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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

|           |  |                                                                                     
|---------- |  | ------------------------------------------------------------------------------------
|(Mark One)
|          
|          
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|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2000
or

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

For the transition period from __________ to __________.

Commission file number 333-86835

DJ ORTHOPEDICS, LLC

(Exact name of Registrant as specified in its charter)


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|-------------------------------------------------------------- |  | -------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 3842                                                     |  | 52-2165554                             
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|(State or other jurisdiction of
Incorporation or organization) |  | (Primary Standard Industrial
Classification Code Number) |  | (I.R.S. Employer
Identification Number)

DJ ORTHOPEDICS CAPITAL CORPORATION

(Exact name of Registrant as specified in its charter)


|                                                               |  |                                                          |  |                                        
|-------------------------------------------------------------- |  | -------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 3842                                                     |  | 52-2157537                             
|                                                              
|                                                              
|                                                              
|                                                              
|(State or other jurisdiction of
Incorporation or organization) |  | (Primary Standard Industrial
Classification Code Number) |  | (I.R.S. Employer
Identification Number)

DONJOY, L.L.C.

(Exact name of Registrant as specified in its charter)


|                                                               |  |                                                          |  |                                        
|-------------------------------------------------------------- |  | -------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 3842                                                     |  | 33-0848317                             
|                                                              
|                                                              
|                                                              
|                                                              
|(State or other jurisdiction of
Incorporation or organization) |  | (Primary Standard Industrial
Classification Code Number) |  | (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:
None

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

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

|                                   |  |         |  |         
|---------------------------------- |  | ------- |  | --------
|DJ ORTHOPEDICS, LLC                |  | Yes [X] |  | No [   ]
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|DJ ORTHOPEDICS CAPITAL CORPORATION |  | Yes [X] |  | No [   ]
|                                  
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|DONJOY, L.L.C.                     |  | Yes [X] |  | No [   ]

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

All outstanding shares of DJ Orthopedics Capital Corporation are owned by dj
Orthopedics, LLC, all of whose equity interests are owned by DonJoy, L.L.C. As
of March 1, 2001 there were 793,890 common units of DonJoy, L.L.C. outstanding,
all of which were held by affiliates. There is no public trading market for
DonJoy L.L.C.s common units.

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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 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 10-K                    
|SIGNATURES   
|Exhibit 10.21
|EXHIBIT 12.1 



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##### Table of Contents



DJ ORTHOPEDICS, LLC
DJ ORTHOPEDICS CAPITAL CORPORATION
DONJOY, L.L.C.

FORM 10-K

TABLE OF CONTENTS

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|Item 1.    |  | Business                                                                              |  |          | 3  | 
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|Item 2.    |  | Properties                                                                            |  |          | 29 | 
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|Item 3.    |  | Legal Proceedings                                                                     |  |          | 29 | 
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|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  |          | 29 | 
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|Item 5.    |  | Market for the Registrants Common Equity and Related Stockholder Matters             |  |          | 29 | 
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|Item 6.    |  | Selected Financial Data                                                               |  |          | 30 | 
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|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  |          | 32 | 
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|Item 7A    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |          | 41 | 
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|Item 8.    |  | Financial Statements and Supplementary Data                                           |  |          | 42 | 
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|Item 9.    |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  |          | 61 | 
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|PART III  
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|Item 10.   |  | Directors and Executive Officers of the Registrant                                    |  |          | 62 | 
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|Item 11.   |  | Executive Compensation                                                                |  |          | 63 | 
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|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management                        |  |          | 66 | 
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|Item 13.   |  | Certain Relationships and Related Transactions                                        |  |          | 70 | 
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|PART IV   
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|Item 14.   |  | Exhibits, Financial Statement Schedules and Reports On Form 8-K                       |  |          | 73 | 
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|SIGNATURES |  |                                                                                       |  |          | 77 | 

EXPLANATORY NOTE

This integrated Form 10-K is filed pursuant to the Securities Exchange Act of
1934, as amended, for each of DonJoy, L.L.C. (DonJoy), a Delaware limited
liability company, dj Orthopedics, LLC (dj Ortho), a Delaware limited
liability company and a wholly-owned subsidiary of DonJoy, and DJ Orthopedics
Capital Corporation (DJ Capital), a Delaware corporation and 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 of $100,000,000 aggregate
principal amount at maturity of 12 5/8% Senior Subordinated Notes due 2009. DJ
Capital does not hold any assets or other properties or conduct any business.
No separate financial information for DJ Capital has been provided herein
because management believes such information would not be meaningful because DJ
Capital has no financial or other data to report in response to the
requirements of Form 10-K and, accordingly, there is no separate information
regarding DJ Capital to report herein. DonJoy 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 Donjoy. As a result, the
consolidated financial position and results of operations of DonJoy are
substantially the same as dj Orthos.

BACKGROUND

The Company was established in 1982 under the laws of California as DonJoy,
Inc. The Company was acquired by Smith & Nephew, Inc. (formerly Smith & Nephew
Consolidated, Inc., the Former Parent) effective September 18, 1987 through a
purchase of all the then outstanding shares of the Companys stock. The Former
Parent is a wholly-owned subsidiary of Smith & Nephew plc., a United Kingdom
company. In November 1996, DonJoy, Inc. was merged into the Former Parent and
began to operate as a division. Effective December 29, 1998, the Former Parent
contributed the Companys net assets and shares of a Mexican subsidiary into
DonJoy, L.L.C., a newly formed Delaware limited liability company, and became
the sole member of the new entity. In June 1999, the Former Parent sold
approximately 92.7% of its members interest back to the Company in connection
with a series of recapitalization transactions (See Note 1 of Notes to DonJoys
Audited Consolidated Financial Statements). In June 2000, the Former Parent
sold its remaining members interest to the existing members at that time. The
Companys principal executive offices are located at 2985 Scott Street, Vista,
California 92083, and its telephone number is (800) 336-5690.

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PART I







Item 1.Business

This Annual Report on Form 10-K contains forward-looking statements which are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements are based on
the beliefs of our management as well as on assumptions made by and information
currently available to us. Forward-looking statements include, among other
things, those relating to our plans, business and growth prospects and
strategies, possible future results of operations, and financing plans.
Forward-looking statements include all statements that are not historical facts
and can be identified by forward-looking words such as anticipate, believe,
estimate, expect, will, plan, intend, and similar expressions.
Forward-looking statements are subject to a number of risks, uncertainties and
other factors that could cause our actual results, performance, prospects and
opportunities to differ materially from those expressed in or implied by the
forward-looking statements. Important factors that could affect our results,
performance, prospects and opportunities include, but are not limited to, (i)
our high level of indebtedness; (ii) the restrictions imposed by the terms of
our indebtedness; (iii) the ability to generate cash to service our debts; (iv)
healthcare reform and the emergence of managed care and buying groups; (v)
patents and proprietary know-how; (vi) uncertainty of domestic and foreign
regulatory clearance and approvals; (vii) dependence on orthopedic
professionals, agents and distributors; (viii) our dependence on certain key
personnel; (ix) risks related to competition in our markets; (x) risks related
to changing technology and new product developments; (xi) the sensitivity of
our business to general economic conditions; (xii) uncertainty relating to
third party reimbursement; and (xiii) the other risks referred to under the
caption Risk Factors in this Annual Report on Form 10-K. Unless the context
requires otherwise, the Company, we, us and our each refers to DonJoy,
dj Ortho and its wholly owned subsidiaries, DJ Capital and dj Orthopedics de
Mexico, S.A. de C.V.

Industry Data

Information contained in this Annual Report on Form 10-K concerning the
orthopedic products industry and its segments, including the orthopedic
recovery products industry, our general expectations concerning that industry
and its segments and our market position and market share within that industry
or its segments, both domestically and internationally, are based on estimates
prepared by us using 1998 data from various sources (primarily Frost &
Sullivan, an international marketing consulting firm, as well as data from our
internal research) and on assumptions made by us, based on that data and our
knowledge of the orthopedic products industry and its segments, which we
believe to be reasonable. Industry data is compiled based on the area of usage
of the brace or support (i.e. for the knee, ankle, back, wrist or upper
extremities) and includes both the non-retail market in which we compete and
the retail market. Accordingly, industry data does not correspond to the
organization of our operating segments. Thus, for example, knee braces and
supports market data generally cover both rigid and soft knee braces and
supports. We believe data regarding the orthopedic products industry and its
segments and our market position and market share within that industry or its
segments are inherently imprecise, but are generally indicative of their size
and our market position and market share within the industry or its segments.
Data on our market position and market share within the orthopedic recovery
products industry or its segments is based on 1998 U.S. sales. Estimated
revenues for the orthopedic recovery products industry and its segments and the
historical growth rates of that industry and its segments are based on
information from Frost & Sullivan based on data for 1998, the last year for
which data is available. While we are not aware of any misstatements regarding
any industry data presented in this Annual Report on Form 10-K, 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 on Form 10-K.

OVERVIEW

The Company is a world leading designer, manufacturer and marketer of
orthopedic recovery products. Based on U.S. sales, the Company believes it is
the leading provider of orthopedic recovery products and certain complementary
products in the United States. The Companys broad product lines of rigid knee
braces, soft goods and specialty and other orthopedic products provide a range
of solutions for patients and orthopedic professionals during the various
stages of the orthopedic treatment and recovery process. The Companys products
are used before, after, and as an alternative to surgery, during and after
rehabilitation and for the treatment of osteoarthritis. The Company is a market
leader in the orthopedic recovery products industry, selling more than 600
individual products in over 44 countries throughout the world. The Company
sells its products primarily under the DonJoy and ProCare brand names, each of
which the Company believes enjoys one of the highest levels of brand name
recognition within the orthopedic recovery products industry. In addition to
the typical orthopedic patient, the Companys products are used by professional
athletes, NCAA athletic programs and the U.S. Ski Team. The Company believes
that its leading market positions, strong brand names, reputation for quality
products, broad product lines, established distribution networks in the United
States and commitment to research and development provide it with significant
opportunities to further grow revenues and earnings. For 2000 and 1999, the
Companys net revenues were $147.5 million and $117.8 million, respectively,
and the Companys EBITDA (as defined) was $29.2 million and $25.1 million,
respectively.

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

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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 currently offered by the Company.
Following the Orthotech Acquisition, the Company sold products under the
Orthotech brand; however, the Company has now integrated Orthotech products
into its DonJoy and ProCare brands. Orthotech also had an inventory management
and billing program that has complemented the Companys current OfficeCare
program.

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



| |  | Rigid Knee Braces. The Companys rigid knee braces include ligament
braces, which provide durable support for knee ligament instabilities,
post-operative braces, which provide both knee immobilization and a
protected range of motion; and osteoarthritic (OA) braces, which
provide relief of knee pain due to osteoarthritis. These
technologically-advanced products are generally prescribed to a
patient by an orthopedic professional. The Companys rigid knee braces
are either customized braces, utilizing basic frames which are then
custom-manufactured to fit a patients particular measurements, or are
standard braces which are available off-the-shelf in various sizes
and can be easily adjusted to fit the patient in the orthopedic
professionals office. Substantially all of the Companys rigid knee
braces are marketed under the DonJoy brand name. These products
represented approximately 38% of the Companys net revenues, excluding
freight revenue, for the year ended December 31, 2000.                      
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Soft Goods. The Companys soft goods products, most of which are
fabric or neoprene-based, provide support and/or heat retention and
compression for afflictions of the knee, ankle, back and upper
extremities, including the shoulder, elbow, neck and wrist. As of
December 31, 2000, approximately 58% of the Companys revenues from
soft goods products, excluding freight revenue, were derived from
products marketed under the ProCare brand name, with the remainder
marketed under the DonJoy brand name. These products represented
approximately 36% of the Companys net revenues, excluding freight
revenue, for the year ended December 31, 2000.                                                                                                                                                                                                                                                                                                                                                                                         
| 
| |  | Specialty and Other Orthopedic Products. The Companys portfolio of
specialty and other orthopedic products, which are designed to
facilitate orthopedic rehabilitation, include lower extremity walkers
(boots which are an alternative to lower extremity casting), upper
extremity braces (shoulder and arm braces and slings), cold therapy
systems (a form of pain management which provides continuous cold
therapy to assist in the reduction of pain and swelling) and pain
management delivery systems (a range of ambulatory infusion pumps for
the delivery of local anesthetic directly into a joint following
surgery). As of December 31, 2000, approximately 84% of the Companys
revenues from specialty and other orthopedic products, excluding
freight revenue, were derived from products marketed under the DonJoy
brand name, with the remainder marketed under the ProCare brand name.
These products represented approximately 26% of the Companys net
revenues, excluding freight revenue, for the year ended December 31,
2000.

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

COMPETITIVE STRENGTHS

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

Leading Market Positions. The Company is a world leading designer,
manufacturer and marketer of orthopedic recovery products and, based on U.S.
sales, the Company believes it is the leading provider of orthopedic recovery
products and certain complementary products in the United States. As a result
of the Orthotech Acquisition, the Company believes it has increased its market
position within the U.S. to an estimated market share of 24%. Based on U.S.
sales, the Company believes it now holds the leading U.S. market position for
ligament braces, post-operative braces, back braces and soft ankle braces, with
estimated market shares of 34%, 32%, 27% and 26%, respectively, the number two
market position for OA braces, with an estimated market share of 18%, and
leading positions in the markets for certain of the Companys other products.
The Company has established its leadership positions:



| |  | by delivering innovative products that provide patients with superior quality and value;                                                                                                                                               
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | through successful marketing and sales programs which focus on gaining the support of widely recognized orthopedic
professionals and maintaining strong relationships with the Companys customers; and                                
| 
| |  | by delivering quality products with a high standard of customer service, including shipping the majority of the Companys
products within 24 hours of receipt of the customer order, or 72 hours in the case of customized knee braces.

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

Broad Product Lines. The Company believes that it has one of the broadest
product lines in the orthopedic recovery products industry. The Company markets
over 600 individual products that provide solutions to patients and orthopedic
professionals in addressing the various stages of the orthopedic treatment and
recovery process.



| |  | The Companys quality soft goods products are used by patients to address a wide range of orthopedic injuries and afflictions.                                                                                                                                                  
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The Companys customized and off-the-shelf rigid knee braces are used as an alternative to surgery, to help bring patients
back to pre-injury levels post-surgery or to support the normal functioning of the knee for patients who have returned to
pre-injury activity levels.
| 
| |  | The Companys other specialized devices such as cold therapy systems and pain management delivery systems are used by
patients who have just undergone orthopedic surgery.                                                                                                      

Established U.S. Distribution Networks. The Company has established broad
distribution networks within the United States. The Companys DonJoy product
lines are marketed by 30 commissioned sales organizations (referred to herein
as agents) which employ approximately 198 sales representatives (including
additional sales representatives added as a result of the Orthotech
Acquisition). These sales representatives undergo extensive training by both
the Company and the agent and use their technical expertise to market our
products to orthopedic surgeons, orthotic and prosthetic centers, hospitals,
surgery centers, physical therapists and trainers. The Company sells its
ProCare products primarily to large, national third party distributors,
including Owens & Minor Inc., McKesson/HBOC and Allegiance Healthcare, as well
as to regional medical surgical dealers and medical products buying groups. The
Company believes that its strong distribution networks in the United States
provide the Company with an established base from which to introduce new or
enhanced products and expand sales of existing product lines.

Successful Record of New Product Development. The Company has developed a
reputation as a research and development leader by introducing a steady flow of
product enhancements and new products into the market. Since 1998, the Company
has introduced more than ten significant new products, sales of which
represented approximately 15% of the Companys net revenues for the year ended
December 31, 2000. The Company owns or has licensing rights to more than 50
patents, including the Four Points of Leverage system, which is a critical
element in the design of the Companys ligament braces. In addition, the
Company maintains close relationships with a number of widely recognized
orthopedic surgeons and sports medicine specialists who assist in product
research, development and marketing. These professionals often become product
champions, speaking about the Companys products at medical seminars,
assisting in the training of other professionals in the use and/or fitting of
the products and providing us with feedback on the industrys acceptance of the
new products.

Experienced and Incentivized Management Team. The Companys management team
has extensive experience in the orthopedic recovery products industry. The
Companys five senior executives have an average of 9 years of experience with
the Company and an average of over 20 years of experience within the orthopedic
recovery products industry. Management owns or has the right to acquire
pursuant to unit options, subject to certain conditions, up to approximately
18% of DonJoys equity interests on a fully diluted basis.

BUSINESS STRATEGY

The Companys strategic objectives are to strengthen its leadership position in
the orthopedic recovery products industry and to increase its revenues and
profitability. The Company intends to pursue the following strategic
initiatives:



| |  | broaden its market reach,              
|- |  | ---------------------------------------
| 
| |  | enhance and grow its core business, and
| 
| |  | expand its business platform.          

The key elements of its business strategy are to:

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Increase International Sales. The Company markets products in over 44
countries, primarily in Europe, Canada and Japan, under the DonJoy and ProCare
brand names. International sales accounted for approximately 12% and 16% of
the Companys net revenues, excluding freight revenue, for the years ended
December 31, 2000 and 1999, respectively. The decrease in international net
revenues as a percentage of total revenues in 2000 as compared to prior years
is a direct result of the Orthotech business which historically consisted
primarily of domestic sales. Excluding freight revenue, sales in Germany, the
Companys largest foreign market, accounted for approximately 32% of the
Companys 2000 international net revenues, and sales in Canada accounted for
approximately 10% of the Companys 2000 international net revenues, with no
other country accounting for 10% or more of the Companys 2000 international
net revenues. Excluding freight revenue, total sales in Europe accounted for
approximately 72% of the Companys 2000 international net revenues, while sales
in Germany, the United Kingdom, France, Spain and Italy accounted for
approximately 50% of the Companys 2000 international net revenues. Excluding
freight revenue, sales in Japan accounted for approximately 9% of the Companys
2000 international net revenues. In 2000, the Company sold and distributed its
products in foreign markets through 30 independent distributors and 13
remaining Smith & Nephew sales organizations in Canada and in some smaller
markets. The Company plans to increase its international sales by continuing
the reorganization and expansion of its independent international distribution
network started in 1999 and implementing the marketing and distribution
strategies which the Company successfully utilizes in the United States and in
most major international territories. During 2001, the Company expects to
replace some of the remaining Smith & Nephew sales organizations with
independent distributors who will focus on building strong relationships with
its targeted customers and will be responsible for achieving specified sales
targets. The Company continues to develop relationships with orthopedic
professionals who are well recognized in major countries to become product
champions, similar to orthopedic professionals in the United States who speak
about our products at medical seminars, assist in training other professionals
how to use and/or fit our products and provide us with feedback on industrys
acceptance of our new products.

Improve Operating Efficiencies.The Company is actively pursuing opportunities
to improve the efficiencies of its total operations. By upgrading its computer
systems to achieve more efficient business processes, the Company expects to
achieve more efficient customer order fulfillment and reduced overhead and
working capital requirements. The Company also is in the process of further
automating its manufacturing operations through the use of more technologically
advanced fabrication and equipment systems. In addition, the Company will
continue to move portions of its labor intensive operations to its facilities
in Mexico to generate labor cost savings and utilize the resulting additional
capacity in its U.S. facility to manufacture its more technologically advanced
products. The Company will continue to rationalize the raw materials used in
the production of its existing products, thereby enabling the Company to
leverage its purchasing power. The Company also plans to achieve cost savings
by further reducing the number of stock keeping units (SKUs) without impacting
service or breadth of the Companys product range.

Introduce New Products and Product Enhancements.The Company intends to
maintain its position as a leading innovator of orthopedic recovery products
through its commitment to research and development and its close working
relationships with orthopedic professionals. Using its materials, process and
design expertise in bracing and supports, the Company will continue to enhance
its current range of products to address changing customer needs. In addition,
the Company intends to add complementary products through its own research and
development efforts and arrangements with third parties. For example, the
Company has introduced two pain management systems, the IceMan, a cold therapy
system which it developed, and, more recently, the PainBuster Pain
Management System, a range of ambulatory infusion pumps which it distributes
under a licensing arrangement. The Company believes the PainBuster
provides a platform for further opportunities in the surgical market. The
Company plans to release the DonJoy Vista System, a computerized
post-operative brace designed to optimize a patients rehabilitation in the
treatment of knee injuries, in 2001.

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



| |  | expand the Companys core business,                     
|- |  | --------------------------------------------------------
| 
| |  | enable the Company to offer complementary products, and 
| 
| |  | diversify into the broader orthopedic products industry.

INDUSTRY

The orthopedic recovery products industry, the primary industry in which the
Company currently competes, is a segment of the worldwide orthopedic products
industry, which had estimated sales in 1998, the last year for which data is
available, of $8.5 billion, including estimated U.S. sales of $5.1 billion. The
worldwide orthopedic products market includes reconstructive implants, tissue
fixation and healing products, orthopedic recovery products, spinal implants,
arthroscopy products, and other related products. The orthopedic recovery
products industry includes retail and non-retail sales of braces and supports
for the knee, ankle, back and upper extremities, including the shoulder, elbow,
neck and wrist and other related products. The U.S. orthopedic recovery
products industry

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generated estimated revenues of $630 million in 1998. The
Company currently competes in the non-retail segment of the U.S. orthopedic
recovery products industry, which generated estimated revenues of $535 million
in 1998. The European orthopedic recovery products industry generated estimated
revenues of $330 million in 1998. Comparable data for the rest of the world is
not readily available. Complementary market segments to the orthopedic recovery
products industry within the overall orthopedic products industry include
orthopedic pain management systems and devices, a market in which the Company
currently competes, and which generated estimated 1998 U.S. revenues of $150
million, and soft tissue fixation products and tissue healing products, which
represent attractive markets for the Company and which generated estimated 1998
U.S. revenues of $350 million. Comparable data for 2000 and 1999, and for
Europe and the rest of the world is not readily available.

The orthopedic recovery products industry is highly fragmented and
characterized by competition among a few large, diversified orthopedic
companies and numerous smaller niche competitors. Revenues in the U.S.
orthopedic recovery products industry grew at an estimated compound annual
growth rate of 3.5% from 1994 through 1998. This growth has been driven by
increased participation in exercise, sports and other physical activity, the
aging baby boomer population including adults suffering from osteoarthritis,
and a growing awareness of the importance of preventative bracing. Comparable
data for 2000 and 1999, and for Europe and the rest of the world is not readily
available.

The Company believes data set forth in this annual report regarding the
orthopedic products industry and its segments and the Companys market position
and market share within that industry or its segments are inherently imprecise,
but are generally indicative of their relative size and the Companys market
position and market share within that industry or its segments. Estimated
revenues for the orthopedic recovery products industry and its segments and the
historical growth rates for such industry and its segments are based on
information obtained from Frost & Sullivan, an international marketing
consulting firm. The Companys estimates are subject to change based on
various factors, including those described under the caption Factors Affecting
Future Performance in this annual report. The following are descriptions of
segments of the U.S. orthopedic recovery products industry. Comparable data for
2000 and 1999, and for Europe and the rest of the world is not readily
available.

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

The Company believes it is the U.S. market leader in ligament braces and
post-operative braces, with an estimated 34% and 32% market share,
respectively, and the number two U.S. provider of OA braces, with an estimated
18% market share. The knee brace and support market is highly fragmented. Many
of the participants in this market are primarily suppliers of soft knee
supports.

Ankle Braces and Supports.The retail and non-retail ankle brace and support
market generated estimated revenues of $157 million in 1998, of which
approximately $131 million was generated in the non-retail segment in which the
Company competes. The ankle brace and support market consists of lower
extremity walkers, rigid ankle stirrups and soft ankle supports sold through an
orthopedic prescribing professional and other soft ankle supports sold
primarily in the retail segment. Revenues in this segment of the industry grew
at an estimated compound annual growth rate of 6.6% from 1994 through 1998. In
1998, over 2,000,000 people sought medical attention for ankle and foot
injuries. In the non-retail segment, the Company believes it is the market
leader in soft ankle supports with an estimated 26% market share and one of the
market leaders of lower extremity walkers with an estimated 14% market share.

Back, Wrist, and Upper Extremity Braces and Supports. The retail and
non-retail back, wrist and upper extremity markets collectively generated
estimated revenues of $175 million in 1998, of which approximately $147 million
was generated in the non-retail segment in which the Company competes. The
back, wrist and upper extremity markets consist of orthopedic braces and
supports to address afflictions of the back, wrist, shoulder, elbow and neck
which are sold in the prescriptive non-retail segment as well as in the retail
segment. Aggregate revenues in these segments of the industry grew at an
estimated compound annual growth rate of 3.1% from 1994 through 1998. In the
non-retail segment, the Company believes it is the market leader in the back
brace industry with an estimated 27% market share and enjoys leading market
positions in the wrist and upper extremity markets.

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

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PRODUCTS

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

The Company markets its products under the DonJoy and ProCare brand names.
Based on net revenues, excluding freight revenue, the Company marketed
approximately 98% of its rigid knee braces, 84% of its specialty and other
orthopedic products and 42% of its soft goods products under the DonJoy brand
name during the year ended December 31, 2000. The Company believes DonJoy is
the most recognized brand name of knee braces in the orthopedic recovery
products industry. Based on net revenues, excluding freight revenue, the
Company marketed approximately 58% of its soft goods products, 16% of its
specialty and other orthopedic products and 2% of its rigid knee braces under
the ProCare brand name during the year ended December 31, 2000. The ProCare
brand name is well recognized by third party distributors of soft goods in the
orthopedic recovery products industry.

On July 7, 2000, the Company completed the Orthotech Acquisition. Orthotech
developed, manufactured and marketed an array of orthopedic products for the
sports medicine market including braces, soft goods and specialty products
which are similar to the products currently offered by the Company. Following
the Orthotech Acquisition, the Company sold products under the Orthotech brand;
however, the Company has now integrated Orthotech products into its DonJoy and
ProCare brands.

Rigid Knee Bracing

The Company designs, manufactures and markets a broad range of rigid knee
bracing products, including ligament braces, post-operative braces and OA
braces. These technologically-advanced products are generally prescribed to a
patient by an orthopedic professional. The Companys rigid knee braces are
either customized braces, utilizing basic frames which are then
custom-manufactured to fit a patients particular measurements, or are standard
braces which are available off-the-shelf in various sizes and can be easily
adjusted to fit the patient in the orthopedic professionals office. Rigid knee
bracing products represented approximately 38% of the Companys net revenues,
excluding freight revenue, for the year ended December 31, 2000.

Ligament Braces. Ligament braces provide durable support for moderate to
severe knee ligament instabilities to help patients regain range-of-motion
capability so they can successfully complete rehabilitation and resume the
activities of daily living after knee surgery or injury. They are generally
prescribed six to eight weeks after knee surgery, often after use of a more
restrictive post-operative brace. The Companys ligament braces can also be
used to support the normal functioning of the knee for patients who have
returned to pre-injury activity levels. The Companys ligament bracing product
line includes premium customized braces generally designed for strenuous
athletic activity and off-the-shelf braces generally designed for use in less
rigorous activity. All of the Companys ligament braces are designed using the
Companys patented Four Points of Leverage system. Sales of ligament braces
represented approximately 64% of the net revenues, excluding freight revenue,
of rigid knee bracing products in 2000.

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

OA Braces. OA braces are used to treat patients suffering from osteoarthritis,
a form of damage to the articular surface of the knee joint. The Companys line
of customized and off-the-shelf OA braces is designed to shift the resultant
load going through the knee, providing additional stability and reducing pain,
and in some cases may serve as a cost-efficient alternative to total knee
replacement.

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

|                                            |  |                         |  |            |      |                      |  |                                                                                                                               
|------------------------------------------- |  | ----------------------- |  | ---------- | ---- | -------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|                                            |  |                         |  | Year      
|Product                                     |  | Type of Brace           |  | Introduced |      | Function/Description
|                                            |  |                         |  |            |      |                     
|                                           
|                                           
|                                           
|                                           
|Defiance Custom Knee
  Brace                |  | Ligament/Osteoarthritic |  |            | 1992 |                      |  | The Companys hallmark premium
brace. Custom-built,
lightweight, strong and
durable. Designed for strenuous
athletic activity.
|                                           
|                                           
|                                           
|                                           
|Enchanced Defiance
Custom Custom Knee Brace |  | Ligament                |  |            | 1998 |                      |  |                                                                                                                               
|                                           
|                                           
|                                           
|                                           
|4TITUDE Brace                               |  | Ligament                |  |            | 1999 |                      |  | The Companys newest
off-the-shelf brace. Introduced
in June 1999.                                                            
|                                           
|                                           
|                                           
|                                           
|Legend Brace                                |  | Ligament                |  |            | 1995 |                      |  | Sturdy, low-profile,
off-the-shelf brace. Designed
for athletic use.                                                          

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|                                 |  |                       |  |            |      |                      |  |                                                                                                                                                                                                                                                                                                        
|-------------------------------- |  | --------------------- |  | ---------- | ---- | -------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                 |  |                       |  | Year      
|Product                          |  | Type of Brace         |  | Introduced |      | Function/Description
|                                 |  |                       |  |            |      |                     
|                                
|                                
|                                
|                                
|SE4-point                        |  | Ligament              |  |            | 2001 |                      |  | Low cost off-the-shelf brace                                                                                                                                                                                                                                                                           
|                                
|                                
|                                
|                                
|TROM Post-Operative
  Brace      |  | Post-operative        |  |            | 1998 |                      |  | Allows for both immobilization
and protected range of motion
after surgery. Utilizes the
Companys easy-to-use patented
hinge assembly.                                                                                                                                                                
|                                
|                                
|                                
|                                
|TROM Rehabilitation
  Brace      |  | Post-operative        |  |            | 1998 |                      |  | Designed to provide protection
for the recovering knee up to 8
weeks within a program of
aggressive long-term
rehabilitation. Utilizes the
Companys easy to use patented
hinge assembly.                                                                                                              
|                                
|                                
|                                
|                                
|IROM Brace                       |  | Post-operative        |  |            | 1992 |                      |  | Used for ligament
instabilities. Allows for both
immobilization and protected
range of motion.                                                                                                                                                                                                         
|                                
|                                
|                                
|                                
|Telescoping bar
  post-op line   |  | Post-operative        |  |            | 2001 |                      |  | Adjustable bar length post-op
braces for reduced inventory
requirements and improved fit
and performance.                                                                                                                                                                                              
|                                
|                                
|                                
|                                
|Monarch Custom OA
  Brace        |  | Osteoarthritic        |  |            | 1994 |                      |  | Custom-built or off-the-shelf,
flexible premium braces                                                                                                                                                                                                                                                 
|                                
|                                
|                                
|                                
|Patient Ready Monarch
  OA Brace |  | Osteoarthritic        |  |            | 1996 |                      |  | recommended for relief of
osteoarthritic pain and ease of
use. Can be easily adjusted by
the patient.                                                                                                                                                                                                  
|                                
|                                
|                                
|                                
|OAdjuster Brace                  |  | Osteoarthritic        |  |            | 2000 |                      |  | The OAdjuster off-the-shelf
brace was introduced at the
AAOS conference in March 2000.
Double uprights allow improved
support. Patented hinge and
diagnostic tool.                                                                                                                                     
|                                
|                                
|                                
|                                
|OPAL OA Knee Brace               |  | Osteoarthritic        |  |            | 1998 |                      |  | Off-the-shelf, comfortable,
light-weight, low-profile,
slip-on sleeve-style Drytex
brace. Specifically designed
for women.                                                                                                                                                                             
|                                
|                                
|                                
|                                
|DonJoy VistaTM
  Technology      |  | Rehabilitation System |  |            | 2001 |                      |  | The DonJoy VistaTM System
includes a post-op brace,
hand-held patient device and
Clinician computer software to
reduce the overall cost to
rehab an anterior cruciate
ligament (ACL)
reconstruction. The rehab
system has individualized
protocols and records the
patients progress and
compliance.

Soft Goods

The Companys soft goods products, most of which are fabric or neoprene-based,
provide support and/or heat retention and compression for afflictions of the
knee, ankle, back and upper extremities, including the shoulder, elbow, neck
and wrist. The Company currently offers products ranging from simple neoprene
knee sleeves to complex products that incorporate advanced materials and
features such as air-inflated cushions and metal alloy hinge components. The
Companys soft goods products include the RocketSoc, an ankle support designed
for chronic sprains, the Playmaker, a neoprene knee brace for mild to moderate
ligament instabilities, and the Air DonJoy, a line of knee sleeves with air
inflatable cushions designed to treat and ease pain from knee malalignment.
Soft goods products represented approximately 36% of the Companys net
revenues, excluding freight revenue, for the year ended December 31, 2000.

Specialty and Other Orthopedic Products

The Company has a portfolio of specialty and other orthopedic recovery products
designed to facilitate orthopedic rehabilitation, including lower extremity
walkers, upper extremity braces, cold therapy systems, pain management delivery
systems and other related products and accessories. These products represented
approximately 26% of the Companys net revenues, excluding freight revenue, for
the year ended December 31, 2000.

Lower Extremity Walkers. These products are boots which fit on a patients
foot and provide comfort and stability for ankle and foot injuries. Because
they can be removed for showering or therapy, the Companys walkers are used as
an alternative to traditional casts. Sales of walkers represented approximately
43% of the net revenues, excluding freight revenue, of specialty and other
orthopedic products in 2000.

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

Cold Therapy Systems. The Company manufactures, markets and sells the IceMan,
a cold therapy product which was introduced in 1996, as well as other cold
therapy products such as ice packs and wraps. The IceMan is a portable device
used after surgery or injury to reduce swelling, minimize the need for
post-operative pain medications and accelerate the rehabilitation process. The
product consists of a durable quiet pump and control system which is used to
circulate cold water from a reservoir to a pad which is designed to fit the
afflicted area, such as the ankle, knee or shoulder. The IceMan uses a patented
circulation system to provide constant fluid flow rates, thereby minimizing
temperature fluctuations which can reduce device effectiveness and create the
potential for tissue or nerve damage.

Pain Management Delivery Systems. The Company entered into an arrangement in
1998, 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 surgical procedures.
These pain management and relief systems provide a continuous infusion of local
anesthetic dispensed by the physician directly into the wound site following
surgical procedures. The portable PainBuster Pain Management System
consists 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 System is intended to provide direct pain
relief, reduce hospital stays and allows earlier and greater ambulation. The
Company believes that the PainBuster Pain Management System provides it
with a platform for further opportunities in the surgical market.

RESEARCH AND DEVELOPMENT

The Companys research and development program is aimed at developing and
enhancing products, processes and technologies to maintain the Companys
position as a leading innovator in the orthopedic recovery products industry.
The Companys research and development expenditures were $2.5 million, $2.1
million and $2.2 million during the years ended December 31, 2000, 1999 and
1998 respectively.

The Companys research and development activities are conducted in its Vista
facility by a group of 12 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 a
variety of computational tools and computer aided design (CAD) systems during
the development process, which allow a design to be directly produced on
computer-based fabrication equipment, reducing both production time and costs.

The Companys current research and development activities are focused on using
new materials, innovative designs and state of the art manufacturing processes
to develop new products and to enhance the Companys existing products. The
Company is also pursuing strategic initiatives to identify areas for
technological innovation and to develop products that improve rehabilitation by
utilizing advanced technologies. For example, the Company is currently
developing the DonJoy Vista system, a rehabilitation management
system that incorporates an instrumented post-op brace, patient hand-held
device and PC software. The DonJoy Vista system is designed to lower
the cost and enhance the delivery of rehabilitation for knee injuries.

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

The Company maintains the Clinical Education Research Facility (CERF)
Laboratory in its Vista facility which is used by orthopedic surgeons to
practice surgical techniques. These surgeons often provide the Company with
feedback which assists the Company in the development and enhancement of
products. In addition, the Company utilizes its biomechanical laboratory in its
Vista facility to test the effectiveness of the Companys products. U.S. based
and international surgeons/researchers collaborate with the research staff to
perform biomechanical testing. The tests are designed to demonstrate
functionality of new products and effectiveness of new surgical procedures.
State of the art mechanical models are used to simulate behavior of normal,
injured and osteoarthritic knees and look at the performance of new product
designs as well as competitive products. The Company believes it is the only
orthopedic recovery products manufacturer which has both surgical techniques
and biomechanical laboratories, the combination of which allows professionals
to practice procedures and then to measure the effectiveness of those
procedures. In addition, the Company provides external clinical and academic
research grants to leading health care professionals and institutions. The
focus of these projects is to evaluate treatments on specific patient
populations, for example, after knee surgery or subjects with knee
osteoarthritis. Recent

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projects include measurement of ACL strain with and
without brace use, patient outcome after ACL surgery with and without brace
use, strength of ACL fixation devices, and cold therapy effectiveness.

SALES, MARKETING AND DISTRIBUTION

The Company distributes its products in the U.S. and international markets
primarily through networks of agents and distributors who market and sell to
orthopedic surgeons, orthotic and prosthetic centers, third party distributors,
hospitals, surgery centers, physical therapists and trainers within the
orthopedic community. The Companys products are used by people who have
sustained an injury, have recently completed an orthopedic surgical procedure
and/or suffer from an affliction of the joint. In addition, a number of high
profile professional and amateur athletes who participate in sports such as
football, basketball and skiing, choose to use the Companys products. The
Company is the official and exclusive supplier of braces and supports to the
U.S. Ski Team. In addition, the Company believes it is the leading supplier of
knee braces to players in the National Football League, among whom use of knee
braces has more than tripled over the last two years according to a recent
survey of NFL team physicians. No individual agent or distributor accounted for
10% or more of the Companys net revenues for the year ended December 31,
2000.

The Company is committed to providing its customers with a superior standard of
customer service. The Companys 53 customer care representatives strive for
prompt product processing and delivery by coordinating between the customer and
the Companys sales, operations and shipping departments. The Company ships the
majority of its products within 24 hours of receipt of the customer order, or
72 hours in the case of customized braces. In addition, customer care
representatives also provide support regarding order status, product
information, returns and general information.

United States

The Company markets products in the United States under the DonJoy and ProCare
brands through two distinct sales and distribution channels as well as under
national contracts and through the OfficeCare program. Sales in the United
States accounted for approximately 88% of the Companys net revenues, excluding
freight revenue, for the year ended December 31, 2000.

DonJoy. DonJoy products are marketed by 30 commissioned sales organizations
(referred to herein as agents) which employ approximately 198 sales
representatives (including additional sales representatives added as a result
of the Orthotech Acquisition). These sales representatives market to orthopedic
surgeons, orthotic and prosthetic centers, hospitals, surgery centers, physical
therapists and athletic trainers. Because the DonJoy product line generally
requires customer education on the application and use of the product, the
sales representatives are technical specialists who receive extensive training
from both the Company and the agent and use their technical expertise to help
fit the patient with the Companys product and assist the orthopedic
professional in choosing the appropriate product to meet the patients needs.
After a product order is received by a sales representative, the Company ships
and bills the product directly to the orthopedic professional and the Company
pays a sales commission to the agent.

The Company enjoys long-standing relationships with most of its 30 agents and
198 sales representatives, many of which have marketed DonJoy products for over
10 years. Under the arrangements with the agents, each agent is granted an
exclusive geographic territory for sales of the Companys products and is not
permitted to market products, or represent competitors who sell or distribute
products, that compete with the Company. The agents receive a commission which
varies based on the type of product being sold. If an agent fails to achieve
specified sales quotas during any quarter, the Company may terminate the agent,
which the Company has done in the past.

Procare. ProCare products are sold in non-exclusive territories under private
label brand names to third party distributors. These distributors include
large, national third party distributors such as Owens & Minor Inc.,
McKesson/HBOC, General Medical Corp., Allegiance Healthcare, PSS World Medical
Inc. and Bergen Brunswig Corp.; regional medical surgical dealers; and medical
products buying groups which consist of a number of dealers who make purchases
through the buying group. These distributors generally resell the ProCare
products to large hospital chains, hospital buying groups, primary care
networks and orthopedic physicians for use by the patient. Unlike DonJoy
products, ProCare products generally do not require significant customer
education for their use.

National Contracts. In response to the emergence of managed care and the
formation of buying groups, national purchasing contracts and various bidding
procedures imposed by hospitals and buying groups, the Company has entered into
national contracts for DonJoy and ProCare products with large health care
providers and buying groups, such as HealthSouth Corp., NovaCare Inc., Premier
Purchasing Partners, L.P., AmeriNet Inc., US Government/Military hospitals,
Shared Services HealthCare, National Purchasing Alliance, Magnet, and Hospital
Purchasing Services. Under these contracts, the Company provides discounted
pricing to the buying group and is generally designated as one of several
preferred purchasing sources for the members of the buying group for specified
products, although the members are not obligated to purchase the Companys
products. The Company is also sole supplier for Kaiser Permanente, Columbia
HCA, and Novation. The Company expects that in the future it will enter into
additional national contracts with other health care providers and buying
groups. See Risk Factors  Responses by Health Care Providers to Price
Pressures; Formation of Buying Groups and Managements Discussion and
Analysis of Financial Condition and Results of Operations  Overview  Third
Party Reimbursement; Health Care Reform; Managed Care.

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

International

The Company markets 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 12% and 16% of the
Companys net revenues for the years ended December 31, 2000 and 1999,
respectively. The decrease in international net revenues as a percentage of
total revenues in 2000 as compared to prior years is a direct result of the
Orthotech business, which historically consisted primarily of domestic sales.
Excluding freight revenue, sales in Germany, the Companys largest foreign
market, accounted for approximately 32% of the Companys 2000 international net
revenues, and sales in Canada accounted for approximately 10% of the Companys
2000 international net revenues, with no other country accounting for 10% or
more of the Companys 2000 international net revenues. Excluding freight
revenue, total sales in Europe accounted for approximately 72% of the Companys
2000 international net revenues, while sales in Germany, the United Kingdom,
France, Spain and Italy accounted for approximately 50% of the Companys 2000
international net revenues. Excluding freight revenue, sales in Japan
accounted for approximately 9% of the Companys 2000 international net
revenues.

In 2000, the Company sold and distributed its products in foreign markets
through 30 independent distributors and 13 remaining Smith & Nephew sales
organizations in Canada and in some smaller markets. The Company plans to
increase its international sales by continuing the reorganization and expansion
of its independent international distribution network started in 1999 and
implementing the marketing and distribution strategies which the Company
successfully utilizes in the United States and in most major international
territories. International sales made through Smith & Nephew sales
organizations were 20%, 40% and 55% of the Companys international sales,
exclusive of freight revenue, in 2000, 1999 and 1998, respectively. During
2001, the Company expects to replace some of the remaining Smith & Nephew sales
organizations with independent distributors who will focus on building strong
relationships with its targeted customers and will be responsible for achieving
specified sales targets. The Company continues to develop relationships with
orthopedic professionals who are well recognized in major countries to become
product champions, similar to orthopedic professionals in the United States.

MANUFACTURING

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

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

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

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

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

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COMPETITION

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

Competition in the rigid knee brace market is primarily based on product
technology, quality and reputation, relationships with customers, service and
price. Competition in the soft goods market is less dependent on innovation and
technology and is primarily based on product range, service and price.
Competitors have initiated stock and bill programs similar to our OfficeCare
program to provide value to their customers. Electro-Biology, Inc. (EBI)
Medical Systems, a division of Biomet, is the market leader with this type of
program. Competition in specialty and other orthopedic products is based on a
variety of factors, depending on the type of product.

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

INTELLECTUAL PROPERTY

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

The Company owns or has licensing rights to over 50 patents and has several
pending patent applications. The Company anticipates that it will apply for
additional patents in the future as it develops new products and product
enhancements. The Companys most significant patent involves the bracing
technology and design which it has patented as the Four Points of Leverage
system. Many of the Companys ligament bracing products have been designed
using the Four Points of Leverage system which effectively produces pressure
to the upper portion of the tibia, which, in turn, reduces strain on the
damaged, reconstructed or torn ligament. Because this system is patented, the
Companys competitors are prohibited from designing products which apply
pressure to the tibia using the Companys technique. The Companys patent
covering the Four Points of Leverage system expires in January 2005. The
Companys other significant patents include the Custom Contour Measuring
Instrument, which serves as an integral part of the measurement process for
patients ordering the Companys customized ligament and OA braces. In addition,
the Company owns patents covering a series of hinges for its post-operative
braces, as well as pneumatic pad design and production technologies (which
utilize air inflatable cushions that allow the patient to vary the location and
degree of support) used in braces such as the Defiance and the Patient Ready
Monarch. The Company also has patents relating to its OA braces and specific
mechanisms in a number of the Companys products. In addition to these patents,
the Company relies on non-patented know-how, trade secrets, process and other
proprietary information, which the Company protects through a variety of
methods, including confidentiality agreements and proprietary information
agreements with vendors, employees, consultants and others who have access to
the Companys proprietary information.

The Company owns or has the licensing rights to a number of trademarks. In
addition to the DonJoy®, ProCare® and Orthotech® brand names, the
Companys most significant trademarks include Defiance®, GoldPoint®,
Monarch®, RocketSoc®, IceMan®, Air DonJoy®, Quadrant®, LegendTM,
TROMTM, PlaymakerTM, PainBusterTM OPALTM, 4TITUDETM, OAdjusterTM
and OfficeCareSM, registered worldwide.

In August 1998, Smith & Nephew entered into a five-year exclusive arrangement
with IZEX Technologies to license know-how and technology for the design,
manufacture and distribution of the DonJoy Vista 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 the Company.

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

EMPLOYEES

As of December 31, 2000, the Company had 1,022 employees. The Companys
workforce is not unionized. The Company has not experienced any strikes or work
stoppages, and management generally considers its relationships with its
employees to be satisfactory.

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GOVERNMENT REGULATION

MEDICAL DEVICE REGULATION

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

Under the Federal Food, Drug, and Cosmetic Act (the 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. The Companys
current products are all Class I or Class II medical devices. All of the
Companys currently marketed products hold the relevant exemption or premarket
clearance required under the FFDCA.

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



| |                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------
| | (1) a device that was legally marketed prior to May 28, 1976, the date
upon which the Medical Device Amendments of 1976 were enacted, or
|
| | (2) to another commercially available, similar device which was
subsequently cleared through the 510(k) process.                        

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

A Class III product is a product which has a new intended use or uses advanced
technology that is not substantially equivalent to a use or technology with
respect to a legally marketed device. The safety and effectiveness of Class III
devices cannot be assured solely by the General Controls and the other
requirements described above. These devices almost always require formal
clinical studies to demonstrate safety and effectiveness.

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

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

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

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

There are no restrictions under U.S. law on the export from the United States
of any medical device that can be legally distributed in the United States. In
addition, there are only limited restrictions under U.S. law on the export from
the United States of medical devices that cannot be legally distributed in the
United States. If a Class I or Class II device does not have 510(k) clearance,
but is eligible for approval under the 510(k) process, then the device can be
exported to a foreign country for commercial marketing without the submission
of any type of export request or prior FDA approval, if it satisfies certain
limited criteria relating primarily to specifications of the foreign purchaser
and compliance with the laws of the country to which it is being exported.
Class III devices which do not have PMA approval may be exported to any foreign
country, if the product complies with the laws of that country and, with
respect to the following countries, has valid marketing authorization under the
laws of such country: Australia, Canada, Israel, Japan, New Zealand,
Switzerland, South Africa, the European Union, a country in the European
Economic Area or such other countries as may be approved by the FDA. The
unapproved device must also satisfy the criteria required to be satisfied by
Class I and Class II devices as well as additional criteria applicable to the
devices. All of the Companys products which are exported to foreign countries
currently comply with the restrictions described in this paragraph.

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

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

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

The Company is 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. The Company has never been challenged
by a governmental authority under any of these laws and believes that its
operations are in material compliance with such laws. However, because of the
far-reaching nature of these laws, there can be no assurance that the Company
would not be required to alter one or more of its practices to be in compliance
with these laws. In

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addition, there can be no assurance that the occurrence of
one or more violations of these laws would not result in a material adverse
effect on the Companys financial condition and results of operations.

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

The Company operates a stock and bill program, known as the OfficeCare program,
through which it makes its products and services available in the offices of
physicians or other providers. In conjunction with the OfficeCare program, the
Company may pay participating physicians a fee for rental space and support
services provided by such physicians to the Company. 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.
The Company believes it has structured the OfficeCare Program to comply with
these laws.

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

False Claims Laws. Under separate statutes, submission of claims for payment
that are not provided as claimed may lead to civil money penalties, criminal
fines and imprisonment, and/or exclusion from participation in Medicare,
Medicaid and other federally funded state health programs. These false claims
statutes include the Federal False Claims Act, which allows any person to bring
suit alleging false or fraudulent Medicare or Medicaid claims or other
violations of the statute and to share in any amounts paid by the entity to the
government in fines or settlement. Such suits, known as qui tam actions, have
increased significantly in recent years causing greater numbers of health care
companies to have to defend a false claim action, pay fines or be excluded from
the Medicare and for Medicaid programs as a result of an investigation arising
out of such action.

ENVIRONMENTAL AND OTHER MATTERS

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

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

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on the Companys business or financial condition. In addition, changes in
environmental and worker health and safety requirements or liabilities from
newly-discovered contamination could have a material effect on the Companys
business or financial condition.

GOVERNMENTAL AUDITS

The Companys operations are subject to periodic survey by governmental
entities or contractors to assure compliance with Medicare and Medicaid
standards and requirements. From time to time in the ordinary course of
business, the Company, like other health care companies, receives survey audits
or reviews from governmental entities, which may cite certain deficiencies
based on the Companys alleged failure to comply with applicable supplier
standards and other requirements. The Company reviews such audits or reports
and attempts to take appropriate corrective action. The failure to effect such
action or to obtain, renew or maintain any of the required regulatory
approvals, certifications or licenses could adversely affect the Companys
business, results of operations or financial condition and could prevent the
programs involved from offering products and services to patients.

OTHER FEDERAL AND STATE REGULATIONS

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

RISK FACTORS

Substantial Leverage  Our substantial indebtedness could adversely affect our
ability to operate our business and to fulfill our obligations under the 12
5/8% Senior Subordinated Notes issued in connection with the recapitalization.

As a result of the recapitalization transactions and the Orthotech Acquisition,
we are highly leveraged, which means we have a large amount of indebtedness in
relation to our members deficit. The following chart shows certain important
credit statistics as of December 31, 2000 and 1999.

|                           |  |                   |         |  
|-------------------------- |  | ----------------- | ------- | -
|                           |  | December 31, 2000
|                           |  |                  
|                           |  | (in thousands)   
|Long-term debt             |  | $                 | 157,222 |  
|                          
|                          
|                          
|                          
|Redeemable preferred units |  | $                 | 41,660  |  
|                          
|                          
|                          
|                          
|Members deficit           |  | $                 | (63,625 | )

|                                   |  |                   |       |                   |  |  |       | 
|---------------------------------- |  | ----------------- | ----- | ----------------- |  |  | ----- | 
|                                   |  | Year Ended        |       | Year Ended       
|                                   |  | December 31, 2000 |       | December 31, 1999
|                                   |  |                   |       |                  
|Ratio of earnings to fixed charges |  |                   | 1.29x | (a)               |  |  | 2.12x | 



---

|(a) |  | Reflects indebtedness incurred to finance the Orthotech Acquisition from
the date of acquisition.
|--- |  | -------------------------------------------------------------------------------------------------

We may also incur additional indebtedness from time to time to finance
acquisitions, as we did in connection with the Orthotech Acquisition,
investments or strategic alliances or capital expenditures or for other
purposes subject to the restrictions contained in the credit facility and the
indenture. See Managements Discussion and Analysis of Financial Condition and
Results of Operations  Liquidity and Capital Resources.

Our high degree of leverage could have important consequences to us, including
the following:



| |  | Our ability to obtain additional financing, if necessary, for working capital, capital expenditures, acquisitions or other
purposes may be impaired or such financing may not be available on favorable terms.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | We will need a substantial portion of our cash flow to pay the principal and interest on our indebtedness, including
indebtedness that we may incur in the future.                                            
| 
| |  | Payments on our indebtedness will reduce the funds that would otherwise be available for our operations and future business
opportunities.                                                                    
| 
| |  | Debt under the credit facility is secured and matures prior to the notes.                                                                                                                                     

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| |  | A substantial decrease in our net operating cash flows could make it difficult for us to meet our debt service requirements
and force us to modify our operations.      
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | We may be more highly leveraged than our competitors, which may place us at a competitive disadvantage.                                                                 
| 
| |  | Our debt level may make us more vulnerable than our competitors to a downturn in our business or the economy generally.                                                 
| 
| |  | Our debt level reduces our flexibility in responding to changing business and economic conditions.                                                                      
| 
| |  | Some of our debt has a variable rate of interest, which exposes us to the risk of increased interest rates.                                                             
| 
| |  | There would be a material adverse effect on our business and financial condition if we are unable to service our
indebtedness or obtain additional financing, as needed.

Ability to Service Debt  To service our indebtedness, we will require a
significant amount of cash. Our ability to generate cash depends on many
factors beyond our control.

Our ability to pay principal and interest on the notes and to satisfy our other
obligations will depend upon, among other things:



| |  | Our future financial and operating performance, which performance will be
affected by prevailing economic conditions and financial, business,
regulatory and other factors, certain of which are beyond our control;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

Based on our current and
expected levels of operations, we expect that our operating cash flow and
borrowings under the revolving credit facility should be sufficient for us to
meet our operating expenses, to make necessary capital expenditures and to
service our debt requirements as they become due. However, our operating
results and borrowings under the revolving credit facility may not be
sufficient to service our indebtedness, including the notes. In addition, we
may incur additional indebtedness in order to make acquisitions, investments or
strategic alliances. If we cannot service our indebtedness, we will be forced
to take actions such as reducing or delaying acquisitions, investments,
strategic alliances and/or capital expenditures, selling assets, restructuring
or refinancing our indebtedness (which could include the notes), or seeking
additional equity capital or bankruptcy protection. There is no assurance that
any of these remedies can be effected on satisfactory terms, if at all. In
addition, the terms of existing or future debt agreements, including the credit
facility and the indenture, may restrict us from adopting any of these
alternatives.

Subordination of the Notes and the Guarantee; Structural Subordination of the
Notes  The notes and the guarantee by DonJoy are, and guarantees by any of our
future subsidiaries will be, effectively subordinated to all senior debt of our
subsidiaries.

The notes are subordinated in right of payment to the prior payment in full of
all dj Orthos existing and future senior indebtedness and the guarantee of the
notes by DonJoy and any future subsidiaries providing a guarantee of the notes
will be subordinated in right of payment to all senior indebtedness of the
applicable guarantor. The indenture requires each of our domestic subsidiaries
that is formed or acquired in the future to guarantee the notes, unless we
designate the subsidiary as an Unrestricted Subsidiary (as defined in
the indenture). As of
December 31, 2000, dj Ortho had approximately $59.0 million of senior
indebtedness outstanding (excluding unused commitments under the revolving
credit facility), all of which is secured, and DonJoy had no senior
indebtedness outstanding (other than its guarantee of our borrowings under the
credit facility). In addition, the indenture permits us and our Restricted
Subsidiaries (as defined in the indenture) to incur additional senior
indebtedness, including indebtedness under the credit facility. dj Ortho or the
applicable guarantor may not pay principal, premium (if any), interest or other
amounts on account of the notes or the guarantee by DonJoy or any subsidiary in
the event of a payment default on, or another default that has resulted in the
acceleration of, certain senior indebtedness (including debt under the credit
facility) unless such indebtedness has been paid in full or the default has
been cured or waived. In the event of certain other defaults with respect to
certain senior indebtedness, dj Ortho or the applicable guarantor may not be
permitted to pay any amount on account of the notes or the guarantee by DonJoy
or any subsidiary for a designated period of time. In the event of a
bankruptcy, liquidation, dissolution, reorganization or similar proceeding with
respect to dj Ortho or a guarantor, dj Orthos assets or a guarantors assets,
as the case may be, will be available to pay obligations on the notes or the
guarantors guarantee, as applicable, only after dj Orthos senior indebtedness
or the senior indebtedness of that guarantor has been paid in full, and there
can be no assurance that there will be sufficient assets remaining to pay
amounts due on all or any of the notes or any guarantee of the notes.

dj Orthos right to receive assets of any subsidiary which is not a guarantor
upon the liquidation or reorganization of that subsidiary (and thus the rights
of the holders of notes to realize any value with respect to those assets) will
be subject to the prior claims of creditors of that subsidiary (including trade
creditors). Accordingly, since our Mexican subsidiary is not a guarantor of the
notes, the notes are effectively subordinated to all liabilities (including
trade payables and contingent liabilities) of our Mexican subsidiary and any of
our future subsidiaries that do not provide a guarantee of the notes except to
the extent that we are recognized as a creditor of

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such subsidiary. However,
even if we were recognized as a creditor of a subsidiary that does not
guarantee the notes, our claims would still be subordinate to any security
interest in the assets of that subsidiary, and any indebtedness of that
subsidiary senior to that held by us. As of December 31, 2000, the aggregate
amount of the liabilities of our Mexican subsidiary as reflected on its balance
sheet was $0.2 million.

Limited Value of DonJoy Guarantee  You should not rely on the guarantee by
DonJoy in the event we cannot make payments upon the notes.

All of the operations of DonJoy are conducted through dj Ortho and DonJoy has
no material assets other than its ownership of 100% of dj Orthos equity
interests. Accordingly, DonJoys cash flow and, consequently, its ability to
service debt, including its guarantee of the notes and our credit facility,
depends on our operations. As a result, holders of the notes should not rely on
the guarantee by DonJoy for repayment of the notes.

Asset Encumbrances to Secure the Credit Facility  If we default under our
senior debt, our senior lenders can foreclose on the assets we have pledged to
secure payment of the senior debt to the exclusion of holders of the notes.

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

Restrictive Debt Covenants  Our debt agreements restrict our business in many
ways.

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



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

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

These restrictions contained in the indenture and the credit facility could:



| |  | limit our ability to plan for or react to market conditions or meet
capital needs or otherwise restrict our activities or business plans,
and
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

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| |  | adversely affect our ability to finance our operations, acquisitions,
investments or strategic alliances or other capital needs or to engage
in other business activities that would be in our interest.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A breach of any of these covenants, ratios, tests or other restrictions could
result in an event of default under the credit facility and/or the indenture.
Upon the occurrence of an event of default under the credit facility, the
lenders could elect to declare all amounts outstanding under the credit
facility, together with accrued interest, to be immediately due and payable. If
we were unable to repay those amounts, the lenders could proceed against the
collateral granted to them to secure such indebtedness. If the lenders under
the credit facility accelerate the payment of the indebtedness, there can be no
assurance that our assets would be sufficient to repay in full such
indebtedness and our other indebtedness, including the notes. See 
Subordination of the Notes and the Guarantee; Structural Subordination of the
Notes, and  Asset Encumbrances to Secure the Credit Facility.

Uncertainty Relating to Third Party Reimbursement  Changes in reimbursement
policies for our products by third party payors or reductions in reimbursement
rates for our products could adversely affect us.

The ability of our customers (or persons to whom our customers sell our
products) to receive reimbursement for the cost of our products from private
third party payors and, to a lesser extent, Medicare, Medicaid and other
governmental programs, is important to our business. Except with respect to our
OfficeCare program and our insurance billing service, we are not directly
involved in the third party reimbursement process, and while we are unable to
give precise data, we believe that a substantial portion of our other sales to
customers (or by them to their customers) are reimbursed by third party payors.
In the United States, third party reimbursement is generally based on the
medical necessity of the product to the user, and generally products which are
prescribed by doctors are eligible for reimbursement. As such, we believe that
substantially all of our U.S. sales of rigid knee braces and a substantial
portion of our U.S. sales of soft goods and specialty and other orthopedic
products are reimbursed by third party payors. In response to the historic and
forecasted reductions of U.S. reimbursement rates, we and many of our
competitors are introducing new product offerings at lower prices. Failure by
users of our products to obtain sufficient reimbursement from third party
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. There
can be no assurance that third party reimbursement for our products will
continue to be available or at what rate such products will be reimbursed.

Congress and certain state legislatures are considering reforms in the health
care industry that may lower reimbursement practices, including controls on
health care spending through limitations on the growth of Medicare and Medicaid
spending.

In 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 a number of 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 set reimbursement rates at a discount
to Medicare. If enacted, Congressional or regulatory measures that reduce
Medicare reimbursement rates could reduce reimbursement rates for our products,
which could have an adverse effect on our ability to sell our products or cause
our customers to use less expensive products, which could have a material
adverse effect on our results of operations.

Similar to our domestic business, our success in international markets also
depends upon the eligibility of our products for reimbursement through
government sponsored health care payment systems and third party payors,
particularly in Europe and Japan, our principal international markets.
Reimbursement practices vary significantly by country, with certain
jurisdictions, most notably France, requiring products to undergo lengthy
regulatory review in order to be eligible for reimbursement. In addition,
health care cost containment efforts similar to those we face in the United
States are prevalent in many of the foreign jurisdictions in which our products
are sold and these efforts are expected to continue. For example, in Germany,
our largest foreign market representing approximately 32% of international
sales in 2000, exclusive of freight revenue, reimbursement for our products was
decreased in 1997 to 80% from 100% by government sponsored health care payment
systems and third party payors. In Italy, our rigid knee bracing products and
cold therapy systems, among others, are no longer eligible for reimbursement at
all. In the United Kingdom, while reimbursement for our products through the
National Health Service, or NHS, is currently available, the cost of our
products is not reimbursed by private health insurance plans and orthopedic
professionals are being pressured by the NHS to reduce or eliminate the number
of rigid knee braces prescribed for orthopedic patients. In France, while we
believe our rigid knee braces would be eligible for reimbursement, our knee
brace products have not gone through the lengthy regulatory process necessary
for reimbursement eligibility and, accordingly, the cost of these products is
not currently reimbursed in France. Any developments in our foreign markets
that eliminate or reduce reimbursement rates for our products could have an
adverse effect on our ability to sell our products or cause our customers to
use less expensive products, which could have a material adverse effect on our
results of operations.

Responses by Health Care Providers to Price Pressures; Formation of Buying
Groups  Healthcare reform and managed care and buying groups has put downward
pressure on the prices of our products.

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Within the United States, health care reform and managed care are changing the
dynamics of the health care industry as it seeks ways to control rising health
care costs. As a result of health care reform, the U.S. health care industry
has seen a rapid expansion of managed care at the expense of traditional
private insurance. The development of managed care programs in which the
providers contract to provide comprehensive health care to a patient population
at a fixed cost per person (referred to as capitation) has given rise to, and
is expected to continue to cause, pressures on health care providers to lower
costs. The advent of managed care has also resulted in greater attention to the
tradeoff between patient need and product cost, so-called demand matching,
where patients are evaluated as to age, need for mobility and other parameters
and are then matched with an orthopedic recovery product that is cost effective
in light of such evaluation. One result of demand matching has been, and is
expected to continue to be, a shift toward lower priced products, and any such
shift in our product mix to lower margin, off-the-shelf products could have an
adverse impact on our operating results. For example, in our rigid knee bracing
segment, we and many of our competitors are offering lower priced,
off-the-shelf products in response to managed care. These lower priced products
have in part contributed to our minimal sales growth in our rigid knee bracing
product lines over the past few years and could have a material adverse effect
on our business, financial condition and results of operations in the future.

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

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

Potential Regulation Limiting Customer Base  Proposed laws could limit the
types of orthopedic professionals who can fit, sell or seek reimbursement for
our products.

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

Patents and Proprietary Know-How  We rely on intellectual property to develop
and manufacture our products and our business could be adversely affected if we
lose our intellectual property rights.

We hold U.S. and foreign patents relating to certain of our components and
products and have patent applications pending with respect to certain
components and products. We also anticipate that we will apply for additional
patents as we deem appropriate. We believe that certain of our existing
patents, particularly the patents for our:



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

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| |  | pneumatic pad design and production technologies which utilize air inflatable cushions that allow
the patient to vary the location and degree of support provided by braces such as the Defiance and
the Patient Ready Monarch,
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | osteoarthritis bracing concepts, including pending patents on the recently released OPAL and
OAdjuster braces (Monarch, PR Monarch, OPAL, OAdjuster),                                                                          
| 
| |  | ankle bracing, both rigid and soft (ALP, RocketSoc, ProCare stirrup), and                                                                                                                                                      
| 
| |  | rigid shoulder bracing (Quadrant),                                                                                                                                                                                             

are and will continue to be extremely important to our success. However, we cannot assure you that:



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

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

In addition, we hold licenses from third parties to utilize certain patents,
patents pending and technology utilized in the design of some of our existing
products and products under development, including the IceMan and the DonJoy
Vista system. If we lost these licenses, we would not be able to
manufacture and sell the related products, which could have a material adverse
effect on our business, financial condition and results of operations.

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

Patent Litigation  We could be adversely affected if we become involved in
litigation regarding our patents or other intellectual property rights.

The medical device industry has experienced extensive litigation regarding
patents and other intellectual property rights. We or our products may become
subject to patent infringement claims or litigation or interference proceedings
declared by the United States Patent and Trademark Office, or USPTO, to
determine the priority of inventions. The defense and prosecution of
intellectual property suits, USPTO interference proceedings and related legal
and administrative proceedings are both costly and time-consuming. We have from
time to time needed to, and may in the future need to, litigate to enforce our
patents, to protect our trade secrets or know-how or to determine the
enforceability, scope and validity of the proprietary rights of others. Any
future litigation or interference proceedings will result in substantial
expense to us and significant diversion of effort by our technical and
management personnel. An adverse determination in litigation or interference
proceedings to which we may become a party could:



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

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

Uncertainty of Domestic and Foreign Regulatory Clearance and Approval  We may
not receive regulatory clearance or approval for our products or operations in
the United States or abroad.

Our products and operations are subject to extensive regulation in the United
States by the FDA. The FDA regulates the research, testing, manufacturing,
safety, labeling, storage, recordkeeping, promotion, distribution, and
production of medical devices in the

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United States to ensure that medical
products distributed domestically are safe and effective for their intended
uses. In particular, in order for us to market certain products for clinical
use in the United States, we generally must first obtain clearance from the
FDA, pursuant to Section 510(k) of the 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, or PMA. All of our currently manufactured products hold the
relevant exemption or premarket clearance under the FFDCA. See Business 
Government Regulation.

The FDA may not act favorably or quickly in its review of our 510(k) or PMA
submissions, or we may encounter significant difficulties and costs in our
efforts to obtain FDA clearance or approval, all of which could delay or
preclude sale of new products in the United States. Furthermore, the FDA may
request additional data, require us to conduct further testing, or compile more
data, including clinical data, in support of a 510(k) submission. The FDA may
also, instead of accepting a 510(k) submission, require us to submit a PMA,
which is typically a much more complex application than a 510(k). To support a
PMA, the FDA would likely require that we conduct one or more clinical studies
to demonstrate that the device is safe and effective, rather than substantially
equivalent to another legally marketed device. We may not be able to meet the
requirements to obtain 510(k) clearance or PMA approval, or the FDA may not
grant any necessary clearances or approvals. In addition, the FDA may place
significant limitations upon the intended use of our products as a condition to
a 510(k) clearance or PMA approval. Product applications can also be denied or
withdrawn due to failure to comply with regulatory requirements or the
occurrence of unforeseen problems following approval. Failure to obtain FDA
clearance or approvals of new products we develop, any limitations imposed by
the FDA on new product use or the costs of obtaining FDA clearance or approvals
could have a material adverse effect on our business, financial condition and
results of operations.

In order to conduct a clinical investigation involving human subjects for the
purpose of demonstrating the safety and effectiveness of a device, a company
must, among other things, apply for and obtain Institutional Review Board, or
IRB, approval of the proposed investigation. In addition, if the clinical study
involves a significant risk (as defined by the FDA) to human health, the
sponsor of the investigation must also submit and obtain FDA approval of an
investigational device exemption, application. We may not be able to obtain
FDA and/or IRB approval to undertake clinical trials in the U.S. for any new
devices we intend to market in the United States in the future. If we obtain
such approvals, we may not be able to comply with the IDE and other regulations
governing clinical investigations or the data from any such trials may not
support clearance or approval of the investigational device. Failure to obtain
such approvals or to comply with such regulations could have a material adverse
effect on our business, financial condition and results of operations.

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

In many of the foreign countries in which we market our products, we are
subject to regulations affecting, among other things, product standards,
packaging requirements, labeling requirements, import restrictions, tariff
regulations, duties and tax requirements. Many of the regulations applicable to
our devices and products in such countries are similar to those of the FDA,
including those in Germany, our largest foreign market. In addition, in many
countries the national health or social security organizations require our
products to be qualified before they can be marketed with the benefit of
reimbursement eligibility. Failure to receive, or delays in the receipt of,
relevant foreign qualifications could also have a material adverse effect on
our business, financial condition, and results of operations. See Business 
Government Regulation. Due to the movement towards harmonization of standards
in the European Union, we expect a changing regulatory environment in Europe
characterized by a shift from a country-by-country regulatory system to a
European Union wide single regulatory system. The timing of this harmonization
and its effect on us cannot currently be predicted. Any such developments could
have a material adverse effect on our business, financial condition and results
of operations.

Dependence on Orthopedic Professionals, Agents and Distributors  We rely
heavily on our relationships with orthopedic professionals, agents and
distributors for marketing our products.



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

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Our marketing success in the United States also depends largely upon marketing
arrangements with independent agents and distributors. Our success depends upon
our agents and distributors sales and service expertise and relationships
with the customers in the marketplace. Our failure to maintain relationships
with agents and distributors could have a material adverse effect on our
business, financial condition and results of operations. See Business 
Sales, Marketing and Distribution.

Transition to New Independent Distributors in International Markets  Our
operating results could be adversely affected if we are not successful in
finding and retaining new independent distributors in international markets.

In international markets our products have historically been sold through 30
Smith & Nephew sales organizations and 13 independent distributors. Since the
recapitalization, we have replaced 17 Smith & Nephew sales organizations with
independent distributors. International sales made through Smith & Nephew
sales organizations were 20%, 40% and 55% of our international sales, exclusive
of freight revenue, in 2000, 1999 and 1998, respectively. We believe that we
will be able to continue to increase sales by switching to independent
distributors who will be responsible for achieving sales targets and focused on
building strong relationships with our targeted customers. However, we may not
be able to find and retain independent distributors on favorable terms or
successfully effect the transition to such new distributors without a
significant disruption or loss of sales in the applicable foreign jurisdiction.
In addition, the new distributors may not become technically proficient in the
use and benefits of our products in a timely manner, if at all. Accordingly,
our transition to new independent distributors could have a material adverse
effect on our business, financial condition and results of operations.

In connection with the recapitalization, we entered into a distribution
agreement pursuant to which the 30 Smith & Nephew sales organizations which
sold our products prior to the recapitalization would continue to do so, and 13
Smith & Nephew sales organizations continue to sell our products under this
agreement. However, Smith & Nephew has the right to cease distributing our
products in a specific territory on 60 days notice. See Certain Relationships
and Related Transactions  Other Agreements between DonJoy and Smith & Nephew
 Distribution Agreement. If Smith & Nephew terminates the distribution of
our products in a territory, we may not be able to find a new independent
distributor to replace the Smith & Nephew sales organization, which could have
a material adverse effect on our sales in such jurisdiction. The termination of
distribution by Smith & Nephew in a sufficient number of jurisdictions prior to
the time we are able to replace the Smith & Nephew sales organizations being
terminated with new independent distributors could have a material adverse
effect on our business, financial condition and results of operations. Smith &
Nephew has not given notice to terminate any of the remaining distributors.

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

Excluding freight revenue, sales in foreign markets, primarily Europe, Canada
and Japan, represented approximately 12% of our net revenues for the year ended
December 31, 2000, with Germany representing approximately 32% of international
net revenues. See Note 7 of Notes to DonJoys Audited Consolidated Financial
Statements. See Business  Business Strategy. Since our international sales
are denominated in U.S. dollars, our operating results are not directly
impacted by foreign currency exchange fluctuations. However, the volume and
product mix of our international sales may be adversely impacted by foreign
currency exchange fluctuations as changes in the rate of exchange between the
U.S. dollar and the applicable foreign currency will affect the cost of our
products to our foreign customers and thus may impact the overall level of
customer purchases or result in the customer purchasing less expensive, lower
margin products. See Managements Discussion and Analysis of Financial
Condition and Results of Operations  Overview. In addition, future sales of
our products may be denominated in foreign currencies which would cause
currency fluctuations to more directly impact our operating results.

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

International Operations  Our lack of manufacturing operations outside the
United States may cause our products to be less competitive in international
markets.

We currently have no manufacturing operations in any foreign jurisdiction other
than Mexico. The cost of transporting our products to foreign jurisdictions is
currently borne by our customers, who are also often required to pay foreign
import duties on our products. As a result, the cost of our products to
customers who use or distribute them outside the United States is often greater
than products manufactured in the local foreign jurisdiction. In addition,
foreign manufacturers of competitive products often receive various local tax
concessions which lower their overall manufacturing costs. In order to compete
successfully in international markets, we may be required to open or acquire
manufacturing operations abroad, which would increase our exposure to the risks
of doing business in

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international jurisdictions. We may not be able to
successfully operate off-shore manufacturing operations, which could have a
material adverse effect on our international operations or on our business,
financial condition and results of operations.

Risks Generally Associated with Strategic Growth Opportunities  We intend to
pursue, but may not be able to identify, finance or successfully complete
strategic growth opportunities.

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



| |  | the diversion of managements attention to the assimilation of the operations and personnel of the new business,                                                                                                                                            
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | adverse short-term effects on our operating results,                                                                                                                                                                                                        
| 
| |  | the inability to successfully integrate the new businesses with our existing business, including financial reporting,
management and information technology systems,                                                                                        
| 
| |  | unforeseen operating difficulties and expenditures,                                                                                                                                                                                                         
| 
| |  | the need to manage a significantly larger business,                                                                                                                                                                                                         
| 
| |  | amortization of large amounts of goodwill and other intangible assets, such as the approximately $45.1 million of goodwill
and other intangible assets relating to our acquisition of Orthotech which we will amortize over the next three to fifteen
years,
| 
| |  | the risks of 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 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 financings for future acquisitions,
investments or strategic alliances which may not be available on favorable
terms, if at all. We may not be able to successfully integrate or operate
profitably any new business we acquire and we cannot assure you that any other
investments we make or strategic alliances we enter into will be successful.

Implementation of Business Strategy  If we cannot successfully implement our
business strategy, we may not be able to service our indebtedness.

Our business strategy is to:



| |  | increase international sales,                   
|- |  | ------------------------------------------------
| 
| |  | improve operating efficiencies,                 
| 
| |  | introduce new products and product enhancements,
| 
| |  | pursue strategic growth opportunities.          

Our ability to achieve our objectives is subject to a variety of factors, many
of which are beyond our control, and we may not be successful in implementing
our strategy. In addition, the implementation of our strategy may not improve
our operating results. We may decide to alter or discontinue certain aspects of
our business strategy and may adopt alternative or additional strategies due to
competitive factors or factors not currently foreseen, such as unforeseen costs
and expenses or events beyond our control, such as an economic downturn. See
 Substantial Leverage and Ability to Service and Refinance Debt.

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

Dependence Upon Key Personnel  We may be adversely affected if we lose any
member of our Senior Management.

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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,
and Michael R. McBrayer, our Senior Vice President  Domestic Sales. The loss
of these key personnel could have a material adverse effect on us.

Competition  We operate in a very competitive business environment.

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

Technological Change  We may not be able to develop and market new products or
product enhancements to remain competitive.

Our competitors may develop new medical procedures, technologies or products
that are more effective than ours or that would render our technology or
products obsolete or uncompetitive which could have a material adverse effect
on us. For example, the development and use of joint lubricants to treat
osteoarthritis in the knee may prove to be an effective alternative to the use
of our OA braces.

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



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

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

Product Liability Exposure  We could be adversely affected if a product
liability claim is brought against us and we 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. Although we maintain product liability insurance in amounts which we
believe to be reasonable and standard in the industry, the amount and scope of
any coverage may be inadequate to protect us in the event of a substantial
adverse product liability judgment.

Concentration of Ownership and Control of the Company  We are controlled by
CDP, Fairfield Chase and their members and their interests may not be aligned
with yours.

Chase DJ Partners, LLC, or CDP, owns approximately 92.1% of the outstanding
voting units of DonJoy, which owns all of dj Orthos equity interests. The
members of CDP are J.P. Morgan Partners (23A SBIC), LLC (formerly CB Capital
Investors, L.L.C.), or JPMP (23A SBIC), an affiliate of J.P. Morgan Partners,
LLC, or JPMP LLC, First Union Capital Partners, LLC and DJ Investment LLC, or
the First Union Affiliates, affiliates of First Union Investors, Inc.,
Fairfield Chase Medical Partners, LLC, or Fairfield Chase, and affiliates, or
TCW Affiliates, of TCW/Crescent Mezzanine, LLC. JPMP (23A SBIC) who owns a
majority of the interests of CDP and Fairfield Chase, which is controlled by
Charles T. Orsatti, is the initial managing member of CDP. In addition, through
their ownership of redeemable preferred units, JPMP (23A SBIC), DJ Investment,
and the TCW Affiliates also directly own approximately 2.7%, 0.8% and 1.8%,
respectively, of the outstanding voting units of DonJoy. Accordingly, CDP and
Fairfield Chase, which as managing member initially controls CDP, and their
members have the power, subject to certain exceptions, to control dj Ortho and
DonJoy. Under certain circumstances, JPMP (23A SBIC) can become the managing
member of CDP. For a description of the ownership, voting and management
arrangements regarding DonJoy and CDP, see Security Ownership of Certain
Beneficial Owners and Management. The interests of CDP, Fairfield Chase and
their members may not in all cases be aligned with holders of the notes.

26



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Purchase of the Notes Upon Change of Control  We may not have the ability to
raise the funds necessary to finance the change of control offer required by
the indenture.

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

The change of control provision in the indenture will not necessarily afford
holders of the notes protection in the event of a highly leveraged transaction,
including a reorganization, restructuring, merger or other similar transaction
involving us, that may adversely affect you. Such transaction may not involve a
change in voting power or beneficial ownership, or, even if it does, may not
involve a change of the magnitude required under the definition of change of
control in the indenture to trigger these provisions. Except for certain
provisions, the indenture does not contain provisions that permit the holders
of the notes to require us to repurchase or redeem the notes in the event of a
takeover, recapitalization or similar transaction.

Impact of Environmental and Other Regulation  We are subject to a variety of
environmental laws and other regulations which could adversely affect us.

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

Regulation of Fraud and Abuse in Health Care  We may need to change our
business practices to comply with health care fraud and abuse regulations.

We are subject to various federal and state laws pertaining to health care
fraud and abuse, including antikickback laws and physician self-referral laws.
Violations of these laws are punishable by criminal and/or civil sanctions,
including, in some instances, imprisonment and exclusion from participation in
federal and state health care programs, including Medicare, Medicaid, VA health
programs and TRICARE. We have never been challenged by a governmental authority
under any of these laws and believe that our operations are in material
compliance with such laws. However, because of the far-reaching nature of these
laws, we may be required to alter one or more of our practices to be in
compliance with these laws. In addition, we cannot assure you that the
occurrence of one or more violations of these laws would not result in a
material adverse effect on our business, financial condition and results of
operations. If there is a change in law, regulation or administrative or
judicial interpretations, we may have to change our business practices or our
existing business practices could be challenged as unlawful, which could have a
material adverse effect on our business, financial condition and results of
operations. See Business  Government Regulation.

We may also become subject to litigation for submission of claims for payment
that are not provided as claimed under federal statutes. Federal false claims
litigation can lead to civil money penalties, criminal fines and imprisonment,
and/or exclusion from participation in Medicare, Medicaid and other federally
funded state health programs. These false claims statutes include the Federal
False Claims Act, which allows any person to bring suit alleging false or
fraudulent Medicare or Medicaid claims or other violations of the statute and
to share in any amounts paid by the entity to the government in fines or
settlement. Such suits, known as qui tam actions, have increased significantly
in recent years and have increased the risk that a health care company will
have to defend a false claim action, pay fines or be excluded from the Medicare
and for Medicaid programs as a result of an investigation arising out of such
action.

Uncertainty Relating to Governmental Audits

Medicare contractors and Medicaid agencies periodically conduct pre-and
post-payment reviews and other audits of claims, and are under increasing
pressure to scrutinize more closely health care claims. 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.

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Fraudulent Conveyance Statutes  Federal and state laws permit a court to void
the notes and guarantees under certain circumstances.

The notes were issued in exchange for the old notes. dj Ortho used the net
proceeds from the offering of the old notes, together with borrowings under the
term loan portion of the credit facility, to purchase the assets and operations
of DonJoy. DonJoy used such amounts, together with the proceeds from the
issuance of the common units to CDP and three members of senior management (the
Management Members) and the redeemable preferred units to repurchase a
portion of the equity interests of DonJoy owned by Smith & Nephew. The
obligations dj Ortho incurred under the indenture and the old notes and the
obligations incurred by DonJoy under the indenture and its guarantee may be
subject to review under federal bankruptcy law or relevant state fraudulent
conveyance and similar statutes in a bankruptcy or reorganization case or
lawsuit commenced by or on behalf of dj Orthos or DonJoys unpaid creditors.
Under these laws, if a court were to find that, at the time dj Ortho issued the
old notes or DonJoy issued its guarantee of the old notes, we or DonJoy, as the
case may be:



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

then, such court might:



| |  | subordinate the notes or DonJoys guarantee of the notes to dj Orthos or DonJoys presently existing or future indebtedness,
|- |  | -----------------------------------------------------------------------------------------------------------------------------
| 
| |  | void the issuance of the notes (in the case of dj Ortho) or DonJoys guarantee, or                                           
| 
| |  | take other actions detrimental to holders of the notes.                                                                      

The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction being applied. However, dj Ortho or DonJoy
generally would be considered insolvent at the time dj Ortho incurred
indebtedness under the old notes or DonJoy issued its guarantee, as the case
may be, if either:



| |  | the fair salable value of dj Orthos or DonJoys assets, as applicable, were less than the amount required to pay dj
Orthos or DonJoys probable liability on our or its total existing debts and liabilities (including contingent
liabilities) as they become absolute or matured, or
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the sum of our or DonJoys debts (including contingent liabilities) were greater than dj Orthos or DonJoys assets,
at fair valuation.                                                                                                                                                 

We cannot predict:



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

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

To the extent a court voids DonJoys guarantee as a fraudulent conveyance or
holds it unenforceable for any other reason, holders of the notes would cease
to have any claim in respect of DonJoy and would be creditors solely of dj
Ortho.

Based upon financial and other information available to us, we believe that dj
Ortho and DonJoy issued the old notes and the guarantee of the old notes for
proper purposes and in good faith and that at the time dj Ortho and DonJoy
issued the old notes and the guarantee of the old notes, dj Ortho and DonJoy
(i) were not insolvent or rendered insolvent thereby, (ii) had sufficient
capital to run our business and (iii) were able to pay our debts as they mature
or become due. In reaching these conclusions, we relied on various

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valuations
and estimates of future cash flow that necessarily involve a number of
assumptions and choices of methodology. However, a court may not adopt the
assumptions and methodologies we have chosen or concur with our conclusion as
to our solvency.

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

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

Trading Market for the Notes  You cannot be sure that an active trading market
will develop for the notes.

We do not intend to apply for a listing of the notes on a securities exchange
or any automated dealer quotation system. We have been advised by Chase Securities, Inc. (CSI) that as of the date of this annual
report CSI intends to make a market in the notes. CSI is not obligated to do
so, however, and any market-making activities with respect to the notes may be
discontinued at any time without notice. In addition, this market-making
activity will be subject to limits imposed by the Securities Act and the
Exchange Act. Because CSI is our affiliate, CSI is required to deliver a
current market-making prospectus and otherwise comply with the registration
requirements of the Securities Act in any secondary market sale of the notes.
Accordingly, the ability of CSI to make a market in the notes may, in part,
depend on our ability to maintain a current market-making prospectus.

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







Item 2.Properties

The Company is headquartered in Vista, California and operates 3 manufacturing
facilities. Manufacturing operations in the United States were consolidated in
1998 into the Vista facility which consists of three buildings. The Vista
facility is subleased from Smith & Nephew. The two other facilities are
located in Tijuana, Mexico, within 100 miles of Vista, and are managed from the
Vista facility.

|                  |  |                                                                                        |  |        |  |                  |  |               |         | 
|----------------- |  | -------------------------------------------------------------------------------------- |  | ------ |  | ---------------- |  | ------------- | ------- | 
|                  |  |                                                                                        |  | Owned/ |  | Lease            |  | Size         
|Location          |  | Use                                                                                    |  | Leased |  | Termination Date |  | (Square Feet)
|                  |  |                                                                                        |  |        |  |                  |  |              
|Vista, California |  | Corporate Headquarters
Research & Development
Manufacturing & Distribution
Warehousing |  | Leased |  | February 2008    |  |               | 266,041 | 
|                 
|                 
|                 
|                 
|Tijuana, Mexico   |  | Manufacturing                                                                          |  | Leased |  | December 2001(1) |  |               | 48,600  | 
|                 
|                 
|                 
|                 
|Tijuana, Mexico   |  | Manufacturing                                                                          |  | Owned  |  |                  |  |               | 13,000  | 



---

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







Item 3.Legal Proceedings

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







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

Not applicable.







PART II







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

There is no established public trading market for DonJoys membership units,
and it is not expected that such a market will develop in the future. DonJoy
is authorized to issue up to 2,900,000 common units and up to 100,000 preferred
units. As of December 31, 2000, DonJoy had 793,890 common units and 44,405
preferred units issued and outstanding, and 17% of the common units on a fully
diluted basis have been reserved for issuance to officers, directors, employees
and independent consultants and advisors of the

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Company or any subsidiary
thereof pursuant to the Second Amended and Restated 1999 Option Plan. There
were 10 unit holders of record as of December 31, 2000.

The indenture and the credit facility permit dj Ortho to make distributions to
DonJoy in certain amounts to allow DonJoy to make distributions to its members
to pay income taxes in respect of their allocable share of the taxable income
of DonJoy and its subsidiaries including dj Ortho.

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

The preferred units are subject to mandatory redemption on December 31, 2005
and may be redeemed at the Companys option at any time (Redeemable Preferred
Unit). Upon a change of control, holders of Redeemable Preferred Units will
have the right, subject to certain conditions, to require the Company to redeem
their Redeemable Preferred Units (including the Redeemable Preferred Units
Participating Interest). In addition, at any time following the sixth
anniversary of the closing of the recapitalization, holders will have the
right, subject to certain conditions, to require the Company to redeem their
Redeemable Preferred Units Participating Interest. Unless equity proceeds or
other funds are available to the Company for the purpose, the ability of the
Company to make any of the foregoing payments will be subject to receipt of
distributions from the Company in amounts sufficient to make such payments and
such distributions will be subject to the restrictions contained in the new
credit facility and the indenture.

On June 30, 1999, dj Ortho, together with DJ Capital, issued $100.0 million of
12 5/8% Senior Subordinated Notes, resulting in net proceeds of $98.0 million.
The notes were issued to qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended (the Securities Act). In
December 1999, the Company exchanged all of these notes for new notes having
the same terms except the exchange notes have been registered under the
Securities Act of 1933, as amended, and, therefore, do not bear legends
restricting their transfer. The exchange notes evidence the same debt as the
original notes (which they replace). There were 13 record holders of the notes
as of December 31, 2000.

In accordance 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
CDP and certain members of management for $5.9 million. CDP 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 loans from DonJoy,
evidenced by full recourse promissory notes.

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 CDP 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 units of Redeemable Preferred Units were received from
existing Redeemable Preferred Unit holders of which the net proceeds totaled
$3.4 million (excluding preferred unit fees). Both of these transactions were
exempt from registration under the Securities Act pursuant to Section
4(2) thereof, as transactions not involving any public offering.

Item 6.Selected Financial Data

The selected financial data set forth below with respect to DonJoy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:

|                          |                                |                                  |   |                          |        |  |  |  |  |      |   |         |        |  |  |      |  |      |   |         |        |  |   |        |        |  |   |        |        | 
|------------------------- | ------------------------------ | -------------------------------- | - | ------------------------ | ------ |  |  |  |  | ---- | - | ------- | ------ |  |  | ---- |  | ---- | - | ------- | ------ |  | - | ------ | ------ |  | - | ------ | ------ | 
|                          |                                |                                  |   | Years Ended December 31,
|                          |                                |                                  |   |                         
|                          |                                |                                  |   | 2000                     |        |  |  |  |  | 1999 |   |         |        |  |  | 1998 |  | 1997 |   | 1996   
|                          |                                |                                  |   |                          |        |  |  |  |  |      |   |         |        |  |  |      |  |      |   |        
|                          |                                |                                  |   | (dollars in thousands)  
|Statement of Income Data:
|                         
|                         
|                         
|                         
|                          | Net revenues                   |                                  | $ | 147,469                  |        |  |  |  |  |      | $ | 117,767 |        |  |  |      |  |      | $ | 104,292 |        |  | $ | 95,288 |        |  | $ | 85,334 |       
|                         
|                         
|                         
|                         
|                          | Cost of goods sold (a)         |                                  |   | 60,178                   |        |  |  |  |  |      |   | 51,744  |        |  |  |      |  |      |   | 46,466  |        |  |   | 39,393 |        |  |   | 36,916 |       
|                          |                                |                                  |   |                          |        |  |  |  |  |      |   |         |        |  |  |      |  |      |   |         |        |  |   |        |        |  |   |       
|                          | Gross profit                   |                                  |   | 87,291                   |        |  |  |  |  |      |   | 66,023  |        |  |  |      |  |      |   | 57,826  |        |  |   | 55,895 |        |  |   | 48,418 |       
|                         
|                         
|                         
|                         
|                          | Operating expenses (a):       
|                         
|                         
|                         
|                         
|                          |                                | Sales and marketing              |   |                          | 42,536 |  |  |  |  |      |   |         | 30,251 |  |  |      |  |      |   |         | 28,282 |  |   |        | 25,062 |  |   |        | 21,769 | 
|                         
|                         
|                         
|                         
|                          |                                | General and administrative       |   |                          | 19,761 |  |  |  |  |      |   |         | 16,755 |  |  |      |  |      |   |         | 16,484 |  |   |        | 15,802 |  |   |        | 12,941 | 
|                         
|                         
|                         
|                         
|                          |                                | Research and development         |   |                          | 2,465  |  |  |  |  |      |   |         | 2,115  |  |  |      |  |      |   |         | 2,248  |  |   |        | 2,055  |  |   |        | 1,766  | 
|                         
|                         
|                         
|                         
|                          |                                | Merger and integration costs (b) |   |                          | 400    |  |  |  |  |      |   |         |       |  |  |      |  |      |   |         |       |  |   |        |       |  |   |        |       | 
|                         
|                         
|                         
|                         
|                          |                                | Restructuring costs (c)          |   |                          |       |  |  |  |  |      |   |         |       |  |  |      |  |      |   |         | 2,467  |  |   |        |       |  |   |        |       | 
|                          |                                |                                  |   |                          |        |  |  |  |  |      |   |         |        |  |  |      |  |      |   |         |        |  |   |        |        |  |   |       
|                          | Total operating expenses       |                                  |   | 65,162                   |        |  |  |  |  |      |   | 49,121  |        |  |  |      |  |      |   | 49,481  |        |  |   | 42,919 |        |  |   | 36,476 |       
|                          |                                |                                  |   |                          |        |  |  |  |  |      |   |         |        |  |  |      |  |      |   |         |        |  |   |        |        |  |   |       
|                          | Income from operations         |                                  |   | 22,129                   |        |  |  |  |  |      |   | 16,902  |        |  |  |      |  |      |   | 8,345   |        |  |   | 12,976 |        |  |   | 11,942 |       
|                         
|                         
|                         
|                         
|                          | Interest expense               |                                  |   | (16,958                  | )      |  |  |  |  |      |   | (7,568  | )      |  |  |      |  |      |   |        |        |  |   | (2,072 | )      |  |   | (2,459 | )     
|                         
|                         
|                         
|                         
|                          | Interest income                |                                  |   | 437                      |        |  |  |  |  |      |   | 181     |        |  |  |      |  |      |   |        |        |  |   |       |        |  |   |       |       
|                         
|                         
|                         
|                         
|                          | Discontinued acquisition costs |                                  |   | (449                     | )      |  |  |  |  |      |   |        |        |  |  |      |  |      |   |        |        |  |   |       |        |  |   |       |       
|                          |                                |                                  |   |                          |        |  |  |  |  |      |   |         |        |  |  |      |  |      |   |         |        |  |   |        |        |  |   |       
|                          | Income before income taxes     |                                  |   | 5,159                    |        |  |  |  |  |      |   | 9,515   |        |  |  |      |  |      |   | 8,345   |        |  |   | 10,904 |        |  |   | 9,483  |       

30



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##### Table of Contents



|                                       |                                                                      |  |   |                          |   |  |  |   |  |      |   |         |   |  |  |      |  |      |   |        |   |  |   |        |   |  |   |        |   | 
|-------------------------------------- | -------------------------------------------------------------------- |  | - | ------------------------ | - |  |  | - |  | ---- | - | ------- | - |  |  | ---- |  | ---- | - | ------ | - |  | - | ------ | - |  | - | ------ | - | 
|                                       |                                                                      |  |   | Years Ended December 31,
|                                       |                                                                      |  |   |                         
|                                       |                                                                      |  |   | 2000                     |   |  |  |   |  | 1999 |   |         |   |  |  | 1998 |  | 1997 |   | 1996  
|                                       |                                                                      |  |   |                          |   |  |  |   |  |      |   |         |   |  |  |      |  |      |   |       
|                                       |                                                                      |  |   | (dollars in thousands)  
|                                      
|                                      
|                                      
|                                      
|                                       | Provision for income taxes                                           |  |   |                         |   |  |  |   |  |      |   | 2,387   |   |  |  |      |  |      |   | 3,394  |   |  |   | 4,367  |   |  |   | 3,828  |  
|                                       |                                                                      |  |   |                          |   |  |  |   |  |      |   |         |   |  |  |      |  |      |   |        |   |  |   |        |   |  |   |       
|                                       | Net income                                                           |  | $ | 5,159                    |   |  |  |   |  |      | $ | 7,128   |   |  |  |      |  |      | $ | 4,951  |   |  | $ | 6,537  |   |  | $ | 5,655  |  
|                                       |                                                                      |  |   |                          |   |  |  |   |  |      |   |         |   |  |  |      |  |      |   |        |   |  |   |        |   |  |   |       
|                                       | Less: Preferred stock dividends and accretion of
Preferred unit fees |  |   | (5,415                   | ) |  |  |   |  |      |   | (2,343  | ) |  |  |      |  |      |   |       |   |  |   |       |   |  |   |       |  
|                                       |                                                                      |  |   |                          |   |  |  |   |  |      |   |         |   |  |  |      |  |      |   |        |   |  |   |        |   |  |   |       
|                                       | Net income (loss) available to members                               |  | $ | (256                     | ) |  |  |   |  |      | $ | 4,785   |   |  |  |      |  |      |   |       |   |  |   |       |   |  |   |       |  
|                                       |                                                                      |  |   |                          |   |  |  |   |  |      |   |         |   |  |  |      |  |      |   |        |   |  |   |        |   |  |   |       
|Other Data:                           
|                                      
|                                      
|                                      
|                                      
|                                       | EBITDA (d)                                                           |  | $ | 28,894                   |   |  |  |   |  |      | $ | 21,854  |   |  |  |      |  |      | $ | 15,665 |   |  | $ | 17,779 |   |  | $ | 16,584 |  
|                                      
|                                      
|                                      
|                                      
|                                       | Adjusted EBITDA (e)                                                  |  |   | 29,162                   |   |  |  |   |  |      |   | 25,082  |   |  |  |      |  |      |   | 21,957 |   |  |   | 22,090 |   |  |   | 19,187 |  
|                                      
|                                      
|                                      
|                                      
|                                       | Depreciation and amortization                                        |  |   | 6,365                    |   |  |  |   |  |      |   | 4,952   |   |  |  |      |  |      |   | 4,853  |   |  |   | 4,803  |   |  |   | 4,642  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Capital expenditures and acquired intangibles                        |  |   | 7,722                    |   |  |  |   |  |      |   | 4,706   |   |  |  |      |  |      |   | 4,149  |   |  |   | 2,273  |   |  |   | 1,848  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Ratio of earnings to fixed charges (f)                               |  |   | 1.29x                    |   |  |  |   |  |      |   | 2.12x   |   |  |  |      |  |      |   | 8.84x  |   |  |   | 4.83x  |   |  |   | 3.94x  |  
|                                      
|                                      
|                                      
|                                      
|Cash flows provided by (used in)      
|                                      
|                                      
|                                      
|                                      
|                                       | Operating activities                                                 |  | $ | 1,229                    |   |  |  |   |  |      | $ | 16,065  |   |  |  |      |  |      | $ | 3,748  |   |  | $ | 11,076 |   |  | $ | 9,631  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Investing activities                                                 |  |   | (57,015                  | ) |  |  |   |  |      |   | (4,776  | ) |  |  |      |  |      |   | (4,049 | ) |  |   | (2,322 | ) |  |   | (1,860 | )
|                                      
|                                      
|                                      
|                                      
|                                       | Financing activities                                                 |  |   | 53,965                   |   |  |  |   |  |      |   | (6,171  | ) |  |  |      |  |      |   | 200    |   |  |   | (8,401 | ) |  |   | (7,932 | )
|                                      
|                                      
|                                      
|                                      
|Balance Sheet Data (at end of period):
|                                      
|                                      
|                                      
|                                      
|                                       | Cash                                                                 |  | $ | 4,106                    |   |  |  |   |  |      | $ | 5,927   |   |  |  |      |  |      | $ | 809    |   |  | $ | 910    |   |  | $ | 557    |  
|                                      
|                                      
|                                      
|                                      
|                                       | Working capital                                                      |  |   | 38,695                   |   |  |  |   |  |      |   | 27,413  |   |  |  |      |  |      |   | 15,625 |   |  |   | 9,749  |   |  |   | 9,675  |  
|                                      
|                                      
|                                      
|                                      
|                                       | Total assets                                                         |  |   | 155,672                  |   |  |  |   |  |      |   | 89,416  |   |  |  |      |  |      |   | 77,056 |   |  |   | 71,288 |   |  |   | 70,787 |  
|                                      
|                                      
|                                      
|                                      
|                                       | Long-term obligations                                                |  |   | 157,222                  |   |  |  |   |  |      |   | 112,805 |   |  |  |      |  |      |   |       |   |  |   |       |  
|                                      
|                                      
|                                      
|                                      
|                                       | Redeemable preferred units                                           |  |   | 41,660                   |   |  |  |   |  |      |   | 32,539  |   |  |  |      |  |      |   |       |  
|                                      
|                                      
|                                      
|                                      
|                                       | Obligations to Smith & Nephew (including current portion)            |  |   |                          |   |  |  |  |  |      |   |         |   |  |  |     |  |      |   | 45,227 |   |  |   | 45,027 |   |  |   | 53,428 |  
|                                      
|                                      
|                                      
|                                      
|                                       | Total equity (deficit)                                               |  |   | (63,625                  | ) |  |  |   |  |      |   | (70,429 | ) |  |  |      |  |      |   | 12,832 |   |  |   | 7,881  |   |  |   | 1,344  |  



---

|(a) |  | Historical amounts include various charges and overhead allocations from
Smith & Nephew. See note (e) below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | We recorded merger and integration costs in 2000 associated with the
consolidation of the Orthotech operations into the Companys existing
facilities including merger and integration and information systems
consulting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|   
|   
|   
|(c) |  | We recorded restructuring costs in 1998 relating to the consolidation of
our operations at our Vista, California facility. See Note 10 of Notes to
DonJoys Audited Consolidated Financial Statements, and Managements
Discussion and Analysis of Financial Condition and Results of Operations
 Overview  Manufacturing Cost Reduction Initiatives.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|   
|   
|   
|(d) |  | EBITDA is defined as income from operations plus restructuring costs,
merger and integration costs and depreciation and amortization. EBITDA is
not a measure of performance under generally accepted accounting
principles. EBITDA should not be considered in isolation or as a
substitute for net income, cash flows from operating activities and other
income or cash flow statement data prepared in accordance with generally
accepted accounting principles, or as a measure of profitability or
liquidity. However, management has included EBITDA because it may be used
by certain investors to analyze and compare companies on the basis of
operating performance, leverage and liquidity and to determine a companys
ability to service debt. Our definition of EBITDA differs from the
definition of EBITDA under our credit agreement. Using our definition
of EBITDA, we are still in compliance with all debt covenants under
the credit agreement. Our definition of EBITDA may not be comparable to
that of other companies.
|   
|   
|   
|   
|(e) |  | Adjusted EBITDA represents EBITDA (as defined above) adjusted to
eliminate:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



| | (1) |  | charges for brand royalties paid by DonJoy to Smith & Nephew for use
of the Smith & Nephew trademarks and trade names which amounts are no
longer paid following the recapitalization;                                                                                                            
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | foreign sales corporation commissions paid by DonJoy 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 (the Eliminated
Allocations);                                                               
|
| | (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 (collectively, the Other Corporate
Allocations);
|
| | (5) |  | the incremental cost of the fair market value of acquired inventories
associated with the Orthotech Acquisition;                                                                                                                                                                                  

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

31



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##### Table of Contents



|                                                   |  |                         |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|-------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                   |  | Years Ended December 31
|                                                   |  |                        
|                                                   |  | 2000                    |        | 1999 |  | 1998 |        | 1997 |  | 1996
|                                                   |  |                         |        |      |  |      |        |      |  |     
|                                                   |  | (in thousands)         
|EBITDA(a) data:                                   
|                                                  
|                                                  
|                                                  
|                                                  
|Income from operations                             |  | $                       | 22,129 |      |  | $    | 16,902 |      |  | $    | 8,345  |   |  | $ | 12,976 |   |  | $ | 11,942 |  
|                                                  
|                                                  
|                                                  
|                                                  
|Restructuring costs                                |  |                         |       |      |  |      |       |      |  |      | 2,467  |   |  |   |       |   |  |   |       |  
|                                                  
|                                                  
|                                                  
|                                                  
|Merger & integration
costs                         |  |                         | 400    |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|                                                  
|                                                  
|                                                  
|                                                  
|Depreciation and amortization                      |  |                         | 6,365  |      |  |      | 4,952  |      |  |      | 4,853  |   |  |   | 4,803  |   |  |   | 4,642  |  
|                                                   |  |                         |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|EBITDA (as defined)                                |  |                         | 28,894 |      |  |      | 21,854 |      |  |      | 15,665 |   |  |   | 17,779 |   |  |   | 16,584 |  
|                                                  
|                                                  
|                                                  
|                                                  
|Brand royalties                                    |  |                         |       |      |  |      | 1,817  |      |  |      | 3,249  |   |  |   | 1,605  |   |  |   | 1,274  |  
|                                                  
|                                                  
|                                                  
|                                                  
|Foreign sales corporation commissions              |  |                         |       |      |  |      |       |      |  |      | 439    |   |  |   | 661    |   |  |   | 492    |  
|                                                  
|                                                  
|                                                  
|                                                  
|Eliminated Allocations                             |  |                         |       |      |  |      | 979    |      |  |      | 1,726  |   |  |   | 1,652  |   |  |   | 836    |  
|                                                  
|                                                  
|                                                  
|                                                  
|Other Corporate Allocations                        |  |                         |       |      |  |      | 832    |      |  |      | 1,678  |   |  |   | 1,193  |   |  |   | 801    |  
|                                                  
|                                                  
|                                                  
|                                                  
|Step-up in inventory                               |  |                         | 268    |      |  |      |       |      |  |      |       |  
|                                                  
|                                                  
|                                                  
|                                                  
|Estimated costs to replace Smith & Nephew
Services |  |                         |       |      |  |      | (400   | )    |  |      | (800   | ) |  |   | (800   | ) |  |   | (800   | )
|                                                   |  |                         |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|Adjusted EBITDA                                    |  | $                       | 29,162 |      |  | $    | 25,082 |      |  | $    | 21,957 |   |  | $ | 22,090 |   |  | $ | 19,187 |  
|                                                   |  |                         |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  

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 9 of
Notes to DonJoys Audited Consolidated Financial Statements, Managements
Discussion and Analysis of Financial Condition and Results of Operations 
Overview  Smith & Nephew Allocations and Sales and Certain Relationships
and Related Transactions  Other Agreements between DonJoy and Smith &
Nephew  Transition Services Agreement.



| | (f) |  | 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

Donjoy is a guarantor of the notes and of the credit facility and has no
material assets or operations other than its ownership of all dj Orthos equity
interests. As a result, the discussion below of the historical consolidated
financial position and results of operations of DonJoy is substantially the
same as dj Orthos. No financial information of DJ Capital, the co-issuer of
the notes, is included herein because management believes such information
would not be material given DJ Capitals lack of assets and liabilities.

On June 30 1999, the Company consummated a $215.3 million recapitalization. In
connection with the recapitalization transactions, DonJoy established dj Ortho
and DJ Capital. DonJoy sold all of its net assets to dj Ortho for cash which
was funded with the net proceeds of $100.0 million principal amount of 12 5/8%
Notes issued by dj Ortho and DJ Capital, as co-issuers, and the remainder by
funds borrowed by dj Ortho under a senior credit facility. In addition, new
investors, including certain members of management, invested new capital of
$96.4 million in equity in DonJoy. The proceeds of the equity investment
together with debt financings were used as follows: (i) approximately $199.1
million as consideration paid to redeem a portion of members equity from the
Companys former parent, and (ii) 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, the Companys former
parent made a capital contribution in an amount equal to our then existing cash
balance and canceled our liabilities to it (which included current and deferred
income taxes due to former parent) and a then existing restructuring reserve
which resulted in an additional capital contribution in those amounts. All such
amounts were treated as a capital contribution by the former parent to members
equity.

In accordance 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
CDP and certain members of management for $5.9 million. CDP 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, which they financed by cash and promissory notes issued to
DonJoy.

On July 7, 2000, the Company completed the purchase of certain assets and
assumed certain liabilities of DePuy Orthotech related to DePuy Orthotechs
bracing and soft goods business, referred to as the Orthotech business. The
Orthotech business 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 currently offered by the
Company. The Orthotech business also had an inventory management and billing
program that complemented the Companys current OfficeCare program.

The asset purchase agreement provided for the purchase of certain assets and
the assumption of certain liabilities of DePuy Orthotech, comprising the
Orthotech business, for a purchase price of $46.4 million in cash, exclusive of
transaction fees and expenses. The Company purchased primarily inventory,
equipment and certain intellectual property. The Company was 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.

32



---



##### Table of Contents



The following discussion should be read in conjunction with DonJoys audited
consolidated financial statements and the related notes thereto, and the other
financial data included elsewhere in this report.

Overview

Segments. The Company designs, manufactures and markets orthopedic recovery
products and complementary products. The Companys product lines include rigid
knee braces, soft goods and a portfolio of specialty and other orthopedic
products. The Companys rigid knee braces include ligament braces, which
provide durable support for knee ligament instabilities, post-operative braces,
which provide both knee immobilization and a protected range of motion, and OA
braces, which provide relief of knee pain due to osteoarthritis. The Companys
soft goods products, most of which are fabric or neoprene-based, provide
support and/or heat retention and compression for afflictions of the knee,
ankle, back and upper extremities, including the shoulder, elbow, neck and
wrist. The Companys portfolio of specialty and other orthopedic products,
which are designed to facilitate orthopedic rehabilitation, include lower
extremity walkers, upper extremity braces, cold therapy systems and pain
management delivery systems. The rigid knee brace product lines and the soft
goods product lines constitute reportable segments under generally accepted
accounting principles. See Note 7 of Notes to DonJoys Audited Consolidated
Financial Statements. Set forth below is revenue and gross profit information
for the Companys three product lines for the years ended December 31, 2000,
1999 and 1998. 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 the Company 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 Notes to DonJoys Audited Consolidated Financial
Statements.

|                                         |                     |  |                          |        |      |  |      |        |   |  |   |        |  
|---------------------------------------- | ------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                         |                     |  | Years Ended December 31,
|                                         |                     |  |                         
|                                         |                     |  | 2000                     |        | 1999 |  | 1998
|                                         |                     |  |                          |        |      |  |     
|                                         |                     |  | (in thousands)          
|Rigid knee braces:                      
|                                        
|                                        
|                                        
|                                        
|                                         | Net revenues        |  | $                        | 54,456 |      |  | $    | 49,406 |   |  | $ | 48,594 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Gross profit        |  |                          | 38,493 |      |  |      | 35,721 |   |  |   | 34,460 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Gross profit margin |  |                          | 70.7   | %    |  |      | 72.3   | % |  |   | 70.9   | %
|                                        
|                                        
|                                        
|                                        
|Soft goods:                             
|                                        
|                                        
|                                        
|                                        
|                                         | Net revenues        |  | $                        | 52,031 |      |  | $    | 39,652 |   |  | $ | 34,233 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Gross profit        |  |                          | 25,761 |      |  |      | 19,276 |   |  |   | 16,637 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Gross profit margin |  |                          | 49.5   | %    |  |      | 48.6   | % |  |   | 48.6   | %
|                                        
|                                        
|                                        
|                                        
|Specialty and other orthopedic products:
|                                        
|                                        
|                                        
|                                        
|                                         | Net revenues        |  | $                        | 36,570 |      |  | $    | 25,194 |   |  | $ | 17,958 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Gross profit        |  |                          | 22,115 |      |  |      | 12,516 |   |  |   | 8,978  |  
|                                        
|                                        
|                                        
|                                        
|                                         | Gross profit margin |  |                          | 60.5   | %    |  |      | 49.7   | % |  |   | 50.0   | %

The Companys total gross profit margin before brand royalties, other cost of
goods sold not allocable to specific product lines and freight revenue was
60.4%, 59.1%, 59.6%, for the years ended December 31, 2000, 1999 and 1998,
respectively.

The Companys products are marketed globally under the DonJoy and ProCare brand
names through several distribution channels. DonJoy brand product sales
represented approximately 74% of total net revenues, excluding freight revenue,
in 2000. Excluding freight revenue, the Company markets substantially all of
its rigid knee braces, approximately 84% of its specialty and other orthopedic
products and approximately 42% of its soft goods products under the DonJoy
brand name. ProCare brand product sales represented approximately 26% of total
net revenues, excluding freight revenue, in 2000. Excluding freight revenue,
the Company markets approximately 58% of its soft goods products, approximately
16% of its specialty and other orthopedic products and a small percentage of
its rigid knee braces under the ProCare brand name. Following the Orthotech
Acquisition, the Company is proceeding to integrate the current Orthotech brand
name into the DonJoy and ProCare brand names.

Domestic sales. In the United States, DonJoy brand products are marketed to
orthopedic surgeons, orthotic and prosthetic centers, hospitals, surgery
centers, physical therapists and athletic trainers by 30 commissioned sales
agents who employ approximately 198 sales representatives to sell DonJoy
products (including additional sales representatives added as a result of the
Orthotech Acquisition). After a product order is received by a sales
representative, the Company ships and bills the product directly to the
orthopedic professional and the Company pays a sales commission to the agent.
The gross profit and gross profit margins on DonJoy products sold in the United
States do not include the commissions paid to the agents on sales of such
products, which commissions are reflected in sales and marketing expense in the
DonJoys Audited Consolidated Financial Statements. Excluding freight revenue,
domestic sales of DonJoy brand products represented approximately 58% and 61%
of total net revenues in 2000 and 1999, respectively.

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 30% and 24% of total net revenues in 2000
and 1999, respectively. Domestically, Orthotech products were historically
sold through DePuy Orthotech sales personnel.

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International sales. Excluding freight revenue, international sales, primarily
in Europe, Canada, and Japan, accounted for approximately 12%, 16%, and 18% of
the Companys net revenues, in 2000, 1999 and 1998, respectively. Excluding
freight revenue, total sales in Europe, Germany and Canada accounted for 72%,
32% and 10%, respectively, of the Companys 2000 international net revenues,
with no other country accounting for 10% or more of the Companys 2000
international net revenues. Excluding freight revenue, sales in Japan accounted
for approximately 9% of the Companys international net revenues in 2000. The
decrease in international net revenues as a percentage of total revenues in
2000 as compared to prior years is a direct result of the Orthotech business
which historically consisted primarily of domestic sales. Historical Orthotech
revenues were generated primarily from domestic sales. In addition,
international sales were adversely impacted by foreign currency exchange
fluctuations as the changes in the rate of exchange between the U.S. dollar and
the Euro affected the cost of our products to our European customers.

International sales are currently made through two distinct channels:
independent third party distributors (such as in Germany) and Smith & Nephew
sales organizations within certain major countries (such as Canada).
Distributors in both of these channels buy and resell the Companys products
and have the ability to sell DonJoy and ProCare brand products within their
designated countries. Excluding freight revenue, DonJoy brand products
constituted approximately 82% of 2000 international net revenues as compared to
84% in 1999 and 81% in 1998. 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 20%, 40% and 55% of the Companys international sales,
exclusive of freight revenue, in 2000, 1999 and 1998, respectively. The
Company believes future opportunities for sales growth within international
markets are significant. The Company expects to increase international sales by
reorganizing and expanding its international distribution network and
implementing the marketing and distribution strategies which it has
successfully utilized in the United States and certain international
territories, most notably Germany. In particular, the Company has replaced 17
Smith & Nephew sales organizations with independent distributors who will focus
on building strong relationships with the Companys targeted customers and will
be responsible for achieving specified sales targets.

The Companys international sales are made in United States dollars.
Accordingly, the Companys results of operations are not directly impacted by
foreign currency exchange fluctuations. However, as was the case in 2000, the
volume and product mix of international sales may be impacted by foreign
currency exchange fluctuations as changes in the rate of exchange between the
U.S. dollar and the foreign currency will affect the cost of our products to
our customers and thus may impact the overall level of customer purchases or
result in the customer purchasing less expensive products.

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

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

In response to the historic and forecasted reductions of reimbursement rates
and the impact of demand matching (where patients are evaluated as to age, need
for mobility and other parameters and are then matched with an orthopedic
recovery product that is cost effective in light of such evaluation), the
Company and many of its competitors are introducing new product offerings at
lower prices. This is particularly evident within the U.S. rigid knee bracing
segment of the orthopedic recovery products industry where the Company and many
of its competitors are offering lower priced, off-the-shelf products. The
minimal sales growth in the Companys rigid knee bracing product lines over the
past few years has in part resulted from these price pressures. The increase
in 2000 in revenues from the Companys rigid knee bracing product line is due
to the Orthotech Acquisition. Excluding sales of Orthotech products, revenue
growth within the rigid knee-bracing segment was minimal.

The Company believes that it will not be materially adversely affected by U.S.
or international health care reform. The Company currently does not have any
capitated health care service arrangements. The Company believes that to the
extent it responds to price pressures through lower prices for its products, it
will be able to substantially offset the effect of this price erosion through
reductions in its manufacturing and other costs. In addition, because of the
quality, functionality and reputation of its products, its marketing and sales
programs which emphasize strong relationships with customers and the service it
provides to its customers, the Company believes it will be able to compete even
if reimbursement rates are materially altered. For example, revenues from the
IceMan from 1997 to 2000 increased despite elimination of its eligibility for
reimbursement.

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

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

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

The OfficeCare program represented approximately 13% and 7% of the Companys
net revenues, excluding freight revenue, for 2000 and 1999, respectively, with
sales of soft goods and specialty and other orthopedic products representing
the majority of such sales. The OfficeCare program involves the Companys lower
priced soft goods products, but is designed to also strengthen the Companys
relationship with the customer, thereby also increasing sales of the higher end
products. The OfficeCare program has historically experienced a strong growth
rate, with an increase of sales, of 113% in 2000 over 1999 and 63% in 1999 over
1998. As a result of the growth of the program, the Companys working capital
needs have significantly increased due to higher levels of accounts receivable
and inventories necessary to operate the program. In addition, OfficeCare has
expanded the Companys involvement in the third party reimbursement process, or
in certain cases directly with the patient. The collection period for these
receivables as compared to other segments of the Companys business is
significantly longer and has also resulted in a need to increase the Companys
bad debt allowance requirements. The increase in OfficeCare bad debt allowance
is the primary reason for the increase in the Companys allowance for doubtful
accounts at December 31, 2000.

The Orthotech business acquired by the Company also had an inventory management
and billing program that was integrated with and complements the Companys
existing OfficeCare Program. The Company believes that, as the result of the
acquisition of Orthotech, the percentage of its net revenues represented by the
OfficeCare program will increase in future periods.

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

As a result of the Company formerly being a division of Smith & Nephew, the
Companys historical results of operations 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 the Company on the basis of direct usage
where identifiable, with the remainder allocated to the Company on the basis of
its annual sales or the capital employed by Smith &Nephew in the Companys
business. See Note 9 of Notes to DonJoys Audited Consolidated Financial
Statements.

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



| | (1) |  | Charges for brand royalties historically included in the Companys
cost of goods sold resulting from the use by the Company of the Smith &
Nephew trademarks and trade name. These charges were $1.8 million and
$3.2 million in 1999 and 1998, respectively. As a result of the
recapitalization on June 30, 1999, the Company no longer has the right
to use the Smith & Nephew trademarks and trade names and, accordingly,
these charges are no longer incurred by the Company.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Foreign sales corporation commissions historically included in the
Companys general and administrative expense paid by the Company on
sales to foreign sales corporations established by Smith & Nephew. The
use of sales corporations was a tax planning strategy for Smith &
Nephew. These charges were $0.4 million in 1998. As of January 1999,
the Company no longer incurred these charges.                                                                                 

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| | (3) |  | Smith & Nephew allocations for a portion of its corporate managed
accounts and new business expense and corporate management expense
historically included in the Companys general and administrative
expense. These allocations (Eliminated Allocations) were $1.0 million
and $1.7 million in 1999 and 1998, respectively. These allocations were
for a portion of Smith & Nephews overhead expenses that the Company
has 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 the Company which were included in the Companys general and
administrative expense. These allocations (referred to in this annual
report collectively as the Other Corporate Allocations) were $0.8
million and$1.7 million in 1999 and 1998, respectively. These
allocations were for a portion of Smith & Nephews overhead expenses.
The Company on a stand-alone basis replaced these services provided by
Smith & Nephew following the recapitalization on June 30, 1999, and has
incurred additional expenses associated with external auditing and
periodic filings with the Securities and Exchange Commission. The
Company estimates that the aggregate annual cost of replacing these
services and such additional expenses was approximately $0.8 million
following the recapitalization.
|
| | (5) |  | Other allocations relating to bonuses, pension and insurance
historically included in the Companys cost of goods sold, sales and
marketing expense and general and administrative expense, and charges
for payroll taxes and benefits and direct legal expenses incurred by
Smith & Nephew on the Companys behalf included in the Companys
general and administrative expense. These costs and expenses are of a
nature the Company continues 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 the
Company through November 30, 2000. The Company has replaced the services
provided by Smith & Nephew with internal staff, including the addition of new
employees and through arrangements with third party providers. As noted above,
the Company estimates that the services described in paragraph (4) above (which
will be reflected as general and administrative expense following the
recapitalization) have cost the Company approximately $0.8 million following
the recapitalization.

For the years ended December 31, 2000, 1999 and 1998, the Companys sales to
Smith & Nephew and its affiliates (including Smith & Nephews sales
organizations) were $4.6 million, $8.3 million, and $10.7 million,
respectively, or 2%, 7%, and 11%, respectively, of total sales, excluding
freight revenue, for these periods. International sales made through Smith &
Nephew sales organizations were 20%, 40%, and 55% of international sales,
excluding freight revenue, in 2000, 1999 and 1998, respectively. In connection
with the recapitalization, Smith & Nephew and its sales organizations which
distribute the Companys products internationally entered into agreements with
the Company regarding the purchase of Company products following consummation
of the recapitalization. However, neither Smith & Nephew nor such sales
organizations have any obligation to purchase any specific or minimum quantity
of products pursuant to such agreements. See Certain Relationships and Related
Transactions  Other Agreements between DonJoy and Smith & Nephew  Supply
Agreement and  Distribution Agreement.

Manufacturing Cost Reduction Initiatives.Over the past several years, the
Company has undertaken initiatives designed to lower its overall manufacturing
cost structure. In order to take advantage of the lower labor costs in Mexico,
in 1993 the Company began manufacturing certain of its labor intensive
products, principally soft goods products, subassemblies and pads used in rigid
knee braces and covers, in two facilities in Tijuana, Mexico. In 1998 the
Company completed the consolidation of its domestic operations into one
location in Vista, California. As a result, the Company incurred $2.5 million
of restructuring costs in 1998, substantially all of which related to lease
termination costs on the vacated facility. Pursuant to the recapitalization
agreement, the remainder of the restructuring reserve, which amounted to $0.9
million at June 29, 1999 and consisted of the remaining lease obligations on
the vacated facility, was assumed by Smith & Nephew. In addition, in 1998
general and administrative expense included $0.2 million of costs related to
moving costs resulting from the consolidation of the facilities. Operating
results for the first three quarters of 1998 were adversely affected by the
consolidation due to disruption caused as the Company totally integrated
manufacturing operations of the DonJoy and ProCare brands which were previously
separate and distinct, but returned to prior levels in the fourth quarter of
1998 and sustained these levels through the remainder of 1999 and 2000.

In 2000, the Company completed the consolidation of the Orthotech operations
into its Vista, California location. Operating results for the last two
quarters of 2000 were adversely affected by the consolidation due to disruption
caused as the Company integrated manufacturing operations of the DePuy
Orthotech brands which were previously separate and distinct.

The Company has identified additional opportunities to reduce manufacturing
costs and improve operating efficiencies. The Company will move as appropriate
greater portions of its labor intensive operations to its facilities in Mexico
to generate further labor cost savings for its more labor intensive products
and utilize the resulting additional capacity in its U.S. facilities to
manufacture its more technologically advanced products. By upgrading its
computer systems to achieve more efficient production, the Company expects to
achieve material and labor cost reductions as well as economies of scale across
its manufacturing operation. In addition, the Company intends to further
automate its manufacturing operations through the use of more technologically
advanced fabrication and equipment systems. The Company will continue to
rationalize raw materials used in the production of its existing products,

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thereby enabling the Company to leverage its purchasing power. Finally, in
order to achieve further cost savings, the Company intends to further reduce
its number of stock keeping units (SKUs) without impacting service or breadth
of the Companys product range.

Basis of presentation; taxes. The Companys former parent files a consolidated
federal income tax return which includes all of its eligible subsidiaries and
divisions, which prior to the recapitalization included the Company. The
provision for income taxes has been presented assuming the Company filed a
separate federal income tax return. The recapitalization had no impact on the
historical basis of the Companys assets and liabilities as reflected in DonJoys consolidated financial statements except for the elimination
of the remaining restructuring reserve and the intercompany accounts. However,
as a result of the recapitalization, for federal income tax purposes, the
Company has recorded an increase in the tax basis of its fixed and intangible
assets in an amount approximately equal to the taxable gain recognized by Smith
& Nephew on the sale of its interest in DonJoy. As a result, after the
recapitalization, for tax purposes the Company is able to depreciate assets
with a higher tax basis than for financial reporting purposes. 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 recorded by the Company under
purchase accounting (see Note 2 to Notes to DonJoys Audited Consolidated
Financial Statements).

Prior to the recapitalization, the Companys results of operations were
included in the consolidated federal income tax returns which Smith & Nephew
filed in the United States and the historical financial statements reflect a
provision for income taxes assuming that DonJoy had filed a separate federal
income tax return. As limited liability companies, DonJoy and dj Ortho are not
subject to income taxes following the recapitalization. Instead, DonJoys
earnings following the recapitalization will be allocated to its members and
included in the taxable income of its members. The indenture and the credit
facility permit the Company to make distributions to DonJoy in certain amounts
to allow DonJoy to make distributions to its members to pay income taxes in
respect of their allocable share of taxable income of DonJoy and its
subsidiaries, including dj Ortho.

Results of Operations

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

In the fourth quarter of 2000, the Company adopted Emerging Issues Task Force
(EITF) Issue 00-10 Accounting for Shipping and Handling Fees and Costs. As
a result, the Company has reclassed $4.4 million, $3.5 million and $3.5 million
for December 31, 2000, 1999 and 1998, respectively, of freight revenue from
sales and marketing expenses into net revenues. The Company continues to
include freight expenses in sales and marketing expense.

The following table sets forth the Companys operating results as a
percentage of net revenues:

|                                |                                         |  |                          |      |      |  |       |      |   |  |       |      |  
|------------------------------- | --------------------------------------- |  | ------------------------ | ---- | ---- |  | ----- | ---- | - |  | ----- | ---- | -
|                                |                                         |  | Years Ended December 31,
|                                |                                         |  |                         
|                                |                                         |  | 2000                     |      | 1999 |  | 1998 
|                                |                                         |  |                          |      |      |  |      
|Net revenues:                  
|                               
|                               
|                               
|                               
|                                | Rigid knee bracing                      |  |                          | 36.9 | %    |  |       | 41.9 | % |  |       | 46.6 | %
|                               
|                               
|                               
|                               
|                                | Soft goods                              |  |                          | 35.3 |      |  |       | 33.7 |   |  |       | 32.8 |  
|                               
|                               
|                               
|                               
|                                | Specialty and other orthopedic products |  |                          | 24.8 |      |  |       | 21.4 |   |  |       | 17.2 |  
|                                |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Revenues from product lines     |                                         |  | 97.0                     |      |      |  | 97.0  |      |   |  | 96.6  |     
|                               
|                               
|                               
|                               
|                                | Freight revenue                         |  |                          | 3.0  |      |  |       | 3.0  |   |  |       | 3.4  |  
|                                |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Total consolidated net revenues |                                         |  | 100.0                    |      |      |  | 100.0 |      |   |  | 100.0 |     
|                               
|                               
|                               
|                               
|Cost of goods sold              |                                         |  | 40.8                     |      |      |  | 43.9  |      |   |  | 44.5  |     
|                                |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Gross profit                    |                                         |  | 59.2                     |      |      |  | 56.1  |      |   |  | 55.5  |     
|                               
|                               
|                               
|                               
|                                | Sales and marketing                     |  |                          | 28.8 |      |  |       | 25.7 |   |  |       | 27.1 |  
|                               
|                               
|                               
|                               
|                                | General and administrative              |  |                          | 13.4 |      |  |       | 14.2 |   |  |       | 15.8 |  
|                               
|                               
|                               
|                               
|                                | Research and development                |  |                          | 1.7  |      |  |       | 1.8  |   |  |       | 2.2  |  
|                               
|                               
|                               
|                               
|                                | Merger and integration costs            |  |                          | 0.3  |      |  |       |     |   |  |       |     |  
|                               
|                               
|                               
|                               
|                                | Restructuring costs                     |  |                          |     |      |  |       |     |   |  |       | 2.4  |  
|                                |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Income from operations          |                                         |  | 15.0                     |      |      |  | 14.4  |      |   |  | 8.0   |     
|                               
|                               
|                               
|                               
|Interest expense                |                                         |  | (11.5                    | )    |      |  | (6.4  | )    |   |  |      |     
|                               
|                               
|                               
|                               
|Interest income                 |                                         |  | 0.3                      |      |      |  | 0.1   |      |   |  |      |     
|                               
|                               
|                               
|                               
|Discontinued acquisition costs  |                                         |  | (0.3                     | )    |      |  |      |      |   |  |      |     
|                                |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Income before income taxes      |                                         |  | 3.5                      |      |      |  | 8.1   |      |   |  | 8.0   |     
|                               
|                               
|                               
|                               
|Provision for income taxes      |                                         |  |                         |      |      |  | (2.0  | )    |   |  | (3.3  | )   
|                                |                                         |  |                          |      |      |  |       |      |   |  |       |     
|Net income                      |                                         |  | 3.5                      | %    |      |  | 6.1   | %    |   |  | 4.7   | %   
|                                |                                         |  |                          |      |      |  |       |      |   |  |       |     

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The following table summarizes certain of the Companys operating results by
quarter for 2000 and 1999:

|                         |  |                              |        |         |  |         |        |         |  |       |        |  |  |   |        |  |  |   |         | 
|------------------------ |  | ---------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                         |  | Year Ended December 31, 2000
|                         |  |                             
|                         |  | First                        |        | Second  |  | Third   |        | Fourth  |  | Total
|                         |  | Quarter                      |        | Quarter |  | Quarter |        | Quarter |  | Year 
|                         |  |                              |        |         |  |         |        |         |  |      
|                         |  | (in thousands)              
|Net revenues             |  | $                            | 32,569 |         |  | $       | 30,934 |         |  | $     | 40,965 |  |  | $ | 43,001 |  |  | $ | 147,469 | 
|                        
|                        
|                        
|                        
|Gross profit             |  |                              | 19,685 |         |  |         | 18,613 |         |  |       | 23,120 |  |  |   | 25,873 |  |  |   | 87,291  | 
|                        
|                        
|                        
|                        
|Income from operations   |  |                              | 5,809  |         |  |         | 5,386  |         |  |       | 4,583  |  |  |   | 6,351  |  |  |   | 22,129  | 
|                        
|                        
|                        
|                        
|Number of operating days |  |                              | 65     |         |  |         | 63     |         |  |       | 63     |  |  |   | 61     |  |  |   | 252     | 

|                         |  |                              |        |         |  |         |        |         |  |       |        |  |  |   |        |  |  |   |         | 
|------------------------ |  | ---------------------------- | ------ | ------- |  | ------- | ------ | ------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- | 
|                         |  | Year Ended December 31, 1999
|                         |  |                             
|                         |  | First                        |        | Second  |  | Third   |        | Fourth  |  | Total
|                         |  | Quarter                      |        | Quarter |  | Quarter |        | Quarter |  | Year 
|                         |  |                              |        |         |  |         |        |         |  |      
|                         |  | (in thousands)              
|Net revenues             |  | $                            | 29,312 |         |  | $       | 26,683 |         |  | $     | 31,120 |  |  | $ | 30,652 |  |  | $ | 117,767 | 
|                        
|                        
|                        
|                        
|Gross profit             |  |                              | 15,799 |         |  |         | 14,647 |         |  |       | 18,114 |  |  |   | 17,463 |  |  |   | 66,023  | 
|                        
|                        
|                        
|                        
|Income from operations   |  |                              | 3,080  |         |  |         | 2,739  |         |  |       | 5,637  |  |  |   | 5,446  |  |  |   | 16,902  | 
|                        
|                        
|                        
|                        
|Number of operating days |  |                              | 64     |         |  |         | 61     |         |  |       | 66     |  |  |   | 60     |  |  |   | 251     | 

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

Net Revenues.Net revenues increased $29.7 million, or 25.2%, to $147.5
million in 2000 from $117.8 million in 1999. Net revenues, excluding freight
revenue, for the rigid knee-bracing segment increased $5.1 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 $12.4
million over the prior year due primarily to the Orthotech Acquisition and
increased sales volumes of wrist splints, ankle braces, knee braces and other
general soft good supports. The increases also reflected the growth in the
OfficeCare program. Specialty and other orthopedic product sales, excluding
freight revenue, increased by $11.4 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.

Gross Profit.Gross profit increased $21.3 million, or 32.2%, to $87.3 million
in 2000 from $66.0 million in 1999 primarily as a result of the Orthotech
Acquisition. Gross profit margin, exclusive of brand royalties and other cost
of goods sold not allocable to specific product lines and freight revenue
increased to 60.4% in 2000 from 59.1% in 1999 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 $2.8 million, with gross profit margin
decreasing to 70.7% from 72.3%. The margin decrease reflects the change in
product mix. Gross profit, excluding freight revenue, for the soft goods
segment increased $6.5 million as a result of increased sales volume, with
gross profit increasing to 49.5% from 48.6% in 1999. The increase in gross
profit margin is a result of the change in product mix, primarily related to
sales of the Orthotech products and the success of the group purchase
organization contracts. Gross profit, excluding freight revenue, for the
specialty and other orthopedic products segment increased $9.6 million, with
gross profit margin increasing to 60.5% from 49.7%. 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 the Companys
facilities in Mexico in the first quarter of 2000 to take advantage of labor
cost savings. As a result of the consummation of the recapitalization on June
30, 1999, the Company no longer has the right to use the Smith & Nephew
trademarks and trade names and, accordingly, charges for brand royalties are no
longer incurred by the Company. Other cost of goods sold not allocable to
specific product lines increased $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 $12.3
million, or 40.6%, to $42.5 million in 2000 from $30.2 million in 1999. The
increase primarily reflected an increase in commissions associated with higher
sales of DonJoy products in the United States and increased costs associated
with the OfficeCare program. In addition, as a result of the Orthotech
Acquisition the Company 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, the Company completed the consolidation of the Orthotech
operations into its Vista, California location. As a result, the Company
incurred $0.5 million in consolidation costs consisting primarily of
consulting, information systems, travel and moving expenses. The increase was
also due to increases in salaries and benefits, an increase in consulting
expenses related to the implementation of a new Enterprise Resource Planning
(ERP) System and human resources support combined with an 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.

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Merger and Integration Costs.The Company incurred $0.4 million in one-time,
non-recurring merger and integration costs associated with the consolidation of
the Orthotech operations into the Companys 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.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

Net Revenues.Net revenues increased $13.5 million, or 12.9%, to $117.8
million in 1999 from $104.3 million in 1998. Net revenues, excluding freight
revenue, for the rigid knee bracing segment increased $0.8 million over the
prior year due to increased sales of ligament braces, including the
introduction of the 4TITUDE brace and post-operative braces. Soft goods sales,
excluding freight revenue, increased by $5.4 million over the prior year due
primarily to increased sales volumes of neoprene bracing products, wrist
splints, ankle braces and other soft good supports, including the introduction
of the On-Track system. These increases primarily reflect the effect of
national contracts entered into in the second half of 1998 as well as the
growth of the OfficeCare program. Specialty and other orthopedic products
sales, excluding freight revenue, increased by $7.2 million over the prior year
due primarily to the recently introduced PainBuster Pain Management
Systems, cold therapy units and to increased sales of lower extremity walkers
as well as growth of the OfficeCare program.

Gross Profit.Gross profit increased $8.2 million, or 14.2%, to $66.0 million
in 1999 from $57.8 million in 1998. Gross profit margin, exclusive of brand
royalties and other cost of goods sold not allocable to specific product lines
and freight revenue, decreased to 59.1% in 1999 from 59.6% in 1998. Gross
profit, excluding freight revenue, for the rigid knee bracing segment increased
$1.3 million, with gross profit margin increasing to 72.3% from 70.9%. These
increases reflected the improved product mix. Gross profit, excluding freight
revenue, for the soft goods segment increased $2.6 million as a result of
increased sales volume, with gross profit margin remaining constant at 48.6%
from 1998 to 1999. Gross profit, excluding freight revenue, for the specialty
and other orthopedic products segment increased $3.5 million, with gross profit
margin decreasing to 49.7% from 50.0%, reflecting increased sales of lower
margin products. As a result of the consummation of the recapitalization on
June 30, 1999, the Company no longer has the right to use the Smith & Nephew
trademarks and trade names and, accordingly, charges for brand royalties are no
longer incurred by the Company. Other cost of goods sold not allocable to
specific product lines increased to $3.2 million in 1999 from $2.5 million in
1998. This increase is primarily due to costs associated with support of the
SKU reduction plan, the OfficeCare program and the amortization of the
PainBuster Pain Management System distribution rights.

Sales and Marketing Expenses.Sales and marketing expenses increased $2.0
million, or 7.0%, to $30.3 million in 1999 from $28.3 million in 1998. The
increase primarily reflected an increase in commissions associated with higher
sales of DonJoy products in the United States and increased costs associated
with the OfficeCare program.

General and Administrative Expenses.General and administrative expenses
increased $0.3 million, or 1.6%, to $16.8 million in 1999 from $16.5 million in
1998. The increase was primarily due to an increase in salaries and benefits
offset by a reduction in corporate allocations from Smith & Nephew of $1.9
million. General and administrative expenses declined as a percentage of net
revenues to 14.2% from 15.8% primarily due to the reduction in Smith & Nephew
allocations.

Research and Development Expenses.Research and development expenses were
approximately equal over the two periods. Significant resources within the
department were re-deployed to focus primarily on the development of the DonJoy
Vista System as well as the development and release of the new
4TITUDE brace in 1999.

Restructuring Costs.In March 1998, dj Ortho combined its two operating
facilities into one location in Vista, California and accrued $2.5 million in
costs resulting from the restructuring which had no future economic benefit.
These costs related primarily to remaining lease obligations on the vacated
facility, net of projected sublease income, and severance costs associated with
the termination of twelve employees.

Interest Expense.Interest expense in 1999 was $7.6 million. 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.

Liquidity and Capital Resources

The Companys principal liquidity requirements are to service its debt and meet
its working capital and capital expenditure needs. The Companys long-term
indebtedness at December 31, 2000 was $157.2 million.

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Net cash provided by operating activities was $1.2 million, $16.1 million, and
$3.7 million in 2000, 1999, and 1998, respectively. 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).

Cash flows used in investing activities were $57.0 million, $4.8 million, and
$4.0 million for 2000, 1999, and 1998, respectively. Included in investing
activities is the Companys $49.0 million investment in Orthotech. Capital
expenditures in 2000 primarily reflect an increase in construction in progress
related to the capitalization of costs directly associated with the Companys
acquisition and implementation of an enterprise resource planning system and
investments in manufacturing equipment.

Cash flows provided by (used in) financing activities were $54.0 million,
$(6.2) million, and $0.2 million in 2000, 1999, and 1998, respectively. The
changes 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 of common and preferred units in the
third quarter of 2000, all related to the Orthotech Acquisition. The Company
borrowed an additional $8.0 million at the end of the year as a result of the
increase in working capital associated with the Orthotech Acquisition. Prior to
the recapitalization, the Company participated in Smith & Nephews central cash
management program, wherein all of the Companys cash receipts were remitted to
Smith & Nephew and all cash disbursements were funded by Smith & Nephew.
Following the recapitalization, the Company no longer participates in Smith &
Nephews cash management program.

Interest payments on the Notes and on borrowings under the new credit facility
have significantly increased the Companys liquidity requirements. The credit
facility provides for two term loans totaling $39.5 million. 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. The Company also has available
up to $25.0 million of revolving credit borrowings under the revolving credit
facility, which are available for working capital and general corporate
purposes, including financing of acquisitions, investments and strategic
alliances. As of December 31, 2000, the Company has borrowed $20.6 million
under that facility, primarily due to the Orthotech Acquisition. Borrowings
under the term loans and the revolving credit facility bear interest at
variable rates plus an applicable margin.

The following table sets forth the principal payments on the term loans for 2001 through their maturity in 2005:

|     |  |           |        | 
|---- |  | --------- | ------ | 
|     |  | Principal
|Year |  | Payment  
|     |  |          
|2001 |  | $         | 1,274  | 
|    
|    
|    
|    
|2002 |  |           | 1,274  | 
|    
|    
|    
|    
|2003 |  |           | 1,274  | 
|    
|    
|    
|    
|2004 |  |           | 17,202 | 
|    
|    
|    
|    
|2005 |  |           | 17,338 | 

In addition, the Company is 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 new credit facility) (75% if the Companys
leverage ratio exceeds a certain level). The Company had no excess cash flow
at December 31, 2000 or December 31, 1999. 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 DonJoy, dj Ortho or any of its
subsidiaries and (b) 100% of the net cash proceeds of certain asset sales or
other dispositions of property by DonJoy, dj Ortho or any of its subsidiaries,
in each case subject to certain exceptions. No mandatory prepayments were
required at December 31, 2000 or December 31, 1999.

The credit facility and the indenture impose certain restrictions on the
Company, including restrictions on its ability to incur indebtedness, pay
dividends, make investments, grant liens, sell its assets and engage in certain
other activities. In addition, the credit facility requires the Company to
maintain certain financial ratios. At December 31, 2000, the Company was in
compliance with all of these covenants. Indebtedness under the credit facility
is secured by substantially all of the assets of the Company, including the
Companys real and personal property, inventory, accounts receivable,
intellectual property and other intangibles.

The Company incurred fees and costs of $8.8 million in connection with the
recapitalization. Approximately $7.4 million, principally relating to
financing fees and expenses, has been capitalized and will be amortized over
the terms of the related debt instruments.

As part of its strategy, the Company intends to pursue acquisitions, such as
the Orthotech Acquisition, investments and strategic alliances. The Company may
require new sources of financing to consummate any such transactions, including
additional debt or equity financing. There can be no assurance that such
additional sources of financing will be available on acceptable terms if at
all.

The Companys ability to satisfy its debt obligations and to pay principal and
interest on its indebtedness, including the notes, fund working capital
requirements and make anticipated capital expenditures will depend on its
future performance, which is subject to general economic, financial and other
factors, some of which are beyond its control. Management believes that based
on current levels of operations and anticipated growth, cash flow from
operations, together with other available sources of funds including the
availability of borrowings under the new revolving credit facility, will be
adequate for at least the next twelve months to make

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required payments of
principal and interest on the Companys indebtedness, including the notes, to
fund anticipated capital expenditures and for working capital requirements.
There can be no assurance, however, that the Companys business will generate
sufficient cash flow from operations or that future borrowings will be
available under the new revolving credit facility in an amount sufficient to
enable the Company to service its indebtedness, including the notes, or to fund
its other liquidity needs.

Seasonality

The Company generally records its highest net revenues in the first and fourth
quarters due to the greater number of orthopedic surgeries and injuries
resulting from increased sports activity, particularly football and skiing. In
addition, during the fourth quarter, a patient has a greater likelihood of
having satisfied his annual insurance deductible than in the first three
quarters of the year, and thus there is an increase in the number of elective
orthopedic surgeries. Conversely, the Company generally has lower net revenues
during its second and third quarters as a result of decreased sports activity
and fewer orthopedic surgeries. The Companys results of operations would be
adversely and disproportionately affected if the Companys sales were
substantially lower than those normally expected during its first and fourth
quarters. Increases in the Companys net revenues beginning in the third
quarter of 2000 reflect the Orthotech Acquisition.

Year 2000

The year 2000 issue relates to computer systems that use the last two digits
rather than all four to define a year and whether such systems would properly
and accurately process information when the year changed to 2000. As of the
date of this report, the Company had not yet experienced any material problems
related to the year 2000. The Company has not become aware of any significant
year 2000 issues affecting the Companys major customers or suppliers. The
Company also has not received any material complaints regarding any year 2000
issues related to its products. Year 2000 related costs through December 31,
2000 were approximately $360,000 and have been expensed as incurred. These
costs included labor expended in contacting customers and suppliers, testing
systems and software, and software upgrades for year 2000.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes accounting and reporting
standards for derivative instruments and hedging activities. The Statement
will require the recognition of all derivatives on dj Orthos balance sheet at
fair value. In July 1999, the FASB issued Statement of Accounting Standards
No. 137, Accounting for Derivative Instruments and Hedging Activities 
Deferral of the Effective Date of FASB Statement No. 133 which defers the
adoption requirement to the first quarter of 2001. The impact on the Companys
financial statements is not expected to be material.







Item 7A.Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to certain market risks as part of its ongoing business
operations. Primary exposure includes changes in interest rates. The Company
is exposed to interest rate risk in connection with the term loans which bear
interest at floating rates based on London Inter-Bank Offered Rate (LIBOR) or
the prime rate plus an applicable borrowing margin. The Company manages its
interest rate risk by balancing the amount of fixed and variable debt. For
fixed rate debt, interest rate changes affect the fair market value but do not
impact earnings or cash flows. Conversely, for variable rate debt, interest
rate changes generally do not affect the fair market value but do impact future
earnings and cash flows, assuming other factors are held constant. As of
December 31, 2000, the Company had $98.3 million principal amount of fixed rate
debt represented by the notes and $59.0 million of variable rate debt
represented by borrowings under the credit facility (at interest rates ranging
from 8.875% to 9.813% at December 31, 2000). Based on the Companys current
balance outstanding under the credit facility, an immediate increase of one
percentage point in the applicable interest rate would cause an increase in
interest expense of approximately $0.6 million on an annual basis. At December
31, 2000, up to $4.4 million of variable rate borrowings was available under
the revolving credit facility. The Company may use derivative financial
instruments, where appropriate, to manage its interest rate risks. However, the
Company, as a matter of policy, does not enter into derivative or other
financial investments for trading or speculative purposes. All of the Companys
sales are denominated in U.S. dollars, thus the Company is not subject to
foreign currency exchange risk.

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Item 8.Financial Statements and Supplementary Data

The following documents are filed as part of this report:

|                                                                                                                     |  |      |    | 
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|Description                                                                                                          |  | Page
|                                                                                                                     |  |     
|Report of Ernst & Young LLP, Independent
Auditors                                                                    |  |      | 45 | 
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    
|Consolidated Balance Sheets as of December 31, 2000 and 1999                                                         |  |      | 46 | 
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    
|Consolidated Statements of Income for the years ended December 31,
2000, 1999 and 1998                               |  |      | 47 | 
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    
|Consolidated Statements of Changes in Members Equity (Deficit) for the
years ended December 31, 2000, 1999 and 1998 |  |      | 48 | 
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    
|Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998                           |  |      | 49 | 
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    
|                                                                                                                    
|Notes to DonJoys Audited Consolidated Financial Statements                                                          |  |      | 50 | 

42



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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of DonJoy, L.L.C.
as of December 31, 2000 and 1999, and the related consolidated statements of
income, members equity and cash flows for each of the three years in the
period ended December 31, 2000. Our audits also included the financial
statement schedule listed in the Index at Item 14(a). DonJoys Audited
Consolidated Financial Statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of DonJoy, L.L.C. at
December 31, 2000 and 1999, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.

| |                   
| | ------------------
| | ERNST & YOUNG, LLP

San Diego, California
February 16, 2001

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DONJOY, L.L.C.
CONSOLIDATED BALANCE SHEETS

(in thousands, except unit information)

|                                                                                                                                                                                                                      |                                                                                                                                       |                    |         |              |        |              |         |          |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | ------- | ------------ | ------ | ------------ | ------- | -------- | ------ | 
|                                                                                                                                                                                                                      |                                                                                                                                       |                    |         | December 31, |        | December 31,
|                                                                                                                                                                                                                      |                                                                                                                                       |                    |         | 2000         |        | 1999        
|                                                                                                                                                                                                                      |                                                                                                                                       |                    |         |              |        |             
|Assets                                                                                                                                                                                                               
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|Current assets:                                                                                                                                                                                                      
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Cash and cash equivalents                                                                                                             |                    | $       | 4,106        |        |              | $       | 5,927    |       
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Accounts receivable, net of allowance for doubtful
accounts of $4,278 and $989 at December 31, 2000 and
1999, respectively            |                    |         | 34,498       |        |              |         | 21,406   |       
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Inventories, net                                                                                                                      |                    |         | 18,510       |        |              |         | 13,664   |       
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Other current assets                                                                                                                  |                    |         | 3,270        |        |              |         | 917      |       
|                                                                                                                                                                                                                      |                                                                                                                                       |                    |         |              |        |              |         |         
|Total current assets                                                                                                                                                                                                  |                                                                                                                                       |                    | 60,384  |              |        |              | 41,914  |         
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|Property, plant and equipment, net                                                                                                                                                                                    |                                                                                                                                       |                    | 12,785  |              |        |              | 7,297   |         
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|Intangible assets, net                                                                                                                                                                                                |                                                                                                                                       |                    | 75,419  |              |        |              | 33,195  |         
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|Debt issuance costs, net                                                                                                                                                                                              |                                                                                                                                       |                    | 6,549   |              |        |              | 6,875   |         
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|Other assets                                                                                                                                                                                                          |                                                                                                                                       |                    | 535     |              |        |              | 135     |         
|                                                                                                                                                                                                                      |                                                                                                                                       |                    |         |              |        |              |         |         
|Total assets                                                                                                                                                                                                          |                                                                                                                                       | $                  | 155,672 |              |        | $            | 89,416  |         
|                                                                                                                                                                                                                      |                                                                                                                                       |                    |         |              |        |              |         |         
|Liabilities and members deficit                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|Current liabilities:                                                                                                                                                                                                 
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Accounts payable                                                                                                                      |                    | $       | 8,982        |        |              | $       | 6,411    |       
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Accrued compensation                                                                                                                  |                    |         | 2,937        |        |              |         | 2,443    |       
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Accrued commissions                                                                                                                   |                    |         | 1,444        |        |              |         | 954      |       
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Long-term debt, current portion                                                                                                       |                    |         | 1,274        |        |              |         | 500      |       
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Accrued interest                                                                                                                      |                    |         | 686          |        |              |         | 526      |       
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Other accrued liabilities                                                                                                             |                    |         | 6,366        |        |              |         | 3,667    |       
|                                                                                                                                                                                                                      |                                                                                                                                       |                    |         |              |        |              |         |         
|Total current liabilities                                                                                                                                                                                             |                                                                                                                                       |                    | 21,689  |              |        |              | 14,501  |         
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|12 5/8% Senior Subordinated Notes                                                                                                                                                                                     |                                                                                                                                       |                    | 98,260  |              |        |              | 98,055  |         
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|Long-term debt, less current portion                                                                                                                                                                                  |                                                                                                                                       |                    | 57,688  |              |        |              | 14,750  |         
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|Redeemable Preferred Units; 100,000 units authorized, 44,405 and 40,184 units
issued and outstanding at December 31, 2000 and 1999, respectively;
liquidation preference $43,688 and $35,368 at December 31, 2000 and
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      |                                                                                                                                       | 1999, respectively |         |              | 41,660 |              |         |          | 32,539 | 
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|Commitments and contingencies (Note 11)                                                                                                                                                                              
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|Members deficit:                                                                                                                                                                                                    
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Common units; 2,900,000 units authorized 793,890 and 718,000 units issued
and outstanding at December 31, 2000 and 1999, respectively |                    |         | 74,754       |        |              |         | 66,521   |       
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Notes receivable from officers                                                                                                        |                    |         | (1,772       | )      |              |         | (1,400   | )     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                     
|                                                                                                                                                                                                                      | Retained deficit                                                                                                                      |                    |         | (136,607     | )      |              |         | (135,550 | )     
|                                                                                                                                                                                                                      |                                                                                                                                       |                    |         |              |        |              |         |         
|Total members deficit                                                                                                                                                                                                |                                                                                                                                       |                    | (63,625 | )            |        |              | (70,429 | )       
|                                                                                                                                                                                                                      |                                                                                                                                       |                    |         |              |        |              |         |         
|Total liabilities and members deficit                                                                                                                                                                                |                                                                                                                                       | $                  | 155,672 |              |        | $            | 89,416  |         
|                                                                                                                                                                                                                      |                                                                                                                                       |                    |         |              |        |              |         |         

See accompanying notes.

44



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##### Table of Contents



DONJOY, L.L.C.
CONSOLIDATED STATEMENTS OF INCOME

(in thousands)

|                                                                    |                              |   |                          |        |      |   |         |        |  |   |         |        | 
|------------------------------------------------------------------- | ---------------------------- | - | ------------------------ | ------ | ---- | - | ------- | ------ |  | - | ------- | ------ | 
|                                                                    |                              |   | Years Ended December 31,
|                                                                    |                              |   |                         
|                                                                    |                              |   | 2000                     |        | 1999 |   | 1998   
|                                                                    |                              |   |                          |        |      |   |        
|Net revenues                                                        |                              | $ | 147,469                  |        |      | $ | 117,767 |        |  | $ | 104,292 |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Cost of goods sold                                                  |                              |   | 60,178                   |        |      |   | 51,744  |        |  |   | 46,466  |       
|                                                                    |                              |   |                          |        |      |   |         |        |  |   |         |       
|Gross profit                                                        |                              |   | 87,291                   |        |      |   | 66,023  |        |  |   | 57,826  |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Operating expenses:                                                
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Sales and marketing          |   |                          | 42,536 |      |   |         | 30,251 |  |   |         | 28,282 | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | General and administrative   |   |                          | 19,761 |      |   |         | 16,755 |  |   |         | 16,484 | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Research and development     |   |                          | 2,465  |      |   |         | 2,115  |  |   |         | 2,248  | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Merger and integration costs |   |                          | 400    |      |   |         |       |  |   |         |       | 
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Restructuring costs          |   |                          |       |      |   |         |       |  |   |         | 2,467  | 
|                                                                    |                              |   |                          |        |      |   |         |        |  |   |         |       
|Total operating expenses                                            |                              |   | 65,162                   |        |      |   | 49,121  |        |  |   | 49,481  |       
|                                                                    |                              |   |                          |        |      |   |         |        |  |   |         |       
|Income from operations                                              |                              |   | 22,129                   |        |      |   | 16,902  |        |  |   | 8,345   |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Interest expense                                                    |                              |   | (16,958                  | )      |      |   | (7,568  | )      |  |   |        |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Interest income                                                     |                              |   | 437                      |        |      |   | 181     |        |  |   |        |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Discontinued acquisition costs                                      |                              |   | (449                     | )      |      |   |        |        |  |   |        |       
|                                                                    |                              |   |                          |        |      |   |         |        |  |   |         |       
|Income before income taxes                                          |                              |   | 5,159                    |        |      |   | 9,515   |        |  |   | 8,345   |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Provision for income taxes                                          |                              |   |                         |        |      |   | 2,387   |        |  |   | 3,394   |       
|                                                                    |                              |   |                          |        |      |   |         |        |  |   |         |       
|Net income and comprehensive net income                             |                              |   | 5,159                    |        |      |   | 7,128   |        |  |   | 4,951   |       
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Less: Preferred unit dividends and accretion
of preferred unit fees |                              |   | (5,415                   | )      |      |   | (2,343  | )      |  |   | N/A     |       
|                                                                    |                              |   |                          |        |      |   |         |        |  |   |         |       
|Net income (loss) available to members                              |                              | $ | (256                     | )      |      | $ | 4,785   |        |  |   | N/A     |       
|                                                                    |                              |   |                          |        |      |   |         |        |  |   |         |       

See accompanying notes.

45



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##### Table of Contents



DONJOY, L.L.C.
CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS EQUITY (DEFICIT)

(in thousands, except unit information)

|                                                                                     |  |              |            |            |  |               |         |   |  |       |        |  
|------------------------------------------------------------------------------------ |  | ------------ | ---------- | ---------- |  | ------------- | ------- | - |  | ----- | ------ | -
|                                                                                     |  |              |            |            |  |               |         |   |  | Notes
|                                                                                     |  | Common Units |            | Receivable
|                                                                                     |  | Units        |            | Amount     |  | from Officers
|                                                                                     |  |              |            |            |  |              
|Balance at December 31, 1997                                                         |  |              |           |            |  | $             |        |   |  | $     |       |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net income                                                                           |  |              |           |            |  |               |        |   |  |       |       |  
|                                                                                     |  |              |            |            |  |               |         |   |  |       |        |  
|Balance at December 31, 1998                                                         |  |              |           |            |  |               |        |   |  |       |       |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Capital contribution by Smith & Nephew, Inc.
in connection with the Recapitalization |  |              | 2,054,000  |            |  |               | 64,117  |   |  |       |       |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Issuance of common units at $100 per unit,
net of transaction fees of $1,563         |  |              | 645,500    |            |  |               | 62,987  |   |  |       |       |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Purchase of common units from Smith &
Nephew, Inc.                                   |  |              | (2,000,000 | )          |  |               | (62,433 | ) |  |       |       |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Issuance of common units at $100 per unit,
in exchange for cash and notes receivable |  |              | 18,500     |            |  |               | 1,850   |   |  |       | (1,400 | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Preferred unit dividends and accretion
of preferred unit fees                        |  |              |           |            |  |               |        |   |  |       |       |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net income (excluding $196 allocated to
preferred unit holders)                      |  |              |           |            |  |               |        |   |  |       |       |  
|                                                                                     |  |              |            |            |  |               |         |   |  |       |        |  
|Balance at December 31, 1999                                                         |  |              | 718,000    |            |  |               | 66,521  |   |  |       | (1,400 | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Issuance of common units at $109 per unit,
in exchange for cash and notes receivable |  |              | 75,890     |            |  |               | 8,272   |   |  |       | (174   | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Note receivable issued to Management for
purchase of common units                    |  |              |           |            |  |               |        |   |  |       | (124   | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Transfer of interest receivable to
note receivable                                   |  |              |           |            |  |               |        |   |  |       | (74    | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Transaction fees in connection with
the Recapitalization                             |  |              |           |            |  |               | (39     | ) |  |       |       |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Stock options granted for services                                                   |  |              |           |            |  |               |        |   |  |       |       |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Tax distributions to preferred unit holders                                          |  |              |           |            |  |               |        |   |  |       |       |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Preferred unit dividends and accretion
of preferred unit fees                        |  |              |           |            |  |               |        |   |  |       |       |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net income (excluding $274 allocated to
preferred unit holders)                      |  |              |           |            |  |               |        |   |  |       |       |  
|                                                                                     |  |              |            |            |  |               |         |   |  |       |        |  
|Balance at December 31, 2000                                                         |  |              | 793,890    |            |  | $             | 74,754  |   |  | $     | (1,772 | )
|                                                                                     |  |              |            |            |  |               |         |   |  |       |        |  

[Additional columns below]

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

|                                                                                     |  |                    |          |                  |  |   |          |  
|------------------------------------------------------------------------------------ |  | ------------------ | -------- | ---------------- |  | - | -------- | -
|                                                                                     |  | Retained           |          | Total Members'  
|                                                                                     |  | Earnings (Deficit) |          | Equity (Deficit)
|                                                                                     |  |                    |          |                 
|Balance at December 31, 1997                                                         |  | $                  | 7,881    |                  |  | $ | 7,881    |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net income                                                                           |  |                    | 4,951    |                  |  |   | 4,951    |  
|                                                                                     |  |                    |          |                  |  |   |          |  
|Balance at December 31, 1998                                                         |  |                    | 12,832   |                  |  |   | 12,832   |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Capital contribution by Smith & Nephew, Inc.
in connection with the Recapitalization |  |                    | (16,264  | )                |  |   | 47,853   |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Issuance of common units at $100 per unit,
net of transaction fees of $1,563         |  |                    |         |                  |  |   | 62,987   |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Purchase of common units from Smith &
Nephew, Inc.                                   |  |                    | (136,707 | )                |  |   | (199,140 | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Issuance of common units at $100 per unit,
in exchange for cash and notes receivable |  |                    |         |                  |  |   | 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                                                         |  |                    | (135,550 | )                |  |   | (70,429  | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Issuance of common units at $109 per unit,
in exchange for cash and notes receivable |  |                    |         |                  |  |   | 8,098    |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Note receivable issued to Management for
purchase of common units                    |  |                    |         |                  |  |   | (124     | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Transfer of interest receivable to
note receivable                                   |  |                    |         |                  |  |   | (74      | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Transaction fees in connection with
the Recapitalization                             |  |                    |         |                  |  |   | (39      | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Stock options granted for services                                                   |  |                    | 36       |                  |  |   | 36       |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Tax distributions to preferred unit holders                                          |  |                    | (563     | )                |  |   | (563     | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Preferred unit dividends and accretion
of preferred unit fees                        |  |                    | (5,415   | )                |  |   | (5,415   | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net income (excluding $274 allocated to
preferred unit holders)                      |  |                    | 4,885    |                  |  |   | 4,885    |  
|                                                                                     |  |                    |          |                  |  |   |          |  
|Balance at December 31, 2000                                                         |  | $                  | (136,607 | )                |  | $ | (63,625  | )
|                                                                                     |  |                    |          |                  |  |   |          |  

See accompanying notes.

46



---



##### Table of Contents



DONJOY, L.L.C.
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

|                                                                                  |                                                                                                              |                           |         |                          |         |      |          |        |        |   |        |       |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ------------------------- | ------- | ------------------------ | ------- | ---- | -------- | ------ | ------ | - | ------ | ----- | ------ | -
|                                                                                  |                                                                                                              |                           |         | Years Ended December 31,
|                                                                                  |                                                                                                              |                           |         |                         
|                                                                                  |                                                                                                              |                           |         | 2000                     |         | 1999 |          | 1998  
|                                                                                  |                                                                                                              |                           |         |                          |         |      |          |       
|Operating activities                                                             
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net income                                                                        |                                                                                                              | $                         | 5,159   |                          |         | $    | 7,128    |        |        | $ | 4,951  |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Adjustments to reconcile net income to net cash provided by
operating activities:
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Depreciation and amortization                                                                                |                           |         | 6,365                    |         |      |          | 4,952  |        |   |        | 4,853 |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Amortization of debt issuance costs and discount on Senior
Subordinated Notes                                |                           |         | 1,082                    |         |      |          | 510    |        |   |        |      |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Step-up to fair value of acquired inventory                                                                  |                           |         | 268                      |         |      |          |       |        |   |        |      |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Stock options granted for services                                                                           |                           |         | 36                       |         |      |          |       |        |   |        |      |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Restructuring costs                                                                                          |                           |         |                         |         |      |          |       |        |   |        | 2,467 |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Merger and integration costs                                                                                 |                           |         | 400                      |         |      |          |       |        |   |        |      |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Changes in operating assets and liabilities:                                                                
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                                              | Accounts receivable       |         |                          | (13,092 | )    |          |        | (1,564 | ) |        |       | (3,816 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                                              | Inventories               |         |                          | (2,576  | )    |          |        | 704    |   |        |       | (2,760 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                                              | Other current assets      |         |                          | (2,427  | )    |          |        | (106   | ) |        |       | (97    | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                                              | Accounts payable          |         |                          | 2,571   |      |          |        | (893   | ) |        |       | 495    |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                                              | Accrued interest          |         |                          | 160     |      |          |        | 526    |   |        |       |       |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                                              | Accrued compensation      |         |                          | 494     |      |          |        | 1,057  |   |        |       | (174   | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                                              | Accrued commissions       |         |                          | 490     |      |          |        | (237   | ) |        |       | (377   | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                                              | Income taxes              |         |                          |        |      |          |        | 2,516  |   |        |       | (744   | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                                              | Restructuring reserve     |         |                          |        |      |          |        | (339   | ) |        |       | (1,197 | )
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  |                                                                                                              | Other accrued liabilities |         |                          | 2,299   |      |          |        | 1,811  |   |        |       | 147    |  
|                                                                                  |                                                                                                              |                           |         |                          |         |      |          |        |        |   |        |      
|Net cash provided by operating activities                                         |                                                                                                              |                           | 1,229   |                          |         |      | 16,065   |        |        |   | 3,748  |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Investing activities                                                             
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchases of property, plant and equipment                                        |                                                                                                              |                           | (6,522  | )                        |         |      | (2,502   | )      |        |   | (3,189 | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from assets held for sale                                                |                                                                                                              |                           | 126     |                          |         |      |         |       
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Purchase of intangible assets                                                     |                                                                                                              |                           | (1,200  | )                        |         |      | (2,204   | )      |        |   | (960   | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Investment in Orthotech                                                           |                                                                                                              |                           | (49,019 | )                        |         |      |         |        |        |   |       |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Other assets                                                                      |                                                                                                              |                           | (400    | )                        |         |      | (70      | )      |        |   | 100    |      
|                                                                                  |                                                                                                              |                           |         |                          |         |      |          |        |        |   |        |      
|Net cash used in investing activities                                             |                                                                                                              |                           | (57,015 | )                        |         |      | (4,776   | )      |        |   | (4,049 | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Financing activities                                                             
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net proceeds from Senior Subordinated Notes                                       |                                                                                                              |                           |        |                          |         |      | 97,953   |        |        |   |       |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Proceeds from long-term debt                                                      |                                                                                                              |                           | 44,600  |                          |         |      | 15,500   |        |        |   |       |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Repayment of long-term debt                                                       |                                                                                                              |                           | (888    | )                        |         |      | (250     | )      |        |   |       |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Distributions                                                                     |                                                                                                              |                           | (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 units                                        |                                                                                                              |                           | 8,059   |                          |         |      | 63,437   |        |        |   |       |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Net proceeds from issuance of preferred units                                     |                                                                                                              |                           | 3,432   |                          |         |      | 30,000   |        |        |   |       |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Note receivable issued for purchase of common units                               |                                                                                                              |                           | (124    | )                        |         |      |         |        |        |   |       |      
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Intercompany obligations                                                          |                                                                                                              |                           |        |                          |         |      | (6,388   | )      |        |   | 200    |      
|                                                                                  |                                                                                                              |                           |         |                          |         |      |          |        |        |   |        |      
|Net cash (used in) provided by financing activities                               |                                                                                                              |                           | 53,965  |                          |         |      | (6,171   | )      |        |   | 200    |      
|                                                                                  |                                                                                                              |                           |         |                          |         |      |          |        |        |   |        |      
|Net increase (decrease) in cash                                                   |                                                                                                              |                           | (1,821  | )                        |         |      | 5,118    |        |        |   | (101   | )    
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Cash at beginning of period                                                       |                                                                                                              |                           | 5,927   |                          |         |      | 809      |        |        |   | 910    |      
|                                                                                  |                                                                                                              |                           |         |                          |         |      |          |        |        |   |        |      
|Cash at end of period                                                             |                                                                                                              | $                         | 4,106   |                          |         | $    | 5,927    |        |        | $ | 809    |      
|                                                                                  |                                                                                                              |                           |         |                          |         |      |          |        |        |   |        |      
|Supplemental disclosure of cash flow information:                                
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                  | Interest paid                                                                                                |                           | $       | 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                          |                           | $       | 5,415                    |         |      | $        | 2,343  |        |   | $      |      |       
|                                                                                  |                                                                                                              |                           |         |                          |         |      |          |        |        |   |        |      
|                                                                                  | Common units issued in exchange for notes receivable and transfer
of interest receivable to notes receivable |                           | $       | 248                      |         |      | $        | 1,400  |        |   | $      |      |       
|                                                                                  |                                                                                                              |                           |         |                          |         |      |          |        |        |   |        |      

See accompanying notes

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DONJOY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

1. Organization and Summary of Significant Accounting Policies

DonJoy, L.L.C. (DonJoy), through its subsidiary dj Orthopedics, LLC (dj
Ortho) and dj Orthos subsidiaries (collectively the Company), designs,
manufactures and markets various lines of external recovery products and
accessories and is the successor to a corporation established in December 1982
as DonJoy, Inc. Donjoy, Inc. was acquired by Smith & Nephew, Inc. (formerly
Smith & Nephew Consolidated, Inc., the Former Parent) effective September 18,
1987 through a purchase of all the then outstanding shares of 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 into DonJoy, L.L.C., a newly formed Delaware limited liability
company, and became the sole member of the new entity.

DonJoy, L.L.C. will be dissolved on December 31, 2030, unless prior to that
date certain events occur as defined in the Third Amended and Restated
Operating Agreement dated as of July 7, 2000. The debts, obligations and
liabilities of the Company, whether arising in contract, tort or otherwise,
shall be solely debts, obligations and liabilities of the Company, and no
member or manager of DonJoy, L.L.C. shall be obligated personally for any such
debt, obligation or liability of the Company solely by reason of being a member
or manager.

Recapitalization

On June 30, 1999, DonJoy consummated a $215.3 million recapitalization (the
Recapitalization). In the Recapitalization, new investors, including Chase DJ
Partners, L.L.C. (CDP) and affiliates of CDP, invested new capital of $94.6
million in DonJoy. In addition, certain members of management invested net
equity of $0.5 million, by purchasing $1.8 million in equity which was financed
in part by $1.4 million in interest-bearing, full recourse loans from DonJoy.
The Former Parent retained 54,000 common units, which represented approximately
7.3% of total units in DonJoy then outstanding. In connection with the
recapitalization transactions, DonJoy established the dj Ortho and DJ
Orthopedics Capital Corporation (DJ Capital). 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 (the Notes) issued by dj Ortho and DJ Capital, as
co-issuers, and the remainder by funds borrowed by dj Ortho under a senior
credit facility. The Notes are fully and unconditionally guaranteed by DonJoy.
dj Ortho is a wholly-owned subsidiary of DonJoy and represents substantially
all of the revenues and net income of DonJoy. DJ Capital is a wholly-owned
subsidiary of dj Ortho, has no significant assets or operations and was formed
solely for the purpose of being a co-issuer of the Notes (see Note 8).

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 92.7% of members equity from the Former Parent,
and approximately $8.8 million of costs and fees paid in association with the
Recapitalization.

In accordance 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
CDP and certain members of management for $5.9 million. CDP 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 loans from DonJoy,
evidenced by full recourse promissory notes. As a result of this transaction,
Smith and 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.

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 currently offered by the
Company.

Basis of Presentation

The accompanying consolidated financial statements present the historical
consolidated financial position and results of operations of the Company and
include the accounts of dj Ortho and the accounts of its wholly-owned Mexican
subsidiary that manufactures a portion of dj Orthos products under Mexicos
maquiladora program. The maquiladora program allows foreign manufacturers to
take advantage of Mexicos lower cost production sharing capabilities. All
intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at

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the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.

Cash Equivalents

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

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, is 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, 2000.                                               

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.

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

Computer Software Costs

In 1999, 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 2000 and 1999, the Company capitalized $3.9
million and $1.1 million, respectively, related to the acquisition and
implementation of its new enterprise resource planning system. Once the system
is fully implemented, the company will amortize the costs over three years.

Inventories

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

Revenue Recognition

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 goal 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. Estimated returns are accrued 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 warranty costs are accrued in the period sales are
recognized.

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 issue
concluded that all amounts billed to a customer in a sale transaction represent
the fees earned for the goods provided and, accordingly, should be included
with revenues in the statement of income. The Company has implemented Issue
00-10 in the fourth quarter of 2000. As a result, revenues in 2000, 1999 and
1998 have been increased by the amounts billed to customers for freight of $4.4
million, $3.5 million and $3.5 million, respectively, which was previously
offset against shipping and handling costs which are part of sales and
marketing expenses. Shipping and handling costs included as part of sales and
marketing expenses were $7.6 million, $5.6 million and $5.6 million for
December 31, 2000, 1999 and 1998, respectively.

Advertising Expense

The cost of advertising is expensed as incurred. The Company incurred
$252,000, $152,000 and $122,000 in advertising costs for the years ended
December 31, 2000, 1999 and 1998.

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Foreign Currency Translation

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

Concentration of Credit Risk

dj Ortho sells the majority of its products in the United States through 30
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 12%, 16% and
18% of the Companys net revenues in 2000, 1999 and 1998, 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, 2000, The Company had no individual
customer, supplier or distributor which accounted for 10% or more of total
annual revenues.

Stock-Based Compensation

As permitted under Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation (FAS 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. Adoption of FAS 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 FAS 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.

Income Taxes

The Former Parent files a consolidated federal income tax return which includes
all of its eligible subsidiaries and divisions, which prior to the
Recapitalization in June 1999 included the Company. The provision for income
taxes has been presented assuming the Company filed a separate federal income
tax return. The Recapitalization had no impact on the historical basis of the
Companys assets and liabilities as reflected in its consolidated financial
statements except for the elimination of the restructuring reserve and
intercompany accounts. However, as a result of the Recapitalization, for
federal income tax purposes, the Company recorded an increase in the tax basis
of its inventory, fixed and intangible assets in an amount approximately equal
to the taxable gain recognized by Smith & Nephew on the sale of its interest in
DonJoy and, for tax purposes, the Company is 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 and 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 recorded by the Company under
purchase accounting (See Note 2).

Prior to the Recapitalization, the Companys results of operations include a
provision for income taxes assuming that the Company had filed a separate
federal income tax return. As a limited liability company, neither DonJoy nor
dj Ortho is subject to income taxes. Instead, DonJoys earnings will be
allocated to its members and included in the taxable income of its members.
The indenture and the credit facility permit dj Ortho to make distributions to
DonJoy in certain amounts to allow DonJoy to make distributions to its members
to pay income taxes in respect of their allocable share of taxable income of
DonJoy and its subsidiaries, including dj Ortho.

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. Comprehensive income for the years ended December 31, 2000, 1999 and
1998 did not differ from reported net income.

Recently Issued Accounting Standards

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, (FAS 133)
which establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement will require the recognition
of all derivatives on the Companys balance sheet at fair value. In July
1999,

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the FASB issued SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities  Deferral of the Effective Date of FASB Statement No. 133
which defers the adoption requirement to the first quarter of 2001. The impact
on the Companys financial statements is not expected to be material.

Reclassifications

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

2. Acquisition

On July 7, 2000, the Company completed the Orthotech Acquisition.
Approximately $49.4 million in cash was required to finance the Orthotech
Acquisition, including approximately $3.0 million for transaction fees and
expenses ($0.4 million of which relates to debt issuance costs). The sources
of funds for the Orthotech Acquisition consisted of:



| |  | The sale of common units to CDP 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.                                                                                                                                             

The sources and uses 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 CDP        |  |        | 8.1  | 
|                                    
|                                    
|                                    
|                                    
|Common unit investment by Management |  |        | 0.2  | 
|                                     |  |        |      | 
|                                     |  | $      | 49.6 | 
|                                     |  |        |      | 
|Uses                                
|                                    
|                                    
|                                    
|                                    
|Cash to DePuy Orthopeadic            |  | $      | 46.4 | 
|                                    
|                                    
|                                    
|                                    
|Debt issuance costs                  |  |        | 0.4  | 
|                                    
|                                    
|                                    
|                                    
|Transaction fees and costs           |  |        | 2.6  | 
|                                    
|                                    
|                                    
|                                    
|Management promissory notes          |  |        | 0.2  | 
|                                     |  |        |      | 
|                                     |  | $      | 49.6 | 
|                                     |  |        |      | 

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 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 have been reduced by 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.

51



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The accompanying consolidated statements of income reflect the operating
results of Orthotech since the date of acquisition. 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 |  | $            | 171,397 |              |  | $ | 164,487 | 
|            
|            
|            
|            
|Net income   |  | $            | 4,168   |              |  | $ | 6,770   | 

3. Financial Statement Information

Inventories

Inventories consist of the following (in thousands):

|                                     |  |              |        |              |  |   |        |  
|------------------------------------ |  | ------------ | ------ | ------------ |  | - | ------ | -
|                                     |  | December 31, |        | December 31,
|                                     |  | 2000         |        | 1999        
|                                     |  |              |        |             
|Raw materials                        |  | $            | 9,074  |              |  | $ | 6,392  |  
|                                    
|                                    
|                                    
|                                    
|Work-in-progress                     |  |              | 1,572  |              |  |   | 1,446  |  
|                                    
|                                    
|                                    
|                                    
|Finished goods                       |  |              | 11,638 |              |  |   | 6,817  |  
|                                     |  |              |        |              |  |   |        |  
|                                     |  |              | 22,284 |              |  |   | 14,655 |  
|                                    
|                                    
|                                    
|                                    
|Less reserve for excess and obsolete |  |              | (3,774 | )            |  |   | (991   | )
|                                     |  |              |        |              |  |   |        |  
|                                     |  | $            | 18,510 |              |  | $ | 13,664 |  
|                                     |  |              |        |              |  |   |        |  

The reserve for excess and obsolete inventory as of December 31, 2000 includes
$2.2 million relating to the inventory acquired in the Orthotech Acquisition.
The reserve recorded upon the acquisition totaled $5.1 million of which $2.9
million was utilized in the year ended December 31, 2000.

Property, Plant and Equipment

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

|                                                |  |              |         |              |  |   |         |  
|----------------------------------------------- |  | ------------ | ------- | ------------ |  | - | ------- | -
|                                                |  | December 31, |         | December 31,
|                                                |  | 2000         |         | 1999        
|                                                |  |              |         |             
|Buildings and leasehold improvements            |  | $            | 3,676   |              |  | $ | 3,577   |  
|                                               
|                                               
|                                               
|                                               
|Office furniture, fixtures, equipment and other |  |              | 19,025  |              |  |   | 15,817  |  
|                                               
|                                               
|                                               
|                                               
|Construction in progress                        |  |              | 5,804   |              |  |   | 1,297   |  
|                                                |  |              |         |              |  |   |         |  
|                                                |  |              | 28,505  |              |  |   | 20,691  |  
|                                               
|                                               
|                                               
|                                               
|Less accumulated depreciation and amortization  |  |              | (15,720 | )            |  |   | (13,394 | )
|                                                |  |              |         |              |  |   |         |  
|                                                |  | $            | 12,785  |              |  | $ | 7,297   |  
|                                                |  |              |         |              |  |   |         |  

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, and the Companys acquisition of Orthotech in 2000.
The Company acquired a license in 1999 related to the distribution of the
PainBuster products. In addition, the Company re-acquired
distribution rights in 2000. Intangible assets consist of the following (in
thousands):

|                               |  |            |       |              |  |      |         |   |  |   |         |  
|------------------------------ |  | ---------- | ----- | ------------ |  | ---- | ------- | - |  | - | ------- | -
|                               |  | Useful     |       | December 31,
|                               |  | Life       |       |             
|                               |  | (in years) |       | 2000         |  | 1999
|                               |  |            |       |              |  |     
|Goodwill                       |  |            | 20    |              |  | $    | 61,365  |   |  | $ | 24,742  |  
|                              
|                              
|                              
|                              
|Patented technology            |  |            | 5-20  |              |  |      | 14,437  |   |  |   | 14,437  |  
|                              
|                              
|                              
|                              
|Customer base                  |  |            | 15-20 |              |  |      | 20,000  |   |  |   | 11,600  |  
|                              
|                              
|                              
|                              
|Licensing agreements           |  |            | 5     |              |  |      | 2,000   |   |  |   | 2,000   |  
|                              
|                              
|                              
|                              
|Assembled workforce            |  |            | 3-5   |              |  |      | 287     |   |  |   | 250     |  
|                              
|                              
|                              
|                              
|Other                          |  |            | 5-20  |              |  |      | 1,599   |   |  |   | 399     |  
|                               |  |            |       |              |  |      |         |   |  |   |         |  
|                               |  |            |       |              |  |      | 99,688  |   |  |   | 53,428  |  
|                               |  |            |       |              |  |      |         |   |  |   |         |  
|Less: accumulated amortization |  |            |       |              |  |      | (24,269 | ) |  |   | (20,233 | )
|                               |  |            |       |              |  |      |         |   |  |   |         |  
|                               |  |            |       |              |  | $    | 75,419  |   |  | $ | 33,195  |  
|                               |  |            |       |              |  |      |         |   |  |   |         |  

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Other Accrued Liabilities

Other accrued liabilities consist of (in thousands):

|                                    |  |              |       |              |  |   |       | 
|----------------------------------- |  | ------------ | ----- | ------------ |  | - | ----- | 
|                                    |  | December 31, |       | December 31,
|                                    |  | 2000         |       | 1999        
|                                    |  |              |       |             
|Accrued
cost of distribution rights |  | $            | 1,050 |              |  | $ |      | 
|                                   
|                                   
|                                   
|                                   
|Accrued returns                     |  |              | 618   |              |  |   | 397   | 
|                                   
|                                   
|                                   
|                                   
|Accrued rebate expense              |  |              | 541   |              |  |   | 356   | 
|                                   
|                                   
|                                   
|                                   
|Accrued warranty expense            |  |              | 305   |              |  |   | 259   | 
|                                   
|                                   
|                                   
|                                   
|Other accruals                      |  |              | 3,852 |              |  |   | 2,655 | 
|                                    |  |              |       |              |  |   |       | 
|                                    |  | $            | 6,366 |              |  | $ | 3,667 | 
|                                    |  |              |       |              |  |   |       | 

4. Financing Arrangements

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

|                                                                                                       |  |              |         |              |  |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ------------ | ------- | ------------ |  | - | ------- | -
|                                                                                                       |  | December 31, |         | December 31,
|                                                                                                       |  | 2000         |         | 1999        
|                                                                                                       |  |              |         |             
|12-5/8% Senior Subordinated Notes due 2009, net of $1,740 of unamortized
discount at December 31, 2000 |  | $            | 98,260  |              |  | $ | 98,055  |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Senior Credit Facility:                                                                               
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Term loans due 2005, interest rates ranging from 9.18% to 9.813%
at December 31, 2000                  |  |              | 38,362  |              |  |   | 15,250  |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Revolving credit facility, interest rates ranging from 8.875% to 9.00%
at December 31, 2000            |  |              | 20,600  |              |  |   |        |  
|                                                                                                       |  |              |         |              |  |   |         |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |  |              | 157,222 |              |  |   | 113,305 |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Current portion of long-term debt                                                                      |  |              | (1,274  | )            |  |   | (500    | )
|                                                                                                       |  |              |         |              |  |   |         |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |  |              | 155,948 |              |  |   | 112,805 |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Less: Senior Subordinated Notes (see above)                                                            |  |              | (98,260 | )            |  |   | (98,055 | )
|                                                                                                       |  |              |         |              |  |   |         |  
|Long-term debt net of current portion                                                                  |  | $            | 57,688  |              |  | $ | 14,750  |  
|                                                                                                       |  |              |         |              |  |   |         |  

12-5/8% Senior Subordinated Notes Due 2009

On June 30, 1999, dj
Ortho issued $100.0 million of 12-5/8% Senior Subordinated
Notes due 2009 (the Notes) to various investors in connection with the
financing of the Recapitalization. The Notes were issued at a discount of $2.0 million
which 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, 2000, the Company was in compliance with all covenants.

Guarantees; Co-Issuers. The Notes are guaranteed by DonJoy and co-issued by dj
Ortho and DJ Capital, but are not guaranteed by dj Orthopedics, LLC de Mexico
de S.A. de C.V., dj Orthos only existing subsidiary (other than DJ Capital).

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

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

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Amended Credit Facility

In connection with the Recapitalization, dj Ortho entered into a Credit
Agreement with First Union National Bank (First Union) and the Chase
Manhattan Bank (Chase) and other lenders. 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, 2000, dj Ortho has borrowed $20.6
million under the revolving credit facility, primarily to consummate and fund
working capital needs of the Orthotech Acquisition. 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 (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 2001 through its maturity in 2005 (in thousands):

|      |  |   |        | 
|----- |  | - | ------ | 
|2001  |  | $ | 1,274  | 
|     
|     
|     
|     
|2002  |  |   | 1,274  | 
|     
|     
|     
|     
|2003  |  |   | 1,274  | 
|     
|     
|     
|     
|2004  |  |   | 17,202 | 
|     
|     
|     
|     
|2005  |  |   | 17,338 | 
|      |  |   |        | 
|Total |  | $ | 38,362 | 
|      |  |   |        | 

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). dj Ortho had no excess cash flow at
December 31, 2000 or 1999. In addition, the term loan is subject to mandatory
prepayments in an amount equal to (a) 100% of the net cash proceeds of certain
equity and debt issuances by DonJoy, dj Ortho or any of its subsidiaries and
(b) 100% of the net cash proceeds of certain asset sales or other dispositions
of property by DonJoy, dj Ortho or any of its subsidiaries, in each case
subject to certain exceptions. No mandatory prepayments were required by dj
Ortho at December 31, 2000, or 1999.

Security; Guarantees. The obligations of dj Ortho under the Amended Credit
Agreement are irrevocably guaranteed, jointly and severally, by DonJoy, DJ
Capital and future subsidiaries. In addition, the Amended Credit Agreement and
the guarantees thereunder are secured by substantially all the assets 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 distributions); (vi) redeem or repurchase membership interests or capital
stock, create liens on assets, make investments, loans or advances, make
acquisitions; (vii) engage in mergers or consolidations; (viii) change the
business conducted by dj Ortho and its subsidiaries; (ix) make 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 the 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, 2000.

5. Common and Preferred Units

DonJoy is 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
preferred units were issued and outstanding, and 17% of the common units on a
fully diluted basis have

54



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been reserved for issuance to officers, directors,
employees, independent consultants and advisors of the Company or any
subsidiary thereof pursuant to the Second Amended and Restated 1999 Option
Plan.

In accordance 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
CDP and certain members of management for $5.9 million. CDP 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 loans from DonJoy,
evidenced by full recourse promissory notes with market interest rates. As a
result of this transaction, dj Ortho no longer reflects any intercompany
transactions in its consolidated financial statements. The related party
revenues were $4.6 million in 2000, $8.3 million in 1999 and $10.7 million in
1998.

In connection with the unit purchase agreement, DonJoy 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 CDP 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 units of Redeemable Preferred Units were received from
existing Redeemable Preferred Unit holders of which the net proceeds totaled
$3.4 million (excluding preferred unit fees).

The Redeemable Preferred Units accrue a cumulative quarterly preferred return
at a fixed rate of 14.0% per annum, subject to increase to 16.0% per annum upon
the occurrence of certain events of non-compliance. Total dividends for the
year ended December 31, 2000 were $5.3 million. Payment of the preferred
dividends is made at the discretion of the Board of Managers. The proceeds
received from the sale of the Redeemable Preferred Units are net of $1.8
million of preferred unit fees paid to J.P. Morgan Partners (23A SBIC), LLC
(formerly CB Capital Investors, LLC), and DJ Investment, LLC (formerly First
Union Capital Partners, LLC). These Redeemable Preferred Unit fees are being
accreted over a period of 114 months, beginning July 1, 1999 and ending on
December 31, 2008. The accretion of these Redeemable Preferred Units for the
year ended December 31, 2000 was $0.2 million and are included in dividends. In
addition to the rights with respect to the preferred return (including related
tax distributions and distributions to the holders of preferred units of their
original capital investment), the Redeemable Preferred Units will share ratably
with the common units in any distributions (including tax distributions and
upon liquidation) made by DonJoy in respect of common units (the Redeemable
Preferred Units Participating Interest).

The Redeemable Preferred Units are subject to mandatory redemption on December 31,
2009 and may be redeemed at DonJoys option at any time. Upon a change of
control, holders of Redeemable Preferred Units will have the right, subject to
certain conditions, to require DonJoy to redeem their Redeemable Preferred
Units (including the Redeemable Preferred Units Participating Interest). In
addition, at any time after June 30, 2005 holders will have the right, subject
to certain conditions, to require DonJoy to redeem their Redeemable Preferred
Units Participating Interest. Unless equity proceeds or other funds are
available to DonJoy for the purpose, the ability of DonJoy to make any of the
foregoing payments will be subject to receipt of distributions from dj Ortho in
amounts sufficient to make such payments and such distributions will be subject
to the restrictions contained in the Amended Credit Agreement and the
Indenture.

Upon the occurrence of any Liquidation Event (as defined in the Third Amended
and Restated Operating Agreement of DonJoy, L.L.C. dated July 7, 2000), the
holders of Redeemable Preferred Units are entitled to receive payment, before
any payments shall be made to the holders of common units, equal to the
original costs of such Redeemable Preferred Unit plus any unpaid cumulative
dividends. In addition, DonJoy has the option to redeem the Redeemable
Preferred Units prior to the redemption date based upon the following percents
which would be applied to the total of the original costs of such Redeemable
Preferred Unit plus any unpaid cumulative dividends:

|                                              |  |  |     |  
|--------------------------------------------- |  |  | --- | -
|Prior to June 30, 2000                        |  |  | 105 | %
|                                             
|                                             
|                                             
|                                             
|From June 30, 2000 and prior to June 30, 2001 |  |  | 104 | %
|                                             
|                                             
|                                             
|                                             
|From June 30, 2001 and prior to June 30, 2002 |  |  | 103 | %
|                                             
|                                             
|                                             
|                                             
|From June 30, 2002 and prior to June 30, 2003 |  |  | 102 | %
|                                             
|                                             
|                                             
|                                             
|From June 30, 2003 and prior to June 30, 2004 |  |  | 101 | %
|                                             
|                                             
|                                             
|                                             
|On or after June 30, 2004                     |  |  | 100 | %

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

Tax Distributions.The indenture and the credit facility permit dj Ortho to
make distributions to DonJoy in certain amounts to allow DonJoy to make
distributions to its members to pay income taxes in respect of their allocable
share of the taxable income of DonJoy and its subsidiaries including dj Ortho.

Unit Options

Under DonJoy, L.L.C.s Second Amended and Restated 1999 Option Plan, 166,799
common units are reserved for issuance upon exercise of options granted or to
be granted under the plan. The plan is administered by the Compensation
Committee appointed from time to time by the Board of Managers. The plan
expires on August 19, 2015 unless earlier terminated by the Board of Managers.
The plan provides for the grant of nonqualified options to officers, directors,
and employees of, and independent consultants and advisors to, the Company.

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.                                                                                           

As of December 31, 2000, 14,140 units issued under this plan were exercisable
and 17,959 units were available for future grant under the option plan. The
following table summarizes option activity through December 31, 2000:

|                                    |  |          |         |          |  |           |             |  |  |         
|----------------------------------- |  | -------- | ------- | -------- |  | --------- | ----------- |  |  | --------
|                                    |  |          |         |          |  |           |             |  |  | Weighted
|                                    |  |          |         |          |  |           |             |  |  | Average 
|                                    |  |          |         |          |  |           |             |  |  | Exercise
|                                    |  | Number   |         | Price    |  | Price per
|                                    |  | of Units |         | per Unit |  | Unit     
|                                    |  |          |         |          |  |          
|Outstanding as of December 31, 1998 |  |          |        |          |  | $         |            |  |  | $       
|                                   
|                                   
|                                   
|                                   
|Granted                             |  |          | 120,512 |          |  | $         | 100         |  |  | $       
|                                   
|                                   
|                                   
|                                   
|Exercised                           |  |          |        |          |  |           |            |  |  |         
|                                   
|                                   
|                                   
|                                   
|Cancelled                           |  |          |        |          |  |           |            |  |  |         
|                                    |  |          |         |         
|Outstanding as of December 31, 1999 |  |          | 120,512 |          |  | $         | 100         |  |  | $       
|                                   
|                                   
|                                   
|                                   
|Granted                             |  |          | 28,328  |          |  | $         | 100 to $109 |  |  | $       
|                                   
|                                   
|                                   
|                                   
|Exercised                           |  |          |        |          |  |           |            |  |  |         
|                                   
|                                   
|                                   
|                                   
|Cancelled                           |  |          |        |          |  |           |            |  |  |         
|                                    |  |          |         |         
|Outstanding at December 31, 2000    |  |          | 148,840 |          |  | $         | 100 to $109 |  |  | $       
|                                    |  |          |         |         

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

|         |  |                     |         |                     |  |          |       |              |  |          |     |  |  |  |        |  |  |   |     | 
|-------- |  | ------------------- | ------- | ------------------- |  | -------- | ----- | ------------ |  | -------- | --- |  |  |  | ------ |  |  | - | --- | 
|         |  | Options Outstanding |         | Options Exercisable
|         |  |                     |         |                    
|         |  | Number              |         | Weighted            |  |          |       |              |  | Number  
|         |  | Outstanding         |         | Average             |  | Weighted |       | Exercisable  |  | Weighted
|Range of |  | as of               |         | Remaining           |  | Average  |       | as of        |  | Average 
|Exercise |  | December 31,        |         | Life in             |  | Exercise |       | December 31, |  | Exercise
|Prices   |  | 2000                |         | Years               |  | Price    |       | 2000         |  | Price   
|         |  |                     |         |                     |  |          |       |              |  |         
|$100     |  |                     | 136,540 |                     |  |          | 13.60 |              |  | $        | 100 |  |  |  | 14,040 |  |  | $ | 100 | 
|        
|        
|        
|        
|$109     |  |                     | 12,300  |                     |  |          | 14.60 |              |  | $        | 109 |  |  |  |       |  |  | $ | 109 | 

Pro forma information regarding net income is required by SFAS 123 and has been
determined as if the Company had accounted for its employee options under the
fair value method of SFAS 123. The fair value of these options was estimated
at the date of grant using the minimum value model for option pricing with the
following assumptions for 2000 and 1999: a risk-free interest rate of 6.25%; a
dividend yield of zero; and a weighted average life of the option of 4 years
for Tier I options and 8.5 years for Tier II and Tier III options.

56



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Option valuation models require the input of highly subjective assumption.
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.

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):

|                     |  |      |       |      |  |   |       | 
|-------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                     |  | 2000 |       | 1999
|                     |  |      |       |     
|Pro forma net income |  | $    | 3,979 |      |  | $ | 6,569 | 

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

6. Recapitalization Costs and Fees

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, $7.4 million ($6.5 million net of accumulated amortization) has
been capitalized in the accompanying balance sheet as of December 31, 2000.
The remaining $1.5 million has been recorded as a reduction to members equity
(deficit) transaction fees and expenses as of December 31,1999. The
capitalized debt fees are being amortized over the term of the related debt.

7. Segment and Related Information

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

|                                |                                         |   |                          |         |      |   |         |        |   |   |         |        |  
|------------------------------- | --------------------------------------- | - | ------------------------ | ------- | ---- | - | ------- | ------ | - | - | ------- | ------ | -
|                                |                                         |   | Years Ended December 31,
|                                |                                         |   |                         
|                                |                                         |   | 2000                     |         | 1999 |   | 1998   
|                                |                                         |   |                          |         |      |   |        
|Net revenues:                  
|                               
|                               
|                               
|                               
|                                | Rigid knee bracing                      |   | $                        | 54,456  |      |   | $       | 49,406 |   |   | $       | 48,594 |  
|                               
|                               
|                               
|                               
|                                | Soft goods                              |   |                          | 52,031  |      |   |         | 39,652 |   |   |         | 34,233 |  
|                                |                                         |   |                          |         |      |   |         |        |   |   |         |       
|                                | Net revenues for reportable segments    |   |                          | 106,487 |      |   |         | 89,058 |   |   |         | 82,827 |  
|                               
|                               
|                               
|                               
|                                | Specialty and other orthopedic products |   |                          | 36,570  |      |   |         | 25,194 |   |   |         | 17,958 |  
|                               
|                               
|                               
|                               
|                                | Freight revenue                         |   |                          | 4,412   |      |   |         | 3,515  |   |   |         | 3,507  |  
|                                |                                         |   |                          |         |      |   |         |        |   |   |         |       
|Total consolidated net revenues |                                         | $ | 147,469                  |         |      | $ | 117,767 |        |   | $ | 104,292 |       
|                                |                                         |   |                          |         |      |   |         |        |   |   |         |       
|Gross profit:                  
|                               
|                               
|                               
|                               
|                                | Rigid knee bracing                      |   | $                        | 38,493  |      |   | $       | 35,721 |   |   | $       | 34,460 |  
|                               
|                               
|                               
|                               
|                                | Soft goods                              |   |                          | 25,761  |      |   |         | 19,276 |   |   |         | 16,637 |  
|                                |                                         |   |                          |         |      |   |         |        |   |   |         |       
|                                | Gross profit for reportable segments    |   |                          | 64,254  |      |   |         | 54,997 |   |   |         | 51,097 |  
|                               
|                               
|                               
|                               
|                                | Specialty and other orthopedic products |   |                          | 22,115  |      |   |         | 12,516 |   |   |         | 8,978  |  
|                               
|                               
|                               
|                               
|                                | Freight revenue                         |   |                          | 4,412   |      |   |         | 3,515  |   |   |         | 3,507  |  
|                               
|                               
|                               
|                               
|                                | Brand royalties                         |   |                          |        |      |   |         | (1,817 | ) |   |         | (3,249 | )
|                               
|                               
|                               
|                               
|                                | Other cost of goods sold                |   |                          | (3,490  | )    |   |         | (3,188 | ) |   |         | (2,507 | )
|                                |                                         |   |                          |         |      |   |         |        |   |   |         |       
|Total consolidated gross profit |                                         | $ | 87,291                   |         |      | $ | 66,023  |        |   | $ | 57,826  |       
|                                |                                         |   |                          |         |      |   |         |        |   |   |         |       

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

For the years ended December 31, 2000 and 1999, dj Ortho had no individual
customer, supplier or distributor within a segment which accounted for more
than 10% or more of total annual revenues.

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

57



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|                                |  |                          |         |      |  |      |         |  |  |   |         | 
|------------------------------- |  | ------------------------ | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                                |  | Years Ended December 31,
|                                |  |                         
|                                |  | 2000                     |         | 1999 |  | 1998
|                                |  |                          |         |      |  |     
|United States                   |  | $                        | 125,200 |      |  | $    | 96,370  |  |  | $ | 82,955  | 
|                               
|                               
|                               
|                               
|Europe                          |  |                          | 12,718  |      |  |      | 12,891  |  |  |   | 12,376  | 
|                               
|                               
|                               
|                               
|Other foreign countries         |  |                          | 5,139   |      |  |      | 4,991   |  |  |   | 5,454   | 
|                               
|                               
|                               
|                               
|Freight revenue                 |  |                          | 4,412   |      |  |      | 3,515   |  |  |   | 3,507   | 
|                                |  |                          |         |      |  |      |         |  |  |   |         | 
|Total consolidated net revenues |  | $                        | 147,469 |      |  | $    | 117,767 |  |  | $ | 104,292 | 
|                                |  |                          |         |      |  |      |         |  |  |   |         | 

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

8. Condensed Consolidating Financial Information

As discussed in Notes 1 and 4 above, dj Orthos obligations under the Notes are
guaranteed by its parent, DonJoy L.L.C. This guarantee and any guarantee by a
future wholly-owned subsidiary guarantor, is full and unconditional. dj Ortho and DJ Capital comprise all the direct and indirect subsidiaries of
DonJoy (other than minor subsidiaries). We have concluded that separate financial
statements of DonJoy, dj Ortho and DJ Capital are not required to be
filed as separate reports under the Securities Exchange Act of 1934. The 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 DonJoy unless
certain financial tests are satisfied in the case of the indenture or the
consent of the lenders in the case of the credit facility. The
indenture and the credit facility permit dj Ortho to make
distributions to DonJoy in certain amounts to allow DonJoy to make
distributions to its members to pay income taxes in respect of their
allocable share of taxable income of DonJoy and its subsidiaries,
including dj Ortho. At December 31,
2000, under these requirements, neither dj Ortho nor DJ Capital would be
permitted to make dividends, distributions, loans or advances to DonJoy except
for the permitted tax distributions.

9. Transactions with Smith & Nephew

Prior to the Recapitalization, the Company was a wholly owned subsidiary of
Smith & Nephew, Inc. On June 30, 1999 the Company consummated the
Recapitalization.. On June 28, 2000, the Former Parent sold its remaining
interest in DonJoy to CDP and certain members of management (see Note 1). As a
result of this transaction, the Company no longer reflects any intercompany
transactions as of December 31, 2000 on the consolidated balance sheets,
statements of income and statements of cash flows.

Under the control of its Former Parent, the Company had numerous transactions
with its Former Parent and its affiliates. The intercompany obligations
represent a net balance as the result of various transactions. 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 recorded
through the intercompany obligations account follows (in thousands):

|                               |                                    |   |        |                          |   |      |        |         |   | 
|------------------------------ | ---------------------------------- | - | ------ | ------------------------ | - | ---- | ------ | ------- | - | 
|                               |                                    |   |        | Years Ended December 31,
|                               |                                    |   |        |                         
|                               |                                    |   |        | 1999                     |   | 1998
|                               |                                    |   |        |                          |   |     
|Balance at beginning of period |                                    | $ | 45,227 |                          |   | $    | 45,027 |        
|                              
|                              
|                              
|                              
|                               | Net cash remitted to Former Parent |   |        | (17,743                  | ) |      |        | (18,256 | )

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|                                   |                                                                                                  |                                            |        |                          |       |      |        |        |       | 
|---------------------------------- | ------------------------------------------------------------------------------------------------ | ------------------------------------------ | ------ | ------------------------ | ----- | ---- | ------ | ------ | ----- | 
|                                   |                                                                                                  |                                            |        | Years Ended December 31,
|                                   |                                                                                                  |                                            |        |                         
|                                   |                                                                                                  |                                            |        | 1999                     |       | 1998
|                                   |                                                                                                  |                                            |        |                          |       |     
|                                  
|                                  
|                                  
|                                  
|                                   | Net intercompany sales                                                                           |                                            |        | (112                     | )     |      |        | (5,078 | )    
|                                  
|                                  
|                                  
|                                  
|                                   | Net fixation device sales                                                                        |                                            |        |                         |       |      |        | 256    |      
|                                  
|                                  
|                                  
|                                  
|                                   | Share of Former Parents current income
tax liability                                            |                                            |        | (134                     | )     |      |        | 4,287  |      
|                                  
|                                  
|                                  
|                                  
|                                   | Corporate management expense allocations                                                         |                                            |        | 3,159                    |       |      |        | 5,664  |      
|                                  
|                                  
|                                  
|                                  
|                                   | Cash owed to Former Parent                                                                       |                                            |        | 1,002                    |       |      |        |       |      
|                                  
|                                  
|                                  
|                                  
|                                   | I-Flow licensing agreement                                                                       |                                            |        | 800                      |       |      |        |       |      
|                                  
|                                  
|                                  
|                                  
|                                   | Dividend in connection with the merger
of Smith & Nephew Don Joy, Inc.
into Smith & Nephew,
Inc. |                                            |        |                         |       |      |        |       |      
|                                  
|                                  
|                                  
|                                  
|                                   | Capital contribution                                                                             |                                            |        | (38,865                  | )     |      |        |       |      
|                                  
|                                  
|                                  
|                                  
|                                   | Dividends to Smith & Nephew,
Inc.                                                                |                                            |        |                         |       |      |        |       |      
|                                  
|                                  
|                                  
|                                  
|                                   | Interest on note payable                                                                         |                                            |        |                         |       |      |        |       |      
|                                  
|                                  
|                                  
|                                  
|                                   | Direct charges:                                                                                 
|                                  
|                                  
|                                  
|                                  
|                                   |                                                                                                  | Brand royalties                            |        |                          | 1,817 |      |        |        | 3,249 | 
|                                  
|                                  
|                                  
|                                  
|                                   |                                                                                                  | Payroll taxes and benefits                 |        |                          | 4,651 |      |        |        | 8,635 | 
|                                  
|                                  
|                                  
|                                  
|                                   |                                                                                                  | Direct legal expenses                      |        |                          | 67    |      |        |        | 324   | 
|                                  
|                                  
|                                  
|                                  
|                                   |                                                                                                  | Foreign Sales Corporation (FSC) commission |        |                          |      |      |        |        | 439   | 
|                                  
|                                  
|                                  
|                                  
|                                   | Miscellaneous other administrative expenses                                                      |                                            |        | 131                      |       |      |        | 680    |      
|                                   |                                                                                                  |                                            |        |                          |       |      |        |       
|Balance at end of period           |                                                                                                  |                                            |       |                          |       |      | 45,227 |       
|                                  
|                                  
|                                  
|                                  
|Less current portion               |                                                                                                  |                                            |       |                          |       |      | (1,210 | )     
|                                   |                                                                                                  |                                            |        |                          |       |      |        |       
|Long-term intercompany obligations |                                                                                                  | $                                          |       |                          |       | $    | 44,017 |       
|                                   |                                                                                                  |                                            |        |                          |       |      |        |       
|Average balance during the period  |                                                                                                  | $                                          | 22,614 |                          |       | $    | 45,127 |       
|                                   |                                                                                                  |                                            |        |                          |       |      |        |       

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.

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

|                                                      |                            |   |                          |       |      |   |       |       | 
|----------------------------------------------------- | -------------------------- | - | ------------------------ | ----- | ---- | - | ----- | ----- | 
|                                                      |                            |   | Years Ended December 31,
|                                                      |                            |   |                         
|                                                      |                            |   | 1999                     |       | 1998
|                                                      |                            |   |                          |       |     
|Corporate managed accounts and
new business           |                            | $ | 195                      |       |      | $ | 394   |      
|                                                     
|                                                     
|                                                     
|                                                     
|Finance (risk management, treasury,
audit, and taxes) |                            |   | 177                      |       |      |   | 310   |      
|                                                     
|                                                     
|                                                     
|                                                     
|Human resources and payroll                           |                            |   | 147                      |       |      |   | 291   |      
|                                                     
|                                                     
|                                                     
|                                                     
|Legal                                                 |                            |   | 128                      |       |      |   | 223   |      
|                                                     
|                                                     
|                                                     
|                                                     
|Research and development                              |                            |   | 380                      |       |      |   | 854   |      
|                                                     
|                                                     
|                                                     
|                                                     
|Corporate management expense                          |                            |   | 784                      |       |      |   | 1,332 |      
|                                                     
|                                                     
|                                                     
|                                                     
|Bonus                                                 |                            |   | 467                      |       |      |   | 503   |      
|                                                     
|                                                     
|                                                     
|                                                     
|Pension                                               |                            |   | 267                      |       |      |   | 514   |      
|                                                     
|                                                     
|                                                     
|                                                     
|Insurance                                             |                            |   | 614                      |       |      |   | 1,243 |      
|                                                      |                            |   |                          |       |      |   |       |      
|                                                      |                            | $ | 3,159                    |       |      | $ | 5,664 |      
|                                                      |                            |   |                          |       |      |   |       |      
|Amounts included in:                                 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Cost of goods sold         |   | $                        | 495   |      |   | $     | 991   | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Sales and marketing        |   |                          | 94    |      |   |       | 179   | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | General and administrative |   |                          | 2,553 |      |   |       | 4,439 | 
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Research and development   |   |                          | 17    |      |   |       | 55    | 
|                                                      |                            |   |                          |       |      |   |       |      
|                                                      |                            | $ | 3,159                    |       |      | $ | 5,664 |      
|                                                      |                            |   |                          |       |      |   |       |      

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.

10. Restructuring

In March 1998, dj Ortho combined its two operating facilities into one location
in Vista, California and accrued $2.5 million in costs resulting from the
restructuring which had no future economic benefit. These costs relate
primarily to remaining lease obligations on the vacated facility, net of
projected sublease income, and severance costs associated with the termination
of twelve employees.

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Included in general and administrative costs for 1998 are
$0.2 million of costs also related to the combination of the facilities.
Pursuant to the Recapitalization agreement, the restructuring reserve, which
amounted to $0.9 million at June 29, 1999 and consisted of the remaining lease
obligations on the vacated facility, was assumed by Smith & Nephew.

11. 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. DonJoy has guaranteed the payment of rent and other amounts owed
under the sublease by the Company.

Minimum annual lease commitments for noncancellable operating leases as of
December 31, 2000 are as follows (in thousands):

|                    |  |   |        | 
|------------------- |  | - | ------ | 
|2001                |  | $ | 2,458  | 
|                   
|                   
|                   
|                   
|2002                |  |   | 2,263  | 
|                   
|                   
|                   
|                   
|2003                |  |   | 2,202  | 
|                   
|                   
|                   
|                   
|2004                |  |   | 1,880  | 
|                   
|                   
|                   
|                   
|2005                |  |   | 1,852  | 
|                   
|                   
|                   
|                   
|2006 and thereafter |  |   | 4,013  | 
|                    |  |   |        | 
|                    |  | $ | 14,668 | 
|                    |  |   |        | 

Aggregate rent expense was approximately $3.2 million, $2.7 million and $3.2
million for the years ended December 31, 2000, 1999 and 1998.

License Agreements

In August of 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, 2000, $1.0 million is included in intangible assets (patented
technology) in the accompanying balance sheet. Under an amended agreement, the
Company is obligated to make an additional payment of $0.8 million.

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 has been capitalized during 1999 and is being amortized over 5
years. In addition, the Company purchased $2.8 million in I-Flow product during
2000 and is required to purchase $2.5 million in I-Flow product in 2001.

Contingencies

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

12. Retirement Plans

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):

|                                |  |                          |     |      |  |   |     | 
|------------------------------- |  | ------------------------ | --- | ---- |  | - | --- | 
|                                |  | Years Ended December 31,
|                                |  |                         
|                                |  | 1999                     |     | 1998
|                                |  |                          |     |     
|Service costs                   |  | $                        | 242 |      |  | $ | 466 | 
|                               
|                               
|                               
|                               
|Interest costs                  |  |                          | 25  |      |  |   | 48  | 
|                                |  |                          |     |      |  |   |     | 
|Total pension expense allocated |  | $                        | 267 |      |  | $ | 514 | 
|                                |  |                          |     |      |  |   |     | 

DonJoy has a qualified 401(k) profit-sharing plan covering substantially all of
its U.S. employees, which is substantially the same as the plan previously
provided by Smith & Nephew. The assets funding the Smith & Nephew plan were
transferred to the DonJoy 401(k) Plan. 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 $0.4 million, $0.3 million and $0.3 million for the years
ended December 31, 2000, 1999 and 1998, respectively. The plan also provides
for discretionary Company contributions (employee profit sharing) which began
on June 30, 1999 as approved by the Board of Managers. There were no

60



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contributions for the year ended December 31, 2000. The Companys
discretionary 401(k) contributions for the year ended December 31, 1999 were
$228,000. DonJoys 401(k) plan is administered by Fidelity Investments
Institutional Services Company, Inc.

13. Terminated Acquisition

In October 2000, the Company decided to discontinue its pursuit of a potential
acquisition. Absent the resumption of negotiations which is not currently
anticipated, costs incurred related to this potential acquisition have been
expensed during the fourth quarter of 2000 in the amount of $0.4 million.







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

Not applicable.

61



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##### Table of Contents









PART III







Item 10.Directors and Executive Officers of the Registrant

Board of Managers and Executive Officers

The following table sets forth certain information with respect to persons who
are members of the Board of Managers (each a Manager) of both DonJoy and dj
Ortho, which share a common Board of Managers, and executive officers of dj
Ortho. Two additional Managers may be designated by CDP, however, such
individuals have not yet been identified.

|                        |  |     |    |          |  |                                                                       
|----------------------- |  | --- | -- | -------- |  | ----------------------------------------------------------------------
|Name                    |  | Age |    | Position
|                        |  |     |    |         
|Leslie H. Cross         |  |     | 50 |          |  | President, Chief Executive Officer and Manager                        
|                       
|                       
|                       
|                       
|Cyril Talbot III        |  |     | 45 |          |  | Senior Vice President  Finance, Chief Financial Officer and Secretary
|                       
|                       
|                       
|                       
|Michael R. McBrayer     |  |     | 41 |          |  | Senior Vice President  Domestic Sales                                
|                       
|                       
|                       
|                       
|Peter Bray              |  |     | 53 |          |  | Vice President  International Business                               
|                       
|                       
|                       
|                       
|Kenneth D. Rolfes       |  |     | 52 |          |  | Senior Vice President  Global Operations and Customer Care           
|                       
|                       
|                       
|                       
|Charles T. Orsatti      |  |     | 56 |          |  | Manager                                                               
|                       
|                       
|                       
|                       
|Mitchell J. Blutt, M.D. |  |     | 43 |          |  | Manager                                                               
|                       
|                       
|                       
|                       
|Damion E. Wicker, M.D.  |  |     | 39 |          |  | Manager                                                               
|                       
|                       
|                       
|                       
|W. Brett Ingersoll      |  |     | 37 |          |  | Manager                                                               
|                       
|                       
|                       
|                       
|Ivan R. Sabel, CPO      |  |     | 55 |          |  | Manager                                                               
|                       
|                       
|                       
|                       
|Kirby L. Cramer         |  |     | 63 |          |  | Manager                                                               

Leslie H. Cross has served as President of dj Ortho since July 1995 and became
the Chief Executive Officer and a Manager of DonJoy and dj Ortho upon
consummation of the recapitalization. From 1990 to 1994, Mr. Cross held the
position of Senior Vice President of Marketing and Business Development. He was
a Managing Director of two different divisions of Smith & Nephew from 1982 to
1990. Prior to that time, he worked at American Hospital Supply Corporation.
Mr. Cross earned a diploma in Medical Technology from Sydney Technical College
in Sydney, Australia and studied Business at the University of Cape Town in
Cape Town, South Africa.

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

Michael R. McBrayer has served as Senior Vice President  Domestic Sales of dj
Ortho since 1993. He held several managerial positions after joining dj Ortho
in 1987 as a national sales manager for the retail product line. Mr. McBrayer
received his B.S. (Marketing and Management) at Northern Arizona University in
Flagstaff, Arizona.

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

Kenneth D. Rolfes joined dj Ortho as Senior Vice President  Global Operations
and Customer Care in 2000. Prior to joining the Company, he was corporate
officer and vice president of operations of Graphic Controls, a leading company
providing hospitals with cardiovascular, obstetric, and operating room
supplies. Mr. Rolfes holds a Bachelor of Science in Industrial Engineering and
a Master of Business Administration in Finance.

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

Mitchell J. Blutt, M.D. became a Manager of DonJoy upon consummation of the
recapitalization. He has been an Executive Partner of JPMP LLC, or its
predecessor, CCP, since 1992. JPMP LLC serves as the management company for the
private equity organization within J.P. Morgan Chase & Co. known as JPMorgan
Partners (JPMP). He is also an executive officer of J.P. Morgan Partners
(23A SBIC Manager), Inc. (JPMP (23A SBIC Mgr.)), the managing member of JPMP
(23A SBIC), and was a General Partner of

62



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##### Table of Contents



CCP from 1988 to 1992. Dr. Blutt has a
B.A. and a M.D. from the University of Pennsylvania and an M.B.A. from The
Wharton School of the University of Pennsylvania. He serves as a director of
FHC, Fisher Scientific International, Inc., Hanger Orthopedic Group, Inc., La
Petite Academy, Inc., Medical Arts Press, Inc., Senior Psychology Services
Management, Inc., UtiliMED, Inc., Vista Healthcare Asia Pte. Ltd. and IBC Asia
Health Care Ltd.

Damion E. Wicker, M.D. became a Manager of DonJoy upon consummation of the
recapitalization. He has been a partner of JPMP LLC, or its predecessor, CCP,
since 1997. He is also an executive officer of JPMP (23A SBIC Mgr.). Prior to
joining CCP in 1997, Dr. Wicker was President of Adams Scientific and held
positions with MBW Venture Partners and Alexon, Inc. Dr. Wicker received a B.S.
with honors from The Massachusetts Institute of Technology, an M.D. from Johns
Hopkins University School of Medicine and an M.B.A. from the Wharton School of
the University of Pennsylvania. He serves as a director of Genomic Solutions,
Inc., Landec Corporation, Optiscan Biomedical Corp., Praecis Pharmaceuticals,
Inc., Transurgical, Inc., Vitagen, Inc. and V.I. Technologies, Inc.

W. Brett Ingersoll became a manager of DonJoy in February 2001. He has been a
partner of JPMP LLC since January 1, 2001. He has worked at JPMP, or its
predecessor, CCP, since 1993. He is also an executive officer of JPMP (23A
SBIC Mgr.). He received his B.A. from Brigham Young University in Economics and
an M.B.A. from the Harvard Business School. Mr. Ingersoll currently serves as
a director of MediChem Life Sciences, Inc. HealthMarket, Inc., CB Technologies,
SMG, Inc., Tricordia Health, and HealthNet.

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

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

Committees of the Board of Managers

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







Item 11.Executive Compensation

The following table sets forth information concerning the compensation of the
Chief Executive Officer and each of the other four most highly compensated
executive officers of dj Ortho for the year ended December 31, 2000.

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|                                                            |  |                     |      |           |  |       |         |                 |  |   |         |  |  |   |         | 
|----------------------------------------------------------- |  | ------------------- | ---- | --------- |  | ----- | ------- | --------------- |  | - | ------- |  |  | - | ------- | 
|                                                            |  | Annual Compensation
|                                                            |  |                     |      | All Other
|Name and Principal Position                                 |  | Year                |      | Salary    |  | Bonus |         | Compensation(1)
|                                                            |  |                     |      |           |  |       |         |                
|Leslie H. Cross                                             |  |                     | 2000 |           |  | $     | 279,413 |                 |  | $ | 143,526 |  |  | $ | 2,917   | 
|                                                           
|                                                           
|                                                           
|                                                           
|President and Chief Executive Officer                       |  |                     | 1999 |           |  |       | 234,487 |                 |  |   | 62,944  |  |  |   | 238,464 | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |  |                     | 1998 |           |  |       | 226,825 |                 |  |   | 183,258 |  |  |   | 2,669   | 
|                                                           
|                                                           
|                                                           
|                                                           
|Cyril Talbot III                                            |  |                     | 2000 |           |  |       | 177,132 |                 |  |   | 65,582  |  |  |   | 3,500   | 
|                                                           
|                                                           
|                                                           
|                                                           
|Senior
Vice President  Finance and Chief Financial Officer |  |                     | 1999 |           |  |       | 151,088 |                 |  |   | 20,352  |  |  |   | 153,825 | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |  |                     | 1998 |           |  |       | 146,100 |                 |  |   | 48,397  |  |  |   | 1,888   | 
|                                                           
|                                                           
|                                                           
|                                                           
|Kenneth D. Rolfes (2)                                       |  |                     | 2000 |           |  |       | 197,588 |                 |  |   | 9,750   |  |  |   | 64,730  | 
|                                                           
|                                                           
|                                                           
|                                                           
|Senior Vice President  Global Operations/Customer Care    
|                                                           
|                                                           
|                                                           
|                                                           
|Michael R. McBrayer                                         |  |                     | 2000 |           |  |       | 171,757 |                 |  |   | 66,857  |  |  |   | 2,461   | 
|                                                           
|                                                           
|                                                           
|                                                           
|Senior Vice President  Domestic Sales                      |  |                     | 1999 |           |  |       | 154,800 |                 |  |   | 29,119  |  |  |   | 158,112 | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |  |                     | 1998 |           |  |       | 148,300 |                 |  |   | 47,923  |  |  |   | 2,363   | 
|                                                           
|                                                           
|                                                           
|                                                           
|Peter Bray                                                  |  |                     | 2000 |           |  |       | 180,478 |                 |  |   | 68,848  |  |  |   | 3,067   | 
|                                                           
|                                                           
|                                                           
|                                                           
|Vice President  International Business                     |  |                     | 1999 |           |  |       | 161,976 |                 |  |   | 30,558  |  |  |   | 84,616  | 
|                                                           
|                                                           
|                                                           
|                                                           
|                                                            |  |                     | 1998 |           |  |       | 156,750 |                 |  |   | 50,649  |  |  |   | 3,350   | 



---

|NA  | = | Not applicable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(1) |   | Includes contributions to dj Orthos 401(K) Plan, relocation expenses in
the amount of $61,230 in the case of Mr. Rolfes in 2000 and retention
bonuses paid to Messrs. Cross, Talbot, McBrayer and Bray in 1999 upon
consummation of the recapitalization. The recapitalization constituted a
Change of Control or Division Divestiture (as defined in the retention
agreements of these employees). Consequently, each of these members of
management of dj Ortho who remained in his position through the
consummation of the Change of Control or Division Divestiture received a
special retention bonus. Pursuant to the recapitalization agreement, such
special bonus was paid by Smith & Nephew. 1999 retention bonuses were
paid out as follows: (a) Leslie H. Cross received $235,900, (b) Cyril
Talbot III received $151,945, (c) Michael R. McBrayer received $155,715
and (d) Peter Bray received $81,510.
|   
|   
|   
|   
|(2) |   | Mr. Rolfes joined dj Ortho in January 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

The following table lists stock option grants to the officers named is the
summary compensation table in 2000.

|                  |  |                                   |       |            |  |           |      |            |  |    |     |                            |  |  |        |  |  |                      |     |  |  |   |       | 
|----------------- |  | --------------------------------- | ----- | ---------- |  | --------- | ---- | ---------- |  | -- | --- | -------------------------- |  |  | ------ |  |  | -------------------- | --- |  |  | - | ----- | 
|                  |  | Option Grants in Last Fiscal Year
|                  |  |                                  
|                  |  |                                   |       |            |  |           |      |            |  |    |     |                            |  |  |        |  |  | Potential realizable
|                  |  |                                   |       |            |  |           |      |            |  |    |     |                            |  |  |        |  |  | value at assumed    
|                  |  | Number of                         |       | Percent of |  | Exercise  |      |            |  |    |     | annual rates of unit price
|                  |  | securities                        |       | total      |  | price per |      |            |  |    |     | appreciation              
|                  |  | underlying                        |       | options    |  | unit at   |      |            |  |    |     | for option term(1)        
|                  |  | options                           |       | Granted in |  | the time  |      | Expiration |  |   
|Name              |  | Granted(#)                        |       | 2000       |  | of grant  |      | date       |  | 5% |     | 10%                       
|                  |  |                                   |       |            |  |           |      |            |  |    |     |                           
|                  |  |                                   |       |            |  |           |      |            |  |    |     |                            |  |  |        |  |  | (in thousands)      
|Kenneth D. Rolfes |  |                                   | 6,660 |            |  |           | 23.5 | %          |  | $  | 100 |                            |  |  | 2/1/15 |  |  | $                    | 718 |  |  | $ | 2,116 | 



---

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

The following table sets forth information concerning option exercises during
2000 and options held by each of the officers named in the summary compensation
table at December 31, 2000.

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|                  |  |                                                                                    |   |          |  |                           |   |                              |  |                        |              |                      |  |                |             | 
|----------------- |  | ---------------------------------------------------------------------------------- | - | -------- |  | ------------------------- | - | ---------------------------- |  | ---------------------- | ------------ | -------------------- |  | -------------- | ----------- | 
|                  |  | Aggregated options Exercises in Last Fiscal Year and Fiscal Year-End Option Values
|                  |  |                                                                                   
|                  |  |                                                                                    |   |          |  |                           |   |                              |  | Number of securities  
|                  |  |                                                                                    |   |          |  |                           |   |                              |  | underlying unexercised |              | Value of unexercised
|                  |  | Units                                                                              |   |          |  |                           |   | options at                   |  | in-the-money options  
|                  |  | acquired                                                                           |   | Value    |  | Fiscal Year-end           |   | at Fiscal Year-end          
|Name              |  | on excise(1)                                                                       |   | realized |  | Exercisable/Unexercisable |   | Exercisable/Unexercisable(2)
|                  |  |                                                                                    |   |          |  |                           |   |                             
|                  |  |                                                                                    |   |          |  |                           |   |                              |  |                        |              |                      |  | (in thousands)
|Les Cross         |  |                                                                                    |  |          |  |                           |  |                              |  |                        | 2,676/24,084 |                      |  |                | $291/$2,625 | 
|                 
|                 
|                 
|                 
|Michael McBrayer  |  |                                                                                    |  |          |  |                           |  |                              |  |                        | 892/8,028    |                      |  |                | 97/875      | 
|                 
|                 
|                 
|                 
|Cy Talbot         |  |                                                                                    |  |          |  |                           |  |                              |  |                        | 892/8,028    |                      |  |                | 97/875      | 
|                 
|                 
|                 
|                 
|Kenneth D. Rolfes |  |                                                                                    |  |          |  |                           |  |                              |  |                        | 666/5,994    |                      |  |                | 73/653      | 
|                 
|                 
|                 
|                 
|Peter Bray        |  |                                                                                    |  |          |  |                           |  |                              |  |                        | 446/4,014    |                      |  |                | 49/438      | 



---

|(1) |  | No options were exercised in 2000.                                                              
|--- |  | ------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Based on an assumed fair market value of the common units at December 31,
2000 of $109 per unit.

Compensation of the Board of Managers

The members of the Board of Managers affiliated with CDP do not receive
compensation for their service on the Board of Managers but are reimbursed for
their out-of-pocket expenses. Managers who are neither officers of dj Ortho nor
affiliated with CDP receive customary compensation for services on the Board of
Managers of $12,000 per year plus out-of-pocket expenses, an option grant of
2,000 common units in DonJoy, L.L.C. and the right to purchase an additional
2,000 common units in DonJoy, L.L.C. dj Ortho, DonJoy and Charles T. Orsatti
intend to enter into an agreement pursuant to which dj Ortho will agree to pay
Mr. Orsatti up to $250,000 per year if dj Ortho achieves certain performance
objectives to be established by negotiation among such parties, CDP and CCP.
Mr. Orsatti was paid $250,000 in 2000 in connection with the Orthotech
Acquisition.

Second Amended and Restated 1999 Option Plan

Under DonJoy, L.L.C.s Second Amended and Restated 1999 Option Plan, 166,799
common units 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 Managers. The plan expires on
August 19, 2015 unless earlier terminated by the Board of Managers. The plan
provides for the grant of nonqualified options to officers, directors, and
employees of, and consultants and advisors to, dj Ortho.

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



| |  |  | ratably at specified annual intervals from the date of grant (the
Time-Vesting Options) (provided that the maximum number of such
Time-Vesting Options granted shall not exceed 6% of the number of common
units of DonJoy outstanding on a fully diluted basis on the closing date
of the recapitalization); some Time-Vesting Options are also subject to
the achievement of certain sale targets or                                                                                                                                                                                                                                                                                                                              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | upon the occurrence of a Liquidity Event or Material Transaction
(each as defined below) and then only to the extent the common units of
DonJoy owned by CDP have provided CDP with specified internal rates of
return (as set forth in the Option Plan) since the closing date of the
recapitalization (the Event-Vesting Options) (provided that the
maximum number of such Event-Vesting Options vesting based on
achievement of specified internal rates of return shall not exceed 9% of
the number of common units outstanding on a fully diluted basis on the
closing date of the recapitalization), provided that if no Liquidity
Event has occurred by December 31, 2007, such options shall become
vested and exercisable.

A Liquidity Event means a sale or other disposition of all or substantially all
of the assets of DonJoy or all or substantially all of the outstanding equity
interests in DonJoy or a registered public offering of the common equity
interests in DonJoy resulting in a market capitalization of more than $150
million for a period of at least 20 consecutive trading days. A Material
Transaction means a dissolution or liquidation of DonJoy, a reorganization,
merger or consolidation in which DonJoy is not the surviving corporation, or
sale of all or substantially all of the assets of DonJoy. The exercise price
for the options will be the fair market value of the common units of DonJoy on
the date each such option is granted. The options will expire upon the earliest
of (i) the fifteenth anniversary of the date of grant, (ii) 12 months after the
date an Optionees employment is terminated due to the Optionees death or
permanent disability, (iii) immediately upon an Optionees termination of
employment by the dj Ortho for cause (as defined in the Plan), (iv) 90 days
after the date an Optionee ceases to be an employee (other than as listed in
(ii) and (iii) above), (v) the effective date of a Material Transaction if
provision is made in connection with such transaction for the assumption of
outstanding options by, or the substitution for such option of new options
covering equity securities of, the surviving, successor or purchasing
corporation, or (vi) the expiration of such other period of time or the
occurrence of such other event as the Compensation Committee, in its
discretion, may provide in any option agreement. Common units in DonJoy
purchased by an Optionee upon exercise of an option may be repurchased by
DonJoy (or its designee) upon terms and at a price determined in accordance
with the provisions of the applicable option agreement.

As of December 31, 2000, DonJoy has granted options to purchase up to 148,840
common units under the Plan, of which 40% are Time-Vesting Options and 60% are
Event-Vesting Options.

401(k) and Incentive Plans

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

65



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##### Table of Contents



Employment Agreements

In connection with the recapitalization, dj Ortho entered into employment
agreements with Leslie H. Cross, Cyril Talbot III and Michael R. McBrayer. The
employment agreements terminate on June 30, 2002. Pursuant to their respective
employment agreement, Mr. Cross serves as President of dj Ortho at an annual
base salary of $279,413, Mr. Talbot serves as Vice President of Finance of dj
Ortho at an annual base salary of $177,132 and Mr. McBrayer serves as Vice
President of Domestic Sales of dj Ortho at an annual base salary of $171,757.
These base salaries are subject to annual review and adjustment by the Board of
Managers of dj Ortho. In addition, each executive is entitled to such annual
bonuses as may be determined by the Board of Managers, four weeks paid vacation
per year, a car allowance and, for 1999 only, club membership dues and tax
preparation fees. Each executive may be terminated at any time during the term
of the applicable employment agreement with or without cause (as defined in
the applicable employment agreement). In the event of an executives
termination without cause, the executive will be entitled to receive his base
salary from the date of termination until the first anniversary of the date of
termination. Pursuant to the applicable employment agreement, each executive
has agreed that until the fourth anniversary of the date of termination or
expiration of his employment with dj Ortho, he will not:

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

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

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

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

Retention Agreements

In December 1998, Smith & Nephew entered into retention agreements with certain
then existing members of management of dj Ortho (each, a Management
Employee), including Messrs. Cross, Talbot, McBrayer and Bray, to induce each
Management Employee to remain an employee of dj Ortho in the event of a Change
of Control or Division Divestiture (as defined in the retention agreement). The
recapitalization constituted a Change of Control or Division Divestiture. Each
such Management Employee who remained in his position through the consummation
of the Change of Control or Division Divestiture received a special retention
bonus. Pursuant to the recapitalization agreement, such special bonus was paid
by Smith & Nephew.







Item 12.Security Ownership of Certain Beneficial Owners and Management

All of dj Orthos membership units are owned by DonJoy and all of DJ Capitals
equity securities are owned by dj Ortho. The following table sets forth
information with respect to the ownership of the Redeemable Preferred
Units and the common units (the Units) of DonJoy as of
December 31, 2000 by



| |  |  | each person known to own beneficially more than 5% of the Units,                          
| | - |  | ------------------------------------------------------------------------------------------
|
| |  |  | each Manager of DonJoy,                                                                   
|
| |  |  | each executive officer of dj Ortho and DonJoy named in the summary
compensation table, and
|
| |  |  | all executive officers and Managers of dj Ortho and DonJoy as a group.                    

The Redeemable Preferred Units which vote together with the common units as a
single class (see  Description of Operating Agreement) are owned
approximately 51% by JPMP (23A SBIC), an affiliate of CDP, approximately 33% by
the TCW Affiliates and approximately 16% by an affiliate of First Union
Investors.

The amounts and percentages of Units beneficially owned are reported on the
basis of regulations of the SEC governing the determination of beneficial
ownership of securities. Under the rules of the SEC, a person is deemed to be a
beneficial owner of a security if that person has or shares voting power or
investment power, which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial owner
of any securities of which that person has a right to acquire beneficial
ownership within 60 days. Securities that can be so acquired are deemed to be
outstanding for purposes of computing such persons ownership percentage, but
not for purposes of computing any other persons percentage. Under these rules,

66



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##### Table of Contents



more than one person may be deemed beneficial owner of the same securities and
a person may be deemed to be a beneficial owner of securities as to which such
person has no economic interest.

|                                                             |                                              |       |         |         |             |       |            |       |  |  |         |         |  |  |      |      |  
|------------------------------------------------------------ | -------------------------------------------- | ----- | ------- | ------- | ----------- | ----- | ---------- | ----- |  |  | ------- | ------- |  |  | ---- | ---- | -
|                                                             |                                              |       |         |         |             |       | Units     
|                                                             |                                              |       |         |         |             |       | Underlying
|                                                             |                                              |       |         |         |             |       | Options   
|                                                             |                                              |       | Number  |         | exercisable |       |            |       |  |  | Percent
|                                                             |                                              |       | of      |         | within      |       |            |       |  |  | of     
|Name and Address of Beneficial Owner                         |                                              | Units |         | 60 days |             | Total |            | Class
|                                                             |                                              |       |         |         |             |       |            |      
|Chase DJ Partners, LLC(1)                                    |                                              |       | 771,770 |         |             |       | 0          |       |  |  | 771,770 |         |  |  | 92.1 | %   
|                                                            
|                                                            
|                                                            
|                                                            
|J.P. Morgan Partners (23A SBIC) LLC                         
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | (formerly CB Capital Investors L.L.C.)(1)(2) |       |         | 794,343 |             |       |            | 0     |  |  |         | 794,343 |  |  |      | 94.8 | %
|                                                            
|                                                            
|                                                            
|                                                            
|Charles T. Orsatti(3)                                        |                                              |       | 771,770 |         |             |       | 0          |       |  |  | 771,770 |         |  |  | 92.1 | %   
|                                                            
|                                                            
|                                                            
|                                                            
|Leslie H. Cross(4)(9)                                        |                                              |       | 14,946  |         |             |       | 2,676      |       |  |  | 17,622  |         |  |  | 2.1  | %   
|                                                            
|                                                            
|                                                            
|                                                            
|Cyril Talbot III(4)                                          |                                              |       | 3,587   |         |             |       | 892        |       |  |  | 4,479   |         |  |  | 0.5  | %   
|                                                            
|                                                            
|                                                            
|                                                            
|Michael R. McBrayer(4)                                       |                                              |       | 3,587   |         |             |       | 892        |       |  |  | 4,479   |         |  |  | 0.5  | %   
|                                                            
|                                                            
|                                                            
|                                                            
|Peter Bray(4)                                                |                                              |       | 0       |         |             |       | 446        |       |  |  | 446     |         |  |  | 0.1  | %   
|                                                            
|                                                            
|                                                            
|                                                            
|Ken Rolfes(4)                                                |                                              |       | 0       |         |             |       | 666        |       |  |  | 666     |         |  |  | 0.1  | %   
|                                                            
|                                                            
|                                                            
|                                                            
|Mitchell J. Blutt, M.D.(5)(6)                                |                                              |       | 0       |         |             |       | 0          |       |  |  | 0       |         |  |  | 0    | %   
|                                                            
|                                                            
|                                                            
|                                                            
|Damion E. Wicker, M.D.(5)(6)                                 |                                              |       | 0       |         |             |       | 0          |       |  |  | 0       |         |  |  | 0    | %   
|                                                            
|                                                            
|                                                            
|                                                            
|W. Brett Ingersoll(5)(6)                                     |                                              |       | 0       |         |             |       | 0          |       |  |  | 0       |         |  |  | 0    | %   
|                                                            
|                                                            
|                                                            
|                                                            
|Ivan R. Sabel(7)(10)                                         |                                              |       | 0       |         |             |       | 2,500      |       |  |  | 2,500   |         |  |  | 0.3  | %   
|                                                            
|                                                            
|                                                            
|                                                            
|Kirby L. Cramer(8)(10)                                       |                                              |       | 0       |         |             |       | 2,500      |       |  |  | 2,500   |         |  |  | 0.3  | %   
|                                                            
|                                                            
|                                                            
|                                                            
|All directors and executive officers as a group (11 persons) |                                              |       | 816,463 |         |             |       | 10,572     |       |  |  | 827,035 |         |  |  | 97.4 | %   



---

|(1)  |  | The address of CDP and JPMP (23A SBIC) is c/o J.P. Morgan Partners, LLC,
1221 Avenue of the Americas, New York, New York 10020. CDP was formed by
JPMP (23A SBIC), an affiliate of JPMP LLC, and Fairfield Chase. JPMP (23A
SBIC) owns approximately 87.0%, the First Union Affiliates own
approximately 9.6%, the TCW Affiliates own approximately 3.0% and
Fairfield Chase owns approximately 0.4% of the membership interests in
CDP. The TCW Affiliates and the First Union Affiliates also own 14,802 and
7,030 Redeemable Preferred Units, respectively. Fairfield Chase is the
managing member of CDP except that under the circumstances described
below, JPMP (23A SBIC) will become the managing member of CDP. JPMP (23A
SBIC) is a licensed small business investment company (an SBIC) and as
such is subject to certain restrictions imposed upon SBICs by the
regulations established and enforced by the United States Small Business
Administration. Among these restrictions are certain limitations on the
extent to which an SBIC may exercise control over companies in which it
invests. As a result of these restrictions, JPMP (23A SBIC) will only
become the managing member of CDP if certain events described in the
constituent documents of CDP occur. See Description of Members Agreement
and By-Laws.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|    
|    
|    
|(2)  |  | Includes (i) 22,573 Redeemable Preferred Units owned by JPMP (23A SBIC)
and (ii) the common units owned by CDP of which JPMP (23A SBIC) may be
deemed the beneficial owner given its status as a member of CDP owning
approximately 87% of CDPs membership interests.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    
|    
|    
|    
|(3)  |  | Includes the common units owned by CDP given Mr. Orsattis status as the
person controlling Fairfield Chase, which is the managing member of CDP.
As the managing member of CDP, Fairfield Chase may also be deemed to be
the beneficial owner of these Units. The address of Mr. Orsatti is c/o
Fairfield Chase Medical Partners, LLC, 600 Cleveland Street, Suite 1100,
Clearwater, Florida 83755.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    
|    
|    
|    
|(4)  |  | The address of Messrs. Cross, Talbot, McBrayer, Rolfes and Bray is c/o
DonJoy, LLC, 2985 Scott Street, Vista, California 92083.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|(5)  |  | The address of Messrs. Blutt, Wicker and Ingersoll is c/o J.P. Morgan
Partners LLC, 1221 Avenue of the Americas, New York, New York 10020.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    
|    
|    
|    
|(6)  |  | Such person may be deemed the beneficial owner of Units owned by CDP and
JPMP (23A SBIC) due to his status as an executive officer of J.P. Morgan
Partners (23A SBIC Manager), Inc., the managing member of JPMP (23A SBIC).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    
|    
|    
|    
|(7)  |  | The address of Mr. Sabel is c/o Hangar Orthopedic Group, Inc., Two
Bethesda Metro Center, Suite 1200, Bethesda, Maryland 20814.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|(8)  |  | The address of Mr. Cramer is c/o Hazelton Laboratories, 77-455 Iroqouis
Drive, Indian Wells, California, 92210.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    
|    
|    
|    
|(9)  |  | Units are held by a family trust, the Leslie H. Cross & Deborah L. Cross
Family Trust, of which Mr. Cross is a trustee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    
|    
|    
|    
|(10) |  | Includes options to purchase 500 common units under the option plan and
the right to purchase 2,000 common units.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

67



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Description of Operating Agreement

dj Ortho and DonJoy are each limited liability companies organized under the
Delaware Limited Liability Company Act. DonJoy is the sole member and managing
member of dj Ortho and controls dj Orthos policies and operations. DonJoys
operations are governed by a Third Amended and Restated Operating Agreement
among DonJoy, CDP, JPMP (23A SBIC), the First Union Affiliates, the Management
Members and the TCW Affiliates (each a member and collectively the
members). The operating agreement, together with the members agreement
described below, governs the relative rights and duties of the members.

Units. DonJoy is authorized to issue up to 2,900,000 common units and up to
100,000 Redeemable Preferred Units. As of December 31, 2000, 793,890 common
units and 44,405 Redeemable Preferred Units were issued and outstanding, and
19% of the common units on a fully diluted basis have been duly reserved for
issuance to officers, directors and employees of, and independent consultants
and advisors of DonJoy or any subsidiary thereof pursuant to the Second Amended
and Restated 1999 Option Plan.

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



| |  | the failure to pay or distribute when required any amounts with respect to the Redeemable Preferred Units,                                                                                                                         
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | breaches of representations and warranties, covenants (which are substantially similar to the covenants contained in the
indenture) and other agreements contained in the documentation relating to the Redeemable Preferred Units,
| 
| |  | an event of default under the new credit facility, the indenture or other indebtedness having an outstanding principal
amount of $15 million or more and                                                                           
| 
| |  | certain events of bankruptcy, insolvency or reorganization with respect to DonJoy or any of its subsidiaries (an event of
non-compliance).                                                                                       

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

The Redeemable Preferred Units (other than the Redeemable Preferred Units
Participating Interest) are subject to mandatory redemption on December 31,
2009 and may be redeemed at DonJoys option at any time. Upon a change of
control (which is defined in the operating agreement to be the same as a change
of control under the indenture), holders of Redeemable Preferred Units will
have the right, subject to certain conditions, to require DonJoy to redeem
their Redeemable Preferred Units (including the Redeemable Preferred Units
Participating Interest). In addition, at any time on or after June 30, 2005,
holders whose Redeemable Preferred Units have been redeemed as described above,
will have the right, subject to certain conditions, to require DonJoy to redeem
their Redeemable Preferred Units Participating Interest. Unless equity proceeds
or other funds are available to DonJoy for the purpose, the ability of DonJoy
to make any of the foregoing payments will be subject to receipt of
distributions from dj Ortho in amounts sufficient to make such payments and
such distributions will be subject to the restrictions contained in the credit
facility and the indenture.

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

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

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

Tax Distributions. Subject to receipt of distributions from dj Ortho to the
extent permitted by restrictions contained in the credit

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facility and the
indenture, DonJoy will make distributions in agreed upon amounts to its members
to enable them to pay income taxes payable in respect of their allocable share
of the taxable income of DonJoy and its subsidiaries, including dj Ortho.

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

Description of Members Agreement and By-Laws

DonJoy, CDP, JPMP (23A SBIC), the First Union Affiliates, the Management
Members and the TCW Affiliates are parties to a members agreement. The
members agreement contains provisions with respect to the transferability and
registration of the Units. The members agreement also contains provisions
regarding the designation of the members of the Board of Managers and other
voting arrangements. The members agreement terminates on a sale of dj Ortho,
whether by merger, consolidation, sale of Units, a sale of assets or otherwise
(a sale of the company).

The members agreement



| |  | restricts transfers of Units subject to certain exceptions,                                                                                                                         
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | grants the members (other than CDP and the Management Members) (the Non-CDP Members) the right to tag along on certain
sales of common units by CDP to unaffiliated third parties,
| 
| |  | grants the Non-CDP Members certain preemptive rights,                                                                                                                               
| 
| |  | grants certain rights of first refusal to
DonJoy and CDP with respect to transfers of common units by Non-CDP Members and
the Management Members,                                   
| 
| |  | grants DonJoy or its designee the right to repurchase a Management Members Units if such Management Members employment is
terminated, and                                         
| 
| |  | requires the members to participate in and cooperate in consummating a sale of the company approved by CDP.                                                                         

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

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



| |  | one Management Member (initially Leslie H. Cross) designated by
Management Members holding at least a majority of all Units then held
by all Management Members, provided that such Management Member shall
be a member of the Board for only so long as he is both an employee
and a holder of Units,
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | five individuals nominated by CDP,                                                                                                                                                                                                                                                                    
| 
| |  | an additional individual (initially Charles T. Orsatti) nominated by
CDP and having special voting power as described below, and                                                                                                                                                                      
| 
| |  | two individuals with industry expertise designated by mutual agreement
of the other Managers. Mr. Sabel and Mr. Cramer were appointed to the
Board of Managers in August 1999 and December 1999, respectively,
pursuant to this provision.                                                            

The constituent documents of CDP provide that the five individuals nominated by
CDP shall be designated by JPMP (23A SBIC) and that the additional individual
nominated by CDP and having special voting power shall be designated by the
managing member of CDP. The managing member of CDP is initially Fairfield
Chase, except that upon the occurrence of certain events (including where JPMP
(23A SBIC) has determined that it is reasonably necessary for it to assume
control of CDP for the protection of its investment or that any other event has
occurred which would permit JPMP (23A SBIC) to assume control of CDP under
applicable law), JPMP (23A SBIC) will become the managing member of CDP. The
managing member of CDP controls CDP, including the exercise of its rights under
the operating agreement and the members agreement. Upon becoming the managing
member of CDP, JPMP (23A SBIC) will have the ability, through CDP, to designate
Managers having a majority of the voting power of all Managers.

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

69



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Item 13.Certain Relationships and Related Transactions

Unit Issuances

In connection with the
Orthotech Acquisition, DonJoy issued 73,775 common unit
shares to CDP for gross proceeds of $8.0 million. In addition,
DonJoy issued
2,146, 668 and 1,407 preferred units to JPMP (23A SBIC), the First Union
Affiliates and the TCW Affiliates, respectively, for total gross proceeds of
$3.6 million.

Recapitalization Agreement

In addition to providing for
the sale of the common units of DonJoy to CDP and
the Management Members, and the repurchase of a portion of Smith & Nephews
interests in DonJoy, the recapitalization agreement provided for certain other
matters in furtherance of the recapitalization transactions, including those
set forth below. The description below of certain provisions of the
recapitalization agreement is subject to, and is qualified in its entirety by
reference to, the definitive recapitalization agreement, a copy of which was
filed as Exhibit 10.1 to the Companys registration statement on Form S-4
(Registration No. 333-86835), originally filed with the SEC on November 4,
1999.

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

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

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

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



| |  | any breach by Smith & Nephew of its representations and warranties, covenants and agreements in the recapitalization
agreement,
|- |  | -------------------------------------------------------------------------------------------------------------------------------
| 
| |  | any tax liabilities for which Smith & Nephew is liable pursuant to the recapitalization agreement and                          
| 
| |  | certain excluded liabilities.                                                                                                  

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

Other Agreements between DonJoy and Smith & Nephew

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

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Supply Agreement

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



|(1) |  | all ProCare line products,                                                                                                                                                                   
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | all DonJoy products currently listed in Smith & Nephews 1999
Rehabilitation Division catalog for the United States and any
replacements, substitutions and improvements to such products and
|   
|(3) |  | such other products as may be mutually agreed (collectively, the Supply
Agreement Products).                                                                                               

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

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

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



| |  | any injury, death or property damage arising out of DonJoys, dj Orthos or any of their employees or agents negligence or
willful misconduct,                                                                                                                                                                
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | DonJoys or dj Orthos negligent acts or omissions,                                                                                                                                                                                                                                                           
| 
| |  | DonJoys or dj Orthos misstatements or false claims with respect to the Supply Agreement Products,                                                                                                                                                                                                           
| 
| |  | any product liability claims relating to the Supply Agreement Products (other than those claims (Non-Indemnifiable
Claims) resulting from Smith & Nephews or a third partys fault which do not give rise to an indemnifiable claim against
DonJoy by Smith & Nephew under the recapitalization agreement),
| 
| |  | any governmentally-required recall of the Supply Agreement Products (other than Non-Indemnifiable Claims),                                                                                                                                                                                                    
| 
| |  | its failure to comply with its obligations under the Supply Agreement, and                                                                                                                                                                                                                                    
| 
| |  | any claim of infringement by any third party of any patents or any claimed violation of any other intellectual property
right of any third party arising in connection with the sale or distribution of Supply Agreement Products.                                                                            

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



| |  | any injury, death or property damage arising out of Smith & Nephews or its employees or agents negligence or willful
misconduct,
|- |  | ---------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Smith & Nephews negligent act or omission,                                                                                      
| 
| |  | Smith & Nephews misstatements or false claims with respect to the Supply Agreement Products,                                    
| 
| |  | Smith & Nephews misuse of Supply Agreement Product literature, or                                                               
| 
| |  | Smith & Nephews failure to comply with its obligations under the supply agreement.                                              

71



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

Distribution Agreement

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

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

As of December 31, 2000, the Company has replaced 17 Smith & Nephew sales
organizations with independent distributors. As to the remaining 13 Smith &
Nephew distributors, both DonJoy and Smith & Nephew have the right to terminate
the distribution agreement on 60 days notice with respect to Canada, Dubai,
India, Ireland, Korea, Malaysia, Philippines, Puerto Rico, Singapore, South
Africa, Spain, Taiwan and Thailand.

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



|(1) |  | the original purchase price of such Repurchased Inventory plus any duty
and tax paid by such S&N Group Company and the cost paid by such S&N Group
Company in shipping the Repurchased Inventory to such S&N Group Company
plus
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | any sales tax, VAT, duty or fee incurred by such S&N Group Company with
respect to the delivery of such Repurchased Inventory to dj Ortho or such
new distributor.                                                             

With respect to the 17 terminated S & N Group Companies the inventory was
generally purchased by the new third party distributor and the amount of
inventory repurchased by the Company was minimal. If a dispute arises
concerning the applicable repurchase price of the Repurchased Inventory and the
parties are not able to resolve such dispute with ten business days, the
applicable S&N Group Company has the right to sell and distribute the products
that are the subject of the dispute within or outside the Territories. The
Distribution Agreement continues until the termination of the last Territory.

Transition Services Agreement

Pursuant to a transition services agreement among DonJoy and Smith & Nephew,
Smith & Nephew assisted in the transfer and transition of certain services
provided by Smith & Nephew prior to the recapitalization as required by dj
Ortho, including human resources, payroll, sales tax reporting, insurance
coverage, legal and treasury and cash management. Smith & Nephew also acted as
an authorized European Agent/representative/distributor for DonJoy for purposes
of CE regulation. DonJoy did not pay any additional consideration to Smith &
Nephew for such services, but reimbursed Smith & Nephew for all payments to
third parties in connection with the foregoing services. Such amounts were not
material. In addition, Smith & Nephew continued to employ two individuals as
employees of Smith & Nephews affiliates in the United Kingdom and Belgium (the
International Employees) through December 31, 1999. DonJoy reimbursed Smith &
Nephew $179,939 for all compensation, expenses and benefits paid or provided to
or on behalf

72



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##### Table of Contents



of the International Employees. In accordance with the transition
services agreement Smith & Nephew also assisted in the transition of master
group buying contracts relating to ProCare products with NovaCare, Inc.,
Premier Purchasing Partners, L.P. and AmeriNet Inc. (the Group Buying
Contracts) to separate agreements or arrangements between such companies and
dj Ortho. The transition services agreement terminated November 30, 2000.

Group Research Centre Technology Agreement

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

Sublease

Pursuant to a sublease between dj Ortho and Smith & Nephew entered into in
connection with the recapitalization, dj Ortho is subleasing the premises
occupied by the Vista facility from Smith & Nephew. dj Ortho will pay rent
during the term of the sublease in an amount equal to the amount required to be
paid by Smith & Nephew as tenant under the master lease for the Vista facility
together with all taxes and other amounts which are the responsibility of Smith
& Nephew under the master lease. The current rent payable by dj Ortho under the
sublease is $156,728 per month. DonJoy has guaranteed the payment of rent and
other amounts owing under the sublease by dj Ortho. Total lease payments to
Smith & Nephew in 1999 and 2000 were $0.9 million and $1.8 million,
respectively. The sublease expires on February 20, 2008 unless sooner
terminated as provided in the master lease or the sublease.

CERF Laboratories Agreement

Pursuant to a CERF Laboratories Agreement (the CERF Agreement) between DonJoy
and Smith & Nephew, dj Ortho allowed Smith & Nephew and its employees, agents,
representatives and invitees to use dj Orthos Clinical Education Research
Facility (CERF) laboratory, the equipment and supplies in the CERF laboratory
and services offered at the CERF laboratory. Smith & Nephew paid dj Ortho a
quarterly fee calculated in the same manner as it was calculated prior to the
recapitalization. For 2000 and 1999, Smith & Nephew paid DonJoy $56,991 and
$85,649, respectively, for use of the CERF laboratory. On August 31, 2000, the
CERF Agreement was terminated by Smith & Nephew.

Other Arrangements with Affiliates of CDP

In connection with the recapitalization, dj Ortho and DJ Capital entered into
the credit facility with Chase Securities, Inc.
(CSI), as arranger and book manager, and The Chase Manhattan Bank (Chase),
as syndication agent and a lender, both of which are affiliates of CDP. In
connection with the new credit facility, Chase receives customary fees for
acting in such capacities. CSI acted as financial advisor to Smith & Nephew in
connection with the recapitalization and was paid a fee of $2.0 million by
Smith & Nephew upon consummation of the recapitalization. CSI also acted as
financial advisor in connection with the Orthotech Acquisition and was paid a
fee of $0.2 million.







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 DonJoy 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, 2000 and 1999                                                              
|
| | Consolidated Statements of Income for the years ended December 31, 2000,
1999 and 1998                                    
|
| | Consolidated Statements of Changes in Members Equity for the years
ended December 31, 2000, 1999 and 1998                
|
| | Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998                                

73



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##### Table of Contents





| |                                                            
| | -----------------------------------------------------------
| | Notes to DonJoy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 DonJoys
Audited Consolidated Financial Statements or notes thereto.



| |             
| | ------------
| | 3. Exhibits:

|        |  |                                                                                                                                                                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                 
|3.1     |  | Amended and Restated Operating Agreement of dj Orthopedics, LLC(1)                                                                                                                                                                                                                                                                                                              
|       
|       
|       
|       
|3.2     |  | Third Amended and Restated Operating Agreement dated as of July 7, 2000 of DonJoy, L.L.C.
(Incorporated by reference to Exhibit 3.1 to DonJoys report on Form 8-K dated July 21, 2000)                                                                                                                                                                                         
|       
|       
|       
|       
|3.3     |  | Certificate of Amendment to Certificate of Incorporation of DJ Orthopedics Capital Corporation(1)                                                                                                                                                                                                                                                                               
|       
|       
|       
|       
|3.4     |  | By-laws of dj Orthopedics, LLC(1)                                                                                                                                                                                                                                                                                                                                               
|       
|       
|       
|       
|3.5     |  | By-laws of DonJoy, LLC(1)                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|3.6     |  | By-laws of DJ Orthopedics Capital Corporation(1)                                                                                                                                                                                                                                                                                                                                
|       
|       
|       
|       
|4.1     |  | Indenture dated as of June 30, 1999 among the Issuers, DonJoy and The Bank of New York, as Trustee(1)                                                                                                                                                                                                                                                                           
|       
|       
|       
|       
|4.2     |  | Form of New Note (included as Exhibit B to Exhibit 4.1)(1)                                                                                                                                                                                                                                                                                                                      
|       
|       
|       
|       
|4.3     |  | Exchange and Registration Rights Agreement dated as of June 30, 1999 among the Issuers, DonJoy and
Smith & Nephew(1)                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.1    |  | Recapitalization Agreement dated as of April 29, 1999 among CDP,
DonJoy and Smith &
Nephew(1)                                                                                                                                                                                                                                                                                   
|       
|       
|       
|       
|10.2    |  | Group Research Centre Technology Agreement dated as of June 30, 1999 between DonJoy and Smith &
Nephew(1)                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.3    |  | Supply Agreement dated as of June 30, 1999 between DonJoy and Smith & Nephew(1)                                                                                                                                                                                                                                                                                                 
|       
|       
|       
|       
|10.4    |  | Transition Services Agreement dated as of June 30, 1999 between DonJoy and Smith & Nephew(1)                                                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|10.4A   |  | First Amendment to Transition Services Agreement dated as of December 21, 1999 between DonJoy and
Smith & Nephew. (Incorporated by reference to Exhibit 10.29 to the Annual Report from Form 10-K for
the fiscal year ended December 31, 1999).                                                                                                                                 
|       
|       
|       
|       
|10.5    |  | Distribution Agreement dated as of June 30, 1999 between DonJoy, Smith & Nephew and the affiliates of
Smith & Nephew listed on Schedule I thereto(1)                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.6    |  | CERF Laboratories Agreement dated as of June 30, 1999 between DonJoy and Smith & Nephew(1)                                                                                                                                                                                                                                                                                      
|       
|       
|       
|       
|10.7    |  | Subleases dated as of June 30, 1999 between the dj Ortho and Smith & Nephew(1)                                                                                                                                                                                                                                                                                                  
|       
|       
|       
|       
|10.8    |  | Guaranties dated as of June 30, 1999 executed by DonJoy(1)                                                                                                                                                                                                                                                                                                                      
|       
|       
|       
|       
|10.9    |  | Preferred Unit Purchase Agreement dated as of June 30, 1999 among DonJoy, J.P. Morgan Partners
(23A SBIC), L.L.C. (formerly CB Capital Investors, L.L.C.) and First Union Investors(1)                                                                                                                                                                                          
|       
|       
|       
|       
|10.10   |  | Members Agreement dated as of June 30, 1999 among DonJoy, CDP, J.P. Morgan Partners (23A SBIC),
L.L.C. (formerly CB Capital Investors, L.L.C.), First Union Investors, Smith & Nephew and the
Management Members(1)                                                                                                                                                            
|       
|       
|       
|       
|10.11   |  | Credit Agreement dated as of June 30, 1999 among the Issuers, DonJoy, the Lenders party thereto and
First Union National Bank, as Administrative Agent(1)                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.11A  |  | Agreement dated as of July 13, 2000 among DonJoy, L.L.C., DJ Orthopedics, L.L.C., 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s report on Form 8-K dated July 21, 2000).
|       
|       
|       
|       
|10.12   |  | Indemnity, Subrogation and Contribution Agreement dated as of June 30, 1999 among dj Ortho, 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(1)                                                                                                                  
|       
|       
|       
|       
|10.13   |  | Parent Guarantee Agreement dated as of June 30, 1999 between DonJoy and First Union National Bank, as
Collateral Agent(1)                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.14   |  | Subsidiary Guarantee Agreement dated as of June 30, 1999 between DJ Capital and First Union National
Bank, as Collateral Agent(1)                                                                                                                                                                                                                                               
|       
|       
|       
|       
|10.15   |  | Pledge Agreement dated as of June 30, 1999 among dj Ortho, DonJoy and First Union National Bank, as
Collateral Agent(1)                                                                                                                                                                                                                                                         
|       
|       
|       
|       
|10.16   |  | Security Agreement dated as of June 30, 1999 among dj Ortho, DonJoy, 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(1)                                                                                                                                         

74



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|        |  |                                                                                                                                                                                                                                                                                                                                                                                            
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.17   |  | Leasehold Deed of Trust, Security Agreement and Assignment of Leases and Rents dated as of June 30,
1999 by dj Ortho, as grantor, to First American Title Insurance Company, as trustee(1)                                                                                                                                                                                                 
|       
|       
|       
|       
|10.18   |  | Employment Agreement dated as of June 30, 1999 between dj Ortho and Leslie H. Cross(1)                                                                                                                                                                                                                                                                                                     
|       
|       
|       
|       
|10.19   |  | Employment Agreement dated as of June 30, 1999 between dj Ortho and Cyril Talbot III(1)                                                                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|10.20   |  | Employment Agreement dated as of June 30, 1999 between dj Ortho and Michael R. McBrayer(1)                                                                                                                                                                                                                                                                                                 
|       
|       
|       
|       
|10.21   |  | Second Amended and Restated 1999 Option Plan of DonJoy dated
August 18, 2000.                                                                                                                                                                                                                                                                                                              
|       
|       
|       
|       
|10.22   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Les Cross(1)                                                                                                                                                                                                                                                                                                        
|       
|       
|       
|       
|10.23   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Cy Talbot(1)                                                                                                                                                                                                                                                                                                        
|       
|       
|       
|       
|10.24   |  | Retention Agreement dated December 14, 1998 between Smith &
Nephew and MichaelMcBrayer(1)                                                                                                                                                                                                                                                                                                  
|       
|       
|       
|       
|10.25   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Chuck Bastyr(1)                                                                                                                                                                                                                                                                                                     
|       
|       
|       
|       
|10.26   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Peter Bray(1)                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.27   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Kent Bachman (Incorporated by
reference to Exhibit 10.27 to the Annual Report on Form 10-K for the fiscal year ended December 31,
1999).                                                                                                                                                                            
|       
|       
|       
|       
|10.28   |  | Employment and Separation Agreement dated as of October 25, 1999 between Chuck Bastyr and dj
Orthopedics, LLC (Incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1999).                                                                                                                                                  
|       
|       
|       
|       
|10.29   |  | Asset Purchase Agreement dated as of July 7, 2000 among DePuy Orthopaedic Technology, Inc., dj
Orthopedics, L.L.C., and DonJoy L.L.C. (Incorporated by reference to Exhibit 2.1 to DonJoys report
on Form 8-K dated July 21, 2000).                                                                                                                                                       
|       
|       
|       
|       
|10.30   |  | Preferred Unit Purchase Agreement dated as of July 7, 2000, among DonJoy, L.L.C., and J.P. Morgan
Partners (23A SBIC), LLC (formerly CB Capital Investors, L.L.C.), First Union Capital Partners,
L.L.C., DJC, Inc., TCW/Crescent Mezzanine Trust II, and TCW Leveraged Income Trust II, L.P.
(Incorporated by reference to Exhibit 4.1 to DonJoys report on Form 8-K dated July 21, 2000)
|       
|       
|       
|       
|10.31   |  | Common Unit Purchase Agreement dated as of July 7, 2000, among DonJoy, L.L.C., and 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s report on Form 8-K dated July 21, 2000).                                                                                   
|       
|       
|       
|       
|10.32   |  | Secured Promissory Note dated as of July 7, 2000 between the Leslie H. Cross & Deborah L. Cross
Family Trust and Leslie H. Cross and DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.3 to
DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                         
|       
|       
|       
|       
|10.33   |  | Secured Promissory Note dated as of July 7, 2000 between Cyril Talbot III and DonJoy, L.L.C.
(Incorporated by reference to Exhibit 4.4 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                                                                                
|       
|       
|       
|       
|10.34   |  | Secured Promissory Note dated as of July 7, 2000 between Michael R. McBrayer and DonJoy, L.L.C.
(Incorporated by reference to Exhibit 4.5 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                                                                             
|       
|       
|       
|       
|10.35   |  | Second Amended and Restated Pledge Agreement dated as of July 7, 2000, among Leslie H. Cross, Leslie
H. Cross & Deborah L. Cross Family Trust , and DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.6
to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                          
|       
|       
|       
|       
|10.36   |  | Second Amended and Restated Pledge Agreement dated as of July 7, 2000, Cyril Talbot III, and DonJoy,
L.L.C. (Incorporated by reference to Exhibit 4.7 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                                                                 
|       
|       
|       
|       
|10.37   |  | Second Amended and Restated Pledge Agreement dated as of July 7, 2000, between Michael R. McBrayer
and DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.8 to DonJoys report on Form 8-K dated
July 21, 2000).                                                                                                                                                                       
|       
|       
|       
|       
|10.38   |  | Unit Purchase Agreement dated as of June 28, 2000, among Smith & Nephew Disposal, Inc. and 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s report on Form 8-K dated July 21,
2000).                                                                           
|       
|       
|       
|       
|10.39   |  | Amended and Restated Secured Promissory Note dated as of June 28, 2000 between Michael R. McBrayer
and DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.10 to DonJoys report on Form 8-K dated
July 21, 2000).                                                                                                                                                                      
|       
|       
|       
|       
|10.40   |  | 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 DonJoy, L.L.C. (Incorporated by reference to
Exhibit 4.11 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                           
|       
|       
|       
|       
|10.41   |  | Amended and Restated Secured Promissory Note dated as of June 28, 2000 between Cyril Talbot III and
DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.12 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                                                         
|       
|       
|       
|       
|10.42   |  | Secured Promissory Note dated as of June 28, 2000 among Leslie H. Cross & Deborah L. Cross Family
Trust, Leslie H. Cross and DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.13 to DonJoys
report on Form 8-K dated July 21, 2000).                                                                                                                                                

75



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|        |  |                                                                                                                                                                                                                                                           
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description                                                                                                                                                                                                                                               
|        |  |                                                                                                                                                                                                                                                           
|       
|       
|       
|       
|10.43   |  | Secured Promissory Note dated as of June 28, 2000 between Cyril Talbot III and DonJoy, L.L.C.
(Incorporated by reference to Exhibit 4.14 to DonJoys report on Form 8-K dated July 21, 2000).                                                             
|       
|       
|       
|       
|10.44   |  | Secured Promissory Note dated as of June 28, 2000 between Michael R. McBrayer and DonJoy, L.L.C.
(Incorporated by reference to Exhibit 4.15 to DonJoys report on Form 8-K dated July 21, 2000).                                                          
|       
|       
|       
|       
|10.45   |  | Amended and Restated Pledge Agreement dated as of June 28, 2000 among Leslie H. Cross, Leslie H.
Cross & Deborah L. Cross Family Trust, and DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.16
to DonJoys report on Form 8-K dated July 21, 2000).
|       
|       
|       
|       
|10.46   |  | Amended and Restated Pledge Agreement dated as of June 28, 2000 between Cyril Talbot III and DonJoy,
L.L.C. (Incorporated by reference to Exhibit 4.17 to DonJoys report on Form 8-K dated July 21,
2000).                                               
|       
|       
|       
|       
|10.47   |  | Amended and Restated Pledge Agreement dated as of June 28, 2000 between Michael R. McBrayer and
DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.18 to DonJoys report on Form 8-K dated July 21, 2000).                                            
|       
|       
|       
|       
|10.48   |  | 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s report on Form 8-K dated July 21, 2000).                                                                
|       
|       
|       
|       
|10.49   |  | Transition Services Agreement dated as of July 7, 2000 among DePuy Orthopaedic Technology, Inc.,
DonJoy, L.L.C., and dj Orthopedics, L.L.C. (Incorporated by reference to Exhibit 10.2 to DonJoys
report on Form 8-K dated July 21, 2000).               
|       
|       
|       
|       
|12.1    |  | Statement re: computation of ratios of earning to fixed charges                                                                                                                                                                                           
|       
|       
|       
|       
|21.1    |  | Subsidiaries of the Registrants(1)                                                                                                                                                                                                                        
|       
|       
|       
|       
|24.1    |  | Powers of Attorney (included on the signature page)                                                                                                                                                                                                       



---

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



|(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.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT
TO SECTION 12 OF THE ACT.

Except for a copy of this Annual Report on Form 10-K, no annual report to
securities holders covering the registrants last fiscal year or proxy material
will be sent to security holders.

DJ ORTHOPEDICS, LLC

SCHEDULE II  Valuation and Qualifying Accounts and Reserves

For the Three Years Ended December 31, 2000

|                             |                                |   |                   |            |                    |   |           |             |  
|---------------------------- | ------------------------------ | - | ----------------- | ---------- | ------------------ | - | --------- | ----------- | -
|                             |                                |   | Allowance for     |            | Reserve for       
|                             |                                |   | Doubtful Accounts |            | Excess and        
|                             |                                |   | and Sales Returns |            | Obsolete Inventory
|                             |                                |   |                   |            |                   
|Balance at December 31, 1997 |                                | $ | 412,000           |            |                    | $ | 750,000   |            
|                            
|                            
|                            
|                            
|                             | Provision                      |   |                   | 1,407,000  |                    |   |           | 172,000     |  
|                            
|                            
|                            
|                            
|                             | Write-offs and recoveries, net |   |                   | (1,463,000 | )                  |   |           | (366,000    | )
|                             |                                |   |                   |            |                    |   |           |            
|Balance at December 31, 1998 |                                |   | 356,000           |            |                    |   | 556,000   |            
|                            
|                            
|                            
|                            
|                             | Provision                      |   |                   | 2,678,000  |                    |   |           | 1,052,000   |  
|                            
|                            
|                            
|                            
|                             | Write-offs and recoveries, net |   |                   | (2,045,000 | )                  |   |           | (617,000    | )
|                             |                                |   |                   |            |                    |   |           |            
|Balance at December 31, 1999 |                                |   | 989,000           |            |                    |   | 991,000   |            
|                            
|                            
|                            
|                            
|                             | Provision                      |   |                   | 6,285,000  |                    |   |           | 17,050,000  |  
|                            
|                            
|                            
|                            
|                             | Write-offs and recoveries, net |   |                   | (2,996,000 | )                  |   |           | (14,267,000 | )
|                             |                                |   |                   |            |                    |   |           |            
|Balance at December 31, 2000 |                                | $ | 4,278,000         |            |                    | $ | 3,774,000 |            
|                             |                                |   |                   |            |                    |   |           |            

76



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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 15, 2001 |  |  |  | DJ ORTHOPEDICS, LLC
|                    
|                    
|                    
|                    
|                     |  |  |  | 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 Manager
(Principal Executive Officer)                              |  | March 15, 2001
|                                                               
|/s/     CYRIL TALBOT III        
Cyril Talbot III               |  | Senior Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer) |  | March 15, 2001
|                                                               
|/s/     CHARLES T. ORSATTI        
Charles T. Orsatti           |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     MITCHELL J. BLUTT, M.D.        
Mitchell J. Blutt, M.D. |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     DAMION E. WICKER, M.D.        
Damion E. Wicker, M.D.   |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     W. BRETT INGERSOLL        
W. Brett Ingersoll           |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     IVAN R. SABEL        
Ivan R. Sabel                     |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     KIRBY L. CRAMER        
Kirby L. Cramer                 |  | Manager                                                                                                   |  | March 15, 2001

77



---



##### Table of Contents



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 15, 2001 |  |  |  | DJ ORTHOPEDICS CAPITAL CORPORATION
|                    
|                    
|                    
|                    
|                     |  |  |  | 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 Manager
(Principal Executive Officer)                              |  | March 15, 2001
|                                                               
|/s/     CYRIL TALBOT III        
Cyril Talbot III               |  | Senior Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer) |  | March 15, 2001
|                                                               
|/s/     CHARLES T. ORSATTI        
Charles T. Orsatti           |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     MITCHELL J. BLUTT, M.D.        
Mitchell J. Blutt, M.D. |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     DAMION E. WICKER, M.D.        
Damion E. Wicker, M.D.   |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     W. BRETT INGERSOLL        
W. Brett Ingersoll           |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     IVAN R. SABEL        
Ivan R. Sabel                     |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     KIRBY L. CRAMER        
Kirby L. Cramer                 |  | Manager                                                                                                   |  | March 15, 2001

78



---



##### Table of Contents



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 15, 2001 |  |  |  | DONJOY, L.L.C.
|                    
|                    
|                    
|                    
|                     |  |  |  | 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 Manager
(Principal Executive Officer)                              |  | March 15, 2001
|                                                               
|/s/     CYRIL TALBOT III        
Cyril Talbot III               |  | Senior Vice President, Chief Financial Officer
and Secretary
(Principal Financial and Accounting Officer) |  | March 15, 2001
|                                                               
|/s/     CHARLES T. ORSATTI        
Charles T. Orsatti           |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     MITCHELL J. BLUTT, M.D.        
Mitchell J. Blutt, M.D. |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     DAMION E. WICKER, M.D.        
Damion E. Wicker, M.D.   |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     W. BRETT INGERSOLL        
W. Brett Ingersoll           |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     IVAN R. SABEL        
Ivan R. Sabel                     |  | Manager                                                                                                   |  | March 15, 2001
|                                                               
|/s/     KIRBY L. CRAMER        
Kirby L. Cramer                 |  | Manager                                                                                                   |  | March 15, 2001

79



---



##### Table of Contents



INDEX TO EXHIBITS

|        |  |                                                                                                                                                                                                                                                                                                                                                                                 
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                                                                                 
|3.1     |  | Amended and Restated Operating Agreement of dj Orthopedics, LLC(1)                                                                                                                                                                                                                                                                                                              
|       
|       
|       
|       
|3.2     |  | Third Amended and Restated Operating Agreement dated as of July 7, 2000 of DonJoy, L.L.C.
(Incorporated by reference to Exhibit 3.1 to DonJoys report on Form 8-K dated July 21, 2000)                                                                                                                                                                                         
|       
|       
|       
|       
|3.3     |  | Certificate of Amendment to Certificate of Incorporation of DJ Orthopedics Capital Corporation(1)                                                                                                                                                                                                                                                                               
|       
|       
|       
|       
|3.4     |  | By-laws of dj Orthopedics, LLC(1)                                                                                                                                                                                                                                                                                                                                               
|       
|       
|       
|       
|3.5     |  | By-laws of DonJoy, LLC(1)                                                                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|3.6     |  | By-laws of DJ Orthopedics Capital Corporation(1)                                                                                                                                                                                                                                                                                                                                
|       
|       
|       
|       
|4.1     |  | Indenture dated as of June 30, 1999 among the Issuers, DonJoy and The Bank of New York, as Trustee(1)                                                                                                                                                                                                                                                                           
|       
|       
|       
|       
|4.2     |  | Form of New Note (included as Exhibit B to Exhibit 4.1)(1)                                                                                                                                                                                                                                                                                                                      
|       
|       
|       
|       
|4.3     |  | Exchange and Registration Rights Agreement dated as of June 30, 1999 among the Issuers, DonJoy and
Smith & Nephew(1)                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.1    |  | Recapitalization Agreement dated as of April 29, 1999 among CDP,
DonJoy and Smith &Nephew(1)                                                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|10.2    |  | Group Research Centre Technology Agreement dated as of June 30, 1999 between DonJoy and Smith &
Nephew(1)                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.3    |  | Supply Agreement dated as of June 30, 1999 between DonJoy and Smith & Nephew(1)                                                                                                                                                                                                                                                                                                 
|       
|       
|       
|       
|10.4    |  | Transition Services Agreement dated as of June 30, 1999 between DonJoy and Smith & Nephew(1)                                                                                                                                                                                                                                                                                    
|       
|       
|       
|       
|10.4A   |  | First Amendment to Transition Services Agreement dated as of December 21, 1999 between DonJoy and
Smith & Nephew. (Incorporated by reference to Exhibit 10.29 to the Annual Report from Form 10-K for
the fiscal year ended December 31, 1999).                                                                                                                                 
|       
|       
|       
|       
|10.5    |  | Distribution Agreement dated as of June 30, 1999 between DonJoy, Smith & Nephew and the affiliates of
Smith & Nephew listed on Schedule I thereto(1)                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.6    |  | CERF Laboratories Agreement dated as of June 30, 1999 between DonJoy and Smith & Nephew(1)                                                                                                                                                                                                                                                                                      
|       
|       
|       
|       
|10.7    |  | Subleases dated as of June 30, 1999 between the dj Ortho and Smith & Nephew(1)                                                                                                                                                                                                                                                                                                  
|       
|       
|       
|       
|10.8    |  | Guaranties dated as of June 30, 1999 executed by DonJoy(1)                                                                                                                                                                                                                                                                                                                      
|       
|       
|       
|       
|10.9    |  | Preferred Unit Purchase Agreement dated as of June 30, 1999 among DonJoy, J.P. Morgan Partners (23A
SBIC), L.L.C. (formerly CB Capital Investors, L.L.C.) and First Union Investors(1)                                                                                                                                                                                          
|       
|       
|       
|       
|10.10   |  | Members Agreement dated as of June 30, 1999 among DonJoy, CDP, J.P. Morgan Partners (23A SBIC),
L.L.C. (formerly CB Capital Investors, L.L.C.), First Union Investors, Smith & Nephew and the
Management Members(1)                                                                                                                                                            
|       
|       
|       
|       
|10.11   |  | Credit Agreement dated as of June 30, 1999 among the Issuers, DonJoy, the Lenders party thereto and
First Union National Bank, as Administrative Agent(1)                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.11A  |  | Agreement dated as of July 13, 2000 among DonJoy, L.L.C., DJ Orthopedics, L.L.C., 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s report on Form 8-K dated July 21, 2000).
|       
|       
|       
|       
|10.12   |  | Indemnity, Subrogation and Contribution Agreement dated as of June 30, 1999 among dj Ortho, 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(1)                                                                                                                  
|       
|       
|       
|       
|10.13   |  | Parent Guarantee Agreement dated as of June 30, 1999 between DonJoy and First Union National Bank, as
Collateral Agent(1)                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.14   |  | Subsidiary Guarantee Agreement dated as of June 30, 1999 between DJ Capital and First Union National
Bank, as Collateral Agent(1)                                                                                                                                                                                                                                               
|       
|       
|       
|       
|10.15   |  | Pledge Agreement dated as of June 30, 1999 among dj Ortho, DonJoy and First Union National Bank, as
Collateral Agent(1)                                                                                                                                                                                                                                                         
|       
|       
|       
|       
|10.16   |  | Security Agreement dated as of June 30, 1999 among dj Ortho, DonJoy, 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(1)                                                                                                                                         
|       
|       
|       
|       
|10.17   |  | Leasehold Deed of Trust, Security Agreement and Assignment of Leases and Rents dated as of June 30,
1999 by dj Ortho, as grantor, to First American Title Insurance Company, as trustee(1)                                                                                                                                                                                      
|       
|       
|       
|       
|10.18   |  | Employment Agreement dated as of June 30, 1999 between dj Ortho and Leslie H. Cross(1)                                                                                                                                                                                                                                                                                          
|       
|       
|       
|       
|10.19   |  | Employment Agreement dated as of June 30, 1999 between dj Ortho and Cyril Talbot III(1)                                                                                                                                                                                                                                                                                         
|       
|       
|       
|       
|10.20   |  | Employment Agreement dated as of June 30, 1999 between dj Ortho and Michael R. McBrayer(1)                                                                                                                                                                                                                                                                                      
|       
|       
|       
|       
|10.21   |  | Second Amended and Restated 1999 Option Plan of DonJoy dated
August 18, 2000.                                                                                                                                                                                                                                                                                                   

80



---



##### Table of Contents



|        |  |                                                                                                                                                                                                                                                                                                                                                                                            
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description                                                                                                                                                                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.22   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Les Cross(1)                                                                                                                                                                                                                                                                                                        
|       
|       
|       
|       
|10.23   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Cy Talbot(1)                                                                                                                                                                                                                                                                                                        
|       
|       
|       
|       
|10.24   |  | Retention Agreement dated December 14, 1998 between Smith &
Nephew and Michael
McBrayer(1)                                                                                                                                                                                                                                                                                                 
|       
|       
|       
|       
|10.25   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Chuck Bastyr(1)                                                                                                                                                                                                                                                                                                     
|       
|       
|       
|       
|10.26   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Peter Bray(1)                                                                                                                                                                                                                                                                                                       
|       
|       
|       
|       
|10.27   |  | Retention Agreement dated December 14, 1998 between Smith & Nephew and Kent Bachman (Incorporated by
reference to Exhibit 10.27 to the Annual Report on Form 10-K for the fiscal year ended December 31,
1999).                                                                                                                                                                            
|       
|       
|       
|       
|10.28   |  | Employment and Separation Agreement dated as of October 25, 1999 between Chuck Bastyr and dj
Orthopedics, LLC (Incorporated by reference to Exhibit 10.28 to the Annual Report on Form 10-K for
the fiscal year ended December 31, 1999).                                                                                                                                                  
|       
|       
|       
|       
|10.29   |  | Asset Purchase Agreement dated as of July 7, 2000 among DePuy Orthopaedic Technology, Inc., dj
Orthopedics, L.L.C., and DonJoy L.L.C. (Incorporated by reference to Exhibit 2.1 to DonJoys report
on Form 8-K dated July 21, 2000).                                                                                                                                                       
|       
|       
|       
|       
|10.30   |  | Preferred Unit Purchase Agreement dated as of July 7, 2000, among DonJoy, L.L.C., and J.P. Morgan
Partners (23A SBIC), LLC (formerly CB Capital Investors, L.L.C.), First Union Capital Partners,
L.L.C., DJC, Inc., TCW/Crescent Mezzanine Trust II, and TCW Leveraged Income Trust II, L.P.
(Incorporated by reference to Exhibit 4.1 to DonJoys report on Form 8-K dated July 21, 2000)
|       
|       
|       
|       
|10.31   |  | Common Unit Purchase Agreement dated as of July 7, 2000, among DonJoy, L.L.C., and 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s report on Form 8-K dated July 21, 2000).                                                                                   
|       
|       
|       
|       
|10.32   |  | Secured Promissory Note dated as of July 7, 2000 between the Leslie H. Cross & Deborah L. Cross
Family Trust and Leslie H. Cross and DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.3 to
DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                         
|       
|       
|       
|       
|10.33   |  | Secured Promissory Note dated as of July 7, 2000 between Cyril Talbot III and DonJoy, L.L.C.
(Incorporated by reference to Exhibit 4.4 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                                                                                
|       
|       
|       
|       
|10.34   |  | Secured Promissory Note dated as of July 7, 2000 between Michael R. McBrayer and DonJoy, L.L.C.
(Incorporated by reference to Exhibit 4.5 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                                                                             
|       
|       
|       
|       
|10.35   |  | Second Amended and Restated Pledge Agreement dated as of July 7, 2000, among Leslie H. Cross, Leslie
H. Cross & Deborah L. Cross Family Trust , and DonJoy, L.L.C. (Incorporated by reference to Exhibit
4.6 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                          
|       
|       
|       
|       
|10.36   |  | Second Amended and Restated Pledge Agreement dated as of July 7, 2000, Cyril Talbot III, and DonJoy,
L.L.C. (Incorporated by reference to Exhibit 4.7 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                                                                 
|       
|       
|       
|       
|10.37   |  | Second Amended and Restated Pledge Agreement dated as of July 7, 2000, between Michael R. McBrayer
and DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.8 to DonJoys report on Form 8-K dated
July 21, 2000).                                                                                                                                                                       
|       
|       
|       
|       
|10.38   |  | Unit Purchase Agreement dated as of June 28, 2000, among Smith & Nephew Disposal, Inc. and 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s report on Form 8-K dated July 21,
2000).                                                                           
|       
|       
|       
|       
|10.39   |  | Amended and Restated Secured Promissory Note dated as of June 28, 2000 between Michael R. McBrayer
and DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.10 to DonJoys report on Form 8-K dated
July 21, 2000).                                                                                                                                                                      
|       
|       
|       
|       
|10.40   |  | 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 DonJoy, L.L.C. (Incorporated by reference to
Exhibit 4.11 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                           
|       
|       
|       
|       
|10.41   |  | Amended and Restated Secured Promissory Note dated as of June 28, 2000 between Cyril Talbot III and
DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.12 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                                                         
|       
|       
|       
|       
|10.42   |  | Secured Promissory Note dated as of June 28, 2000 among Leslie H. Cross & Deborah L. Cross Family
Trust, Leslie H. Cross and DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.13 to DonJoys
report on Form 8-K dated July 21, 2000).                                                                                                                                                
|       
|       
|       
|       
|10.43   |  | Secured Promissory Note dated as of June 28, 2000 between Cyril Talbot III and DonJoy, L.L.C.
(Incorporated by reference to Exhibit 4.14 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                                                                              
|       
|       
|       
|       
|10.44   |  | Secured Promissory Note dated as of June 28, 2000 between Michael R. McBrayer and DonJoy, L.L.C.
(Incorporated by reference to Exhibit 4.15 to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                                                                           
|       
|       
|       
|       
|10.45   |  | Amended and Restated Pledge Agreement dated as of June 28, 2000 among Leslie H. Cross, Leslie H.
Cross & Deborah L. Cross Family Trust, and DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.16
to DonJoys report on Form 8-K dated July 21, 2000).                                                                                                                                 
|       
|       
|       
|       
|10.46   |  | Amended and Restated Pledge Agreement dated as of June 28, 2000 between Cyril Talbot III and DonJoy,                                                                                                                                                                                                                                                                                       

81



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##### Table of Contents



|        |  |                                                                                                                                                                                                                                            
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description                                                                                                                                                                                                                                
|        |  |                                                                                                                                                                                                                                            
|       
|       
|       
|       
|        |  | L.L.C. (Incorporated by reference to Exhibit 4.17 to DonJoys report on Form 8-K dated July 21,
2000).                                                                                                                                     
|       
|       
|       
|       
|10.47   |  | Amended and Restated Pledge Agreement dated as of June 28, 2000 between Michael R. McBrayer and
DonJoy, L.L.C. (Incorporated by reference to Exhibit 4.18 to DonJoys report on Form 8-K dated July 21, 2000).                             
|       
|       
|       
|       
|10.48   |  | 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s report on Form 8-K dated July 21, 2000).                                                 
|       
|       
|       
|       
|10.49   |  | Transition Services Agreement dated as of July 7, 2000 among DePuy Orthopaedic Technology, Inc.,
DonJoy, L.L.C., and dj Orthopedics, L.L.C. (Incorporated by reference to Exhibit 10.2 to DonJoys
report on Form 8-K dated July 21, 2000).
|       
|       
|       
|       
|12.1    |  | Statement re: computation of ratios of earning to fixed charges                                                                                                                                                                            
|       
|       
|       
|       
|21.1    |  | Subsidiaries of the Registrants(1)                                                                                                                                                                                                         
|       
|       
|       
|       
|24.1    |  | Powers of Attorney (included on the signature page)                                                                                                                                                                                        



---

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

82