ | ----- | ------------ |  | - | ----- | 
|                                    |  | December 31, |       | December 31,
|                                    |  | 2001         |       | 2000        
|                                    |  |              |       |             
|Accrued cost of distribution rights |  | $            | 400   |              |  | $ | 1,050 | 
|Accrued returns                     |  |              | 576   |              |  |   | 618   | 
|Accrued rebate expense              |  |              | 488   |              |  |   | 541   | 
|Accrued warranty expense            |  |              | 353   |              |  |   | 305   | 
|Accrued Reorganization costs        |  |              | 1,132 |              |  |   |      | 
|Accrued credit memos                |  |              | 1,984 |              |  |   | 898   | 
|Other accruals                      |  |              | 3,142 |              |  |   | 2,954 | 
|                                    |  |              |       |              |  |   |       | 
|                                    |  | $            | 8,075 |              |  | $ | 6,366 | 
|                                    |  |              |       |              |  |   |       | 

4. Financing Arrangements

Principal balances under dj Orthos long-term financing arrangements
consist of the following (in thousands):

|                                                                                                                                        |                                                                                                                                      |   |              |        |              |   |         |        | 
|--------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | - | ------------ | ------ | ------------ | - | ------- | ------ | 
|                                                                                                                                        |                                                                                                                                      |   | December 31, |        | December 31,
|                                                                                                                                        |                                                                                                                                      |   | 2001         |        | 2000        
|                                                                                                                                        |                                                                                                                                      |   |              |        |             
|125/8% Senior Subordinated Notes due 2009, net of $1,152 and $1,740
of unamortized discount at December 31, 2001 and 2000, respectively |                                                                                                                                      | $ | 73,848       |        |              | $ | 98,260  |       
|Senior Credit Facility:                                                                                                                 |                                                                                                                                      |   |              |        |              |   |         |       
|                                                                                                                                        | Term loans due 2005, interest rate of 4.94% at December 31, 2001 and
interest rates ranging from 9.18% to 9.81% at December 31, 2000 |   |              | 37,086 |              |   |         | 38,362 | 
|                                                                                                                                        | Revolving credit facility, interest rates ranging from 8.88% to 9.00%
at December 31, 2000                                           |   |              |       |              |   |         | 20,600 | 
|                                                                                                                                        |                                                                                                                                      |   |              |        |              |   |         |       
|                                                                                                                                        |                                                                                                                                      |   | 110,934      |        |              |   | 157,222 |       
|Current portion of long-term debt                                                                                                       |                                                                                                                                      |   | (1,274       | )      |              |   | (1,274  | )     
|                                                                                                                                        |                                                                                                                                      |   |              |        |              |   |         |       
|                                                                                                                                        |                                                                                                                                      |   | 109,660      |        |              |   | 155,948 |       
|Less: Senior Subordinated Notes (see above)                                                                                             |                                                                                                                                      |   | (73,848      | )      |              |   | (98,260 | )     
|                                                                                                                                        |                                                                                                                                      |   |              |        |              |   |         |       
|Long-term debt net of current portion                                                                                                   |                                                                                                                                      | $ | 35,812       |        |              | $ | 57,688  |       
|                                                                                                                                        |                                                                                                                                      |   |              |        |              |   |         |       

125/8% Senior Subordinated Notes Due 2009

On June 30, 1999, dj Ortho issued $100.0 million of 125/8% Senior
Subordinated Notes due 2009 (the Notes) to various investors in connection
with the financing of the Recapitalization. The Notes were issued at a
discount of $2.0 million which is being 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 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. As of December 21, 2001 and 2000, the Company was in compliance
with all covenants.

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

Optional Redemption. Before June 15, 2002, up to 35% of the aggregate
principal amount of the Notes may be redeemed with the proceeds from sales of
common equity at a redemption price of 112.625% of their principal amount, plus
any accrued and unpaid interest. Pursuant to such provision, in 2001 the
Company redeemed $25 million principal amount of the Notes at a redemption
price of 112.625% of their principal amount plus accrued interest on the Notes
so redeemed with a portion of the proceeds from the initial public offering.

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

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

Amended Credit Facility

In connection with the Recapitalization, dj Ortho entered into a Credit
Agreement with First Union National Bank (First Union) and JP Morgan Chase
Bank (Chase) and other lenders. In connection with the Orthotech
Acquisition, the Credit Agreement was amended (Amended Credit Agreement).
Under the Amended Credit Agreement, dj Ortho may borrow up to $64.5 million
consisting of a revolving credit facility of up to $25.0 million (the
revolving credit facility) and term loans in a principal amount of $39.5
million (the term loans). The first term loan, in the amount of $15.5
million, was borrowed in connection with the Recapitalization and the second
term loan, in the amount of $24.0 million, was borrowed to finance the
Orthotech Acquisition. As of December 31, 2001, dj Ortho had no amounts
outstanding under the revolving credit facility. 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. Borrowings under the Amended
Credit Agreement 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%. Borrowings under the revolving credit
facility and term loans bear interest at variable rates plus an applicable
margin (interest rate of 4.94% as of December 31, 2001 and interest rates
ranging from 8.875% to 9.813% as of December 31, 2000).

In addition to paying interest on outstanding principal under the Amended
Credit Agreement, dj Ortho is required to pay a commitment fee to the lenders
under the revolving credit facility in respect of the unutilized commitments
thereunder at a rate equal to 0.5% per annum.

Repayment. The term loans will mature on June 30, 2005 and are subject to
mandatory repayments and reductions as defined in the Amended Credit Agreement.
The following table sets forth the principal payments on the term loans for the
years 2002 through its maturity in 2005 (in thousands):

|      |  |   |        | 
|----- |  | - | ------ | 
|2002  |  | $ | 1,274  | 
|2003  |  |   | 1,274  | 
|2004  |  |   | 17,202 | 
|2005  |  |   | 17,336 | 
|      |  |   |        | 
|Total |  | $ | 37,086 | 
|      |  |   |        | 

In addition, dj Ortho is required to make annual mandatory prepayments of
the term loan under the amended credit facility in an amount equal to 50% of
excess cash flow (as defined in the Amended Credit Agreement) (75% if dj
Orthos leverage ratio exceeds a certain level). Excess cash flow represents
net income adjusted for (i) extraordinary gains or losses; (ii) depreciation,
amortization and other non-cash charges; (iii) changes in working capital; (iv)
changes in deferred revenues; (v) payments for capital expenditures; and (vi)
repayment of indebtedness. dj Ortho had no excess cash flow at December 31,
2001 or 2000. 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 dj Orthopedics, Inc., dj Ortho or any of its subsidiaries and (b)
100% of the net cash proceeds of certain asset sales or other dispositions of
property by dj Orthopedics, Inc., dj Ortho or any of its subsidiaries, in each
case subject to certain exceptions. No mandatory prepayments were required by
dj Ortho at December 31, 2001 or 2000.

Security; Guarantees. The obligations of dj Ortho under the Amended
Credit Agreement are irrevocably guaranteed, jointly and severally, by dj
Orthopedics, Inc., DJ Capital and future subsidiaries. In addition, the
Amended Credit Agreement and the guarantees thereunder are secured by
substantially all the assets of the Company.

Covenants. The Amended Credit Agreement 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

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distributions prior to the Reorganization); (vi) redeem or repurchase
membership interests or capital stock, create liens on assets, make
investments, loans or advances, make acquisitions; (vii) engage in mergers or
consolidations; (viii) change the business conducted by dj Ortho and its
subsidiaries; (ix) make capital expenditures; (x) or engage in certain
transactions with affiliates and otherwise engage in certain activities. In
addition, the Amended Credit Agreement 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 Amended Credit Agreement also contains provisions that
prohibit any modifications of the Notes in any manner adverse to the lenders
under the Amended Credit Agreement and that limit dj Orthos ability to
refinance or otherwise prepay the Notes without the consent of such lenders. dj
Ortho was in compliance with the covenants at December 31, 2001 and 2000.

5. Related Party Transactions and Transactions with Smith & Nephew

Transactions with JPMDJ Partners

On June 30, 1999, DonJoy consummated a Recapitalization (see Note 6)
pursuant to which JPMDJ Partners obtained a controlling interest in DonJoy. On
June 28, 2000, JPMDJ Partners and certain members of management repurchased the
remaining common units held by DonJoys Former Parent. In connection with an
equity investment in June 2001, JPMDJ Partners and certain members of
management purchased additional common units in DonJoy. In connection with
these equity transactions, certain members of management financed their common
unit purchases with full recourse promissory notes. See note 6, Common and
Preferred Stock.

In 2000, DonJoy paid J.P. Morgan Partners, an affiliate of JPMDJ Partners,
$250,000 for providing financial advisory services in connection with
financings and acquisitions, including providing the services of Charles T.
Orsatti as one of its Board of Managers. The Company made a similar payment in
2001 to JPM Fairfield Partners, the managing member of JPMDJ Partners, upon
consummation of its initial public offering. In connection with the initial
public offering, the Company entered into a management consulting agreement
with JPM Fairfield Partners providing for an annual payment of
$250,000, but
will terminate if Mr. Orsatti ceases to be a member of the Board of Directors
of dj Orthopedics, Inc. or if JPMDJ Partners owns less than 5% of the
outstanding common stock of dj Orthopedics, Inc.

Transactions with Former Parent

Under the control of its Former Parent, the Company had numerous
transactions with its Former Parent and its affiliates. There were no terms of settlement or interest charges associated with the
account balance. The balance results from the Companys former participation
in the Former Parents central cash management program, wherein all the
Companys cash receipts were remitted to the Former Parent and all cash
disbursements were funded by the Former Parent. An analysis of intercompany
transactions follows (in thousands):

|                                            |                                               |                            |     |                         |       | 
|------------------------------------------- | --------------------------------------------- | -------------------------- | --- | ----------------------- | ----- | 
|                                            |                                               |                            |     | Year Ended December 31,
|                                            |                                               |                            |     | 1999                   
|                                            |                                               |                            |     |                        
|                                            | Net cash remitted to Former Parent            |                            | $   | (17,743                 | )    
|                                            | Net intercompany sales                        |                            |     | (112                    | )    
|                                            | Share of Former Parents current income taxes |                            |     | (134                    | )    
|                                            | Corporate management expense allocations      |                            |     | 3,159                   |      
|                                            | Cash owed to Former Parent                    |                            |     | 1,002                   |      
|                                            | I-Flow licensing agreement                    |                            |     | 800                     |      
|                                            | Capital contribution                          |                            |     | (38,865                 | )    
|                                            | Direct charges:                               |                            |     |                         |      
|                                            |                                               | Brand royalties            |     |                         | 1,817 | 
|                                            |                                               | Payroll taxes and benefits |     |                         | 4,651 | 
|                                            |                                               | Direct legal expenses      |     |                         | 67    | 
|Miscellaneous other administrative expenses |                                               |                            | 131 |                        

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

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Former Parent allocations consist of the following (in thousands):

|                                                      |                            |   |                         |       | 
|----------------------------------------------------- | -------------------------- | - | ----------------------- | ----- | 
|                                                      |                            |   | Year Ended December 31,
|                                                      |                            |   | 1999                   
|                                                      |                            |   |                        
|Corporate managed accounts and
new business           |                            | $ | 195                     |      
|Finance (risk management, treasury,
audit, and taxes) |                            |   | 177                     |      
|Human resources and payroll                           |                            |   | 147                     |      
|Legal                                                 |                            |   | 128                     |      
|Research and development                              |                            |   | 380                     |      
|Corporate management expense                          |                            |   | 784                     |      
|Bonus                                                 |                            |   | 467                     |      
|Pension                                               |                            |   | 267                     |      
|Insurance                                             |                            |   | 614                     |      
|                                                      |                            |   |                         |      
|                                                      |                            | $ | 3,159                   |      
|                                                      |                            |   |                         |      
|Amounts included in:                                  |                            |   |                         |      
|                                                      | Cost of goods sold         |   | $                       | 495   | 
|                                                      | Sales and marketing        |   |                         | 94    | 
|                                                      | General and administrative |   |                         | 2,553 | 
|                                                      | Research and development   |   |                         | 17    | 
|                                                      |                            |   |                         |      
|                                                      |                            | $ | 3,159                   |      
|                                                      |                            |   |                         |      

Also prior to the Recapitalization, the Company participated in the Former
Parents corporate insurance programs for workers compensation, product and
general liability. These charges were settled with the Former Parent, and
thus, accruals for related liabilities, if any, were maintained by the Former
Parent and are not reflected in the accompanying consolidated balance sheets at
those dates.

6. Common and Preferred Stock

Before the Reorganization in 2001, DonJoy was authorized to issue up to
2,900,000 common units and up to 100,000 preferred units. As of December 31,
2000, 793,890 common units and 44,405 redeemable preferred units were issued
and outstanding. In connection with the Reorganization in 2001, 885,633 common
units of DonJoy were converted to common stock at an
exchange ratio of 10.812 shares for each unit, for a total of
9,575,459 shares
of common stock and 44,405 redeemable preferred units of DonJoy were
exchanged for $47.3 million in cash, representing their liquidation value plus accrued and unpaid distributions as
of the Reorganization date, and 480,107 shares of common stock based
on exchange ratio of 10.812 shares for each unit. Prior to the Reorganization, the redeemable preferred
units accrued 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, 2001 and 2000 were $5.7 and $5.3 million, respectively.

Additionally, we issued 7,800,000 shares of common stock in
the initial public offering. We received proceeds of $118.8 million from our
initial public offering in November 2001, net of $13.8 million in related
costs. At December 31, 2001, we had a total of 17,855,566 shares of common
stock outstanding.

1999 Recapitalization

On June 30, 1999, DonJoy consummated a $215.3 million recapitalization
(the Recapitalization). In the Recapitalization, new investors, including
JPMDJ Partners and affiliates of JPMDJ Partners, invested new capital of $94.6
million in DonJoy, of which $64.6 million was for common units and $30.0
million for preferred units. In addition, certain members of management
invested net equity of $0.4 million, by purchasing $1.8 million in equity which
was financed in part by $1.4 million in interest-bearing, full recourse loans
from DonJoy. The Former Parent retained 54,000 common units, which represented
approximately 7.1% of total units in DonJoy then outstanding. In connection
with the recapitalization transactions, DonJoy established dj Ortho and DJ
Orthopedics Capital Corporation. DonJoy sold all of its net assets including
its shares of its wholly-owned Mexican subsidiary to dj Ortho for cash, which
was funded with the net proceeds of $100.0 million of 12 5/8% Senior
Subordinated 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.

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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 92.9% of members equity from the Former Parent,
and approximately $8.8 million of costs and fees paid in association with the
Recapitalization.

Since the Former Parents retained ownership interest following the
recapitalization was above 5%, in accordance with Staff Accounting Bulletin No.
54, the debt and equity transactions were accounted for using historical values
(referred to as recap accounting) and the new investors higher basis in the
Companys net assets was not pushed-down to the Companys separate financial
statements. The recap accounting resulted in $136.7 million reduction to
retained earnings because the cost of redeeming the Former Parents 2,000,000
units exceeded their historical issue price of $62.4 million.

In connection with the Recapitalization, the Company incurred costs and
fees of $8.8 million, $5.9 million for the Notes, $1.4 million for the credit
agreement and $1.5 million for transaction fees and expenses related to equity.
Of the $8.8 million, $6.6 million ($4.5 million net of accumulated
amortization) has been capitalized in the accompanying balance sheet as of
December 31, 2001. The Company also recorded an extraordinary charge of $1.1
million to debt issuance costs in the fourth quarter of 2001 following the
redemption of a portion of the senior subordinated notes with a portion of the
net proceeds from the initial public offering. The remaining $1.5 million for
transaction fees and expenses has been recorded as a reduction to
stockholders/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.

Other Equity Transactions

In connection with a unit purchase agreement dated as of June 28, 2000,
the Former Parent sold its remaining interest of 54,000 common units in DonJoy
to JPMDJ Partners and certain members of management for $5.9 million. JPMDJ
Partners purchased 52,495 common units for a total consideration of $5.7
million and the members of management purchased the remaining 1,505 units for a
total consideration of $0.2 million, substantially all of which was financed by
dj Orthopedics and evidenced by full recourse promissory notes. As a result of
this transaction, Smith & Nephew, Inc. is no longer a related party;
accordingly, the Company no longer reflects its transactions with Smith &
Nephew, Inc. separately as transactions with an affiliate in its consolidated
financial statements.

In connection with the unit purchase agreement, dj Orthopedics agreed to
amend and restate the promissory notes originally issued by the certain members
of management in connection with the Recapitalization. The principal amount of
each amended and restated note was equal to the sum of outstanding principal on
the original notes and any accrued and unpaid interest on the notes. In
addition to increasing the rate of interest payable on the notes from 5.30% to
6.62% per annum, the amended and restated notes permit the certain members of
management to increase the principal amount due under the note by the amount of
a scheduled interest payment (the PIK Option). If a certain member of
management elects the PIK Option, the principal amount of his note is increased
by the amount of the scheduled interest payment and interest then accrues on
the principal amount of the note as so increased. The amended and restated
notes mature in 2007.

In connection with the Orthotech Acquisition, gross proceeds of $8.3
million from the sale of common units were received through the issuance of
73,775 common units to JPMDJ Partners for gross proceeds of $8.0 million and
the issuance of 2,115 common units to certain members of management for gross
proceeds of $231,000 (of which $174,000 was paid for through the issuance of
full recourse promissory notes by the management members). Gross proceeds of
$3.6 million from the sale of 4,221 Redeemable Preferred Units were received
from existing Redeemable Preferred Unit holders of which the net proceeds
totaled $3.4 million (excluding preferred unit fees).

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

Stock Options

1999 Option Plan

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

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



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

We have granted options to purchase an aggregate of 1,885,989 shares
of common stock under the 1999 Option Plan of which approximately 48% are
time-vesting options and approximately 52% are event-vesting options. As
of December 31, 2001 and 2000, 728,488 and 152,517 shares, respectively,
issued under the 1999 Option Plan were exercisable and 336,935 shares
were available for future grant under the 1999 Option Plan as of December
31, 2000. No future options will be granted under the 1999 Option Plan,
and all shares of common stock which would otherwise have been available
for issuance under the 1999 Option Plan will be available for issuance
under the 2001 Omnibus Plan described below. In connection with the
initial public offering, all the Tier II options vested in accordance
with their terms.

2001 Omnibus Plan

The 2001 Omnibus plan provides for awards of stock options, stock
appreciation rights, performance awards, restricted stock, restricted
stock units, stock bonuses, stock unit awards and cash bonuses to key
personnel, including consultants and advisors. Except as hereafter
described and subject to equitable adjustments to reflect certain
corporate events, the maximum number of shares of our common stock with
respect to which awards may be granted under the Omnibus Plan is
3,800,000. On each January 1, commencing with January 1, 2003, the
number of shares of common stock available for issuance under the Omnibus
Plan will be automatically increased by a number of shares equal to 1% of
the number of shares of common stock outstanding on the previous December
31. In addition, shares of common stock not subject to options granted
under the 1999 Option Plan or subject to awards that are forfeited,
terminated, canceled or settled without the delivery of common stock
under the Omnibus Plan and the 1999 Option Plan will increase the number
of shares available for awards under the Omnibus Plan. Also, shares
tendered to dj Orthopedics, Inc. in satisfaction or partial satisfaction
of the exercise price of any award under the Omnibus Plan or the 1999
Option Plan will increase the number of shares available for awards under
the Omnibus Plan to the extent permitted by Rule 16b-3 under the
Securities Exchange Act of 1934, as amended. The Omnibus Plan is
administered by our Compensation Committee which has the sole and
complete authority to grant awards under the Omnibus Plan to eligible
employees and officers of, and consultants and advisors to, dj
Orthopedics, Inc. and its subsidiaries. At December 31, 2001, options to
purchase 123,900 shares had been granted, none of which were exercisable
and 3,723,285 shares were available for future grant under the Omnibus
Plan.

2001 Non-Employee Directors Stock Option Plan

We have adopted the dj Orthopedics, Inc. 2001 Non-Employee
Directors Stock Option Plan. Each of our directors who is not our
employee or the employee of any of our subsidiaries and who was not
initially elected to the board of directors, and was not our employee or
the employee of any of our subsidiaries, within the previous 12 months
will, immediately following each annual stockholders meeting, commencing
with the annual meeting in 2003, automatically receive an annual grant of
options to purchase 15,000 shares of our common stock at an exercise
price equal to 100% of the fair market value of our common stock at the
date of grant of the option. Except as discussed below, each non-employee
director, upon initially joining our board of directors, will also
receive under the plan an initial grant of options to purchase 15,000
shares of our common stock (30,000 shares if such director joins the
Board of Directors prior to November 15, 2002) at an exercise price equal
to 100% of the fair market value of the common stock as of such date. A
total of 1,500,000 shares of our common stock have been reserved for
issuance under the plan. Options granted under the plan will vest
ratably over a three-year period, commencing on the first anniversary of
the date of grant. No options had been granted under the Plan at
December 31, 2001.

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

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Employee Stock Purchase Plan

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

The following table summarizes option activity through December 31, 2001:

|                                    |  |           |           |                 |  |       |             |           |  |          |       | 
|----------------------------------- |  | --------- | --------- | --------------- |  | ----- | ----------- | --------- |  | -------- | ----- | 
|                                    |  |           |           |                 |  |       |             |           |  | Weighted
|                                    |  |           |           |                 |  |       |             |           |  | Average 
|                                    |  |           |           |                 |  |       |             |           |  | Exercise
|                                    |  | Number of |           |                 |  |       |             | Price per
|                                    |  | Shares    |           | Price per Share |  | Share
|                                    |  |           |           |                 |  |      
|Outstanding as of December 31, 1998 |  |           |          |                 |  | $     |            |           |  | $        |      | 
|Granted                             |  |           | 1,302,975 |                 |  | $     | 9.25        |           |  | $        | 9.25  | 
|Exercised                           |  |           |          |                 |  |       |            |           |  |          |      | 
|Cancelled                           |  |           |          |                 |  |       |            |           |  |          |      | 
|                                    |  |           |           |                 |  |       |             |           |  |          |       | 
|Outstanding as of December 31, 1999 |  |           | 1,302,975 |                 |  | $     | 9.25        |           |  | $        | 9.25  | 
|Granted                             |  |           | 306,283   |                 |  | $     | 9.25-$10.08 |           |  | $        | 9.61  | 
|Exercised                           |  |           |          |                 |  |       |            |           |  |          |      | 
|Cancelled                           |  |           | (13,019   | )               |  | $     | 9.25        |           |  | $        | 9.25  | 
|                                    |  |           |           |                 |  |       |             |           |  |          |       | 
|Outstanding as of December 31, 2000 |  |           | 1,596,239 |                 |  | $     | 9.25-10.08  |           |  | $        | 9.32  | 
|Granted                             |  |           | 607,142   |                 |  | $     | 9.25-$17.00 |           |  | $        | 14.34 | 
|Exercised                           |  |           |          |                 |  |       |            |           |  |          |      | 
|Cancelled                           |  |           | (193,492  | )               |  | $     | 9.25-$10.08 |           |  | $        | 9.39  | 
|                                    |  |           |           |                 |  |       |             |           |  |          |       | 
|Outstanding at December 31, 2001    |  |           | 2,009,889 |                 |  | $     | 9.25-17.00  |           |  | $        | 12.36 | 
|                                    |  |           |           |                 |  |       |             |           |  |          |       | 

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

|         |      |                |                     |                |                     |          |          |              |             |          |          |      |  |  |        |         |  |   |       |      | 
|-------- | ---- | -------------- | ------------------- | -------------- | ------------------- | -------- | -------- | ------------ | ----------- | -------- | -------- | ---- |  |  | ------ | ------- |  | - | ----- | ---- | 
|         |      |                | Options Outstanding |                | Options Exercisable
|         |      |                |                     |                |                    
|         |      |                |                     |                |                     |          |          |              |             |          |          |      |  |  | Number |         |  |   |      
|         |      |                | Number              |                | Weighted            |          | Weighted |              | Exercisable |          | Weighted
|Range of |      | Outstanding as |                     | Average        |                     | Average  |          | as of        |             | Average 
|Exercise |      | of December    |                     | Remaining Life |                     | Exercise |          | December 31, |             | Exercise
|Prices   |      | 31, 2001       |                     | in Years       |                     | Price    |          | 2001         |             | Price   
|         |      |                |                     |                |                     |          |          |              |             |         
|$        | 9.25 |                |                     | 1,313,763      |                     |          |          | 12.62        |             |          | $        | 9.25 |  |  |        | 606,806 |  |   | $     | 9.25 | 
|$10.08   |      |                | 100,552             |                |                     |          | 13.55    |              |             | $        | 10.08    |      |  |  | 36,869 |         |  | $ | 10.08 |     
|$13.28   |      |                | 20,000              |                |                     |          | 4.93     |              |             | $        | 13.28    |      |  |  | 0      |         |  |   | N/A   |     
|$13.60   |      |                | 300,467             |                |                     |          | 14.28    |              |             | $        | 13.60    |      |  |  | 81,570 |         |  | $ | 13.60 |     
|$16.00   |      |                | 171,207             |                |                     |          | 14.83    |              |             | $        | 16.00    |      |  |  | 3,244  |         |  | $ | 16.00 |     
|$17.00   |      |                | 103,900             |                |                     |          | 1.29     |              |             | $        | 17.00    |      |  |  | 0      |         |  |   | N/A   |     

Pro forma information regarding net income is required by SFAS 123 and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of SFAS 123. The fair value of these options was
estimated at the date of grant using the Black-Scholes valuation model for
option pricing with the following assumptions for 2001, 2000 and 1999: a
risk-free interest rate of 5.5%, 6.25% and 6.25%, respectively; a dividend
yield of zero; volatility factors of the expected market price of the Companys
common stock of 70% and a weighted average life of the option of four years.

Option valuation
models require the input of highly subjective assumptions.
Because the Company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.

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

|                                       |  |      |        |      |  |      |       |  |  |   |       | 
|-------------------------------------- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                       |  | 2001 |        | 2000 |  | 1999
|                                       |  |      |        |      |  |     
|Adjusted pro forma net income          |  | $    | 54,791 |      |  | $    | 3,979 |  |  | $ | 6,569 | 
|Basic pro forma net income per share   |  | $    | 5.17   |      |  |      | N/A   |  |  |   | N/A   | 
|Diluted pro forma net income per share |  | $    | 5.05   |      |  |      | N/A   |  |  |   | N/A   | 

The pro forma effect on net income is not necessarily indicative of potential
pro forma effects on results for future years. The weighted average fair value
of options granted during 2001, 2000 and 1999 was $7.02, $5.68 and $5.25 per
share, respectively.

7. Income Taxes

In connection with the Reorganization on November 20, 2001, the Company
became a corporation and subject to U.S. federal, state, and foreign income
taxes on its earnings after that date. For 2001, of the Companys income
before income taxes, $0.2 million was attributable to operations for the period
following the Reorganization. The extraordinary item of $2.8 million is
presented net of $1.9 million of tax benefit. The deferred tax benefit of
$54.2 million resulted from future tax benefits related to the difference in
the book and tax basis of the assets of dj Orthopedics at the time of the
Reorganization.

The benefit (provision) for income taxes on income before extraordinary
items is as follows:

|                             |         |   |                         |    | 
|---------------------------- | ------- | - | ----------------------- | -- | 
|                             |         |   | Year Ended December 31,
|                             |         |   | 2001                   
|                             |         |   |                        
|Current                      |         |   |                         |   
|                             | Federal |   | $                       |   | 
|                             | State   |   |                         |   | 
|                             |         |   |                         |   
|                             |         |   |                         |   | 
|Deferred                     |         |   |                         |   
|                             | Federal |   | $                       | 55 | 
|                             | State   |   |                         | 24 | 
|                             |         |   |                         |   
|                             |         |   | 79                      |   
|Income Tax Expense (Benefit) |         | $ | 79                      |   

Significant components of the Companys deferred tax assets and liabilities as of December 31, 2001 are as follows:

|                          |                           |   |              |        |  
|------------------------- | ------------------------- | - | ------------ | ------ | -
|                          |                           |   | December 31,
|                          |                           |   | 2001        
|                          |                           |   |             
|Deferred tax assets       |                           |   |              |       
|                          | Goodwill for tax purposes |   | $            | 49,108 |  
|                          | Accrued expenses          |   |              | 1,403  |  
|                          | Allowance for bad debts   |   |              | 3,482  |  
|                          | Net operating loss        |   |              | 1,841  |  
|                          | Other, net                |   |              | 1,475  |  
|                          |                           |   |              |       
|Total deferred tax assets |                           |   | 57,309       |       
|Deferred tax liabilities  |                           |   |              |       
|                          | Fixed assets              |   |              | (1,273 | )
|                          |                           |   |              |       
|                          |                           | $ | 56,036       |       
|                          |                           |   |              |       

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The reconciliation of income tax attributable to income before the benefit
(provision) for income taxes at the U.S. federal statutory rate to income tax
expense is as follows:

|                                        |                                      |   |              |        |  
|--------------------------------------- | ------------------------------------ | - | ------------ | ------ | -
|                                        |                                      |   | December 31,
|                                        |                                      |   | 2001        
|                                        |                                      |   |             
|Pre-tax book income                     |                                      | $ | 5,201        |       
|                                        | Less: Pre-Reorganization book income |   |              | (5,031 | )
|                                        |                                      |   |              |       
|Post Reorganization pre-tax income      |                                      |   | 170          |       
|Statutory rate                          |                                      |   | 58           |       
|State income tax net of federal benefit |                                      |   | 12           |       
|Other                                   |                                      |   | 9            |       
|                                        |                                      |   |              |       
|                                        |                                      | $ | 79           |       
|                                        |                                      |   |              |       

Our Former Parent files a consolidated federal income tax return which
includes all of its eligible subsidiaries and divisions, which included us
prior to our 1999 recapitalization (see note 6). The provision for 1999 income
taxes has been presented assuming we had filed a separate federal income tax
return. The recapitalization had no impact on the historical basis of our
assets and liabilities as reflected in our consolidated financial statements.
However, as a result of the recapitalization, for federal income tax purposes,
we recorded an increase in the tax basis of our fixed and intangible assets in
an amount approximately equal to the taxable gain recognized by Smith & Nephew
on the sale of its interest in us. As a result, after the recapitalization, for
tax purposes we are able to depreciate assets with a higher tax basis than for
financial reporting purposes. The increase in tax basis as of December 31, 1999
was as follows (in thousands):

|                            |  |   |         | 
|--------------------------- |  | - | ------- | 
|Inventory                   |  | $ | 3,670   | 
|Property, plant & equipment |  |   | 4,145   | 
|Goodwill                    |  |   | 130,543 | 
|                            |  |   |         | 
|                            |  | $ | 138,358 | 
|                            |  |   |         | 

The Orthotech acquisition also resulted in an increase in the tax basis
due to the fixed and intangible assets acquired. The increase in tax basis due
to the Orthotech acquisition is equal to the amounts we recorded under purchase
accounting. See note 2 of the notes to our consolidated financial statements.

Prior to our June 30, 1999 recapitalization, our results of operations
were included in the consolidated federal income tax returns that Smith &
Nephew filed in the United States and our historical financial statements for
1999 reflect a provision for income taxes assuming that DonJoy had filed a
separate federal income tax return. As limited liability companies, DonJoy,
L.L.C. and dj Ortho were not subject to income taxes following the
recapitalization. Instead, DonJoy, L.L.C.s earnings following the
recapitalization were allocated to its members and included in the taxable
income of its members. The indenture governing our senior subordinated notes
and the credit facility permitted dj Ortho to make distributions to DonJoy,
L.L.C. in certain amounts to allow DonJoy, L.L.C. to make distributions to its
members to pay income taxes in respect of their allocable share of taxable
income.

8. 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 complementary orthopedic products.
None of the other segments met any of the quantitative thresholds for
determining reportable segments, including our recently introduced line of
surgical products. Information regarding industry segments is as follows (in
thousands):

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|                                |                                                       |   |                          |         |      |   |         |         |   |   |         |        |  
|------------------------------- | ----------------------------------------------------- | - | ------------------------ | ------- | ---- | - | ------- | ------- | - | - | ------- | ------ | -
|                                |                                                       |   | Years Ended December 31,
|                                |                                                       |   |                         
|                                |                                                       |   | 2001                     |         | 2000 |   | 1999   
|                                |                                                       |   |                          |         |      |   |        
|Net revenues:                   |                                                       |   |                          |         |      |   |         |         |   |   |         |       
|                                | Rigid knee bracing                                    |   | $                        | 64,636  |      |   | $       | 58,115  |   |   | $       | 52,953 |  
|                                | Soft goods                                            |   |                          | 62,327  |      |   |         | 51,412  |   |   |         | 38,606 |  
|                                |                                                       |   |                          |         |      |   |         |         |   |   |         |       
|                                | Net revenues for reportable segments                  |   |                          | 126,963 |      |   |         | 109,527 |   |   |         | 91,559 |  
|                                | Specialty and other complementary
orthopedic products |   |                          | 37,349  |      |   |         | 29,647  |   |   |         | 21,344 |  
|                                | Freight revenue                                       |   |                          | 4,858   |      |   |         | 4,412   |   |   |         | 3,515  |  
|                                |                                                       |   |                          |         |      |   |         |         |   |   |         |       
|Total consolidated net revenues |                                                       | $ | 169,170                  |         |      | $ | 143,586 |         |   | $ | 116,418 |       
|                                |                                                       |   |                          |         |      |   |         |         |   |   |         |       
|Gross profit:                   |                                                       |   |                          |         |      |   |         |         |   |   |         |       
|                                | Rigid knee bracing                                    |   | $                        | 46,079  |      |   | $       | 41,189  |   |   | $       | 37,994 |  
|                                | Soft goods                                            |   |                          | 27,001  |      |   |         | 24,662  |   |   |         | 18,723 |  
|                                |                                                       |   |                          |         |      |   |         |         |   |   |         |       
|                                | Gross profit for reportable segments                  |   |                          | 73,080  |      |   |         | 65,851  |   |   |         | 56,717 |  
|                                | Specialty and other complementary
orthopedic products |   |                          | 20,866  |      |   |         | 16,635  |   |   |         | 9,447  |  
|                                | Freight revenue                                       |   |                          | 4,858   |      |   |         | 4,412   |   |   |         | 3,515  |  
|                                | Brand royalties                                       |   |                          |        |      |   |         |        |   |   |         | (1,817 | )
|                                | Other cost of goods sold                              |   |                          | (1,522  | )    |   |         | (3,490  | ) |   |         | (3,188 | )
|                                |                                                       |   |                          |         |      |   |         |         |   |   |         |       
|Total consolidated gross profit |                                                       | $ | 97,282                   |         |      | $ | 83,408  |         |   | $ | 64,674  |       
|                                |                                                       |   |                          |         |      |   |         |         |   |   |         |       

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 and therefore has
not disclosed certain other items, such as interest, depreciation and
amortization by segment as permitted by SFAS No. 131. Intersegment sales were
not significant for any period.

For the years ended December 31, 2001, 2000 and 1999, dj Ortho had no
individual customer 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):

|                                |  |                          |         |      |  |      |         |  |  |   |         | 
|------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                |  | Years Ended December 31,
|                                |  |                         
|                                |  | 2001                     |         | 2000 |  | 1999
|                                |  |                          |         |      |  |     
|United States                   |  | $                        | 146,198 |      |  | $    | 121,125 |  |  | $ | 95,022  | 
|Europe                          |  |                          | 11,047  |      |  |      | 11,124  |  |  |   | 11,473  | 
|Other countries                 |  |                          | 7,067   |      |  |      | 6,925   |  |  |   | 6,408   | 
|Freight revenue                 |  |                          | 4,858   |      |  |      | 4,412   |  |  |   | 3,515   | 
|                                |  |                          |         |      |  |      |         |  |  |   |         | 
|Total consolidated net revenues |  | $                        | 169,170 |      |  | $    | 143,586 |  |  | $ | 116,418 | 
|                                |  |                          |         |      |  |      |         |  |  |   |         | 

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

9. Condensed Consolidating Financial Information

dj Ortho is a wholly-owned operating subsidiary of dj Orthopedics, Inc.
and represents substantially all of the revenues and net income of dj
Orthopedics, Inc., which has no independent assets or operations. DJ Capital is
a wholly-owned subsidiary of dj Ortho, has no independent assets or operations
and was formed solely for the purpose of being a co-issuer of the senior
subordinated notes. As discussed in Note 4 above, dj Orthos obligations under
the senior subordinated notes are guaranteed by dj Orthopedics, Inc. This
guarantee and any guarantee by a future parent or wholly-owned subsidiary
guarantor, is full and unconditional. dj Ortho and DJ Capital comprise all the
direct and indirect subsidiaries of dj Orthopedics, Inc. (other than minor
foreign subsidiaries). We have concluded that separate financial statements of
dj Orthopedics, Inc., dj Ortho and DJ Capital are not required to be filed as
separate reports under the Securities Exchange Act of 1934. The senior
subordinated notes and the Amended Credit Agreement contain certain covenants
restricting the ability of dj Ortho and DJ Capital to, among other things, pay
dividends or make other distributions (other than certain tax distributions) or
loans or advances to dj Orthopedics, Inc. unless certain financial

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tests are satisfied in the case of the indenture or the consent of the lenders
is obtained in the case of the credit facility. The
indenture governing the senior subordinated notes and the credit facility
permit dj Ortho to make distributions to dj Orthopedics, Inc. in amounts
required for dj Orthopedics, Inc. to pay federal, state and local income taxes
to the extent such income taxes are attributable to the income of dj Ortho and
its subsidiaries. The restricted net assets of dj Orthopedics, Inc.s
consolidated subsidiaries were $115 million at December 31, 2001.

10. Commitments and Contingencies

The Company 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, the
Company entered into a subleasing agreement with Smith & Nephew for its Vista
facility. dj Orthopedics, Inc. has guaranteed the payment of rent and other
amounts owed under the sublease.

Minimum annual lease commitments for noncancellable operating leases as of
December 31, 2001 are as follows (in thousands):

|                    |  |   |        | 
|------------------- |  | - | ------ | 
|2002                |  | $ | 2,739  | 
|2003                |  |   | 2,678  | 
|2004                |  |   | 2,293  | 
|2005                |  |   | 2,233  | 
|2006                |  |   | 2,111  | 
|2007 and thereafter |  |   | 1,948  | 
|                    |  |   |        | 
|                    |  | $ | 14,002 | 
|                    |  |   |        | 

Aggregate rent expense was approximately $3.6 million, $3.2 million and
$2.7 million for the years ended December 31, 2001, 2000 and 1999,
respectively.

License Agreements and Minimum Purchase Requirements

In 1998, the Company 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. Under the license, the Company also has the
worldwide exclusive rights to manufacture, use and sell developed products. At
December 31, 2001, $1.3 million is included in net intangible assets (patented
technology) in the accompanying balance sheet.

In 1999, the Company entered into an agreement, which was subsequently
amended, with I-Flow Corporation (I-Flow) for the exclusive North American
distribution rights for the PainBuster® Pain Management System manufactured
by I-Flow for use after orthopedic surgical procedures. The license payment of
$2.0 million was capitalized during 1999 and is being amortized over 5 years.
In addition, the Company purchased $2.5 million and $2.8 million in I-Flow
product during 2001 and 2000, respectively.

In 2000, the Company entered into an agreement, which was subsequently
amended, with IMD b.v. (IMD) for the exclusive U.S. distribution rights to
our bone growth stimulator product, OrthoPulse. If final FDA
approval of this product is obtained, which is not expected until at least the fourth quarter of
2002, the Company will be required to make a $2.0 million
payment to IMD. The contract also calls for minimum purchases of
inventory over 2002 and 2003, which is not dependent on the final FDA decision on the PMA for
OrthoPulse. We
recorded $0.5 million and $0.8 million in inventory payments in 2001 and 2000,
respectively, as advances on our future inventory commitments to IMD and made a
$0.5 million investment in IMD (which represents a 5% ownership in the company)
in 2001.

In 2001, the Company agreed upon certain terms to be included in an
agreement with Australian Surgical Design and Manufacture Pty Limited (ASDM)
for the exclusive U.S. distribution rights to the intellectual property,
design, manufacture and distribution of the ASDM Knee for a minimum period of 5
years. The Company has agreed to use its best efforts to achieve purchase
targets of approximately 7.0 million and 8.3 million Australian dollars in 2002
and 2003, respectively, along with the minimum purchase of 50 instrument sets
of the ASDM Knee for each respective year, with minimum purchase obligations to
be mutually agreed upon in 2004 through 2006.

Contingencies

Several class action complaints alleging violations of the federal
securities laws in connection with our November 15, 2001 initial public
offering were filed in the United States District Courts for the Southern
District of New York and for the

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Southern District of California on behalf of
purchasers of our common stock. We are named as a defendant along with Leslie
H. Cross, our President and Chief Executive Officer, Cyril Talbot III, our
Senior Vice President, Finance, Chief Financial Officer, and Secretary, Charles
T. Orsatti, Chairman of our Board of Directors, and the Underwriters of our
initial public offering. The complaints seek unspecified damages and allege
that defendants violated Sections 11, 12, and 15 of the Securities Act of 1933
by, among other things, misrepresenting and/or failing to disclose material
facts in connection with our registration statement and prospectus for the
initial public offering. On February 25, 2002, plaintiffs agreed to dismiss the
New York actions without prejudice. On February 28, 2002, a federal district
court judge consolidated the Southern District of California actions into a
single action, In re DJ Orthopedics, Inc., Securities
Litigation Case No. 01-CV-2238-K (LSP) (S.D.
Cal.), and appointed Oracle Partners, L.P. as lead plaintiff. We believe the
claims are without merit and intend to defend the action vigorously. However,
there can be no assurance that the Company will succeed in defending or
settling this action. Additionally, there can be no assurance that the action
will not have a material adverse effect on the Companys business.

On February 13, 2002, the Company filed a complaint in the United States
District Court, Southern District of California, Case No. 02-CV-0279-K (LAB)
against medi Bayreuth and medi UK, Ltd, the Company's former distributors in
Germany and the United Kingdom, respectively, alleging breach of contract,
unfair competition and patent infringement resulting from the
termination of the Company's distributorship arrangements with them.
The lawsuit presently is
in the discovery phase. The Company anticipates defendants
medi Bayreuth and medi UK will soon file counterclaims against the Company.
The Company intends to vigorously prosecute this litigation and to
vigorously defend any counterclaims which these entities might bring
against us. There can be no assurance that the Company will be
successful in this litigation.

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

11. Employee Benefit Plan

Prior to the Recapitalization, substantially all of the Company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 the
Company related to this plan was as follows (in thousands):

|                                |  |                         |     | 
|------------------------------- |  | ----------------------- | --- | 
|                                |  | Year Ended December 31,
|                                |  | 1999                   
|                                |  |                        
|Service costs                   |  | $                       | 242 | 
|Interest costs                  |  |                         | 25  | 
|                                |  |                         |     | 
|Total pension expense allocated |  | $                       | 267 | 
|                                |  |                         |     | 

dj Orthopedics, Inc. has a qualified 401(k) profit-sharing plan covering
substantially all of its U.S. employees. The Company matches dollar for dollar
the first $500, then matches at a 30 percent rate, employee contributions up to
6 percent of total compensation. The Companys matching contributions related
to this plan were $0.5 million, $0.4 million and $0.3 million for the years
ended December 31, 2001, 2000 and 1999, respectively. The plan also provides
for discretionary Company contributions (employee profit sharing) which began
on June 30, 1999 as approved by the Board of Directors. There were no
discretionary contributions for the years ended December 31, 2001 and 2000. The
401(k) plan is administered by Fidelity Investments Institutional Services
Company, Inc.

12. Discontinued Acquisition Costs

In October 2000, the Company decided to discontinue its pursuit of a
potential acquisition. Costs incurred related to this terminated acquisition
were expensed in 2000 in the amount of $0.4 million.

13. Quarterly Results (unaudited)

The following table summarizes certain of our operating results by quarter
for 2001 and 2000:

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|                                  |  |                                       |        |         |  |         |        |         |  |       |        |  |  |   |        |     |  |   |         | 
|--------------------------------- |  | ------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | ----- | ------ |  |  | - | ------ | --- |  | - | ------- | 
|                                  |  | Year Ended December 31, 2001         
|                                  |  |                                      
|                                  |  | First                                 |        | Second  |  | Third   |        | Fourth  |  | Total
|                                  |  | Quarter                               |        | Quarter |  | Quarter |        | Quarter |  | Year 
|                                  |  |                                       |        |         |  |         |        |         |  |      
|                                  |  | (in thousands, except per share data)
|Net revenues                      |  | $                                     | 40,295 |         |  | $       | 42,988 |         |  | $     | 44,078 |  |  | $ | 41,809 |     |  | $ | 169,170 | 
|Gross profit                      |  |                                       | 23,528 |         |  |         | 25,075 |         |  |       | 24,902 |  |  |   | 23,777 |     |  |   | 97,282  | 
|Income from operations            |  |                                       | 5,994  |         |  |         | 5,731  |         |  |       | 6,036  |  |  |   | 4,828  |     |  |   | 22,589  | 
|Income before extraordinary items |  |                                       | 1,303  |         |  |         | 1,259  |         |  |       | 1,728  |  |  |   | 55,001 | (2) |  |   | 59,291  | 
|Net
income(1)                     |  | $                                     | 1,303  |         |  | $       | 1,259  |         |  | $     | 1,728  |  |  | $ | 52,200 | (2) |  | $ | 56,490  | 
|Number of operating days          |  |                                       | 64     |         |  |         | 63     |         |  |       | 63     |  |  |   | 62     |     |  |   | 252     | 



|    |                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Due to the Reorganization and its impact on the financial
statements, earnings per share information is not presented as it
would not be meaningful.
|   
|   
|   
|   
|(2) | Includes a deferred tax benefit of $54,169 due to the
Reorganization.                                                                               

|                                  |  |                                       |        |         |  |         |        |         |  |       |        |  |  |   |        |  |  |   |         | 
|--------------------------------- |  | ------------------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                                  |  | Year Ended December 31, 2000         
|                                  |  |                                      
|                                  |  | First                                 |        | Second  |  | Third   |        | Fourth  |  | Total
|                                  |  | Quarter                               |        | Quarter |  | Quarter |        | Quarter |  | Year 
|                                  |  |                                       |        |         |  |         |        |         |  |      
|                                  |  | (in thousands, except per share data)
|Net revenues                      |  | $                                     | 31,881 |         |  | $       | 30,432 |         |  | $     | 39,873 |  |  | $ | 41,400 |  |  | $ | 143,586 | 
|Gross profit                      |  |                                       | 18,997 |         |  |         | 18,111 |         |  |       | 22,028 |  |  |   | 24,272 |  |  |   | 83,408  | 
|Income from operations            |  |                                       | 5,809  |         |  |         | 5,386  |         |  |       | 4,583  |  |  |   | 6,351  |  |  |   | 22,129  | 
|Income before extraordinary items |  |                                       | 2,123  |         |  |         | 1,716  |         |  |       | 42     |  |  |   | 1,278  |  |  |   | 5,159   | 
|Net income                        |  | $                                     | 2,123  |         |  | $       | 1,716  |         |  | $     | 42     |  |  | $ | 1,278  |  |  | $ | 5,159   | 
|Number of operating days          |  |                                       | 65     |         |  |         | 63     |         |  |       | 63     |  |  |   | 61     |  |  |   | 252     | 






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

Not applicable.

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PART III




Item 10.Directors and Executive Officers of the Registrant

Item 10 is hereby incorporated by reference to dj Orthopedics, Inc.s
Definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or prior to April 30, 2002.




Item 11.Executive Compensation

Item 11 is hereby incorporated by reference to dj Orthopedics, Inc.s
Definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or prior to April 30, 2002.




Item 12.Security Ownership of Certain Beneficial Owners and Management

Item 12 is hereby incorporated by reference to dj Orthopedics, Inc.s
Definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or prior to April 30, 2002.




Item 13.Certain Relationships and Related Transactions

Item 13 is hereby incorporated by reference to dj Orthopedics, Inc.s
Definitive Proxy Statement to be filed with the Securities and Exchange
Commission on or prior to April 30, 2002.




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 Audited Consolidated Financial Statements of dj Orthopedics, Inc.
listed below and the report thereon are included in Item 8 hereof:                                                                              
|  
|   |  | Report of Ernst & Young LLP, Independent Auditors                                                                                                                                                                     
|   |  | Consolidated Balance Sheets as of December 31, 2001 and 2000                                                                                                                                                          
|   |  | Consolidated Statements of Income for the years ended December 31, 2001,
2000 and 1999                                                                                                                                
|   |  | Consolidated Statements of Changes in Stockholders/Members Equity
(Deficit) for the years ended December 31, 2001, 2000 and 1999                                                                                    
|   |  | Consolidated Statements of Cash Flows for the years ended December 31,
2001, 2000 and 1999                                                                                                                            
|   |  | Notes to dj Orthopedics, Inc.s Audited Consolidated Financial Statements                                                                                                                                             
|  
|2. |  | Financial Statement Schedules:                                                                                                                                                                                        
|  
|   |  | Schedule II  Valuation and Qualifying Accounts and Reserves                                                                                                                                                          
|  
|   |  | All other schedules are omitted because they are not applicable or not
required or because the required information is shown in the dj
Orthopedics, Inc.s Audited Consolidated Financial Statements or notes
thereto.
|  
|3. |  | Exhibits:                                                                                                                                                                                                             



|        |  |                                                                                                                                                                                                                                    
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                    
|Number  |  | Description                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                    
|3.1     |  | Amended and Restated Certificate
        of Incorporation of dj Orthopedics, Inc. (incorporated by reference to
        Exhibit 4.1 to the Registration Statement of dj Orthopedics, Inc.
        on Form S-8 (Reg. No. 333-73966))
|3.2     |  | Amended and Restated By-laws
        of dj Orthopedics, Inc. (incorporated by reference to Exhibit 4.2
        to the Registration Statement of dj Orthopedics, Inc. on Form S-8
        (Reg. No. 333-73966))                     
|3.3     |  | Amended and Restated Operating
        Agreement of dj Orthopedics, LLC (incorporated by reference to Exhibit 3.1
        to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                          
|3.4     |  | By-laws of dj Orthopedics,
        LLC (incorporated by reference to Exhibit 3.4 to the Registration
        Statement on Form S-4 (Reg. No. 333-86835))                                                                           

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|3.5     |  | Certificate of Incorporation
        of DJ Orthopedics Capital Corporation (incorporated by reference to Exhibit 3.3
        to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                                                               
|3.6     |  | By-laws of DJ Orthopedics
        Capital Corporation (incorporated by reference to Exhibit 3.6 to
        the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                                                                                    
|4.1     |  | Indenture dated as of June 30,
        1999 among dj Orthopedics, Inc., as successor to DonJoy, L.L.C., dj Orthopedics,
        LLC and DJ Orthopedics Capital Corporation and The Bank of New York, as
        Trustee (incorporated by reference to Exhibit 4.1 to the Registration
        Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                  
|4.2     |  | Form of 12 5/8%
        Senior Subordinated Note due 2009 (included as Exhibit B to Exhibit 4.1)                                                                                                                                                                                                                                                                                                                                                                           
|10.1    |  | Recapitalization Agreement
        dated as of April 29, 1999 among J.P. Morgan DJ Partners, LLC (f/k/a
        Chase DJ Partners LLC), dj Orthopedics, Inc., as successor to DonJoy,
        L.L.C., and Smith & Nephew (incorporated by reference to Exhibit 10.1
        to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                
|10.2    |  | Group Research Centre Technology
        Agreement dated as of June 30, 1999 between dj Orthopedics, Inc.,
        as successor to DonJoy, L.L.C., and Smith & Nephew (incorporated
        by reference to Exhibit 10.2 to the Registration Statement on Form S-4
        (Reg. No. 333-86835))                                                                                                                                                                           
|10.3    |  | Supply Agreement dated as
        of June 30, 1999 between dj Orthopedics, Inc., as successor to DonJoy,
        L.L.C., and Smith & Nephew (incorporated by reference to Exhibit 10.3
        to the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                             
|10.4    |  | Distribution Agreement dated
        as of June 30, 1999 between dj Orthopedics, Inc., as successor to
        DonJoy, L.L.C., Smith & Nephew and the affiliates of Smith &
        Nephew listed on Schedule I thereto (incorporated by reference to
        Exhibit 10.5 to the Registration Statement on Form S-4 (Reg.
        No. 333-86835))                                                                                                                         
|10.5    |  | Subleases dated as of June 30,
        1999 between dj Orthopedics, LLC and Smith & Nephew (incorporated
        by reference to Exhibit 10.7 to the Registration Statement on Form S-4
        (Reg. No. 333-86835))                                                                                                                                                                                                                                                      
|10.6    |  | Guaranties dated as of June 30,
        1999 of dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (incorporated
        by reference to Exhibit 10.8 to the Registration Statement on Form
        S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                            
|10.7    |  | Preferred Unit Purchase Agreement
        dated as of June 30, 1999 among dj Orthopedics, Inc., as successor
        to DonJoy, L.L.C., J.P. Morgan Partners (23A SBIC), L.L.C. (formerly CB
        Capital Investors, L.L.C.) and First Union Investors, Inc. (incorporated
        by reference to Exhibit 10.9 to the Registration Statement of Form S-4
        (Reg. No. 333-86835))                                                                                 
|10.8    |  | Agreement and Plan of Merger
        dated as of October 26, 2001 between DonJoy, L.L.C., dj Orthopedics,
        Inc. and dj Acquisition Corporation (incorporated by reference to Exhibit
        10.8 to the Registration Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                                                   
|10.9    |  | Credit Agreement dated as
        of June 30, 1999 among dj Orthopedics, Inc. as successor to DonJoy,
        L.L.C., dj Orthopedics, LLC, DJ Orthopedics Capital Corporation, the Lenders
        party thereto and First Union National Bank, as Administrative Agent (incorporated
        by reference to Exhibit 10.11 to the Registration Statement on Form S-4
        (Reg. No. 333-86835))                                                                        
|10.10   |  | Agreement dated as of July 13,
        2000 among dj Orthopedics, Inc., as successor to DonJoy, L.L.C., dj Orthopedics,
        LLC, the Lenders under that certain Credit Agreement dated as of June 30,
        1999, as amended, First Union National Bank, as administrative agent,
        and The Chase Manhattan Bank, as syndication agent. (incorporated by reference
        to Exhibit 10.3 to DonJoy, L.L.C.s report on Form 8-K dated
        July 21, 2000))
|10.11   |  | Indemnity, Subrogation and
        Contribution Agreement dated as of June 30, 1999 among dj Orthopedics,
        LLC, J.P. Morgan Partners (23A SBIC), L.L.C. (formerly CB Capital Investors,
        L.L.C.), DJ Capital Investors L.L.C. and First Union National Bank, as
        Collateral Agent (incorporated by reference to Exhibit 10.12 to the
        Registration Statement on Form S-4 (Reg. No. 333-86835))                                                 
|10.12   |  | Parent Guarantee Agreement
        dated as of June 30, 1999 between dj Orthopedics, Inc., as successor
        to DonJoy, L.L.C., and First Union National Bank, as Collateral Agent
        (incorporated by reference to Exhibit 10.13 to the Registration Statement
        on Form S-4 (Reg. No. 333-86835))                                                                                                                                                          
|10.13   |  | Subsidiary Guarantee Agreement
        dated as of June 30, 1999 between DJ Orthopedics Capital Corporation
        and First Union National Bank, as Collateral Agent (incorporated by reference
        to Exhibit 10.14 to the Registration Statement on Form S-4 (Reg.
        No. 333-86835))                                                                                                                                                                         
|10.14   |  | Pledge Agreement dated as
        of June 30, 1999 among dj Orthopedics, LLC, dj Orthopedics, Inc.,
        as successor to DonJoy, L.L.C., and First Union National Bank, as Collateral
        Agent (incorporated by reference to Exhibit 10.15 to the Registration
        Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                 
|10.15   |  | Security Agreement dated as
        of June 30, 1999 among dj Orthopedics, LLC, dj Orthopedics, Inc.,
        as successor to DonJoy, L.L.C., J.P. Morgan Partners (23A SBIC), L.L.C.
        (formerly CB Capital Investors, L.L.C.), DJ Capital Investors, L.L.C.
        and First Union National Bank, as Collateral Agent (incorporated by reference
        to Exhibit 10.16 to the Registration Statement on Form S-4 (Reg.
        No. 333-86835))                 
|10.16   |  | Leasehold Deed of Trust, Security
        Agreement and Assignment of Leases and Rents dated as of June 30,
        1999 by dj Orthopedics, LLC, as grantor, to First American Title Insurance
        Company, as trustee (incorporated by reference to Exhibit 10.17 to
        the Registration Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                             

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.17   |  | Employment Agreement dated
        as of June 30, 1999 between dj Orthopedics, LLC and Leslie H. Cross
        (incorporated by reference to Exhibit 10.18 to the Registration Statement
        on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                                   
|10.18   |  | Employment Agreement dated
        as of June 30, 1999 between dj Orthopedics, LLC and Cyril Talbot
        III (incorporated by reference to Exhibit 10.19 to the Registration
        Statement on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                                  
|10.19   |  | Employment Agreement dated
        as of June 30, 1999 between dj Orthopedics, LLC and Michael R. McBrayer
        (incorporated by reference to Exhibit 10.20 to the Registration Statement
        on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                               
|10.20   |  | Fifth Amended and Restated
        1999 Option Plan of dj Orthopedics, Inc. dated October 25, 2001 (incorporated
        by reference to Exhibit 4.3 to the Registration Statement on Form
        S-8 of dj Orthopedics, Inc. (Reg. No. 333-73966))                                                                                                                                                                                                                                 
|10.21   |  | Retention Agreement dated
        December 14, 1998 between Smith & Nephew and Leslie Cross (incorporated
        by reference to Exhibit 10.22 to the Registration Statement on Form S-4
        (Reg. No. 333-86835))                                                                                                                                                                                                                                                              
|10.22   |  | Retention Agreement dated
        December 14, 1998 between Smith & Nephew and Cyril Talbot (incorporated
        by reference to Exhibit 10.23 to the Registration Statement on Form S-4
        (Reg. No. 333-86835))                                                                                                                                                                                                                                                              
|10.23   |  | Retention Agreement dated
        December 14, 1998 between Smith & Nephew and Michael McBrayer
        (incorporated by reference to Exhibit 10.24 to the Registration Statement
        on Form S-4 (Reg. No. 333-86835))                                                                                                                                                                                                                                                          
|10.24   |  | Asset Purchase Agreement dated
        as of July 7, 2000 amoung DePuy Orthopaedic Technology, Inc., dj
        Orthopedics, LLC, and dj Orthopedics, Inc., as successor to DonJoy, L.L.C.
        (incorporated by reference to Exhibit 2.1 to DonJoy, L.L.C.s
        report on Form 8-K dated July 21, 2000)                                                                                                                                                                     
|10.25   |  | Preferred Unit Purchase Agreement
        dated as of July 7, 2000, among dj Orthopedics, Inc., as successor
        to DonJoy, L.L.C., and J.P. Morgan Partners (23A SBIC), LLC (formerly
        CB Capital Investors, L.L.C.) First Union Capital Partners, LLC, DJC,
        Inc., TCW/Crescent Mezzanine Trust II, and TCW Leveraged Income Trust
        II, L.P. (incorporated by reference to Exhibit 4.1 to DonJoy, L.L.C.s
        report on Form 8-K dated July 21, 2000)
|10.26   |  | Common Unit Purchase Agreement
        dated as of July 7, 2000, among dj Orthopedics, Inc., as successor
        to DonJoy, L.L.C., and J.P. Morgan DJ Partners, LLC (formerly Chase DJ
        Partners, L.L.C.), Leslie H. Cross & Deborah L. Cross Family Trust,
        Michael R. McBrayer, and Cyril Talbot III, (incorporated by reference
        to Exhibit 4.2 to DonJoy, L.L.C.s report on Form 8-K dated
        July 21, 2000)                                        
|10.27   |  | Secured Promissory Note dated
        as of July 7, 2000 between Leslie H. Cross and dj Orthopedics, Inc.,
        as successor to DonJoy, L.L.C. (incorporated by reference to Exhibit 4.3
        to DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)                                                                                                                                                                                                                      
|10.28   |  | Secured Promissory Note dated
        as of July 7, 2000 between Cyril Talbot III and dj Orthopedics, Inc.,
        as successor to DonJoy, L.L.C. (incorporated by reference to Exhibit 4.4
        to DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)                                                                                                                                                                                                                     
|10.29   |  | Secured Promissory Note dated
        as of July 7, 2000 between Michael R. McBrayer and dj Orthopedics,
        Inc., as successor to DonJoy, L.L.C. (incorporated by reference to Exhibit
        4.5 to DonJoy, L.L.C.s report on Form 8-K dated July 21,
        2000)                                                                                                                                                                                                          
|10.30   |  | Third Amended and Restated
        Pledge Agreement dated as of June 11, 2001, among Leslie H. Cross,
        Leslie H. Cross & Deborah L. Cross Family Trust, and dj Orthopedics,
        Inc., as successor to DonJoy, L.L.C. (incorporated by reference to Exhibit 10.7
        to DonJoy, L.L.C.s quarterly report on Form 10-Q for the quarter
        ended June 30, 2001)                                                                                                    
|10.31   |  | Third Amended and Restated
        Pledge Agreement dated as of June 11, 2001, between Cyril Talbot
        III and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (incorporated
        by reference to Exhibit 10.8 to DonJoy, L.L.C.s quarterly report
        on Form 10-Q for the quarter ended June 30, 2001)                                                                                                                                                           
|10.32   |  | Third Amended and Restated
        Pledge Agreement dated as of June 11, 2001, between Michael R. McBrayer
        and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (incorporated
        by reference to Exhibit 10.9 to DonJoy, L.L.C.s quarterly report
        on Form 10-Q for the quarter ended June 30, 2001)                                                                                                                                                        
|10.33   |  | Unit Purchase Agreement dated
        as of June 28, 2000, among Smith & Nephew Disposal, Inc. and
        J.P. Morgan DJ Partners, LLC (formerly Chase DJ Partners, L.L.C.), Leslie
        H. Cross & Deborah L. Cross Family trust, Michael R. McBrayer, and
        Cyril Talbot III. (incorporated by reference to Exhibit 4.9 to DonJoy,
        L.L.C.s report on Form 8-K dated July 21, 2000)                                                                              
|10.34   |  | Amended and Restated Secured
        Promissory Note dated as of June 28, 2000 between Michael R. McBrayer
        and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (incorporated
        by reference to Exhibit 4.10 to DonJoy, L.L.C.s report on Form 8-K
        dated July 21, 2000)                                                                                                                                                                                   
|10.35   |  | Amended and Restated Secured
        Promissory Note dated as of June 28, 2000 among Leslie H. Cross &
        Deborah L. Cross Family Trust, Leslie H. Cross and dj Orthopedics, Inc.,
        as successor to DonJoy, L.L.C. (incorporated by reference to Exhibit 4.11
        to DonJoy, L.L.C.s report on Form 8-K dated July 21, 2000)                                                                                                                                        
|10.36   |  | Amended and Restated Secured
        Promissory Note dated as of June 28, 2000 between Cyril Talbot III
        and dj Orthopedics, Inc., as successor to DonJoy, L.L.C. (incorporated
        by reference to Exhibit 4.12 to DonJoys report on Form 8-K
        dated July 21, 2000)                                                                                                                                                                                              

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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.37   |  | Secured Promissory Note dated
        as of June 28, 2000 among Leslie H. Cross & Deborah L. Cross
        Family Trust, Leslie H. Cross and dj Orthopedics, Inc., as successor to
        DonJoy, L.L.C. (incorporated by reference to Exhibit 4.13 to DonJoys
        report on Form 8-K dated July 21, 2000)                                                                                                                                                                                                                                                                                                                                 
|10.38   |  | Secured Promissory Note dated
        as of June 28, 2000 between Cyril Talbot III and dj Orthopedics,
        Inc., as successor to DonJoy, L.L.C. (incorporated by reference to Exhibit
        4.14 to DonJoys report on Form 8-K dated July 21, 2000)                                                                                                                                                                                                                                                                                                                                                                                       
|10.39   |  | Secured Promissory Note dated
        as of June 28, 2000 between Michael R. McBrayer and dj Orthopedics,
        Inc., as successor to DonJoy, L.L.C. (incorporated by reference to Exhibit
        4.15 to DonJoys report on Form 8-K dated July 21, 2000)                                                                                                                                                                                                                                                                                                                                                                                    
|10.40   |  | Secured Promissory Note dated
        as of June 11, 2001 among Leslie H. Cross & Deborah L. Cross
        Family Trust, Leslie H. Cross and dj Orthopedics, Inc., as successor to
        DonJoy, L.L.C. (incorporated by reference to Exhibit 10.4 to DonJoy,
        L.L.C.s quarterly report on Form 10-Q for the quarter ended
        June 30, 2001)                                                                                                                                                                                                                                                                                      
|10.41   |  | Secured Promissory Note dated
        as of June 11, 2001 between Cyril Talbot III and dj Orthopedics,
        Inc., as successor to DonJoy, L.L.C. (incorporated by reference to Exhibit
        10.5 to DonJoy, L.L.C.s quarterly report on Form 10-Q for the
        quarter ended June 30, 2001)                                                                                                                                                                                                                                                                                                                                            
|10.42   |  | Secured Promissory Note dated
        as of June 11, 2001 between Michael R. McBrayer and dj Orthopedics,
        Inc., as successor to DonJoy, L.L.C. (incorporated by reference to Exhibit
        10.6 to DonJoy, L.L.C.s quarterly report on Form 10-Q for the
        quarter ended June 30, 2001)                                                                                                                                                                                                                                                                                                                                         
|10.43   |  | Amendment No. 1 dated
        as of May 25, 2000 to the Credit Agreement dated as of June 30,
        1999 (incorporated by reference to Exhibit 10.1 to DonJoy, L.L.C.s
        report on Form 8-K dated July 21, 2000)                                                                                                                                                                                                                                                                                                                                                                                                                        
|10.44   |  | dj Orthopedics, Inc. 2001
        Omnibus Plan (incorporated by reference to Exhibit 4.6 to the Registration
        Statement on Form S-8 of dj Orthopedics, Inc. (Reg No. 333-73966))                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|10.45   |  | Merger Agreement dated as
        of November 7, 2001 between dj Orthopedics, Inc. and DonJoy, L.L.C.
        (incorporated by reference to Exhibit 10.45 to the Registration Statement
        on Form S-1 (Reg. No. 333-74998) dated December 12, 2001)                                                                                                                                                                                                                                                                                                                                                                                        
|10.46   |  | dj Orthopedics, Inc. 2001
        Non-Employee Director Plan (incorporated by reference to Exhibit 4.5
        to the Registration Statement on Form S-8 of dj Orthopedics, Inc.
        (Reg No. 333-73966))                                                                                                                                                                                                                                                                                                                                                                                                                                    
|10.47   |  | dj Orthopedics, Inc. 2001
        Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.4
        to the Registration Statement on Form S-8 of dj Orthopedics, Inc.
        (Reg No. 333-73966))                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.48   |  | Common Unit Purchase Agreement
        dated June 11, 2001 among DonJoy, L.L.C., JP Morgan DJ Partners,
        L.L.C., Leslie H. Cross and Deborah L. Cross Family Trust, Michael R.
        McBrayer and Cyril Talbot III (incorporated by reference to Exhibit 10.3
        to DonJoy, L.L.C.s Report on Form 10-Q for the quarter ended
        June 30, 2001)                                                                                                                                                                                                                                                                              
|10.49   |  | Employment Agreement dated
        as of June 1, 2001 between dj Orthopedics, LLC and Paul K. Nichols,
        Jr. (incorporated by reference to Exhibit 10.2 to DonJoy, L.L.C.s
        Report on Form 10-Q for the quarter ended June 30, 2001)                                                                                                                                                                                                                                                                                                                                                                                               
|10.50   |  | Asset Purchase Agreement dated
        June 1, 2001 by and among Alaron Technologies, L.L.C., seller, Paul
        K. Nichols, Jr., Jamal D. Rushdy, Members, and dj Orthopedics, L.L.C.,
        Buyer (incorporated by reference to Exhibit 10.1 to DonJoy, L.L.C.s
        Report on Form 10-Q for the quarter ended June 30, 2001)                                                                                                                                                                                                                                                                                                          
|10.51   |  | Management Consulting Agreement
        dated November 7, 2001 between dj Orthopedics, Inc., as successor
        to DonJoy, L.L.C., and JPM Fairfield (incorporated by reference to Exhibit
        10.51 to the Registration Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                                                       
|10.52   |  | Consent and Termination Agreement
        dated November 20, 2001 by and among DonJoy, L.L.C., J.P. Morgan
        DJ Partners, L.L.C., Leslie H. Cross & Deborah L. Cross Family Trust,
        Michael R. McBrayer, Cyril Talbot III, J.P. Morgan Partners (23A SBIC),
        LLC, First Union Capital Partners, LLC, DJ Investment, LLC, DJC, Inc.,
        TCW/Crescent Mezzanine Trust II, TCW Leveraged Income Trust II, L.P.,
        TCW Investment Management Company and Crescent Mach I Partners, L.P. (incorporated
        by reference to Exhibit 10.52 to the Registration Statement on Form S-1
        (Reg. No. 333-74998))   
|10.53   |  | Registration Rights Agreement
        dated November 20, 2001 by and among dj Orthopedics, Inc., J.P. Morgan
        DJ Partners, L.L.C., Leslie H. Cross & Deborah L. Cross Family Trust,
        Michael R. McBrayer, Cyril Talbot III, J.P. Morgan Partners (23A SBIC),
        LLC, First Union Capital Partners, LLC, DJ Investment, LLC, DJC, Inc.,
        TCW/ Crescent Mezzanine Trust II, TCW Leveraged Income Trust II, L.P.,
        TCW Investment Management Company and Crescent Mach I Partners, L.P. (incorporated
        by reference to Exhibit 10.53 to the Registration Statement on Form S-1
        (Reg. No. 333-74998))
|10.54   |  | Letter Agreement dated November 20,
        2001 between dj Orthopedics, Inc. and the Leslie H. Cross and Deborah
        L. Cross Family Trust (incorporated by reference to Exhibit 10.54
        to the Registration Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                                                              
|10.55   |  | Letter Agreement dated November 20,
        2001 between dj Orthopedics, Inc. and Cyril Talbot III (Incorporated by
        reference to Exhibit 10.55 to the Registration Statement on Form
        S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                                                                                                   

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|        |  |                                                                                                                                                                                                                                                                                                           
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                           
|Number  |  | Description                                                                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                                                                           
|10.56   |  | Letter Agreement dated November 20,
        2001 between dj Orthopedics, Inc. and Michael R. McBrayer (Incorporated
        by reference to Exhibit 10.56 to the Registration Statement on Form S-1
        (Reg. No. 333-74998))                                                                         
|10.57   |  | Assignment and Assumption
        Agreement dated November 20, 2001 between DonJoy, L.L.C. and dj Orthopedics,
        Inc. (incorporated by reference to Exhibit 10.57 to the Registration
        Statement on Form S-1 (Reg. No. 333-74998))                                                           
|10.58   |  | Assignment and Assumption
        Agreement dated November 20, 2001 among DonJoy, L.L.C., dj Orthopedics,
        Inc., First Union National Bank and The Chase Manhattan Bank (incorporated
        by reference to Exhibit 10.58 to the Registration Statement on Form S-1
        (Reg. No. 333-74998))
|12.1*   |  | Statement re: Computation
        of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                   
|21.1    |  | Subsidiaries of the Registrant
        (incorporated by reference to Exhibit 21.1 to the Registration Statement
        on Form S-1 of dj Orthopedics, Inc. (Reg. No. 333-74998))                                                                                                                         
|23.1*   |  | Consent of Ernst
& Young LLP, Independent Auditors                                                                                                                                                                                                                                                        
|99.1*   |  | Consent of Frost & Sullivan                                                                                                                                                                                                                                                                               



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



|(b) |  | Reports on Form 8-K:
|--- |  | --------------------

| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | No reports on Form 8-K were filed with the Commission during the last
quarter of the period covered by this Annual Report is on Form 10-K.

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##### Table of Contents



DJ ORTHOPEDICS, LLC
SCHEDULE II  Valuation and Qualifying Accounts and Reserves
For the Three Years Ended December 31, 2001

|                             |                                |   |                   |            |                    |   |           |            |  
|---------------------------- | ------------------------------ | - | ----------------- | ---------- | ------------------ | - | --------- | ---------- | -
|                             |                                |   | Allowance for     |            | Reserve for       
|                             |                                |   | Doubtful Accounts |            | Excess and        
|                             |                                |   | and Sales Returns |            | Obsolete Inventory
|                             |                                |   |                   |            |                   
|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   |           
|                             | Provision                      |   |                   | 6,285,000  |                    |   |           | 583,000    |  
|                             | Write-offs and recoveries, net |   |                   | (2,996,000 | )                  |   |           | 2,200,000  |  
|                             |                                |   |                   |            |                    |   |           |           
|Balance at December 31, 2000 |                                |   | 4,278,000         |            |                    |   | 3,774,000 |           
|                             | Provision                      |   |                   | 10,701,000 |                    |   |           | 604,000    |  
|                             | Write-offs and recoveries, net |   |                   | (6,238,000 | )                  |   |           | (1,378,000 | )
|                             |                                |   |                   |            |                    |   |           |           
|Balance at December 31, 2001 |                                | $ | 8,741,000         |            |                    | $ | 3,000,000 |           
|                             |                                |   |                   |            |                    |   |           |           

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SIGNATURES

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



|Date: March 18, 2002 | DJ ORTHOPEDICS, INC.
|-------------------- | --------------------



| | By: | /s/ LESLIE H. CROSS
Leslie H. CrossPresident and Chief Executive Officer
| | --- | ------------------------------------------------------------------------

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

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

Leslie H. Cross           |  | President, Chief Executive Officer and Director
(Principal Executive Officer)                             |  | March 18, 2002
|                                              
|/s/ CYRIL TALBOT III

Cyril Talbot III         |  | Senior Vice President, Chief Financial Officer and
Secretary (Principal Financial and Accounting
Officer) |  | March 18, 2002
|                                              
|/s/ CHARLES T. ORSATTI

Charles T. Orsatti     |  | Director                                                                                                  |  | March 18, 2002
|                                              
|/s/ MITCHELL J. BLUTT

Mitchell J. Blutt, M.D. |  | Director                                                                                                  |  | March 18, 2002
|                                              
|/s/ DAMION E. WICKER

Damion E. Wicker, M.D.   |  | Director                                                                                                  |  | March 18, 2002
|                                              
|Jack R. Blair                                  |  | Director                                                                                                  |  | March __, 2002
|                                              
|/s/ KIRBY L. CRAMER

Kirby L. Cramer           |  | Director                                                                                                  |  | March 18, 2002

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INDEX TO EXHIBITS

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

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

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

89



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|10.53   |  | Registration Rights Agreement
        dated November 20, 2001 by and among dj Orthopedics, Inc., J.P. Morgan
        DJ Partners, L.L.C., Leslie H. Cross & Deborah L. Cross Family Trust,
        Michael R. McBrayer, Cyril Talbot III, J.P. Morgan Partners (23A SBIC),
        LLC, First Union Capital Partners, LLC, DJ Investment, LLC, DJC, Inc.,
        TCW/ Crescent Mezzanine Trust II, TCW Leveraged Income Trust II, L.P.,
        TCW Investment Management Company and Crescent Mach I Partners, L.P. (incorporated
        by reference to Exhibit 10.53 to the Registration Statement on Form S-1
        (Reg. No. 333-74998))
|10.54   |  | Letter Agreement dated November 20,
        2001 between dj Orthopedics, Inc. and the Leslie H. Cross and Deborah
        L. Cross Family Trust (incorporated by reference to Exhibit 10.54
        to the Registration Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                                                              
|10.55   |  | Letter Agreement dated November 20,
        2001 between dj Orthopedics, Inc. and Cyril Talbot III (Incorporated by
        reference to Exhibit 10.55 to the Registration Statement on Form
        S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                                                                                                   
|10.56   |  | Letter Agreement dated November 20,
        2001 between dj Orthopedics, Inc. and Michael R. McBrayer (Incorporated
        by reference to Exhibit 10.56 to the Registration Statement on Form S-1
        (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                                                                                                
|10.57   |  | Assignment and Assumption
        Agreement dated November 20, 2001 between DonJoy, L.L.C. and dj Orthopedics,
        Inc. (incorporated by reference to Exhibit 10.57 to the Registration
        Statement on Form S-1 (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                                                                                  
|10.58   |  | Assignment and Assumption
        Agreement dated November 20, 2001 among DonJoy, L.L.C., dj Orthopedics,
        Inc., First Union National Bank and The Chase Manhattan Bank (incorporated
        by reference to Exhibit 10.58 to the Registration Statement on Form S-1
        (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                       
|12.1*   |  | Statement re: Computation
        of Ratio of Earnings to Fixed Charges                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|21.1    |  | Subsidiaries of the Registrant
        (incorporated by reference to Exhibit 21.1 to the Registration Statement
        on Form S-1 of dj Orthopedics, Inc. (Reg. No. 333-74998))                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|23.1*   |  | Consent of Ernst
& Young LLP, Independent Auditors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|99.1*   |  | Consent of Frost & Sullivan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      






| |  | Filed herewith
|- |  | --------------

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